Archives for March 2013

Investment Returns By Asset Class – April 2013 Update

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Here is my April 2013 update of the trailing total returns for selected major asset classes. Passive ETFs are used to represent major asset classes, as they represent actual investments that folks can buy and sell. Return data was taken after market close at the end of March 2013.

Asset Class
Representative ETF
Benchmark Index
1-Mo 1-Year 5-Year 10-Year
Broad US Stock Market
Vanguard Total Stock Market (VTI)
MSCI US Broad Market Index
3.91% 14.62% 6.682% 9.24%
Broad International Stock Market
Vanguard Total International Stock (VXUS)
MSCI All Country World ex USA Investable Market Index
0.87% 8.72% -0.54% 10.43%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
FTSE Emerging Index
-1.56% 1.69% 0.90% 16.44%
REIT (Real Estate)
Vanguard REIT ETF (VNQ)
MSCI US REIT Index
2.90% 15.97% 7.37% 12.36%
Broad US Bond Market
Vanguard Total Bond Market ETF (BND)
Barclays U.S. Aggregate Float Adj. Bond Index
0.08% 3.66% 5.46% 5.04%
US Treasury Bonds – Short-Term
iShares 1-3 Year Treasury Bond ETF (SHY)
Barclays U.S. 1-3 Year Treasury Bond Index
0.00% 0.48% 1.61% 2.56%
US Treasury Bonds – Long-Term
iShares 20+ Year Treasury Bond ETF (TLT)
Barclays U.S. 20+ Year Treasury Bond Index
-0.31% 6.70% 8.28% 7.43%
TIPS / Inflation-Linked Bonds
iShares TIPS Bond ETF (TIP)
Barclays U.S. TIPS Index
0.22% 5.17% 5.80% 6.45%
(est.)
Gold
SPDR Gold Shares (GLD)
Price of Gold Bullion
0.58% -5.02% 10.90% 16.5%
(est.)

For an easy visual comparison, here is a chart of the 1-year trailing returns:

April 2013 Trailing 1-year Returns

I collect this information because it allows me to keep an eye on the market while still keeping the long-term returns in perspective. Often, the asset classes with the best long-term returns have had recent poor performance. The 1-year chart helps me decide where to invest new funds and also for rebalancing. Note that I do not necessarily invest in all the listed asset classes, see my personal portfolio for details.

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Cash Reserves Update: Best Available Interest Rates – March 2013

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Our family keeps a full year of expenses put aside in cash reserves; it provides us with financial stability with the additional side benefits of lower stress and less concern about stock market gyrations. Emergency funds can actually have a better return on investment than what you see on your bank statement.

I’ve been slacking in terms of updates on this topic. While I still like to maximize my interest, there just hasn’t been many new developments that make me want to jump from one bank from another. However, if you haven’t optimized your cash recently, you may be stuck in a money market fund or megabank saving account paying 0.05% or less. You can definitely still do better than that! Here are what I consider the highlights of the best currently available interest rates.

Certificates of Deposit

If you have a large cushion, it’s quite likely to just sit there for years or more. Therefore, you may wish to put some of it in longer-term investments where you can take the money out in a true emergency and paid an early withdrawal penalty.

  • Everbank’s Yield Pledge Money Market and Interest Checking account both offer 1.10% APY guaranteed for the first 6 months for new accounts. Since it is fixed, this is essentially a 6-month CD with a higher rate than any other 6-month CD rate out there and with no early withdrawal penalty to worry about.
  • Ally Bank Raise Your Rate CDs have a rate bump feature; the 2-year term pays 1.05% APY and the 4-year term pays 1.30% APY (as of 11/1/13). You can change your rate after your account is opened — if their rate on this CD goes up, yours can bump up to match it (one interest rate increase with the 2 year term, two interest rate increases with the 4 year term).They also offer traditional Ally Bank High-Yield CDs with 3-year CDs at 1.20% APY and 5-year CDs at 1.60% APY (as of 11/1/13) currently. Early withdrawal penalty is only 60 days.
  • Discover Bank CDs are currently offering 3-year CDs at 1.25% APY, 5-year CDs at 1.65% APY, 7-year CDs at 1.80% APY, and a 10-year CD at 1.90% APY. Early withdrawal penalty varies from 6 months for the 3-year to 15 months on the 7 and 10-year CD.
  • PenFed Credit Union CDs are currently offering 3-year CDs at 1.60% APY, 5-Year CDs at 1.65% APY, and a 7-Year CD at 1.75% APY. Early withdrawal penalty varies from 6 months for the 3-year CD to 12 months on the 5 and 7-year CD.

