Archives for August 2011

Buy, Hold, and Rebalance! How Patient Investors Still Quietly Grow Their Money

Posted on August 17, 2011 // 15 Comments

There is a lot of uncertainty in investing, and it always seems like especially now. Buy and hold has been called dead many times. However, if you look carefully, you’ll find that there are many people who have quietly grown their portfolio over the last decade using the boring principles of diversification, low-costs, and regular rebalancing. I would also add proper tax planning helps as well.

Here is some data from a WSJ article by Burton Malkiel (author of Random Walk Down Wall Street) that helps illustrates this. (Can’t view the article? Use this Google the title trick and click the first link.) The article is from several months ago, but the S&P 500 index back then was almost exactly the same as yesterday: 1,193 vs. 1,195.

The chart below shows the growth of $100,000 invested at the start of 2000 until the end of 2009. As you can see, a 100% stock investment (in green) would have ended up at $93,717. Thus the term “lost decade for stocks”.

But what happens when you mix in some other assets, and rebalanced them annually? The red line is a portfolio consisting of 67% stocks and 33% bonds, all in low-cost index funds. The stock breakdown was 27% US, 14% Developed International, 14% Emerging Markets, and 12% REITs. The result was a ending balance of $191,859, which means an investor in 2000 could have, without special psychic powers, nearly doubled their portfolio over the same “lost decade”.

The diversified portfolio above matches rather well with my own asset allocation. For one, my AA also has 50/50 US/non-US split plus a chunk in REITs. Although I started out 85% stocks/15% bonds, I am now closer to 75% stocks. I have also rebalanced annually to maintain that ratio, but I do feel that my portfolio has still grown past my contributions even though I haven’t tracked my personal returns as well as I’d like.

Regular rebalancing is key. That is, keeping your target asset allocation by buying what is going down, and selling what is going up, in order to keep your desired risk profile. Both in early 2009 and last week, I was buying stocks. While there is debate on this, I believe that there is a reversion-to-the-mean effect that boosts your returns.

Filed Under: Investing, Retirement //

Mortgage Comparison: 30-Year at 4.75% vs. 15-Year at 3.75%

Posted on August 15, 2011 // 35 Comments

After the interest rate drama last week, I managed to lock in a refinance of my current 30-year mortgage (with 26 years left) which had a 4.75% fixed rate into a new 15-year mortgage at a 3.875% fixed rate. You’ll probably see lower rates in ads and elsewhere, but it did come with negative points that offset my closing costs completely and then some. Anyhow, I wanted to run the numbers to see the potential financial benefit.

To simplify the numbers, I am just going to assume a new mortgage with a loan amount of $300,000. First, we have a 30-year fixed rate with a lower payment, but higher interest rate and longer period of paying interest. Now, we do have the option of making extra payments toward principal and making the loan end early. Alternatively, we have a 15-year fixed mortgage with lower interest rate but higher mandatory monthly payment. There are many calculators out there, but I still like the simple and familiar ones at Dinkytown.

The 30-year at 4.75% would have a monthly payment of $1,565, while the 15-year would have a monthly payment of $2,200. Now, what would happen if we simply paid the $2,200 towards the 30-year mortgage? Using the calculator, we would enter an additional monthly payment of $635. That tells us the 30-year plus extra mortgage would be paid off in 16 year and 5 months, requiring an additional 1.4 years and $36,000 in interest. However, the 30-year does allow me the flexibility to reduce my payment by $600 a month if needed.

A note on interest paid. Lots of people simply look at how much interest is paid on a 30-year and compare it to a 15-year. It’s a big difference! However, you have to remember that you could have done something the money saved each month from a lower monthly payment. Theoretically, if you went out and bought a bank certificate of deposit paying the same rate of interest as the mortgage, there would be no real difference. For example, currently Discover Bank has a 10-year CD yielding 2.25% APY (see CD Rates & Calculator tab). This makes the true interest gap less than what it may appear. Still, there isn’t anything available at anything higher than 4.75% or even 3.875%, so I’m still happy to pay off this house in 15 years.

