Archives for June 2010

Grantham/GMO 7-Year Asset Class Forecast

Posted on June 17, 2010 // 5 Comments

Jeremy Grantham is the head of GMO, an institutional asset management company that has more than $100 billion dollars under management. According to Wikipedia, he started one of the first index funds? He’s built a reputation as a market genius, with stories of successfully avoiding the Japanese bubble, the Dot-com bubble, and the most recent Credit Crisis. Of course, sometimes he was very early and people lost a lot of money trying to follow him.

Every quarter, GMO releases a 7-Year Asset Class Forecast. You can read it and other market commentary for free by registering on their website. I wouldn’t call looking ahead 7 years a “long” time horizon, but since I’ve exploring future market returns, I figured why not throw it out there for future reference. Here’s the latest forecast as of April 30th, 2010. (Click to enlarge.)

The chart represents real return forecast for several asset classes and an estimate of net value expected to be added from active management. These forecasts are forward-looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Actual results may differ materially from the forecasts above.

GMO expects the High Quality US stock, Emerging Markets stock, and Managed Timber asset classes to have the highest real return over the next 7 years. I pretty much ignore the value-added part (“alpha”) because even if I believed it, GMO won’t manage my money for me anyway. 😛

Filed Under: Investing //

myFICO Coupon Code: 20% to 30% Off

Posted on June 17, 2010 // 3 Comments

Update February 2011: Use coupon code FICO25 for 25% off!

I am not a big fan having to purchase credit scores. I can understand why a lender would pay to get a calculation of your likelihood of defaulting on your loan, but if it’s based on our data, why do we have to pay just to see it? Even if I am declined for a loan, I can only see my report, not the numerical score that supposedly defines my financial life.

There are plenty of “FAKE-O” credit scores out there, but the only place to get your real FICO score is myFICO.com. If you must order your score, use the promotional code CPPSAVINGS to get 20% off.

For the Equifax credit score only, you can get it for $10.95 using the code SW94608, which is over 30% off. You enter the promo code relatively late in the buying process, right before entering your credit card information.

Whenever you do buy a score, I would recommend trying to correlate your score and the current information on your report. Then you can start to learn what changes really affect your score. I’ve applied for 12 credit cards and canceled 5 with almost no appreciable affect to my scores (see credit score myths) – despite all the “rules” – only to have a huge balance on my mom’s credit card (with me as authorized user) show up and drop it by 30 points.

Filed Under: Credit Cards, Deals & Offers //

Portfolio Solutions 30-Year Stock/Bond Market Forecast

Posted on June 16, 2010 // 2 Comments

Every year, the low-fee investment advisor Portfolio Solutions, LLC founded by Rick Ferri provides a 30-year market forecast based on their analysis of several factors. In their own words:

Each year, we analyzed the primary drivers of asset class long-term returns including risk as measured by implied volatility, expected earnings growth based on expected long-term GDP, market implied inflation based on the spread between long-term Treasury Bonds and TIPS, and current cash payouts from interest and dividends on bond and stock indexes. These factors plus others are used in a valuation model to create an estimate for risk premiums over the next 30 years. In a sense, we believe these expected returns reflect what the market is estimating will be a fair payment for each asset class over T-bills over the long-term.

You can view all the asset classes on their site, but I have included some of the major ones below for preservation and reference. Another set of estimates to throw into the mix.

Thirty-Year Return Estimates, Assuming 3% Inflation

Asset Classes

Real Return

With 3% Inflation

Risk*

Government-Backed Fixed Income

Intermediate-term U.S. Treasury notes

1.5

4.5

5.0

Long-term U.S. Treasury bonds

2.0

5.0

5.5

Corporate and Emerging Market Fixed Income

Intermediate-term high-grade corporate (AAA-BBB)

2.3

5.3

5.5

Foreign government bonds (unhedged)

2.5

5.5

7.0

U.S. Common Equity and REITs

U.S. large-cap stocks

5.0

8.0

15.0

U.S. small-cap stocks

6.0

9.0

20.0

REITs (real estate investment trusts)

5.0

8.0

15.0

International Equity (unhedged)

Developed countries

5.0

8.0

17.0

Developed countries small company

6.0

9.0

22.0

All emerging markets including frontier countries

8.0

11.0

27.0

*The estimate of risk is the estimated standard deviation of annual returns.