Ally Bank’s Flexible Certificates of Deposit

Ally Bank LogoLet’s focus on the Ally Bank certificates of deposit, where you can still access your money as long as you pay a early withdrawal penalty of 60 days interest – significantly less than at other banks. Why is this good?

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Student Loan Debt Growing, Along With Delinquency Rate

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Here are some interesting charts from a recent presentation about student loan debt by Donghoon Lee, an economist at the Federal Reserve Bank of New York.

Total student debt was the only type of household debt that continued to rise throughout the recent recession while most households were de-leveraging, and is now second only to mortgage debt. You’ve probably heard the “trillion dollar” number in the news.

Below is a recent breakdown of the student loan balances. While a greater percentage of students now have debt, 70% of loan balances are under $25,000. Six-figure debt loads only make up less than 4% of borrowers.

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Share Amazon Prime With Coworkers In Your Office

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Many people enjoy the convenience of Amazon Prime, which for $79 a year gives you free 2-day shipping with no minimum purchase requirement, a decent streaming-video library, and a so-so Kindle book lending library. You may also know that you can share your shipping benefits with other people in your same household (with the ability to use multiple shipping addresses). At the same time, many people choose to get their stuff shipped to their workplace as one of those addresses. Amazon now explicitly allows you to share your shipping benefits with four other coworkers, which mean 5 coworkers can get free 2nd-day shipping by splitting $79 a year. See Share Your Amazon Prime Benefits:

Free or paid Amazon Prime members can share their shipping benefits with up to four additional family members living in the same household, or up to four coworkers. Other Amazon Prime membership benefits such as Prime Instant Video and the Kindle Owners’ Lending Library can’t be shared.

[…] Amazon Mom and Amazon Student members with Amazon Prime shipping benefits and customers receiving a free 30 days of Amazon Prime benefits with Kindle Fire won’t be able to share their benefits.

Only the primary owner gets the video streaming, but I think the shipping benefits are worth the most as Netflix only runs $7.99 a month with a bigger library. The only slightly hard part would perhaps be to collect payment, but really a free lunch per year should do it. Go make some friends! 🙂

Best Value for Citi ThankYou Points Redemptions

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

If you have a Citi credit card or a Citibank account from our partner Citi, with the ThankYou points rewards system, you have a wide array of options to redeem your points at ThankYou.com. But while that fancy coffeemaker may look nice, chances are the cash equivalent value for your points is quite poor. I’ve covered this in bits and pieces before, but here’s a complete guide to getting the most value out of your points.

Eligible ThankYou accounts (* are the ones I have linked to my account):

Option #1: Limited Time Offers

If you have either patience or luck, Citi does offer “sales” on gift card redemptions which can reduce the cost of a reward by up to 25%. For example, last month you could have gotten a $50 Home Depot gift card for 4,500 points. Normally, you’d need 5,000-6,000 points. That equates 1.11 cents in gift card value per point. Previous ThankYou point sales have involved gift card to other popular retailers like Wal-mart, Lowe’s, Kohl’s, Best Buy, Gap, and Macy’s. The regular price is usually 1 cent in gift card value per point.

Option #2: Student Loan & Mortgage Rebate Checks

You can redeem your points towards a “rebate” check towards either a student loan or mortgage. You can redeem in increments of $25 for 2,500 points, which equates to a full 1 cent cash per point. You must call them and provide them the name of your lending institution, and they will mail you a physical check written out directly to that lending institution (i.e. Chase Student Loans). You are then supposed to add in your account number or whatever else is necessary, and then send it on to your lender. Reader Chris shared that he has a workaround if your lender doesn’t take third-party checks:

I just have the check written out to my bank, Chase, and then write my checking account number in the memo space. I drop it in an ATM and they have always deposited it into my checking account just fine. I’ve been doing this for years with no problem. I would just apply the money myself to my auto-payments and keep my 0.25% rate reduction.

I didn’t want to send in a $100 check towards my mortgage, so I tried this method with my local bank as well and the ATM deposit worked for me without any issues. I did indeed use the money from that check to pay extra towards my mortgage. (Note: You can also make a donation to the Red Cross at the same ratio.)

