Archive for August, 2007
Via the Diehards forum, Businessweek recently posted an interview with John Bogle which covers many of the questions that people are asking about investing right now. As usual, he provides a balanced and big-picture perspective on things. I recommend reading through the whole thing, but here are some excerpts:
[…] if I was going to give advice to an individual investor?and I make a very important distinction here?if they have come into this market and have invested the way people should invest, and that means they have a little bond position if they’re young, and an average bond position if they’re in their middle years, and a substantial bond position in their retirement years, then I would do absolutely nothing. They will be protected by the fact that bonds are going up and bonds generate income. No one will take that income from them. They should just hang in there and do nothing.
Even if I was pretty confident that the decline will continue?and I think it’s more likely than not?you’ve not only got to get out right, you’ve also got to get in right. You must be right twice. So if you get out now, and the market goes way down another 15 or 20%, which is quite possible, they will be so scared they won’t get in.
[…] It’s not a good idea to time the market. In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that business earns. It overmagnifies everything. Investors get scared. Their advisors get scared. And you get exactly what we’re having?a bit of a mess.
Posted in Investing | 5 Comments »
Like many people, I like reading personal finance magazines and subscribe to many of them. But you have to remember that in order to sell magazines, they also have to give people what they want, even if it isn’t sound advice. A great example of this is the recent Money magazine article titled 5 ways to know if the bull is over. The introduction reads:
Since Money Magazine last examined the health of the bull market (and pronounced it sound), consumer spending began slowing, several prominent buyout deals unraveled, and oh yeah - concerns about subprime mortgage loans going bad caused stocks to fall off a cliff.
After closing above 14,000 for the first time in late July, the Dow has since plunged nearly 1400 points, or 9.8 percent, close to an official correction. The S&P 500 has given up all of its gains for the year.
All this has added a certain cogency to the view that the five-year-old bull could be closer to the end of its road. So while you know better than to try to time the market - and you do, don’t you? - now is a good moment to check that your portfolio truly matches your appetite for risk.
In the meantime, keep an eye out for five signs that often precede a sharp turn ahead.
Now, let’s place this text through my patent-pending Financial Double-Talk Filter, and try reading it again:
We said the bull market would continue for a long time. We wrote entire articles just like this about it. We were wrong.
Yep. Wrong.
Remember, you shouldn’t try to time the market. Wait, what is that? You’re scared?
In that case, here are some ways to try and time the market!
Sigh. Did you see how smoothly they covered up their mistakes and moved on to the next hot topic? If everyone decided to hang themselves, I bet you’d see articles on how to get the best deal on rope!
(If you liked this, you might also enjoy my Anatomy of a Personal Finance Magazine Article.)
Posted in Investing | 8 Comments »
Here are some promotions that can earn you a few extra frequent flier miles. Although not very lucrative, these can be handy if your miles are about to expire due to inactivity.
Posted in Deals & Offers | 5 Comments »
I don’t do market predictions, but I wanted to keep some things in perspective. In the most recent edition of A Random Walk Down Wall Street, there is an updated version of a chart which I have used before to show how important time horizon is to reducing your projected risk. I have replicated it below:
The fact that the variability in returns decreases the longer one stays in the market is very encouraging news for the long-term investor. But it is critical to remember that this data assumes you buy and hold a diversified portfolio. If you buy or sell stocks based on fear or hype, all bets are off.
Posted in Investing, Retirement | 19 Comments »
Although it may feel like the markets are just bouncing around like crazy this year, Vanguard shares some data that shows that the markets are actually performing in line with history.
A common definition of volatile day is one where the market index moves at least 1% up or down. For example, yesterday all three major market indexes dropped between 1.3 and 1.6%, and it was considered a “pounding”. But, as you can see in the chart below, historically about a quarter of all days are volatile.
In the past few years, we’ve been spoiled by a period of relatively low volatility, and now we’re simply reverting back towards the mean. It’s all part of owning stocks, and I don’t see any reason to make any changes if you already have a long-term plan.
