Archives for March 2015

NAPFA: Warnings When Finding a Financial Advisor

“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.”

warning_signMany people feel more comfortable with someone else helping them with their finances. A common piece of advice these days is to find a fee-only advisor that doesn’t work on commission. Many times this leads to a recommendation of the National Association of Personal Financial Advisors (NAPFA), whose members must promise to be fee-only and act in a fiduciary manner (putting your interests first). They are regularly mentioned in Kiplinger’s magazine, and I’ve even referred a few readers to their website myself. You’d think that putting your money with the president of NAPFA would be a sound idea, right?

I was surprised to read the following warning from Phil DeMuth in his book The Affluent Investor:

The National Association of Personal Financial Advisors (NAPFA) will happily refer you to a fee-only advisor. Despite their lofty mission, no fewer than two of its recent presidents have been investigated for kickback schemes (one for defrauding clients by secretly putting $47.5 million of client money in a start-up he founded). Several years ago, I referred someone who was looking for an advisor to this group. When I followed up to ask how it went, he said, “The guy they sent me to tried to sell me a variable annuity.” This is exactly what fee-only advisors are not supposed to do: push high-margin commissioned products. This organization is a useful idea and I wish I could endorse it, but the execution leaves something to be desired.

Naturally, I had to learn more about these former NAPFA presidents. Here is a good summary excerpted from Wikipedia (emphasis mine):

Two former presidents of the NAPFA, Mark Spangler (serving in 1998) and James Putman (serving in 1996 and 1997) were charged by the SEC with fraudulent behavior: Putman in 2009, for accepting $1.24 million in kickbacks related to unregistered investment pools, and Spangler in 2011, for secretly investing $47.7 million of client money in two technology companies that he or his firm owned. […]

On April 24, 2012, a Wisconsin federal court awarded summary judgment to the Commission on its claims against James Putman (“Putman”), a defendant in an action filed by the Commission in May 2009 and orders Putman to pay disgorgement and prejudgment interest in the amount of $1,530,129 and a civil money penalty of $130,000, for a total amount of $1,660,129. […]

Spangler, a Seattle investment adviser, was found guilty 11/7/13 of 31 counts of fraud and money laundering after deceiving clients by secretly investing more than $46 million of their money into two risky startups in which he had an ownership interest. […] Spangler was sentenced 3/14/14 to 16 years in prison […]

It is important remember the relatively loose relationship between NAPFA and its members. There are many reputable, honest fee-only financial advisors out there that are members of NAPFA. BUT, you can’t solely rely on NAPFA membership to mean that the person you pluck out of their directory will be reputable and fee-only. It’s not very difficult to become a member, so unscrupulous people can join to get that layer of credibility and then abuse it.

Educate and protect yourself. NAPFA is a trade organization, so it mostly about marketing and getting good publicity. There’s nothing wrong with that, but as a potential client there is much more due diligence to be done before settling on an advisor. Make sure your money is kept at a well-known third-party custodian such as Schwab, Fidelity, or TD Ameritrade. Know what products are often sold by commission. Use the helpful resources at this SEC.gov broker check page.

Portfolio Rebalancing Frequency: Even Less Than Annually?

“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.”

scaleHere’s another data point on the debate on how often to rebalance your portfolio to your target asset allocation. Econompic Data writes about rebalancing a portfolio back to 60% S&P 500 / 40% Barclays Aggregate Bond index from 1976-2014 and finds that rebalancing every 3 years actually produced slightly better average annual returns that rebalancing monthly (via Abnormal Returns):

econompic_rebal

Momentum is cited as a potential reason why this works. Looks good at a glance, but look at that y-axis. We are comparing 10.3% and 10.2%. Is that really significant?

I would point out that in a previous Vanguard research article, a similar backtest was done on a 60/40 Broad US Stock/Broad US Bond portfolio rebalanced across various thresholds from 1926-2009. Their conclusion (emphasis mine):

We found that no one approach produced significantly superior results over another. However, all strategies resulted in more favorable risk-adjusted portfolio returns when compared with returns for portfolios that were never rebalanced.

vgrebal

From a 2008 paper from Dimensional Fund Advisors:

Aside from avoiding excessive trading, there are no optimal rebalancing rules that will yield the highest returns on all portfolios and in every period.

From advisor and author William Bernstein:

The returns differences among various rebalancing strategies are quite small in the long run.

