Fidelity IRA Match: Switch and They’ll Match Your Contributions Up to 10%

Fidelity has released an infographic [pdf] about the power of saving 1% more of your income:


To coincide with this, Fidelity started a related promotion to entice folks to move over their IRA assets to them. The Fidelity IRA Match is designed to mimic the 401(k) contribution matching that many employers offer, where Fidelity will match between 1% and 10% of your future contribution for 3 years if you roll over $10,000+ to them. Valid for both new and existing Fidelity customers, but only for IRAs and not other account types. Here’s the breakdown:

Qualifying transfer* Match rate Estimated max benefit* (age 50+)
$10,000 1% $165 ($195)
$50,000 1.5% $247.50 ($292.50)
$100,000 2.5% $412.50 ($487.50)
$250,000 5% $825 ($975)
$500,000 10% $1,650 ($1,950)


* Qualifying transfers must be rollovers or transfers from non-Fidelity IRAs (Traditional or Roth). Rollovers from workplace savings plans are not eligible for this offer. Estimated max benefit is based on $5,500 annual contribution for three years ($6,500 for age 50+). Max benefit is set at $1,950.

It’s an interesting proposal. Keep in mind that many IRA custodians will ding you with an outgoing transfer fee if you move your money out. Also, Fidelity has other deposit promotions going on that offer a little less than the max payout here, but they are more straightforward bonuses.

To participate, you must register at If you do participate, I would like to point out the availability of their Fidelity Spartan Index funds, their Fidelity Freedom Index 20XX target-date funds which you can now purchase in an IRA, and their commission-free iShares ETFs. Fido has some good, low-cost products on their menu, but you may have to look for them.

Selected fine print:

[Read more…]

AssetBuilder 2015 Annual Letter: Currency Effects and Interactive Returns Tool

I enjoy reading articles by Scott Burns (also here) because he sometimes offers a unique perspective on things. He recently released the 2015 Annual Letter for his asset management company AssetBuilder. The whole thing is a good read, but here are two items of note:

Keep in mind the effect of currency fluctuations on your portfolio returns. In 2014, the MSCI European Index fell 6% in dollars. However, that index actually rose nearly 7% in Euros. Most international stock funds sold to US investors, including the Vanguard Total International Index fund, are not currency-hedged. The strong dollar in 2014 has made international returns looks worse from a dollar-based perspective.

At the same time, the dollar rose against other currencies. Over the year, the dollar gained 12.5 percent against a basket of widely traded currencies tracked by the Wall Street Journal. That increase created a looking glass problem. U.S. investors felt investing in Europe was a losing proposition, with the MSCI Europe Index falling 6.18 percent in dollars.

Europeans, meanwhile, felt differently because the index rose 6.84 percent in Euros. Indeed, the world looked strangely positive to an internationally diversified Russian investor. Thanks to the miracle of modern currency collapse, international portfolios measured in Rubles soared. We doubt that gave Russian investors great comfort.

I still like the idea of having my portfolio diversified globally, and hopefully this makes you feel a little better about the recent performance of your international holdings. This will someday work in reverse, where currency fluctuations makes returns look even better.

Also included is an interactive table of asset classes ranked by returns over the last 15 years, similar to the Callan Periodic Table. But with this graphic, you can hover your mouse over any asset class and see it in highlighted. Here it is with the S&P 500:


Notice that the S&P 500 has had quite a run the last 6 years. Since the -37% drop in 2008, in subsequent years 2009-2014 the S&P 500 has went up 26%, 15%, 2%, 16%, 32%, and 14%. It would have been really hard for the “I’ll buy on the next dip” folks to time their way back in the market. If you’ve been invested throughout the entire time, you should be rather pleased with yourself.

Tax-Efficiency and Qualified Dividend Income Percentages

10keybiggerDividend distributions from mutual funds and ETFs are either qualified or non-qualified, and the difference could have you paying double the taxes. Qualified dividends are taxed at the lower long-term capital gains rate, which varies from 0% to 20%. Non-qualified dividends are taxed at ordinary income rates, which can be as high as 39.6%. Even though they all show up as “dividends” in your account, their classification can make a big difference in your final after-tax performance.