Posted in Investing | 26 Comments »
Next up is a model portfolio by actor and personal finance columnist Ben Stein. I have read and reviewed two books he wrote with Phil DeMuth - Yes, You Can Still Retire Comfortably! and Yes, You Can Time The Market!. I actually ran across this information last week while waiting at a Barnes and Noble for my companions to finish shopping. I wrote down that it was in Forbes magazine, but I found the article online under Fortune. Either way, here it is:
Ben Stein Model Portfolio
Asset Allocation For 80% Stocks/20% Bonds (with ETF examples)
25% Total US Stock Market (VTI, IYY)
25% S&P 500 Index (IVV, SPY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
5% Real Estate (VNQ, ICF)
20% Cash
Commentary
On the equity side, I guess he’s leaning towards only having about 15% of the domestic equity portion being Small/Mid Cap stocks, since about 70% of the Total US Stock Market index is made up of the S&P 500 anyways. His exposure to Real Estate is very small, especially compared to the Swensen portfolio we just looked at. He does add a specific allocation to Energy sector stocks to the mix, which you don’t always see.
On the fixed-income side, Stein doesn’t recommend any type of bond, corporate or not. He thinks long-term bonds are too risky, while short-term bonds don’t offer enough yield to warrant not just holding cash instead. I’m not sure if this is solely due to the current flat interest rate curve. This may also be because he seems to take the view that your emergency fund cash should be included in your asset allocation. (I like to keep it separate.)
See here for other model portfolios from respected sources, part of my incomplete Rough Guide to Investing.
Posted in Investing, Retirement | 4 Comments »
This model portfolio is taken from Unconventional Success by David Swensen. As mentioned before, Swensen is not a personal financial advisor, but is a respected institutional money manager who currently runs the Yale Endowment. In his book for individual investors, he writes that there are only a limited number of core asset classes in which one should invest in. Although he avoids giving specific asset allocation guidance, he does provide an “outline of a well-diversified, equity-oriented portfolio”, which is shown below.
(Hurrah, I found my software disks so I can make pretty pie charts again!)
Asset Allocation For 70% Stocks/30% Bonds (with ETF examples)
30% Domestic Equity (VTI, IYY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
20% Real Estate (VNQ, ICF)
15% U.S. Treasury Bonds (SHY, IEF)
15% Inflation-Protected Securities (TIP)
Commentary
There is a healthy portion devoted to real estate in the portfolio. The common way to track this asset class with REITs, which are considered a domestic stock. Instead of taking up less than 5% of the US stock market by capitalization, it is now taking up more than 40% of the domestic equity portion. I’m not really sure why there is so much, although he does write that if you own your home or other real estate, you may want to reduce your REIT exposure.
In addition, corporate and mortgage-backed bonds are left out, following his opinion that they aren’t the most desirable asset classes for individual portfolios due to added call risk and credit risk. (If you’ve been keeping up with the markets recently, it seems he may have been on to something here.)
As with all the model portfolios, the idea here isn’t just to follow any of them blindly. I do think it helps to see where different experts have similar components to their model portfolios, and where they differ. I also like breaking it down this way into pie charts of stocks-only and bonds-only in order to visualize them better.
See here for other model portfolios from respected sources, part of my incomplete Rough Guide to Investing.
Posted in Investing, Retirement | 19 Comments »
An alternative to high-yield bank savings accounts are money market funds held in brokerage accounts. Although both money market funds and savings accounts can change their interest rates paid at any time, comparing their actual returns can be confusing.
Comparing Returns
Money market funds usually report their 7-day annualized yield (also listed as just yield, or 7-day yield), which takes the interest paid net of expenses for the last 7 days and assumes that this average continues over an entire year. Compounding is not taken into account, so the 7-day yield should be compared to a bank account’s annual percentage rate (APR).
Some funds also list the 7-day effective yield (also listed as compound yield), which does take into account compounding via the reinvesting of dividends. So the 7-day effective yield should be compared to annual percentage yield (APY).
Here are two examples from Fidelity and Vanguard where they list both. In this case the Fidelity fund would be comparable to a bank account earning 5.07% APR or 5.19% APY.