Filed Under: Real Estate //

$300 in Gift Cards or $399 towards Airfare or Hotel from Citi ThankYou Premier Card

Posted on August 13, 2011 // 17 Comments

Citi Thank You Premier CardThe Citi ThankYou Premier Card currently offers 30,000 bonus ThankYou Points after $2,000 in purchases within 3 months of account opening. That is enough to redeem for $300 in gift cards at stores including Walmart, Home Depot, Lowes, and CVS Pharmacy. Alternatively, you can get $399 in airfare or hotels when you redeem through their ThankYou Travel Center (prices match Expedia.com). If you redeemed for Walmart gift cards and exchanged them online at a site like PlasticJungle.com, you would net $270 in cash.

This is their new travel-oriented card, with no foreign transaction fee on purchases and you can also earn points based on the amount of miles you actually fly. The annual fee is free the first year, $125 in later years if you keep it. Alternatively, if you want a card with no annual fee period, the Citi ThankYouSM Preferred Card is offering a $250 gift card when you redeem the 25,000 bonus ThankYou® Points received after $2,000 in purchases within 4 months of account opening.

Also compare with other $500+ top credit card bonuses currently available, although you can apply for more than one.

Filed Under: Credit Cards, Deals & Offers //

TradeKing Broker: Free Stock Trades on 8/12

Posted on August 11, 2011 // Leave a Comment

Discount stock broker TradeKing.com will be offering their customers free trades for all of Friday, 8/12/11:

In appreciation of your business, this Friday we’ll be offering a special free trade day for all clients. Any trades placed throughout the day on August 12 will be absolutely free of commissions. How it works is simple. If you trade on Friday 8/12, you’ll see the commission charged as usual. As of Saturday, 8/13, you’ll still see the trade in your Account Activity page with all commissions waived.

Trades are regularly priced at $4.95, so it’s mainly just a nice gesture. New clients should grab the $100 bonus they have for August 2011 and also the transfer fee rebate if moving money from another broker.

Filed Under: Deals & Offers //

3.25% APY Savings Account – Deposit Limits, Ohio Residents Only

Posted on August 11, 2011 // 5 Comments

Reader Alison shares a unique savings account program for residents of Ohio. The SaveNOW program is a higher interest savings account supported by the state in order to encourage savings. The maximum balance on this account is $5,000 and pays 3.25% APY. The fine print regarding deposit limits is a bit confusing. It says:

Limits single deposits to $500 at a time with the exception of lump sum payments such as; a tax return, insurance settlement or inheritance payment

If I read this to mean that each resident to deposit a maximum of $500, every other year, then it would take nearly 20 years to reach the maximum? Otherwise, you might overpay taxes to max out the benefit. In any case, this is not going to make anyone rich, but can be a nice incentive given the program’s goals. A couple could deposit $1,000 every other year up to $10,000 combined.

Does anyone know of similar programs for other states?

Filed Under: Banking, Deals & Offers //

Buying Discounted Gift Cards Just Before Purchase

Posted on August 10, 2011 // 17 Comments

Now that there is a secondary market for gift cards, you can also buy gift cards at a discount to face value and use them at your preferred retailer. Better yet, you can combine them with whatever coupon or sale is already going on. A good use is for larger purchases at stores like Home Depot or Lowe’s, where an additional 7% off means $35 savings on a $500 appliance. These guys often also have 10% off coupons floating around, for example in US Postal Service moving kits or in exchange for signing up for 0% financing.

The downside to this is that for physical gift cards and brick-and-mortar stores, this takes advance planning. You have to buy it, wait for it to come in the mail, and then use it in a store on a future purchase while hoping the sale/promotion is still going on and the item is still in stock. It would be great if you could simply go a store, pick up your items, and then buy some discounted gift cards right before reaching the cash register. This turns out to be possible, but it was a bit clunky. This will only work with retailers that accept online gift certificates in their physical stores.

  1. Find it. You need to find a website that sells discounted Home Depot “eCodes”, which are electronic gift certificates. I used Plastic Jungle (PJ), which currently offers a good selection of Home Depot codes at 7% off. Now, the PJ site says that these codes are for online-use only, but but both the HomeDepot.com website and my actual conversation with an HD employee confirm that you can use them in-store.

    Where can I use my eGift Card? You can use your eGift Card at any The Home Depot store in the United States, its territories or possessions, and in Canada. You may also redeem your eGift Card online at homedepot.com.