At the end of each year, Vanguard provides a list of their mutual funds and what percentage of their dividends are qualified. Here is their 2014 report and 2013 report [pdf]. I don’t know if other fund companies do the same. The Vanguard (US) Total Stock Market Index ETF and mutual funds had 100% of their dividends as qualified for 2014 (VTSMX, VTSAX, VTI). The Vanguard Total International Stock Index ETF and funds had 72% of their dividends as qualified (VGTSX, VTIAX, VXUS). The numbers for 2013 were similar. To me, this establishes a sort of baseline expectation.

I recently made a tweak in my portfolio and replaced my value-tilted holdings with a couple of WisdomTree ETFs. While doing my 2014 taxes, I noticed on the 1099-DIV tax form that only half of the dividend distributions were counted as “qualified dividends”. What was up? I took a closer look.

Here are the specific Wisdom Tree ETFs, their closest Vanguard competitor ETFs, and their respective 2014 qualified dividend income (QDI) percentages with the WisdomTree numbers based off my 1099-DIV form:

  • WisdomTree SmallCap Dividend ETF (DES) 64%
  • Vanguard Small-Cap Value ETF (VBR) 72%
  • WisdomTree Emerging Markets SmallCap Dividend ETF (DGS) 34%
  • Vanguard FTSE Emerging Markets ETF (VWO) 37%

After comparing these numbers, I guess the WisdomTree ETFs aren’t that inefficient on a relative basis, but I’m still not very happy about it because I am holding these ETFs in taxable accounts. My current ordinary income tax rate is pretty high, and I need to figure out a way to fit these inside an IRA or 401(k) plan.

I hadn’t realized that the dividends from nearly all Emerging Markets ETFs were so tax-inefficient. (I usually just hold Emerging Markets exposure inside a Total International fund.) As the dividend yield on these Emerging Markets ETFs range from 2.5% to 3%, it makes a difference over the long-run to keep these in tax-sheltered account if possible.

By the way, I think noticing these types of things is one of the benefits of doing your income tax returns yourself. Even if you hire a professional, try running the numbers on your own and see if they match up. Even CPAs can make mistakes.

Costs Matter: Vanguard Long-Term Performance Update 2015

costsmatterThe purpose of Vanguard’s commitment to low-cost investing is not just to be cheap, it is to give their clients higher performance. Whenever a money manager charges higher fees for themselves, they will have to compensate by creating that much higher returns through whatever combination of skill or luck.

Over long periods of time, the luck tends to shake out and the higher expense ratios usually become a very hard hurdle to continually overcome. (In turn, this pressure also leads some managers to take increasingly risky bets and have luck either save their butts or lose all their client’s money!)

Taken from a recent Vanguard article, the chart below confirms this tendency. It shows the percentage of Vanguard funds in each major asset category that exceeded the average returns of their competing fund peer groups (as determined by industry-standard Lipper) over the 1-, 3-, 5-, and 10-year periods ended December 31, 2014.


Every single number on that 10-year return column is 90% or higher. Every asset class. Is that something I could interest you in?

Chart: Vanguard Low-Cost Philosophy At Work

costsmatterThe debate between active and passive investing has come full circle. We’ve officially gone from “index funds will never work!” to “index funds are working too well, it can’t keep on going”. Check out the Forbes article Is Vanguard Too Successful?

Passive vs. active is just a smokescreen. You know what really works? Low costs! There was a big hubbub when Morningstar admitted that expense ratios were a better predictor of performance than their much-advertised star ratings system. Vanguard has many successful actively-managed funds and that is due both to good managers and low costs. Wellington, Wellesley, PrimeCap, they all have expense ratios that are fractions of their competitors.

In addition, what makes Vanguard special is their inherent, longstanding commitment to low costs. Look at how the asset-weighted average expense ratio of all Vanguard funds (including actively-managed funds) has dropped since their inception:


Providers like Schwab and iShares all have some ETFs that are very low cost now, but they also have a duty to maximize shareholder value. If you’re a for-profit company and you think you can keep prices the same even as your assets rise, you do that. The very structure of Vanguard states that the investors themselves own the funds, which means they naturally pass on any savings onto the retail investor. (I do believe that the recent competition is good however and it keeps everyone, including Vanguard, on their toes.)

The “at-cost” investing structure is why the majority of my assets are invested in Vanguard funds and ETFs.