Since banks usually advertise APY, you can convert if needed using this APY to APR calculator. Keep in mind that since these are moving 7-day averages, the numbers given will change from week to week.
Other Types of Money Market Funds
The above comparison is meant for the most common “taxable” money market funds, which are taxalbe on both federal and state levels just like a bank’s savings account. In addition to these, there are a variety of specific types of funds like Treasury funds (exempt from state income tax) and municipal tax-exempt funds (exempt from federal income tax), and state-specific municipal funds (exempt from both fed and state taxes) that offer special tax consideration.
In this case, you can use a tax-equivalent yield calculator to complete the comparison.
But Is The Risk The Same?
While not eligible to be FDIC-insured as they are not banks, money market funds do have to follow strict guidelines as to maintain the highest credit quality and lowest volatility of the underlying investments. The share is always kept at $1. Due to the recent concerns with mortgage-backed bonds, Fool.com recently asked Is Your Money Market Fund Safe? In my opinion, the risk is a definitely higher than a bank account, but if you hold your money market funds from a respected firm like Vanguard or Fidelity, I would sleep just as soundly, as these companies would repay the funds with their own assets rather than let them falter.
There are also other practical differences between specific banks and specific money market funds, which I am ignoring here.
Posted in Banking, Investing | 25 Comments »
$10 here, $25 there. What’s the point of doing all these little things? For the most part, I look at grabbing freebies and bonuses as a hobby. Sure, there are a million different ways to make more money, and on a pure hourly-return basis it may look like crap, but I can do it in my free time, sitting on the couch, while watching HGTV at 1 am in the morning. But here’s another way to look at it:
You may have heard this before, but here it is again… If you’re young and aren’t in a high tax bracket yet, one of the best things you can do is max out your Roth IRA. You put in some of your take-home pay, and you’ll never be taxed again on it. It’s like supercharging your stock returns by removing the drag of taxes. If you’re 25 and invest $4,000/year and it returns 8% a year, at age 65 you will have over a million dollars. (No, not inflation-adjusted, but still a million dollars.)
$4,000 a year is just $11 a day. It doesn’t take that much to really make a difference. (Or put differently, a free $10-$25 can be seen as a significant amount of money.)
Posted in Retirement | 29 Comments »
I’ve been reading up more on 403(b) plans since my wife is getting one. Although similar to a 401(k) in many ways, there are some important differences. Did you know that if you are unhappy with your administrator, you may be able to transfer it to another provider without changing jobs? This is called a 90-24 transfer. The catch is that the plan must allow for such transfers.
But you’ll have to act quickly, as the Financial Page blog reminds me that the deadline for a 90-24 transfer is coming up on September 24, 2007. (You can still move the plans if you change jobs.) Read more on the 403bWise page on 90-24 transfers, as the transfer can be somewhat tricky.
Posted in General | 1 Comment »
The new service TextPayMe allows you to send money via your cell phone. Right now, if you sign up and confirm your cell phone takes text messages, you get $5. They seem to be legit, with a mention at CNN/Business 2.0. I just signed up, and got the $5 successfully without having to give out my Social Security or credit card number:
You will, however, need to make and send 3 text messages, which may cost something. You can withdraw your funds via online bank transfers, or you can request a check. They also have a referral program where the referrer also gets $5. You can allow me to refer you by clicking on the banner below, at no cost to you.
Once you sign-up, refer your significant other, friends, or anyone with a cell phone. To make things easy, you can have them send the money back to you for one single withdrawal. With two cell phones, you’d get $15 total.
If you haven’t joined already, you can also grab another $5 for signing up with a similar service from OboPay. Try them out, and grab that venture capital money while you’re at it!
Added: You will also need to complete one send money transaction before being able to withdraw the bonus $5. See the comments for more information.
Posted in Deals & Offers | 50 Comments »
If you’re chasing higher interest rates or grabbing sign-up bonuses, you might be concerned about any potential consequences from opening all those bank accounts. In my experience, there are two main factors to be aware of when you open a bank account:
Banks pulling your ChexSystems report. ChexSystems is a consumer information database used by an estimated 80-90% of all banks to help determine the risk of opening new accounts. Think of it as the bank’s version of a credit bureau. If a person commits check fraud or overdraw their account, it will be listed here. In addition, the simple act of opening or closing a bank account may be recorded in their database.