Option #3: Book Travel and Pay with Points

You can also use your ThankYou points to book any flight and car rental through their Book Travel portal. It’s basically the same flights that are available at Expedia.com, but sometimes at a slight markup. For example, the exact same flight from Los Angeles to Las Vegas cost $101.42 at ThankYou.com and $97.80 at Expedia.
However, another flight on American Airlines from LAX-JFK was exactly the same price on both down to the penny. So while the official redemption rate is a full 1 cent per point, a potential slight markup may ding the conversion rate a bit. However, this is also a good way to use up all your points as you can split the payment exactly between cash and points. For example, a $100 ticket could be paid with 5,000 points + $50 or 1,234 points + $87.66.

Note: If you have the Citi PremierSM Card which does have an annual fee, you have the added option of redeeming your points directly towards travel with the special rate of 1 ThankYou point = 1.25 cents towards travel redeemed on the Citi Travel Center. For example, 10,000 ThankYou points could be redeemed for $125 towards travel. That tilts things in favor of the travel option.

Why Everything Else Is Worse. Here’s a quick rundown of the other redemptions that you might think is a good deal but doesn’t work out when you do the math.

  • Pay with points at Amazon.com: 0.80 cents per point
  • Citi Prepaid Visa card: 0.63-0.67 cents per point
  • Cash reward: 0.5 cents per point
  • Statement credit: 0.5 cents per point

Note: Citi ThankYou Point Tiered System. I should point out that Citi does a confusing thing where they don’t offer the same redemption options to everyone. It is my understanding that they separate credit cards into “standard” and “premium” cards. As long as you have one premium card as a “Sponsor account” linked to your pooled ThankYou point account, then you will get the preferred set of available options even if the rest of your cards are standard and all your points come from them. I don’t have enough data points to figure out the exact breakdown of which card is premium and which is not. For example, I believe the Citi ThankYou Preferred card is premium, but the Citi ThankYou card and Citi Forward cards are standard. But all three have no annual fee?! I’ve never had a problem with this, but if you only have the Citi Forward card you may have come across it.

“Disclaimer: This content is not provided or commissioned by the issuer. Opinions expressed here are author’s alone, not those of the issuer, and have not been reviewed, approved or otherwise endorsed by the issuer. This site may be compensated through the issuer’s Affiliate Program.”

TurboTax vs. TaxACT vs. H&R Block at Home: 2012 Lightning Review

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

According to a MyMoneyBlog.com reader poll taken last year, 52% used TurboTax, 18% used TaxACT, and 14% used H&R Block at Home to prepare their tax returns, which agreed with the most popular software overall in the US. The remaining 16% either used an accountant (10%), filed on paper (4%), or used another software (2%).

Last year, I used each of “The Big 3” to do my taxes in order to compare and contract in detail the three software programs. (As an example, my TurboTax 2011 review talks about comma-insertion as a feature…) I plan to do the same thing this year, but to help you early-birds, here’s the highly-condensed version of my reviews:

Accuracy and Maximum Refund Guarantees
In terms of accuracy and interview style, I think all three are comparable if not nearly identical. In fact, I’m certain they all dissect each other’s products annually to ensure this. As such, all three offer a “Maximum Refund Guarantee” as well as a “Accuracy Guarantee” that states that they will pay any penalty and interest assessed by the IRS or your state due to calculation errors on their part (though H&R Block limits this to $10,000).

In my opinion, the remaining major differentiating factors are price, time-saving features, and audit support. Now, there are various discounts and sales that pop up, but here I’m just comparing regular sticker prices.

TurboTax Online

  • The most popular and most polished-looking user interface.
  • Federal Deluxe regular price is $29.99. State return price is $36.99.
  • Best import support from payroll providers and financial institutions for automatic import of W-2 and 1099 forms.
  • Moderate audit support (you get help, but no in-person representation)

Bottom line: The time-saving choice if you have a lot of brokerage and/or bank 1099s to electronically import, or a lot of details to import from last year’s return and you used them last year. For those like me that would pay extra to avoid all that tax lot data entry.

TaxACT Online

  • Cheapest overall with Federal Deluxe regular price at $9.99. Many can get by with Federal Free version. Cheapest state return at $8.00.
  • Again, just as accurate as the others.
  • Limited import support (worst of the three).
  • Limited audit support (worst of the three).