Instead of there being a benefit to rebalancing less often, it may just be safer that the frequency doesn’t matter. On the other hand, given the potential cost of rebalancing from taxes, commissions, and bid/ask spreads perhaps lowering the frequency doesn’t hurt.

I think the most important thing to note is that in every test case above, the rebalancing was done on a strict schedule and without emotion. The problem you are really trying to avoid is being afraid buy whatever has been getting crushed and selling what has been doing awesome. There’s that behavioral/emotional component again.

As for me, I try to check my portfolio once a quarter, but rebalance no more than once a year. An annual frequency is as easy to remember as your birthday, it’s not too often and not too seldom, lots of smart people are proponents, and it gives me the opportunity to do tax-loss harvesting. I use tolerance bands such that if my major asset classes are off by more than 5%, then I will rebalance. Otherwise, I “rebalance lite” year-round using any new money to buy underweight asset classes.

The Only Two States of Your Portfolio: Happy All-Time High or Sad Drawdown

“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.”

emoinvestQuick question – What was the highest value ever for your investment portfolio? Now, what was the value exactly a year before that? You probably know the answer to the first question, but not the second, even though both have little to do with your final portfolio value.

I am currently reading the e-book Global Asset Allocation by Meb Faber and he had a good observation that I don’t recall ever expressed in this specific manner (emphasis mine):

It is a sad fact that as an investor, you are either at an all-time high with your portfolio or in a drawdown – there is no middle ground – and the largest absolute drawdown will always be in your future as the number can only grow larger.

We tend to carry the highest value of our portfolio around in our heads because of the powerful cognitive bias of anchoring. Let’s say that 10 years ago you started with $20,000 and today with your contributions and investment growth your total is $100,000. If next year your portfolio experiences a drawdown to $80,000, you’ll probably identify your portfolio as being 20% down from $100,000, as opposed to a 400% increase from $20,000. $100,000 is “what you had” and you will forever be anchored to that number, even if for it only lasted just for a day.

That is, until you reach another all-time high (yes! $105,000) and that will be your new anchor. (This applies to individual holdings as well – I’ve found this especially pervasive when using brokerage smartphone apps that allow me to frequently check in with just a tap.)

If your portfolio is anything like mine, it has been repeatedly been hitting all-time highs for a year or two. The problem is, sooner or later, there is a 100% chance I’ll be stuck in a prolonged drawdown phase. I will think about my high-water value every time I check my statements (which is why perhaps it is better not to check your investment value much more than once a year). I will question my existing asset allocation and how to invest my new money.

Now add in loss aversion – the other finding from behavioral economics that people feel the pain of losses much more severely than the pleasure of gains (studies suggest we hate losses roughly twice as much as gains).

That means drawdowns are always lurking around the corner, and we hate them twice as much as any investment gain. It’s no wonder that investors are often their own worst enemies by not sticking to their investment plans.

Slate from Chase: 0% Intro APR For 15 Months + No Balance Transfer Fee

“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.”

Slate from Chase Card ArtTransfer your balances to the Chase Slate® Card and get 0% intro APR For 15 Months and pay no balance transfer fee if done within 60 days of account opening. You won’t pay any more interest until 2018, and all your money will go towards paying down the balance principal. You can literally borrow money for free and pay it back in 15 months with no interest (keeping in mind you’ll still need to satisfy the minimum payment each month until then). $0 annual fee.

It is still rather rare these days to find a no balance transfer fee 0% intro APR offer that is available to all (as opposed to being targeted only to specific customers). You can verify in the Pricing & Terms section of the application, down in the Fees box:

None on transfers made within 60 days of account opening. All other transfers: Either $5 or 5% of the amount of each transfer, whichever is greater.

Make sure you initiate that balance transfer within the first 60 days.

Free Monthly FICO Score
As of March 2015, the Chase Slate card now offers an EMV security chip and a free FICO score every month. The FICO score will be based on your Experian credit bureau report, and they’ll also have a “Credit Dashboard” that tells you reasons behind your score and a summary of your Credit Report information. Here’s a screenshot:

slatefico

According to the WSJ, so far this is only available on the Slate and not other Chase-issued credit cards. This is because the Slate is by far Chase’s most popular card for those transferring existing balances and that means many of those 10 million cardholders care about their interest rates and credit scores.

Lower your interest on balances!
This is a great opportunity for those people with good to excellent credit but are still working hard to lower their debt payments, as now you can have all your money applied directly into cutting down your principal instead of having it go towards interest and/or fees. The 0% APR applies to new purchases as well, so your balance owed will go down that much faster and you won’t have to worry about interest until well into 2019.