One thing that may raise up a red flag is opening up several bank accounts in a very short period of time. This is because of the connection of multiple bank accounts to a form of fraud called ‘check kiting‘. Kiting usually involves sending several checks between different banks to create an temporary surplus of money from the bank’s funds availability policies, and then cashing that out before all the checks fully clear. In the end, one of the banks is left holding the bag.
But for the most part, as long as you haven’t left any accounts in bad standing you shouldn’t run into any problems with opening up new bank accounts. I’ve opened up accounts at over 20 different banks already, sometimes two or three in one week, and have never been rejected by any of them. However, getting a negative ChexSystems record can leave you blacklisted from all the major banks. There are even specific websites that help such people find a place that will accept them.
As with credit reports, you can get a free copy of your ChexSystems report once a year.
Banks pulling your credit report. Yes, it is legal for banks to pull your credit report. There are a couple reasons they do so. First, this is another way for them to identify you and measure the risk of giving you a new account. Second, they may use this information to market other financial products like credit cards or home equity loans to you.
Before, I’ve talked about the difference between hard and soft credit pulls. Usually, bank will just perform a soft credit check, which doesn’t affect your credit score. (All those “pre-approved” credit card applications in the mail are from soft credit checks.) However, some banks also perform hard credit checks, which do hurt your credit score slightly. As none of them are offering me any credit, I’ve never understood why some major banks do this while others don’t - for example I have seen Citibank do hard pulls, but not Washington Mutual. I personally suspect that it may just be unintentional and they don’t know the difference. (And most people don’t know the difference so they don’t really get any pushback.) Although I haven’t tried, I would guess that if you spent the effort to appeal these hard checks to the credit bureaus, there may be a chance to get them removed.
To summarize, I usually try to find out first if the bank will perform a hard credit check. This isn’t an exact science, as the banks can often change their practices. If so, then I want to see it pay out at least $100. If there is no credit check, then my standards are lower. Otherwise, I don’t really worry about the number of bank accounts I have, although I do close them as soon as I don’t foresee any future benefit.
Posted in Banking | 13 Comments »
I couldn’t help but catch some of the news coverage about this week’s continuing fallout from subprime loans, the resulting stock market wobbles, and the overall tightening of the credit market. CNBC’s ratings must be through the roof. Then tonight I stumbled upon a post on the housing bubble blog Patrick.net about it being a point of inflexion:
I believe we are now at what will be seen as the inflexion point. It took a long time to get here, but the housing bubble is finally recognized as a pass? concept. The real debate now is how much and how long of a correction.
This reminded me of the graph below, which I brought up when I asked If Real Estate Prices Are Cyclic, Where Are We Now?. This was back on January 4th, 2007.
At that time, I guessed we were somewhere around Anxiety. Now, seven months later, where are we now? I’d say we’ve moved past both Anxiety and Denial already, and we are solidly at Fear. Mathematically, the inflexion point (aka inflection point) is where the second derivative changes sign. Guess where the inflexion point on such a sinusoidal graph is?
As this CNN Money article about tighter lending standard suggest, I may be well positioned to benefit from this progression:
In addition, tightened lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices. The one catch is this: You’ve got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).
Bring on the Desperation! 
Posted in Real Estate | 27 Comments »
In an effort to gather even more information for Google Maps and to promote advertising on it, Google is offering now work (as an independent contractor) under the role of Google Business Referral Representative:
As a Google Business Referral Representative, you’ll visit local businesses to collect information (such as hours of operation, types of payment accepted, etc.) for Google Maps, and tell them about Google Maps and Google AdWords. You’ll also take a few digital photos of the business that will appear on the Google Maps listing along with the business information. After the visit, you submit the business’ info and photo(s) to Google through your Local Business Referrals Center, and we’ll pay you up to $10 for each listing that is approved by Google and verified by the business.