Comparing Your 529 In-State Tax Deduction vs. Better Out-of-State Plans

50statesI’m getting ready to put down a decent chunk of money into a 529 college savings plan, which means lots of research as there are a lot of options and nuances. A general plan for those without strong investment preferences would be to go with one of the age-based portfolios from a consistently top-rated plan by Morningstar, or your in-state plan if the tax deduction is juicy enough.

But how exactly do you compare them? The easiest way to calculate your in-state tax benefits is to use a tool from either Vanguard or

Let’s say you are a married Virginia resident making $100,000 in household taxable income and you want to contribution $4,000 a year to college. Here’s what the Vanguard tool says:


The big block of text explains the assumptions the tool had to make in order to keep things simple. Note that in addition to the state tax savings, you have to consider that you’ll have less state tax to deduct on your federal return (if you itemize deductions).

The SavingForCollege tool comes to the same conclusion regarding tax savings (minus a rounding difference). However, it also goes one step further and helps you quantify the relative value of your in-state tax deduction.


In order for the out-of-state 529 plan to make up the difference from the lost state tax benefit, it would have to achieve better net investment returns of 0.25% per year over the 18 year time period.

So if your in-state plan offers similar desired investments but with expense ratios that were 0.25% higher than the best out-of-state plan, you may actually want to forgo the tax deduction. Note that this number is also based on a set of default assumptions like an 18-year investment period and a 6% annual returns for both plans (you can edit these as you like).

But wait! Some state plans allow you to roll your assets over to another state after making the contribution, and keep the tax deduction. So you could make the contribution, grab the tax credit, and then roll it over into another state’s plan. (You are allowed to have multiple 529 plans.) However, many states have a recapture or “clawback” provision that will make you pay back the tax benefit somehow. For example, if you perform a rollover or non-qualified withdrawal from the Virginia 529 plan, the principal portion will be added back to your Virginia taxable income (to the extent of any prior deductions).

Index Funds vs. Hedge Funds: Buffett $1,000,000 Bet Update 2015


It is now 7 years in on the 10-year bet between Warren Buffett and a successful hedge fund manager. In 2007, Warren Buffett challenged any hedge fund to a long-term bet against the S&P 500. He found a taker.

Fortune magazine announced “Buffett’s Big Bet”, where $1,000,000 would go to the charity chosen by the winner. The bet would run from 2008 to 2018. Buffett would take the S&P 500, represented by the Vanguard S&P 500 index fund (Admiral shares). Protégé Partners would stand behind hedge funds, represented by the average return of five hand-picked hedge funds.

Carol Loomis has just posted the 2015 update in Fortune. The hedge funds were in the lead early on, but started lagging behind in the 2012 update. In 2013, the performance gap widened to about 30%. The gap has widened even more. In 2014, the S&P 500 index fund went up 13.6%, whereas the hedge funds only rose 5.6%.

Through the entire 7-year period that runs through the end of 2014, the S&P 500 index fund is up 63.5%. The hedge fund marker only went up an average of 19.6%. That’s now a gap of over 40%. With three years left, the hedge funds have some serious catching up to do.

Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%. (The “estimated” takes into account that not all of the five funds have final figures for 2014).

Will this collection of hand-picked hedge funds be able to outperform a simple, low-cost index fund over the long run? Hedge funds may employ some bright minds but also charge hefty fees of roughly 2% of assets annually + 20% of any gains. At the start of the bet, the past performance of the hedge funds were excellent – from inception in July 2002 through the end of 2007, the Protégé fund gained 95% (after all fees), soundly beating the Vanguard S&P 500 index fund’s 64%. But lots of funds have good performance when looking backwards. It is much harder to pick out winning managers ahead of time (and harder on those managers when everyone is looking and there is too much money to deploy).

Read the terms of the bet and each side’s opening arguments at This carefully-tracked bet was part of the inspiration for my transparent Beat the Market experiment. Too often, people are not honestly and accurately tracking the performance of their portfolios… again, starting ahead of time! It is natural to point out your winners and conveniently forget the losers.

Read my original 2008 blog post and halfway 5-year update here.

Viewing Stock Market Risk Over The Long Run

stockslongrun3The following is a chart that I usually like to pull out during a crisis when people are scared of investing in the stock market, but since I just found a nicely updated version of it, I had to share. It is taken from Jeremy Siegel’s book Stocks for the Long Run and found via this Vox article about how most people incorrectly view real estate as the best long-term investment*.

