Archives for August 2007

Video Post: Basics of Comparing Investing in a Roth 401k vs. a Traditional 401k

Posted on August 21, 2007 // 22 Comments

I just made my first video blog post which covers part of choosing between a Traditional and a Roth-type of retirement account, be it IRA, 401(k), or 403(b). I’ve covered this topic before, but I wanted to start out with something that I get asked often and also can benefit from the additional information available from a video format.

There are a couple of reasons why I decided to do this:

  1. No Credit Needed made his own first video about the Envelope System of budgeting. I thought it was a good way to explain the concept.
  2. At the same time, my father said that my blog should be more interactive (read: it was dull). When your own father says your blog isn’t cool enough, you know you have to do something!

I don’t think my servers can handle the bandwidth, so I had to throw it up on YouTube. Hopefully it’s not too blurry. It’s certainly a lot more work making a video than typing, so please let me know what you think.

Filed Under: Investing, Retirement, Taxes //

What’s My Marginal Tax Rate Bracket For 2007?

Posted on August 21, 2007 // 17 Comments

For future reference, here are the tax brackets for 2007.

Marginal Tax Rate [Taxable Income] Single Married Filing Jointly
10% $0-$7,825 $0-$15,650
15% $7,826-$31,850 $15,651-$63,700
25% $31,851-$77,100 $63,701-$128,500
28% $77,101-$160,850 $128,501-$195,850
33% $160,851-$349,700 $195,851-$349,700
35% > $349,700 > $349,700

I notice that this year being married with dual incomes will result in us paying more in taxes than if we had stayed single. I really wish the tax code was more simple and logical. Actually, I’m more scared about the AMT this year, which this does not take into account.

For comparison, here are the 2005 and 2006 tax brackets. Taken from IRS.gov. See here for state income tax information.

Filed Under: Taxes //

Bogle On Credit Troubles, Market Timing, And More

Posted on August 20, 2007 // 5 Comments

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.

Filed Under: Investing //

Money Magazine Can’t Time The Market, But Doesn’t Give Up

Posted on August 19, 2007 // 8 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.)

Filed Under: Investing //

Stock Markets Got You Stressed? Here’s A Calming Chart For You

Posted on August 16, 2007 // 19 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:

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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.

Filed Under: Investing, Retirement //

Are The Markets Especially Volatile This Year?

Posted on August 16, 2007 // 26 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.

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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.

Filed Under: Investing //

Model Portfolio #8: Ben Stein and Your Money

Posted on August 15, 2007 // 8 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

Ben

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.

Filed Under: Investing, Retirement //

Model Portfolio #7: Unconventional Success by David Swensen

Posted on August 15, 2007 // 19 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.

Unconventional Success Model Portfolio Breakdown (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.

Filed Under: Investing, Retirement //

How Do I Compare The Interest Rates and Yields Between Money Market Funds and Savings Accounts?

Posted on August 13, 2007 // 25 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).

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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.

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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.

Filed Under: Banking, Investing //

A Maxed Out Roth IRA = $11 a Day

Posted on August 13, 2007 // 31 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.)

Filed Under: Retirement //

Deadline For Transferring 403(b) Plans Approaching

Posted on August 13, 2007 // 1 Comment

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.

Filed Under: General //

Sign-up Bonus: Free $5 From TextPayMe

Posted on August 12, 2007 // 51 Comments

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:

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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.

SignUp at TextPayMe

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.

Filed Under: Deals & Offers //
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