The Affluent Investor by Phil DeMuth – Book for $100,000+ Club

“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.”

affinvestor

This week I’ve been trying to catch up on my book reviews (you should see my “to read” shelf!), and after a good beginner book I thought I’d write about a good intermediate-to-advanced book. You’ve probably noticed there are a lot of starter books out there for novice investors but not as many with more advanced advice ($$$… the potential audience is a fraction of the size). Addressing this deficiency is the goal of The Affluent Investor by Phil DeMuth.

In terms of the title, the industry classifies you as “mass affluent” if you have investable assets between $100,000 and $999,999. From $1 million to $10 million you are “high net worth”. This definition excludes some possibly important stuff – your income, the value of your personal residence, pensions, etc. But in real world terms, I would say this book is for anyone who isn’t living from paycheck-to-paycheck. If you have a $10,000 portfolio and have a surplus each month, sooner or later you will reach $100,000. If instead you have a credit card balance and it just keeps inching up, then you need something closer to a Dave Ramsey book.

The overall tone of the book is that of a close friend who is smart and into finances. DeMuth is already a financial advisor to rich folks so the last part is expected. What I mean is that he will be blunt and isn’t afraid to make stereotypical assumptions in order to rattle off all his tips. At only 200 pages, most things are only touched upon in a concise manner. Here’s a rough outline of the topics covered:

  • Big picture rules. Get and stay married. Make sure you can afford your children. Avoid debt. Save early and invest it. Diversify. Plan ahead.
  • Financial advice based on life stage. He puts you in the basic “affluent” mold of 20-35s have a kid buy a house, 35-55 working hard at professional career making most of your money, 55-65 protect assets and prepare for retirement, and 65+ retire and spend down money.
  • Financial advice based on job. Has special advice for doctors, lawyers, small business owners, and corporate executives.
  • General investing advice and “Can you do better?” investing advice. General investing advice is keep costs low and buy index funds that closely approximate the global market portfolio. “Can you do better?” advice touches on things like value stocks, small-cap stocks, dividend stocks, momentum, low-beta, etc.
  • Asset protection. Being affluent means you have money, and other people will want it. Insurance, buying real estate with LLCs, homestead exemptions, and similar topics are are very complex but his take is condensed into less than a page each.
  • Tax minimization. IRAs, 401ks, Solo Pensions, 529 plans, Health Savings Accounts, etc.

Here are things you might expect from a “book for rich folks” but won’t find inside:

  • You won’t get in-depth, hand-holding walkthroughs of anything. Consider the book as a push in the right direction for researching ideas.
  • You won’t find his secret list of the best hedge fund managers.
  • You won’t find tips on how to get rich with real estate.
  • You won’t find advice on how to pick individual stocks like Warren Buffett.
  • You won’t find him selling his own personal advisory services.

A general problem with all books of this type is that the advice is pretty short and to the point, but it doesn’t provide very much supporting evidence. You’ll either have to do your own due diligence, or blindly decide to trust the author. I’ve read books where the author might sound convincing but their advice is horrible. In my opinion, I think for the most part the advice in this book is good. But I’m just another person on the internet, so again do your own research.

In conclusion, I think this book covers a lot of questions that are commonly asked by the intermediate individual investor. It’s not too long and not too short. Some of the advice won’t fit your own situation, but at this level if you just find one solid actionable idea that makes the entire $18 book worth it. I’m personally going to look into the solo defined-beneift plan idea again, although I may still be too young to take full advantage.

Vanguard High-Yield Corporate Bond Fund Review (VWEHX)

“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.”

vanguardinvThe Vanguard High-Yield Corporate Bond Fund (VWEHX, VWEAX) is a low-cost, actively-managed bond fund that invests in medium- and lower-quality corporate bonds and is advised by Wellington Management Company. I don’t own any in my retirement portfolio, but while reading the book The Affluent Investor by Phil DeMuth, I was intrigued by this interesting tidbit:

If you have settled on buying them anyway, at least wait until the spread between treasury bonds and junk bonds of the same maturity is wide (say, 4 percentage points). The fund to own is Vanguard’s (ticker: VWEHX), which has a gimmick: it buys the highest rated junk bonds. Many institutional investors can only hold investment-grade bonds as a matter of policy, and they are forced to liquidate bonds that get downgraded even when it makes no sense to do so. Vanguard lies in wait to take advantage of their mistake. This is a hedge fund strategy in a bond fund wrapper.