Bottom line: The value choice if you just want reliable DIY tax return software and don’t need any extras.

H&R Block at Home Online

  • Federal Deluxe regular price is $29.95. State return price is $34.95.
  • Moderate import support for 1099s and W-2 (not as broad at TurboTax, better than TaxACT)
  • Best free audit support, as it includes an H&R Block Enrolled Agent actually attending your audit in-person. Neither TurboTax and TaxAct not offer representation. However, you must think about whether you would hire your own representative in the actual event of an IRS audit (probably depends on severity).

Bottom line: The sleep-well-at-night choice if you want the assurance that a federally-authorized enrolled agent will guide you for free through a potential albeit unlikely audit.

Rule of Thumb: When To Pay Off The Mortgage Early

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

There was a lot of good discussion in my lengthy early mortgage payoff post. Now instead of lengthy details, let me try out a quick rule of thumb about early mortgage payoff. Recall from Wikipedia:

A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination.

So roughly applicable to many – but not all – situations.

Early Mortgage Payoff Rule of Thumb

You should time your mortgage payoff date to coincide with the date of retirement, or semi-retirement. Here, I would define retirement or semi-retirement as a time when you’ll be wholly or partially dependent on non-work income like Social Security, pensions, annuity payments, stock dividends, or other investment income. A downshift into a lower-paying second career would count as a semi-retirement.

In my humble opinion, this quick and dirty rule will help you balance the opportunity to invest in potentially higher-returning investments (stock mutual funds, dividend-paying stocks, real estate, high-yield bonds) with pursuing the benefits of having a fully-owned house (less stress, less leverage, lower required monthly expenses, lower required withdrawals from investments and thus lower marginal tax rates).

Example 1. 20s, 30s, 40s with long future career. You love your job and/or want to be doing it for the next 25+ years. In this case you have lots of human capital and a regular stream of income. You also won’t be needed to cash out your retirement assets for a long-time, making it much more likely that your stocks will achieve their higher average returns. Take on the 4% interest rate fixed for 30 years, and over time your salary will rise with inflation while your payment stays the same.

If anything, you could do a DIY biweekly payment plan and pay off your mortgage in under 24 years with less “pain” due to a behavioral trick (works best for those on a biweekly paycheck schedule).

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Fidelity iShares Commission-Free ETF List Updated

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Fidelity recently announced new changes to their commission-free ETF list.

When Blackrock iShares introduced their 10 new Core ETFs, I wondered how they would market these ETFs. Well, that question was answered today with Fidelity and Blackrock announcing a “long-term strategic alliance”, otherwise known as Blackrock writes a big fat check to Fidelity:

For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs.

The move definitely makes sense though, as Fidelity doesn’t have a broad line of in-house ETFs and iShares doesn’t have their own brokerage arm. In general, I think the move is a positive one for Fidelity customers as they now have exposure to a much wider range of low-cost index ETFs meant for long-term holding periods. There are now a total of 65 iShares ETFs where you can avoid the standard $7.95 trade commission. You could build a low-cost, diversified portfolio with just these ETFs, resulting in a weighted expense ratio of just 0.10%:

33% Core S&P Total U.S. Stock Market (ITOT)
33% Core MSCI Total International Stock (IXUS)
33% Core Total U.S. Bond Market (AGG)

However, a few big names were also removed from their commission free list – iShares MSCI EAFE (EFA), and iShares MSCI Emerging Markets (EEM), and most of their Russell Index-based ETFs. If you had a large position in one of these ETFs, now you’re either stuck paying the standard $7.95 commission or you’d have to replace them with their new “Core” versions and thus incur possible capital gains taxes. I’d certainly be annoyed. There will be a short grace period (details below).

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MyMoneyBlog.com in Economics Textbook!

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Years ago I was contacted by an author named Gary Clayton who wanted permission to feature me in the next edition of his book. I said certainly, and pretty much forgot about it as it wasn’t published yet. The book was (is?) the bestselling high-school economics textbook in the country – Economics: Principles and Practices published by McGraw-Hill. Then a couple weeks ago a student named Cameron from South Adams High School in Berne, Indiana left a surprise comment on my blog:

So our economics class just read about your money blog in our book and we wanted to see if blog still existed. It does! You should definitely give a shoutout to our class in your next update!

Again, I said certainly, and asked for a scan or photo of the sidebar article as I’d never seen it before. Well, here is the blurb mentioning MyMoneyBlog.com and picture of Cameron’s Economics class!