Filed Under: Investing, Retirement //

Schwab Reduces Expense Ratios on Selected ETFs

Posted on June 15, 2010 // 2 Comments

Discount stock broker Charles Schwab cut the fees on six of its proprietary exchange traded funds (ETFs) on Monday (official press release).

  • Schwab U.S. Broad Market ETFTM from 0.08% to 0.06%
  • Schwab U.S. Large-Cap Growth ETFTM from 0.15% to 0.13%
  • Schwab U.S. Large-Cap Value ETFTM from 0.15% to 0.13%
  • Schwab U.S. Small-Cap ETFTM from 0.15% to 0.13%
  • Schwab International Equity ETFTM from 0.15% to 0.13%
  • Schwab Emerging Markets Equity ETFTM from 0.35% to 0.25%

The press release also contained a comparison of expense ratios for several similar ETFs from different providers. Price war!

For practical purposes, you would often have to have sizable balances before moving ETFs just because of the slight differences in many of these ETFs. Every 0.01% difference means $1 a year for every $10,000 invested (yup, one dollar). Every bit helps, but consider things like tax consequences and trade commissions first.

But this is still good news for me, as my 401(k) administrator recently approved the addition of a self-directed brokerage option available only through Charles Schwab. They also said they plan to start a TIPS and two regular Treasury ETFs this summer. There are no trade commissions charged on Schwab-branded ETFs when traded inside a Schwab account (see previous post with outdated expense ratios).

Commission-free online trading of Schwab ETFs is available to individual investors at Schwab, to the more than 6,000 independent investment advisor firms who use Schwab’s custodial services through Schwab Advisor Services and through Schwab retirement accounts that permit trading of ETFs.

Fidelity Investments offers free trades on iShares ETFs and Vanguard offers free trades on their own Vanguard ETFs.

Filed Under: Investing //

Firstrade Brokerage Switches Clearing Firms, Offers Free Outgoing Account Transfers

Posted on June 15, 2010 // 5 Comments

I received a letter this week that discount stock broker Firstrade is changing clearing firms from Ridge Clearing to Penson Financial*. Not really a big deal, but hidden in the fine print is that existing users can perform an account transfer to another broker with no fee if you request a transfer within 30 days from the Conversion Date (“on or about June 25, 2010”). The normal outgoing ACAT transfer fee is $50, so this gives you an opportunity to consolidate or switch brokers with no cost.

If you are looking to open a new account with Firstrade, they do offer an fee rebate against your old broker for transferring over. In addition, they have a Firstrade Refer-a-Friend program that offers new customers 5 free trades to start.

* Penson Financial is used by several other discount brokers, including low-price leaders Zecco and OptionsHouse.

Filed Under: Deals & Offers, Investing //

Future Stock Market Returns: Price-Earnings Ratios as a Long-Term Predictive Tool

Posted on June 14, 2010 // 19 Comments

As part of gathering the data needed to go beyond net worth, I’ve shown ways to track find your personal savings rate by tracking your current spending with your current after-tax income. For now, I’m skipping ahead to estimating your portfolio’s long-term investment returns.

There are a lot of ways to estimate future stock returns. You’ve probably heard of the P/E ratio, which is usually the price divided by last year’s earnings. This is one measure of “value”. Here is a plot of historical values of the inflation-adjusted S&P 500 index, along with its annual earnings (source).

Historical Price & Earnings Separately
Historical P/E Ratio

As you can see, there is a lot of volatility in P/E ratio. The “P/E 10” ratio is the share price divided by the average earnings over the last 10 years. By taking a long-term average, you smooth out the noise and bumps.