(I should add that this is after the author warns you about the high-yield bond asset class in general, and how if you adjust the higher yields to account for higher defaults, the net advantage can be small or even zero. He also adds that high-yield “junk” bonds are also quite volatile and should be treated like equities.)

But going back to the quote, DeMuth is saying that this fund tries to take advantage of a specific market inefficiency. I’ve never seen this strategy mentioned in either any Vanguard materials or financial media coverage. I went back and took a closer look at their prospectuses and other investor documents.

I was aware that VWEHX tends to invest in the higher-quality portion of the junk spectrum. From the Product Summary on their website:

Created in 1978, this fund seeks to purchase what the advisor considers higher-rated junk bonds. This approach aims to capture consistent income and minimize defaults and principal loss.

From the Fund Prospectus (dated 5/28/14):

The Fund invests primarily in a diversified group of high-yielding, higher-risk corporate bonds—commonly known as “junk bonds”—with medium- and lower-range credit- quality ratings. The Fund invests at least 80% of its assets in corporate bonds that are rated below Baa by Moody’s […] The Fund may not invest more than 20% of its assets in any of the following, taken as a whole: bonds with credit ratings lower than B or the equivalent, convertible securities, preferred stocks, and fixed and floating rate loans of medium- to lower-range credit quality.

Digging further into the Prospectus, we find the following under the “Security Selection” heading:

Wellington Management Company, LLP (Wellington Management), advisor to the Fund, seeks to minimize the substantial investment risk posed by junk bonds, primarily through its use of solid credit research and broad diversification among issuers. […]

The Fund will only invest in bonds and loans that, at the time of initial investment, are rated Caa or higher by Moody‘s; have an equivalent rating by any other independent bond-rating agency; or, if unrated, are determined to be of comparable quality by the advisor. […]

Wellington Management selects bonds on a company-by-company basis, emphasizing fundamental research and a long-term investment horizon. The analysis focuses on the nature of a company’s business, its strategy, and the quality of its management. Based on this analysis, the advisor looks for companies whose prospects are stable or improving and whose bonds offer an attractive yield. Companies with improving prospects are normally more attractive because they offer better assurance of debt repayment and greater potential for capital appreciation. […]

To minimize credit risk, the Fund normally diversifies its holdings among debt of at least 100 separate issuers, representing many industries. As of January 31, 2014, the Fund held debt of 172 corporate issuers. This diversification should lessen the negative impact to the Fund of a particular issuer’s failure to pay either principal or interest.

Here’s a quick summary of the Moody’s Credit Rating hierarchy, per Wikipedia:

Investment Grade

  • Aaa – Highest quality and lowest credit risk.
  • Aa – High quality and very low credit risk.
  • A – Upper-medium grade and low credit risk.
  • Baa – Medium grade, with some speculative elements and moderate credit risk.

Below-Investment Grade (“Junk”)

  • Ba – Speculative elements and a significant credit risk.
  • B – Speculative and a high credit risk.
  • Caa -Poor quality and very high credit risk.
  • Ca – Highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest.
  • C – Lowest quality, usually in default and low likelihood of recovering principal or interest.

From the Annual Report (dated 1/31/15):

This is the first time we are reporting the performance of the High-Yield Corporate Fund against its new benchmark composite index, which consists of 95% Barclays U.S. High-Yield Ba/B 2% Issuer Capped Index and 5% Barclays U.S. 1–5 Year Treasury Bond Index. As we mentioned when we made the change in November, we believe that the composite index is a better yardstick for the portfolio. It more closely reflects the portfolio’s longtime strategy of investing in higher-rated securities in the below-investment-grade category while maintaining some exposure to very liquid assets.

From Wellington Management Advisor Letter (part of Annual Report, dated 1/31/15)

The decline in commodity prices sparked a significant widening of high-yield bond spreads, and although the problems now affecting high-yield energy credits are justifiable, they are relatively isolated
to that industry. We are looking to take advantage of recent dislocations created by the sell-off in non-energy companies, where wider spreads are attractive and the credits are well-supported by strong fundamentals.

The fund remains consistent in its investment objective and strategy and maintains a significant exposure to relatively higher-rated companies in the high-yield market. We believe that these issuers have more consistent businesses and more predictable cash flows than those at the lower end of the spectrum. We prefer higher-rated credits in order to minimize defaults and provide stable income. We continue to diversify the fund’s holdings by issuer and industry and to de-emphasize non-cash-paying securities, preferred stock, and equity- linked securities (such as convertibles) because of their potential for volatility.