Here is a chart showing the historical range of real (after-inflation) returns for US stocks, long-term bonds (bonds), and short-term bonds (T-bills) from 1802 to 2012.


The chart shows that over bried time periods, the stock market has been historically more of coin flip than anything else. Over a year, you could get anywhere from +70% to -40%. With bonds and cash, the swings are much less wild. But as you lengthen your holding period, your risk of losing money over that time decreases significantly. For time horizons of 20 and 30 years, only stocks never lost you money after inflation.

Note that the average annual returns for each respective asset class remains the same across all time periods. Via the CFA Institute:


This supports the advice that it doesn’t really matter as much what your plan is, but more that you pick one and stick with it. Going heavy on stocks and then bailing out when they are in a funk, or going heavy on bonds and bailing out when they are in a funk, all that is worse than doing NOTHING and simply riding it out. As they say, it’s not about timing the market, it’s about time IN the market.

I believe it was one of William Bernstein’s books that suggested that young folks who understand this should put as much money now into stocks as possible, as to increase your time horizon. Put 100% of your money into stocks now, and then as you get older put more of your money into bonds to get a balanced mix eventually. This can be hard though, as you’re asking the people with less experience and smallest assets to hold the thing that is most volatile. Going 80/20 or 70/30 from beginning to end is also a reasonable approach in my opinion (and personal experience with my own portfolio).

Now, another well-known professor Robert Shiller reminds us that the period above includes the most economically successful century of the most economically successful country in the world so far… and will not necessarily repeat itself. I’m not saying that you should expect 6% real returns from stocks. Shiller’s CAPE ratio model itself forecasts a 3% real return for stocks over the next decade. I’m focusing on the fact that stocks are investments in productive businesses and that the volatility of the pricing of such businesses will stabilize when held across longer holding periods.

* I would actually argue that the long-term return of real estate is actually not that far behind that of stocks, if you add in the imputed rent from the house. Yes, it may be true that the value of a house doesn’t increase that much over inflation over the long run. But houses are also productive in that they can create their own income! If the value of the rent that you could get from that house is included, that could add another 4% to 6% to the return historically. 5% real return would be smack dab between bonds and stocks.

Personal Capital Sign-Up Bonus: Free $10 Amazon Gift Certificate

perscapiphone2Update 2/23: $10 limited-time offer has expired.

Personal Capital is a free tool that allows you to connect all your financial accounts to track your spending, investments, and net worth. If you are familiar with, it is somewhat similar but with more features that help you track your investment portfolio like performance, benchmarking, and asset allocation.

To encourage you to try them out, Personal Capital is offering special bonus if you sign-up for a new account and link at least one bank or investment account. Credit cards, debit cards, Paypal, and Coinbase account do not count. This is a refer-a-friend promotion, so I will get the same thing if you use my link (thanks!).

I don’t know exactly when this will expire, but I do know it is a limited-time promotion. They had a Black Friday deal that was similar and it was very popular (who doesn’t like free money?). You will receive the gift certificate code via e-mail, so be sure that is valid.

Note that if you provide a phone number, Personal Capital may call you to set up a free financial consultation as they make money by providing add-on paid financial advice. (Their management fees are 0.89% annually for the first $1 million, which is high in my opinion.) In my experience, if you are not interested just tell them so and they will not pressure you any further and they won’t call ever again. Or you could take a advantage of the free consultation to answer any money questions you have, as many of their advisors hold the Certified Financial Planner (CFP) designation.

In any case, the base financial tracking service remains completely free. When tracking net worth, I think it’s neat that you can set it to update your home value using a Zillow estimate. I definitely use the smartphone app much more often, as it allows a quick update and supports Touch ID for easy authentication if you have a recent iPhone. Selected fine print below:

Giveaway hosted by Personal Capital. A user must link at least one valid financial account. Credit or debit card, PayPal and Coinbase accounts do not count towards the giveaway. An Gift Card valued at $10.00 will be awarded to each new customer who link an account and the customer who refers new customer. All awards will be electronically delivered through Amazon to customer’s email provided in the registration process. The offer will apply only to the first time customer when a unique account is linked and will not be applied if the same account is linked multiple times in the same or additional accounts, or for any previous account, which was closed by the customer.