Professor Robert Shiller of Yale University, which provided the above data as well, spoke about the usefulness of this ratio in his book Irrational Exuberance, and provided the data for the following chart. The x-axis shows the real “P/E 10” of the S&P Composite Stock Price Index (inflation adjusted price divided by the prior 10-year mean of inflation-adjusted earnings). The y-axis shows the geometric average real annual return of the same index, reinvesting dividends, and selling 20 years later.

Price-Earnings Ratios as a Predictor of Twenty-Year Returns

You can definitely see the relationship that a higher P/E10 usually leads to a lower future return. However, there is still a great deal of scatter for any given P/E10 ratio.

What about today? As of June 2, 2010 the P/E10 is 19.99 with the S&P 500 index at around 1,098. Historical average is about 15. Back in March 2009 when everything was looking bleak, the P/E10 was 13.32. (P/E10 is also referred to as Cyclically Adjusted Price Earnings (CAPE) ratio.)

The Early Retirement Planning Insights website provides a calculator that forecasts future returns based on the current value of P/E 10, again using historical returns. I’m not sure exactly how they did all the regression. Here’s their return forecast for a P/E 10 ratio of 20.

Future Returns Prediction (P/E10 = 20)

For a 20-year forecast, it shows an average outlook of 4% returns, on a real (after-inflation) basis. Of course, the range indicates that the actual returns could look much worse. As the time-horizon lengthens, the range gets smaller due to the phenomenon of reversion to the mean. Kind of scary to look 60 years ahead!

Warnings

To me, this stuff is useful as a general Big Picture planning tool, not as a short-term trading tool. These are just predictions based on the past, which is often the best we can do, but still far from perfect. Many people use P/E10 as a tool for market timing, shifting their asset allocation as it rises and falls. Shiller himself states that his plot above:

confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low.

That may be true, but market timing systems can really test an investor’s faith when they seem to be wrong for a long period of time. On a personal basis, I’d probably limit any asset allocation moves – if any – to if the P/E10 ratio moved to an extreme, for example dropped below 10 or above 25.

Filed Under: Investing, Retirement //

PineCone Paid Survey Links Open Again

Posted on June 14, 2010 // 8 Comments

Here is an updated application link at Pinecone Research, which is again accepting new members. (May expire at any time, so apply now if you’re interested!) Looks open to all, but only one person per household can sign up. Thanks Rafa for the tip.

PineCone Research remains one of the better paying and reliable survey companies, with a payout of $3 (check or PayPal) for each 15-minute online survey. The hardest part is getting accepted, as they only take applications intermittently. Some users have reported an increase in unpaid “weed-out” surveys, while others seem to remain happy.

Other legit survey sites in my experience are SurveySavvy, InboxDollars, Opinion Outpost, GlobalTestMarket, NFO MySurvey, and BzzAgent.

I shared my thoughts on paid surveys in general here. I call them Bored Money – not terribly efficient but you can do it at your leisure and occasionally get to try some neat things like shampoo, dog food, new soda flavors, and once a new $100 Sonicare toothbrush which I got to keep.

Filed Under: Bored Money //

4 Stash Your Cash Deals Most People Haven’t Heard Of

Posted on June 11, 2010 // 23 Comments

Here are four places to stash your cash that aren’t advertised very heavily, so your co-workers probably haven’t heard of them. They are all FDIC-insured, and offer higher yields than most of their direct competitors. Each one is best depending on your investment time frame and deposit size.

Free Rewards Checking at DanversBank

DanversBank offers their Free Rewards Checking account paying 4.01% APY on balances up to $25,000, provided you satisfy the following each month:

* perform at least 12 debit card transactions (excluding ATMs);
* receive their monthly statement electronically;
* access Online Banking, and
* sign up for direct deposit or receive a recurring ACH.

There are no minimum balance requirement or fees, and ATM fees are refunded as well if you meet the above requirements. The branches are located in the Boston area, but accounts are open to anyone in the US. If you can be diligent every month (otherwise you get piddly interest), these types of account are great interest boosters.