Costs and Fees

The expense ratio of the High-Yield Corporate Fund Investor Shares at 0.23% and Admiral Shares at 0.13% are very low in comparison to the peer group average of 1.11% for High-Yield Funds (calculated by Lipper). The fact that Vanguard itself runs at-cost and the fund advisor Wellington agrees to only takes a fee of 0.03% are quite impressive:

Wellington Management Company LLP provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. For the year ended January 31, 2015, the investment advisory fee represented an effective annual rate of 0.03% of the fund’s average net assets.

In comparison, sometimes the creator of an index (like the S&P 500) will want a few basis points just for allowing a fund to follow their computer-generated list of companies. Wellington is pruning through thousands of often-illiquid bonds.

Portfolio Credit Quality

Here is the breakdown of the Vanguard High-Yield Corporate Bond Fund portfolio by credit rating as of 1/31/15. Remember that Baa and above is investment grade, so the vast majority (87%) of their holdings are indeed the top two rungs of the non-investment-grade spectrum. I assume that the 5% allocation to US government bonds is in case of an increase in fund redemptions.

vghighyield

Recap
I am neither recommending nor discouraging investment in this fund. There are many types of risk involved: credit risk, interest rate risk, liquidity risk, poor security selection risk. I was just intrigued by a quote in a book and wanted to dig into it further.

I have read through the prospectus and annual reports and pointed out all of what I saw were pertinent mentions of their investment and bond selection criteria. I didn’t find anything particular in Vanguard’s materials about picking bonds that have recently fallen from investment-grade to just below investment-grade, but such a strategy would certainly align with their historical portfolio and stated goals of holding the “best of the junk”.

If this is indeed a significant market inefficiency, I wonder why it still exists. Perhaps you can only do it with a very low expense ratio? I don’t believe there is any other actively-managed bond fund consisting of high-yield bonds that has such a low expense ratio; 0.13-0.23% is nearly as low as many index funds.

The low costs alone create a relative performance advantage for this fund. I chose not to emphasize past performance as that can be fleeting, but this fund’s past performance numbers also beats their Lipper peer group average over the last 1, 5, and 10 years.

Now, I do own shares of the Vanguard High-Yield Tax-Exempt Fund, which has a different advisor; Vanguard Fixed Income Group. I wonder if they do a similar thing there?

Book Review: The New New Thing: A Silicon Valley Story by Michael Lewis

“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.”

newnewthing

Somehow I picked up a copy of The New New Thing: A Silicon Valley Story, which is a Michael Lewis bestseller published back in 1999 about the internet boom. The central character is Jim Clark, founder of Silicon Graphics (SGI), Netscape, and Healtheon/WebMD. That means Clark started three separate companies in three different industries that were all worth at least hundred of millions of dollars to over a billion dollars. Although Silicon Graphics has since filed for bankruptcy and younger folks probably don’t even know the same, for a while it was one of the most prestigious places for computer engineers to work.

It’s been over 15 years since the dot-com boom, and reading it actually felt nostalgic to this 36-year-old, but as with any Michael Lewis book it was at least a good story. It was light on practical finance-related material, but as always I like to record my notes.

  • The 1990s were a turning point where a young person with strong technology skills could get stupid rich. Before that, it seemed that you needed to work somewhere on Wall Street after showing off your Ivy League credentials. Even today, the smartest people want to be tech entrepreneurs. Geeks are cool and nerds can be treated like rock stars.
  • Clark grew up poor and had a chip on his shoulder. He grew up poor in a small town in Texas with an abusive father. Now on one of his rare returns “home”, he buzzes the town in his private jet, has lunch with his mom, and then jets off again the same day.
  • Jim Clark’s personality was perfect for this era. He had the smarts and street cred of a techie, but also the visionary skills and lack of self-doubt that made him a leader of other techies. Netscape was a web browser without a plan to make money (this was pre-Google!), yet it made Clark a billionaire. I liked this quote:

    Most people don’t enjoy making huge gambles on the future. They would just as soon have someone else tell them what to do. And that is what Jim Clark did. From the moment Netscape made him a billionaire […] half the engineers in the Valley wanted to work for whatever company he started