I think you can see an example here for the best pizza in Portland. $10 a pop? Seems easy enough on the surface; However, digging deeper I found a lot of variables that may affect your payday.
Referrals are approved by Google based on the completeness and quality of data supplied by representatives. Businesses verify their information either by sending us a response postcard or verifying their information online.
You only get $2 for each business approved by Google, and then $8 more if the business actually verifies your information. What are Google’s quality expectations? (Do you have to do an entire spiel about Adwords?) What is the likelihood that the business will verify their info? Also, it’s not clear if you can just pick any old business. You may end up earning at lot less than you think, and still owe self-employment taxes.
On the other hand, it may be fun for those that have the right combination of free time and efficiency. Get a crowded location, sell it right, and maybe make $20-$50 an hour. Soon we’ll all be working for Google in some way… Found via DumbLittleMan.
Posted in Deals & Offers | 16 Comments »
My series of articles on How To Make “Free” Money From 0% APR Balance Transfers has been very popular and many readers have also jumped in. Despite the risks, I’m still happily earning some money from the credit card companies for a change, and haven’t missed any payments. From the beginning, people have asked me to make a spreadsheet or calculator in order to estimate the potential profit from such endeavors. I initially decided against doing so because there are lots of different variables at stake that make an exact prediction close to impossible. However, I think it may still be useful to obtain some more realistic numbers.
Without further ado, I present to you the…
0% Balance Transfer Profit Calculator
Inputs and Definitions
- Arbitraged Interest Rate (APY) - Where are you putting the money you’re borrowing for free? This is the interest rate of the investment vehicle (savings account, CD, Treasury bond) you are using, or perhaps the interest rate of the existing loan (car, home equity, student) that you are paying down.
- Starting Balance (dollars) - How much money are you transferring?
- Monthly Minimum Payment (%) - Usually you must still make a monthly minimum payment on the outstanding balance during the 0% period, which will decrease your profit potential slightly. This is usually around 2%, but may vary between 1.5% and 4%.
Assumptions
- The balance transfer is for 12 months at 0% APR, with no balance transfer fee. You can find my list of the best 0% APR offers here with low or no balance transfer fees here.
- The interest is assumed to compound monthly, which allows me to convert from APY to APR, and then to a periodic rate. Compounding frequency is a variable here, but doesn’t change the numbers too much.
- I am ignoring the time required to actually convert the balance transfer into cash earning interest. Sometimes this can take up to a few weeks, sometimes it is much faster. Instead of guessing, I just leave it be.
- I am also ignoring things like grace periods and the timing of statement cycles and due dates, which can actually increase the time that your borrowed money is earning interest, and thus your profit.
- If you are earning interest in a taxable bank account, you will likely owe income tax on that interest at your marginal rate. This is not accounted for in the calculator, but is a simple calculation.
(If you’re confused about what I am talking about, please refer to the tutorial mentioned above.)
Example Profit Calculation
Let’s say you obtain $15,000 and place it in a bank account paying 5.25% APY, with a 2% monthly payment. Using our assumptions, the 5.25% APY is equivalent to 5.13% APR, or earning 0.4273% of the balance each month.
Beginning of Month #1: You have $15,000 in the bank. Total balance left on credit card: $15,000. Nothing is due yet.
End of Month #1: You earn $64.10 in interest, but also need to pay back $300 (2% of $15,000) out of your bank balance for the minimum payment.
Beginning of Month #2: Total in bank:$14,764.10. Total balance left on credit card: $14,700.
End of Month #2: You earn $63.09 in interest, but also need to pay back $294 (2% of 14,700).
This continues for 12 months, as shown below:
At the end of the 12th month, your bank balance is $12,477.87, and you still owe $11,770.75 on the card. You pay it off completely, leaving you with the resulting estimated profit of $707.12.
Play around with the calculator. Some people actually have over $100,000 out at once, earning them thousands of dollars a year. My credit limits aren’t quite that high…. yet!
Posted in Credit Cards, Deals & Offers, Tools & Calculators | 65 Comments »