Ally Bank 5-Year CD with Small Early-Withdrawal Penalty

Ally Bank LogoOkay, so Ally does spend a lot of money on advertising, but a feature they rarely mention is actually the best reason to open an account with them. They only hit you with a early withdrawal penalty of 60-days of lost interest if you “break” a CD with them. The Ally Bank 5-year CD currently yields 1.60% APY (as of 10/25/13). Rates change constantly, but let’s assume you have a certificate of deposit from any bank paying 2.99% APY with an early withdrawal penalty of the last 60 days of interest. (2.99% APY ~= 2.95% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.

If you look carefully at this charts, you’ll see some great deals:

  • After only 4 months, your annualized rate is 1.48%. (Essentially you 2 months out of 4, which is half of 3.04%). This isn’t bad at all, considering their liquid online savings account is currently paying 0.85% APY.
  • After 1 year, your annualized rate is 2.49%. You can’t find a better rate than this at any other bank for a 1-year CD. Likewise, after 2 years, your annualized rate is 2.87%, compared to Ally’s current 2-year CD at 1.05% APY, although it does have a “raise your rate” feature that lets you bump it up once if rates rise.
  • After 3 years, your annualized rate is 2.83%, again a top rate. Thus, even opening a 5-year CD and holding for anywhere between four months and 3 years gets you a better rate than any other bank currently out there (including Ally itself). There’s also no minimum deposit required to open, so you can make each CD as small as you like!

SmartyPig FDIC-Insured Online Piggy Bank

I reviewed SmartyPig.com a while back when they had just broke onto the scene, but they have made a lot of improvements in response to customer feedback since then. You can think of them like an online piggy bank that helps you towards savings goals, but they’ve added so much flexibility that you can pretty much use them like any other savings account. The best part? They currently pay 2.15% APY on balances up to $50,000 (FDIC-insured). That’s better than any other savings account out there, with no additional requirements. No minimums, no maintenance fees.

An added feature is that if you set a savings goal and reach it, they offer “boosts” if you redeem your cash for a gift card in their mall. My favorite is the 4% boost at Amazon, which for example will get you a $260 gift card for $250 cash. Other highlights include Macy’s at 12% and Travelocity at 10% boost.

Sallie Mae Bank – Online Savings Account

Sallie Mae is best known as the huge student loan originator and servicer. Their new Sallie Mae Bank is an FDIC-insured bank that offers a very competitive 1.40% APY in their online savings account. Not a bad deal to lend out money to captive students at high interest rates, and pay much less as a bank! Hopefully this means that they can keep their rates higher than other banks.

The quickest way to describe it is as another clone of Capital One 360 (currently paying 0.75%). That means… liquid, no minimum balance, no minimum fees, and no deposit caps or tiers (just the $250k FDIC insurance limit to worry about). It’s designed to complement your existing accounts. You can link an unlimited amount of other bank accounts for easy online transfers, which take the usual 2-3 days to complete. Interest is compounded daily and credited monthly.

Also, if you have an account at Upromise, you can link your Sallie Mae account and have your Upromise earning deposited there. You can even get a 10% extra bonus if you do one of the following:

To be eligible for the 10% annual match on your Upromise earnings from Upromise you must link your High-Yield Savings Account to your Upromise Account and, within 90 days of opening your High-Yield Savings Account, either: (1) set up an Automatic Savings Plan with a monthly deposit of $25 or more, or (2) fund the account with $5,000 or more. Upromise will match 10% of your Upromise earnings posted as “funded” to your Upromise Account during the calendar year of January 1 through December 31. Your 10% annual match will be deposited into your High-Yield Savings Account in February of the following year provided that both accounts remain active and are in good standing at the time of transfer.

Filed Under: Banking, Deals & Offers //

Penfed Visa Platinum Cashback Rewards Card – 5% Cash Back on Gas

Posted on June 10, 2010 // 35 Comments

There used to be a bunch of great cashback cards for gas, but now the only one that still offers 5% back to consumers is the PenFed Visa® Platinum Cash Rewards Card. It offers:

  • 5% cash back on gas purchases (must pay at pump)
  • 0.25% cash back on everything else.