  • Rich men have a thing for big boats. Since Michael Lewis spent a lot of time following Jim Clark around and Clark was obsessed with his big-ass sailboat (which would barely fit under the Golden Gate Bridge), a lot of the book is somewhat boring stuff about trying to make a computerized sailboat called Hyperion. Then he commissioned an even bigger boat, Athena. Now go check out Steve Jobs’ super-yacht that cost over $100 million: Venus. Shrug.
  • “If money is how your measure yourself, you’ll never have enough” is a recent quote that I came across, source unknown. But that’s pretty much Clark (and probably a lot of other billionaires to be fair). Before founding his first big company SGI, he said he just wanted $10 million. After becoming a multimillionaire, he wanted $100 million. After his Netscape shares hit $600 million, he wanted a billion. After the Healtheon IPO made him an after-tax billionaire, he wanted more than Larry Ellison ($13B at the time).
  • The book ends with Jim Clark starting another business called myCFO, which was supposed to cater to all those new internet millionaires and help them manage their money without having to go with one of those stuffy, established institutions like Merrill Lynch or Goldman Sachs. myCFO ended up being sold off for “only” $30 million, but I think it was a precursor to modern non-traditional advisors like Wealthfront which also specifically targets Silicon Valley engineers.
  • Jim Clark’s more recent ventures since the publishing of this book have much been less exciting. The only one I hard heard of is Shutterfly, and he was really only involved with the funding. It appears that now he’s just enjoying life with his big boats and family.

The Elements of Investing – Book Review (Updated Edition)

“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.”

elements180

There are two major types of investing books for beginner investors: “Instructional to-do list” books basically tell you what you should do. “Inspirational big-picture” focus more on the philosophical reasons why you should do those things. Both can be equally important and useful.

The Elements of Investing: Easy Lessons for Every Investor by Burton G. Malkiel and Charles D. Ellis falls more into the former “list” category. Malkiel is a noted academic and wrote the classic bestseller A Random Walk Down Wall Street. Ellis is a former director of Vanguard Group and wrote the classic bestseller Winning the Loser’s Game.

Basically, two pillars of the investment world got together and tried to whittle down their 80 years of experience into 200 pages and roughly 2-3 hours of reading time. The pages aren’t even big, as the hardcover version is only 7 inches tall. You could read the entire thing in an afternoon or in snippets before going to bed within a week.

In opinion, they did a pretty good job. Topics are covered in a brief, straighforward manner. If you’ve read your share of personal finance material, none of it will be new to you, but they remain critically important. The key takeaways are clearly laid out and repeated over and over to drill them into your head. Things like:

  • Save regularly and never take on credit card debt (most important).
  • Utilize any available tax-advantaged plans like IRAs, 401ks, 403bs.
  • Keep a safe, liquid emergency fund.
  • Diversification, rebalancing, dollar-cost averaging, and low-cost indexing are the keys to investing success.

There are also a lot of little nuggets of wisdom in the book. My two favorite quotes:

The real purpose of saving is to empower you to keep your priorities—not to make you sacrifice. Your goal in saving is not to “squeeze orange juice from a turnip” or to make you feel deprived. Not at all! Your goal is to enable you to feel better and better about your life and the way you are living it by making your own best-for-you choices. Savings can give you an opportunity to take advantage of attractive future opportunities that are important to you.

As in so many human endeavors, the secrets to success are patience, persistence, and minimizing mistakes.

The updated 2013 edition of the book (original edition was 2009) includes some interesting (controversial?) suggestions for dealing with the current low-interest environment for bonds. Since the current yield for US Treasury bonds is so low, and thus the future expected return just as low, they offer up tax-exempt municipal bonds, emerging markets bonds, and even blue-chip dividend stocks.

It was sort of weird to be told “stay the course!” and then in the next chapter be told “here’s how to change course!”. I actually appreciate that they express their honest opinions, even if it appears to contradict passive-investing dogma. Jack Bogle himself does it from time to time. (I personally choose to hold muni bonds instead of US Treasuries as well.)

Bottom line: This investing primer would make a very good gift for a recent college graduate or young worker if they are ready to start getting serious about investing. If they aren’t, the book may be a bit dry. I will be adding it to my recommended books list, once I get around to updating it…

1,000 Free Hilton Honors Points For Updating Password

“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.”

Hilton is offering people 1,000 Hilton HHonors points for creating a “real” password to replace their previous 4-digit PIN. Took me less than a minute. You must do this between March 12th and March 25th, 2015, and points will be posted in 6-8 weeks. From the e-mail I received:

As of April 1, 2015, we will no longer be accepting PINs. All members will instead be required to create a secure password. […] As a thank you, if you proactively update your password before March 25, 2015, you’ll receive 1,000 Hilton HHonors Bonus Points. […] Create your password now by following the steps below:

• Visit the Personal Information section in your account profile by logging in with your current credentials, and then select “Create Username and Password”.
• Your new password must be at least 8 characters, contain at least 1 upper case letter, contain at least 1 number or 1 special character.