  2. Buy it. Browse the website on your mobile device, and purchase the required amount. You’ll have to decide whether to buy a little less than you need, or a little more and use the rest later. I prefer just buying a little less if I can, like $100 worth for $110 of stuff. PJ uses Paypal, but you can still use a rewards credit card to get extra savings.
  3. Hope it comes instantly, and use it. Now, the extra-clunky part is that most websites don’t promise instant delivery. For example, at Plastic Jungle this was in their purchase confirmation e-mail:

    The PayPal payment you authorized is pending, your order will be processed within 1 business day. You will receive a notification when your payment has been approved. Please note eCODEs purchased after 1PM PST will be delivered via email the next business day.

    However, my gift code did indeed come immediately, literally 30 seconds after the purchase confirmation. Perhaps this is how it goes with Home Depot cards, as I even bought after 1pm PST. I checked the balance and it was legit. You may get a cashier that doesn’t know how to enter the code, in that case ask for a supervisor.

So here is my suggestion for gift card reseller websites. Create an iPhone/Android app or mobile website that allows quick and easy purchases of gift certificate codes that can be delivered and used immediately. Let me save “favorite stores” and secure payment information to make things even faster. As consumers, we should encourage stores to allow online codes to work both online and in-store.

Filed Under: Frugal Living //

Some Reluctant Market Commentary From a Simple Investor

Posted on August 9, 2011 // 6 Comments

After major stock market movements, sometimes I get asked to throw out my own commentary. Now, obviously I am not a market expert and CNBC doesn’t ever ring me up for interviews to argue with another talking head. There are also plenty of articles out there about why you should not panic and sell stocks. I can only offer what’s rattling around in my own head. A head that wears glasses from Costco and a haircut from Fantastic Sams. 🙂

Stocks provide ownership in companies, and by extension ownership of a piece of all future profits. Those profits can be either given back as dividends or reinvested in the company to try and make it even bigger (and ideally even bigger dividends eventually). Look at Microsoft, it’s finally paying a dividend after many years of share price growth. Apple, on the other hand, is still growing with no dividend. When things are uncertain, then you don’t know what those future profits are. This is why prices can vary so much. Any individual company most likely hasn’t gotten 10% worse since a week ago, but all those years and years of future profits might have been affected. People want more margin of safety now, and aren’t willing to pay as much as last week.

As someone still in the accumulation phase, I realize that I have no control over these day-to-day fluctuations. Some people look at stock charts like tea leaves and see patterns. I just tell myself that 20 years from now, the chances that the S&P 500 is still at 1200 is quite low. Actually, I focus on the overall ingenuity of the world these days, but I don’t have a handy reference number for them. So when stocks drop, I quietly keep on accumulating a larger and larger portion of these companies, which again is a larger and larger portion of all future profits. Focus on the fact that you are buying more shares, and not your actual balance down to the penny. To smooth out the ride, I keep 25% of my money in still-safe nominal and inflation-linked Treasury bonds. Ironically, after the credit downgrade, the value of US Treasuries actually went up. (See my target asset allocation & most recent portfolio update.)

If I was in the withdrawal phase of retirement, and trying to live off my portfolio, then hopefully I’d have only a much smaller portion of my portfolio in stocks. My risk tolerance would definitely be much lower. I would own more income-producing investments like dividend-paying stocks and bonds, and in this case focus on the income instead of the balance.

Filed Under: Investing //

Two Movie Tickets For $4 Each – Sprint Promo

Posted on August 9, 2011 // 2 Comments

Sprint has some sort of group-buying promotion called Sprint Ticket Takedown (expired) where the more people register their e-mail and cell number, the lower the price of a movie ticket you can get from either Fandango or MovieTickets.com. You can register any time before 8/14, but you must come back on 8/15 to buy the tickets. One day only.

According to the fine print, only 100,000 tickets will be available, and each registrant can buy two. As of 8/9, there are already over 87,000 registrants. If that number reaches 95,001 then the ticket price will reach the lowest possible $4. I think that’s a pretty safe bet, so you’ll probably want to come back pretty early on 8/15 (opens 12:01am Eastern, so even late Sunday night for some). (Update: It worked, I got two tickets for $4 each at Fandango.com. Sweet!)

Filed Under: Deals & Offers //

On the S&P and Other Ratings Agencies

Posted on August 8, 2011 // 21 Comments

Pssst… did you hear? Standard & Poor (S&P) downgraded the US credit rating from the highest AAA to one notch down at AA+. Let’s remember what these guys are famous for. The ratings agencies missed Enron a decade ago – they didn’t reduce Enron from investment grade to junk until days before they shut down. Then they missed the Worldcom accounting scandal and the Global Crossing meltdown, marking them investment grade months before bankruptcy. Then they missed Bear Stearns, only cutting their rating one business day before they never opened again. Oh, and all those mortgage-backed securities rated AAA when they were stinking piles of poo.