Why You Shouldn’t Bet on Higher Oil Prices Using the USO ETF


Does this sound familiar? Perhaps you’ve heard it around the water cooler, or considered it yourself?

  1. Crude oil has dropped to $50 a barrel.
  2. You just know oil prices will go up eventually.
  3. The futures market is kinda complicated… I know! I’ll buy an ETF like USO.
  4. Profit!?!?

Here are a few things you should know first about the United States Oil Fund (USO) and similar oil ETPs.

You aren’t the only one who’s thought of this. Over $7 billion dollars have already gone into oil ETFs in the last two months alone. Read this series of Businessweek articles on the subject, all by different authors:

The usual market timing questions apply. Sure, the price will go up, but how long is “eventually”? It might be 1,3,5, or 10 years. If you have a specific time-frame in mind, then you can go out on the futures market and then buy a specific contract. But if oil hasn’t risen enough at that time – maybe it peaked earlier and dropped, or it peaks further in the future – you’ll have lost money.

If you buy the ETF, when is a good time to sell? $80 a barrel? $100? $120? What if you sell and then it rises another 50%?

What if it takes a while? The longer you have to hold these ETFs, the less likely they will track the price of oil (see below). Meanwhile, the ETF provider is happily collecting their annual expense ratios of 0.50% to 1%. At the current asset level of $1.28 billion times the 0.45% management fee, that’s $5.8 million a year in fees.

Your commodities futures ETF may not track the price of oil very well at all. To properly track the price of oil, you’d need to buy some oil and store it somewhere (and pay storage and security costs). These ETFs don’t do that, instead they buy oil futures contracts and keep rolling them over into new ones when they expire. That’s not the same thing. USO is designed to track daily price movements in the price of oil, not long-term movements!

Visually, here are a chart from Attain Capital that compares the change in USO share price (purple) as compared to the spot price of crude oil (red) when oil prices doubled between the start of 2009 and the end of 2010 (blue line adjusts USO underperformance for roll costs):


Further, consider these stats from Businessweek (emphasis mine):

Since USO launched in April 2006, it has returned -71 percent, while the spot price of oil returned -26 percent. The last time oil roared back from a bottom was in 2009, when it returned 78 percent on the year. USO returned just 14 percent.

If you don’t understand the terms “backwardation”, “contango”, and “roll costs” then you don’t understand commodities futures. If you don’t understand something, you probably shouldn’t buy it. Take it straight from a USO executive:

John Hyland, chief investment officer of USO, says the fund is a “tactical trading vehicle predominately used by professional traders,” and not meant to be a buy-and-hold investment.

In the end, such a play is a speculative bet and it may just pay off, who knows. But it certainly isn’t a wise investment, especially if the tool you’re using doesn’t even do what you want it to do.

This Is Why My Retirement Portfolio Is Simple and Balanced

Via The Reformed Broker, investment manager Research Affiliates shares how a simple, balanced 60/40 portfolio (specifically 60% S&P 500 stocks, 40% 10-Year US Treasuries) did pretty darn good in the past 100, 50, and 25 years:


It even did well over the last 10 years, considering that “blip” we had in 2008. The 60/40 portfolio outperformed 9 of 16 core asset classes, all while maintaining lower-than-average volatility.


Of course, they also predict (using sound reasoning, in my opinion) that the same 60/40 portfolio will only produce a 1.2% inflation-adjusted return for the next 10 years. Still, I don’t know of any better options.

529 College Savings Plans Now Allow Two Investment Changes Per Year

529Here’s a quick note about a change in 529 college savings plans. Up until recently, you were only allowed one investment change per year, per beneficiary. Starting in 2015, a change in federal law means that you are now allowed two investment changes per calendar year, per beneficiary.

Specifically, this is due to a provision of the new ABLE (Achieving a Better Life Experience) Act. For those that like history lessons, this Fairmark article has more background on why 529s restrict investment changes at all.

Now, the rules have always permitted a change in investment options any time you change the account’s beneficiary, so people have also used this as a workaround although it may not be wise to abuse it. Changing your asset allocation all the time usually isn’t a good idea either, but now you have a little more flexibility (i.e. you can undo a change you regret making!).