If you are not a current Hilton Honors member that joined before 3/12/15, you are not eligible. However, you can sign-up for a new account using this separate 1,000 point bonus.

Participating in this promotion will also extend the expiration date of your points to 12 months out from the date of posting. Per the Hilton website:

Hilton HHonors points do not expire as long as members remain active in the program. To keep an account active, members can stay at one of Hilton Worldwide’s hotels, or earn or redeem HHonors points within 12 months.

Beware of Mutual Funds That Artificially Juice Their Dividend Yield

“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.”

juicingdividendsI like seeing my dividend income roll in each quarter, as do many other investors. But are mutual funds artificially “juicing” their reported dividend yields to attract investors? This is explored in a recent academic paper Juicing the Dividend Yield: Mutual Funds and the Demand for Dividends, which I found via Alpha Architect. Here is the abstract:

Some mutual funds purchase stocks before dividend payments to artificially increase their dividends, which we call “juicing.” Funds paid more than twice the dividends implied by their holdings in 7.4% of fund-years examined. Juicing is associated with larger inflows, and is more common among funds with unsophisticated investors. This behavior is consistent with an underlying investor demand for dividends, but is hard to explain by taxes or need for income, as funds can generate equivalent tax-free distributions by returning capital. Juicing is costly to investors through higher turnover and increased taxes of 0.57% to 1.52% of fund assets per year.

The problem with making extra trades to make your dividend yield look higher is that it is not tax-efficient. The increased turnover itself creates extra capital gains and trading costs. Also, when a funds buy a stock just before the ex-dividend date, then that dividend no longer qualifies for the lower dividend tax rate. I just ran across this problem last month when doing my taxes and looking at my qualified dividend income percentages. (I’m not saying that WisdomTree is not engaging in any “juicing” behaviors, it is very hard to actually calculate and there are other factors involved.)

Interestingly, the paper authors propose addressing that exact problem. Make it easier on investors and require funds to report their qualified dividend income percentages (emphasis mine):

One minimally intrusive regulatory change that could improve investor decision-making is to require funds to break out dividend income into qualified dividends (entitled to a reduced income tax rate, when the stock was held for 60 days or more) and non-qualified dividends (which pay the full income tax rate, for stocks held for less than 60 days) when reporting their distributions in filings such as annual reports. Such disclosure would not harm an investor that was already informed about juicing, but would ensure that investors had easy access to the information necessary to make an informed decision if they chose to do so.

Bottom line: Juicing exists and it hurts investors with higher turnover and higher tax bills, but it’s hard to know when by just looking at the usual mutual fund stats. Until then, be careful if you’re buying an actively-managed fund primarily due to their high dividend yield.

FidSafe Review: Free Digital Document Storage from Fidelity

“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.”

fidsafelogoI have a couple of accounts at Fidelity Investments (solo 401k and taxable brokerage), and recently they sent me letter about a new service. FidSafe is a website that stores digital copies of documents for free and is open to the public, no relationship with Fidelity required. (It is technically from Fidelity Labs, owned by Fidelity Investments.) I signed up for an account and took it for a spin.

Sign-up Process
You are only required to provide a name, e-mail, and birthdate (18+ only). It is highly recommended to provide a mobile phone number as well because they support two-factor authentication, and you can choose to have it activated for every login attempt or only on unfamiliar devices.

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Security
In addition to the two-step login authentication mentioned above, FidSafe states that all files are encrypted both in-transfer and while stored on their servers. You can also upload files that you encrypted yourself, although that will make them more difficult to share with others. FidSafe employee access to your personal data or documents is also restricted.

Finally, they have something called an “Identicon” that helps confirm that you are viewing a legitimate e-mail or web page from FidSafe. Similar to what some banks have when you log in. You can choose from a limited selection of patterns and colors:

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Storage Limits
FidSafe users will each get 5 GB of storage space without charge. You can see your storage status under “Settings [Gear Icon] > General”. Individual files are limited to 200 MB in size. Files shared with you by others do not count against your storage consumption.