No annual fee. The rewards are credited on each monthly statement, so that you don’t have to wait to meet any $50 thresholds or remember to call in. If your family spends $200 on gas per month, that alone will have this card paying you $120 per year in rewards.

The catch? You must also be a member of the Pentagon Federal Credit Union, and you can apply for membership as part of the credit card application. In general, membership is open to members of the military and affiliated organizations, US government employees, or the family or household of existing members. However, anyone can become eligible by joining the National Military Family Association (NMFA) for a $20 one-time fee (and it goes to a good cause). PenFed also offers other competitive financial products, including low-rate mortgages and long-term CD rates.

Filed Under: Credit Cards, Deals & Offers //

Calculating Our Personal Savings Rate

Posted on June 9, 2010 // 24 Comments

Do you know what your household’s savings rate is? Most of us probably have a rough guess, but I wanted to use some more reliable data. Here’s the definition again for my purposes:

Current Spending

There are plenty of ways of tracking your expenditures, as anyone who has tried to follow a monthly budget has found out:

  • Handwritten expense lists
  • Excel or other spreadsheets
  • Online budgeting tools
  • PDA/Smartphone input tools
  • Automated account aggregation tools

I’ve tried various methods to track my expenses manually, but never had the commitment to follow through for more than a month or two at a time. I track all of my numerous financial accounts using account aggregation site Yodlee, but since August 2009 I have linked my primary checking accounts and the few often-used credit cards at the similar-but-nicer Mint.com.

It took a lot of manually categorizing individual transactions, but now it takes less than 10 minutes every couple of weeks at Mint to correct the few new stores I visit (mostly small restaurants). This means I almost have an entire year of spending data from August 2009 to May 2010:

As you can see, there was a general trend, but a few months had major spikes. December had holiday gifts, some travel, and end-of-year charitable giving. In April, we bought a new high-efficiency washer/dryer and had some home electrical-repair bills. In May, we bought our plane tickets and hotel accommodations for a trip to Peru. The lesson here is that there are always going to be these spikes, and it’s best to be prepared and account for them. Our actual average spending ended up being higher than I would have guessed. The monthly fluctuations ranged from 20% below average in October to 30% above average in December.

Current Income

We are a dual-income couple with no kids currently. Our “big-picture budget” is to be able to live off the lesser of our two incomes. We each make relatively good money, so we have been lucky to be able to do this for a few years now. On a practical basis, we do this by having one primary joint checking account in which we only direct deposit that one paycheck. All bills are paid out of this account. This way it psychologically easier to “live within the means” of that single paycheck as the balance goes up and down.

Current Savings Rate

I don’t reveal actual income numbers, so it’s easier to share the savings rate. I am using after-tax income because I feel it is more applicable. According to the above data, on average we spend 84% of the single after-tax paycheck each year, giving us a saving rate of 16%. This is helpful to know we have a buffer if one of us were to lose our jobs. (We also max out the pre-tax 401k plan employee contributions at our jobs, so the single paycheck is already reduce a bit.) When both of our incomes are included, our saving rate is over 60%.

You may consider this low or high, but in terms of early retirement for most people you’ll need to put away a lot more than the 10 to 15% recommended by some experts. I like the idea of both spending a year’s worth of income and saving a year’s worth of income, although this will not be realistic for everyone.

Filed Under: Budgeting, Frugal Living, Retirement //

National Personal Savings Rate Definitions: NIPA vs. FoFA

Posted on June 9, 2010 // Leave a Comment

In looking up some stats for personal savings rates, I found that the Bureau of Economic Analysis (BEA) provides a chart of two separate calculations that track the personal savings rates of US taxpayers:

  1. The National Income and Product Accounts (NIPAs) method, and
  2. The Flow of Funds Accounts (FFAs) method

You may find either of these quoted in mainstream media articles whenever there is a big shift or one goes negative temporarily. Both methods have been criticized for the accuracy, in which I won’t go into detail here. The main differences between the NIPA and FoFA methods are outlined in this chart from the AARP paper [pdf] “The Declining Personal Saving Rate: Is There Cause for Alarm?”:

A few things to note:

  • When I read “disposable income”, I normally think of what’s left over after paying for food and shelter. In this case, disposable income is just personal income minus “personal contributions to social insurance and personal taxes”.
  • Both NIPA and FoFA exclude capital gains on investments, which some say contributes to a “wealth effect” where people will spend more because they feel richer due to growth of investments. (not as much recently…)
  • From the chart, FoFA includes the purchase of new assets and investments as personal savings. NIPA includes employee 401(k) and pension contributions as wage income.
  • FoFA treats the purchase of consumer durables (cars, major appliances) as a form of savings, while NIPA treats it as consumption.
  • NIPA says that paying your mortgage (owner-occupied housing) is savings as imputed rent, while FoFA counts your added home equity as an asset, but your mortgage payment as a liability.

Confused yet? Well, I hope at least you came away with something. The AARP paper goes on to explore various theories for the long-term decline of the personal savings rate. If you’re looking for more, here’s another paper that explores the differences.

Filed Under: Budgeting, Frugal Living, Retirement //

Beyond Net Worth: Tracking Financial Progress Better

Posted on June 8, 2010 // 12 Comments

For a while now, I’ve been thinking about a better way to publicly track my progress towards financial freedom and also allow easier comparisons between readers. I’m sure some people would miss the net worth updates, but I have reached the point where our net worth fluctuates mainly with stock market valuations and not due to actual improvements to income or savings rates.

First, I started to brainstorm the required data needed for such tracking, each of which I can address in a future post. Once we collect these numbers, I can then put out some numbers and ratios that could be better indicators than plain net worth. Heck, a portfolio of a million dollars is nothing if you plan on spending $100k a year, but if you only spend $40k a year and have a small pension, you could be all set.

  1. Current Monthly Income (After-Tax)
    How much money are you taking in right now? For those with variable paychecks, it would probably be best to average this out over the trailing 12-months or 6-months.
  2. Current Monthly Spending Rate
    How much are you spending? This should also be averaged out over at least 6 months, in order to capture all those irregular bills like my semi-annual car insurance bill, as well as those unexpected expenses that always pop up. For example, in the last few months alone we have had an $1,000 electrician bill and a $500 auto repair tab.
  3. Current Portfolio Size
    How big is your current investment nest egg? If you include your house, then you’ll need to include the cost of renting in your future spending.
  4. Future Spending Rate
    What is your “burn rate” going to be in retirement or semi-retirement? Many online calculators simply assume this is 85% to 100% of your current monthly spending. This can be too generic. For example, in less than 20 years, I plan to have my house paid off. My mortgage is more than 50% of my current expenses! Other items like health insurance premiums will be harder to predict.
  5. Investment Return
    There are many smart folks making educated guesses about future market returns based on both looking backwards and forward. Based on your chosen asset allocation, one can at least attempt a rough estimate of future after-inflation returns. We can’t rely on these numbers, but it’s a good beginning.
  6. Safe Withdrawal Rate / Retirement Income Rate
    How will you create your income during retirement? If it’s going to be from selling stocks or bonds, you’ll have to decide on how much is okay to withdraw each year so that you don’t run out. Will you draw a fixed percentage each year? Adjust annually for inflation? Adjust annually for market returns?

    What if you are planning to live off dividends or bond income? What if these fluctuate? If you have a pension or annuity, how will this fixed income change how you draw down other assets?

Potential Indicators

A simple example would be calculating your personal savings rate, which would be independent of market fluctuations for most people:

Multiply by 100 for a percentage. Hopefully this isn’t negative! Another good ratio might be your portfolio multiplier factor, which tracks how big your portfolio is relative to your planned future spending.

Depending on who you talk to, a Portfolio Size Factor of 25 to 35 might be desirable if you are withdrawing money from a portfolio of 60% stocks and 40% bonds. Adjustments should be made for pre-tax vs. post-tax accounts.

I could post these and other monthly indicators each month, instead of net worth. What do you think? Any other numbers that I’m missing?

Filed Under: Budgeting, Retirement //
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