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Pay Off Mortgage Early vs. Save More For Retirement? Digging Deep Into The Details

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

In the world of personal finance, you can always generate a good debate if you talk about paying off your mortgage early. The argument usually boils down to something like this:

If your interest rate is 4%, then paying extra towards that mortgage will earn you 4%. If you think you can earn more than 4% elsewhere, then don’t pay off your mortgage.

However, when it comes down to if YOU should pay extra towards YOUR mortgage, the above statement is an oversimplication. As Einstein is credited with saying, “Make everything as simple as possible, but not simpler.”

Since I am faced with this decision myself, let’s address the implied assumptions in the sentence above and all the other little details that go into the decision.

Warning: This is a braindump post and thus rather long and detailed…

Assumption #1: Your mortgage interest is 100% tax-deductible.

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Barron’s Best Online Broker Rankings 2013

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

The stock market is at or near all-time highs, which means that brokerage firms should be seeing a lot more interest (for better or worse). Weekly business newspaper Barron’s just released their 2013 annual broker survey rankings. Here’s a snippet about their criteria:

We looked at eight categories of service, examining what can be traded online, how the tools work together across platforms, the design and capabilities of mobile platforms, educational offerings and customer service, as well as the nuts and bolts of placing and executing a trade. We closely scrutinized the various tools available for finding appropriate trades, including scanners and charts. When examining costs, we considered stock and options commissions as well as platform or maintenance fees, margin debt, and charges for transferring an account out.

Barron’s notes that overall, the online experience is improving with a growing number of brokers offering their clients real-time quotes, easier-to-use websites, and a better mobile trading experience. They also admit that their overall rankings are based on the needs of their subscribers – namely “wealthy, active traders”. As such, their overall winner was again Interactive Brokers, a broker designed for highly-active traders with an extensive feature set and low commissions. However, IB also has a minimum opening balance of $10,000, a minimum monthly fee of $10 even if you don’t trade at all, and customer service that does not cater to casual investors.

I am not an active trader, but I still like having real-time quotes, a nice user interface, and friendly service when I need it. Thankfully, Barron’s also ranked the brokers for the rest of us:

Top 5 Brokers for Novice Investors

  1. TD Ameritrade. Performed well in customer service & education, research tools, and mobile offerings. Free real-time quotes from NYSE, AMEX, and NASDAQ Level 1 and 2. When placing an order, the trigger price is automatically set at the midpoint between bid and ask.
  2. Fidelity
  3. E-Trade
  4. Charles Schwab
  5. Capital One 360 Sharebuilder

Top 5 Brokers for Long-Term Investing

  1. TD Ameritrade
  2. Fidelity
  3. Charles Schwab
  4. Merrill Edge
  5. E-Trade (down 1)

Top 5 Brokers for In-Person Service

  1. Scottrade. Scottrade has over 500 physical branches across US, so that when you call you reach a human in that local branch. Free in-person educational seminars are offered as well.
  2. Merrill Edge
  3. Charles Schwab
  4. Fidelity
  5. TD Ameritrade

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Capital One Consumer Bank Savings Account Review

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Capital One bought ING Direct USA back in early 2012, and has finally completed their transition and re-branding. Their new savings account product is called Capital One Consumer Bank Savings. Since I’ve had an account with them for over a decade (September 2001, as they remind me every time I log in), here’s an updated review of my 2nd oldest bank account meant for both new and existing customers.

User Interface

At first glance, the only thing that really changed was that the primary colors went from orange and blue to Capital One’s red and blue. However, there are a few other tweaks that I noticed were different from the ole’ ING Direct days.

Login. This is still a little unique amongst online savings accounts. You login with either a username/account number and a PIN number (not an alphanumeric pA$sW0rd). If you have an old 4-digit PIN, they’ll ask you to change the PIN to a 6-digit number for better security. In addition, while the default entry method is via mouse clicks to avoid keystroke loggers stealing your password, you can also use a keyboard to enter the PIN with a creative key-to-number conversion that changes each time. See screenshot below:

Main account screen. The home screen is simple and straightforward, as always. There is better integration with their brokerage arm, Sharebuilder, with your balance automatically showing and the ability to perform same-day transfers between accounts. So if you have a Sharebuilder account, you essentially have a high-interest sweep option instead of a money market fund paying zero interest. Screenshot:
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