File Types
Their site states that files of any type can be uploaded. I uploaded various test files of PDF, PNG, JPG, DOCX (Word Documents), and XLSX (Excel Spreadsheets) formats and they all worked fine and were able to be shown by their in-browser viewing tool. As for what files to store, they provide a suggestion list in their FidSafe Fundamentals Kits here.

User Interface and Design
Here is a screenshot of the main dashboard. The user interface is clean, mobile-friendly, and relatively intuitive. They offer a brief walkthrough tour, and I found it easy to get started right away. (It really shouldn’t be that complicated in any case…)

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Sharing Documents With Others
You can either choose to share specific personal documents with other users all the time, or designate someone to have access to all your documents only upon death. In both cases, the person you are sharing with must be invited through via e-mail and sign up for their own FidSafe login and password (and provide name, e-mail, birthdate).

For immediate sharing, your designated “Contact” can only view the specific documents you share with them. You can choose to give them view-only access or add the ability to download.

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Here are some details on the “Share Upon Death” feature:

To sign-up for the service, under “Settings” you will provide the last 4 digits of your SSN and a designee (one of your existing FidSafe contacts). Upon notification of your death, FidSafe verifies your death certificate and shares your FidSafe content (only documents and notes; passwords are not shared) in the designee’s FidSafe account. Any time after signing up for this service, you can change the designee or unsubscribe to the service.

[…] When FidSafe is notified of your death (by family member, attorney, etc.), FidSafe collects the notifier’s contact information (first name, last name, email address, phone number) and decedent’s information (first name, last name, email address used for FidSafe registration). FidSafe will also need a copy of decedent’s certified death certificate mailed to the following address – Fidelity Labs FidSafe Support, 245 Summer Street V3A, Boston, MA 02210. If the death certificate is verified, FidSafe will share decedent content in designee’s FidSafe account.

Support
Call 800-453-3332 or e-mail support@fidsafe.com

Conclusions: The Good

  • Having a secure, central place where you store your family’s important documents can be quite useful for estate planning and other needs. There may be an emergency (fire, natural disaster, medical) or you might just be applying for a mortgage or a new passport.
  • Providing online access can make things much easier if important people live far apart.
  • There are numerous start-ups out there now that try to combine digital storage and estate planning, but FidSafe is backed by an established, reputable company (that may have a lot of your personal information already).
  • All available security mechanisms appear to be supported, including two-factor authentication and file encryption. I’m not sure what additional measures could be added.
  • Did I mention it’s free?! Other places can charge $75 a year.

Conclusions: The Concerns

  • The fact that this is a free feature can also be seen as a negative because what happens if Fidelity feels a need to “reorganize” or “streamline” their operations and discontinue the service. It probably isn’t a huge expense but it surely costs something to support. This is the type of service you’d want to be around indefinitely.
  • If you choose to share sensitive documents with other people, then you are depending on them to keep your information secure. If you share your file with someone who uses the same password everywhere or downloads the file onto their home computer (or even prints it out), then that can become the weakest link. Making things view-only is a partial solution.
  • FidSafe is digital-only, so original documents still need to be stored securely (although you can note their locations in FidSafe). You should also consider an offsite, physical backup of any computer files in someone else’s safe or a bank deposit box. (This Forbes article says high-quality optical discs may be more reliable for long-term storage than flash drives and hard drives.)

ROI of Brand Name Colleges? It’s What You Study In College That Matters, Not Where You Go

“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.”

Soon high school seniors will start receiving their college acceptance letters. This week’s issue of The Economist has an article discussing the results of a PayScale study of the relationship between the financial return on investment (ROI) of a college degree with the selectivity of the college itself. Via NextDraft.

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The two trendlines above support the conclusion that what you study matters far more than where you study it. The flatness of the lines show that selectively doesn’t improve ROI much for degrees of the same major, while the gap between them shows that the type of major has a significant effect on average future salary.

Engineers and computer scientists do best, earning an impressive 20-year annualised return of 12% on their college fees (the S&P 500 yielded just 7.8%). Engineering graduates from run-of-the-mill colleges do only slightly worse than those from highly selective ones. Business and economics degrees also pay well, delivering a solid 8.7% average return. Courses in the arts or the humanities offer vast spiritual rewards, of course, but less impressive material ones. Some yield negative returns. An arts degree from the Maryland Institute College of Art had a hefty 20-year net negative return of $92,000, for example.

You can also play around with the PayScale ROI rankings here.

Take from this data what you will, but perhaps it will soothe the pain of rejections and help relieve the societal pressure to get a “brand name” degree.