Now, this doesn’t mean that the S&P is necessarily wrong. I just smell a ton of politics, and I hate politics. Also, how often have they sounded an alarm that actually helped small investors? As in “Watch out, you thought this was safe but it really isn’t! Look what we figured out with our in-depth analysis!” As opposed to “Yup, we read a newspaper last week.”

Filed Under: Investing //

Can An Amazon Kindle with Ads Pay For Itself With Coupons?

Posted on August 8, 2011 // 17 Comments

This is the story of how I ended up buying an Amazon Kindle with Special Offers (WiFi) today for $114. I am one of those guys that loves the feel of traditional books and really didn’t know much about eReaders. I figured the Kindle with Special Offers basically meant it came with ads. How annoying! But it turns out the ads never show up when you’re actually reading an book, and the “Special Offers” include some pretty good deals (mostly coupons good at Amazon). Past offers include a $20 Amazon gift certificate for $10, or any mp3 album for $1.

Right now, if you have a Kindle with Special Offers and “claim” it by 11:59pm Pacific August 8th, you can get 20% off select laptops at Amazon. The list actually includes laptops from Apple, Dell, and HP. Thus, if you were going to buy any laptop $570 or higher, this Kindle would essentially be free (plus more deals in the future). Apple laptops rarely go on sale, and you could be getting a $1000 Macbook Air for $800. The highly-motivated could probably buy/resell a higher-end Apple laptop on eBay and make some decent profit. (This is how I paid down a lot of student loan debt during the dot-com boom.) Some folks have been buying just the unique coupon code itself from owners for up to $50.

Of course, today is already August 8th, so to participate you’d have to buy a Kindle today from a retail outlet like Best Buy or Target. Some Apple laptops on Amazon have been going in and out of stock, but you have until September 8th to redeem your coupon.

(Update 8/9: The 20% off laptops is now over. The current offer I see is $15 of $30 in School Supplies at Amazon and $5 off Kindle lights.)

In any case, with some discipline hopefully this Kindle thing will continue pay for itself and my travel bag will be lighter. eBooks are only slightly cheaper than paper ones, especially if you consider resale value, but I do buy around a book a month. I’ve also thought about writing some cheap 99 cent eBooks for the Kindle bookstore. I haven’t even started reading about ways to hack this thing…

Here’s a question I couldn’t get a clear answer to… If you have a US Kindle with 3G, can you use their included web browser internationally? It seems to promise that you can buy and download eBooks over 3G abroad in 100 countries, but I’ve read conflicting reports about web browsing. If I can, I would be very tempted to upgrade to the WiFi+3G version with Special Offers. I know that with 3G coverage across the US you can do simple tasks like check your email on the road, which can be useful for the non-smartphone-with-data-plan crowd.

Filed Under: Deals & Offers //

When The Lottery Is Actually A Winning Proposition

Posted on August 5, 2011 // 6 Comments

There was a very interesting story from the Boston Globe on Sunday about how a few folks managed to virtually guarantee winning hundreds of thousands of dollars on a Massachusetts lottery ticket game due to how the jackpot rolled over if it went unclaimed long enough. The statistics worked out well if you bought at least $100,000 in tickets during a 3-day window every few months.

Just three “investment groups” collected 1,105 of the 1,605 prizes statewide after a May drawing – two of which were run by former Computer Science students at MIT and Northeastern University. One couple bought over $600,000 worth of tickets this year and have won over $1,000,000 in return. See kids, math is cool!

Also of interest was the fact that state officials have known about this “loophole” for years, but have only done something to stop it after negative media attention arose. After the story broke, it was quickly announced that any lottery sales agent could only sell $5,000 of tickets in a single day. Finally, the entire game was announced to be phased out next year.

Filed Under: Funny //

Free Gogo Inflight Internet on Delta During August 2011

Posted on August 4, 2011 // 1 Comment

If you’re flying on Delta airlines in August over land, use the promo code DIETCOKEGOGO up checkout to get free WiFi inflight internet. Valid for Gogo Inflight plan of $12.95 or less (24 hour pass).

Filed Under: Deals & Offers //
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