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Starwood Preferred Guest American Express Review

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

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The travel rewards card that has been in my wallet the longest is the Starwood Preferred Guest® Credit Card from American Express. It is quite famous in the travel junkie circles, but not very well known otherwise. Once you understand the combination of flexibility and value, you will better understand why this is my favorite hotel rewards card and also the only annual fee card that I’ve kept consistently over the last 7+ years.

Highlights:

  • Earn 25,000 bonus Starpoints® after you use your new Card to make $3,000 in purchases within the first 3 months.
  • No Foreign Transaction Fees on international purchases.
  • Receive free in-room, premium internet access. Booking requirements apply.
  • Enjoy complimentary, unlimited Boingo Wi-Fi on up to four devices at more than 1,000,000 Boingo hotspots worldwide. Enrollment required.
  • Earn free nights at over 1,200 hotels and resorts in nearly 100 countries with no blackout dates.
  • Some hotels may have mandatory service and resort charges.
  • $0 introductory annual fee for the first year, then $95.

My review:

  • When redeeming towards hotel stays, I regularly get 2-6 cents of value per point, more than often the value you’d get from airline miles. Get free stays in hotels that otherwise charge $300+ a night.
  • Rather have miles? You can convert 20,000 points to 25,000 miles, which is 1.25 miles per dollar spent, 25% more miles than most other airline-specific cards.
  • Easy transfers mean you can “top off” a frequent flier account to get to that coveted reward ticket level. Your miles aren’t worth anything until you actually use them!
  • You can convert just a few miles to keep your other miles from expiring.

Either I’ve had one, or my wife has had one, or I’ve had the business card version of this card for the last 5+ years. Transferring points within between household members is quite easy and free.

Starwood Points transfer to Frequent Flier Miles

The first reason why this card is so useful is that Starwood points (or Starpoints) can be converted to miles to major domestic airlines and several international ones. This includes Alaska, American, Delta, Hawaiian, and United. Most transfer at a 1:1 ratio (1 Starwood point = 1 frequent flier mile), unless otherwise noted. For example, the ratio is lower for United (2:1 means 2 Starpoints = 1 United mile.

Imagine that you’re only a thousand miles short of a free ticket, but you need to buy a ticket and would really like to make it free. Although there may be other options that involve spending money, you can simply “top off” your balance by transferring as little as 1,500 miles to the specific airline programs that you want. You can even convert a specific number of points. Just need 2,854 miles here and 1,567 somewhere else? No problem.

With most airlines, your miles expire after a period of inactivity. But since any activity counts (not only flying), I could quickly transfer 1,500 miles over in order to save 20,000 hard-earned miles from expiring.

  • Aeromexico Club Premier
  • Aeroplan/Air Canada
  • Air Berlin
  • Air China Companion
  • Air New Zealand Air Points (65:1)
  • Alaska Airlines Mileage Plan
  • Alitalia MileMiglia
  • All Nippon Airways (ANA) Mileage Club
  • American Airlines AAdvantage
  • Asia Miles
  • Asiana Airlines
  • British Airways Executive Club
  • China Eastern Airlines
  • China Southern Airlines’ Sky Pearl Club
  • Delta Airlines SkyMiles
  • Emirates Skywards
  • Etihad Airways
  • Flying Blue
  • Gol Smiles (2:1)
  • Hainan Airlines
  • Hawaiian Airlines
  • Japan Airline (JAL) Mileage Bank
  • Jet Airways
  • LAN Airlines LANPASS Kms (1:1.5)
  • Miles and More
  • Qatar Airways
  • Saudi Arabian Airlines Alfursan
  • Singapore Airlines KrisFlyer
  • Thai Airways International Royal Orchid Plus
  • United Mileage Plus (2:1)
  • US Airways Dividend Miles
  • Velocity Frequent Flier
  • Virgin Atlantic Flying Club

For every 20,000 points you convert, you get an additional 5,000 point bonus. So 20,000 Starwood points = 25,000 miles on the airlines listed above. That’s 25% more miles per dollar than those airline-specific credit cards (although the waived baggage fees are appealing).

Great Hotel Rewards Card

Starwood is a growing collection of over 1,000 mid-scale to very-upscale hotels in nearly 100 countries, from the business-oriented Four Points and Sheratons to the upscale W and Westin hotels. This card has come in very handy for travel to international and bigger US cities.

Short-notice and emergency stays. All room taxes are included when you use points, and there are no blackout dates unlike other hotel programs. I’ve used them in a pinch, burning just 3,000 points for a last-minute $120 a night room at the Vancouver Airport Four Points (now Category 3).

Luxury international hotels. I’m usually happy with a Holiday Inn Express by the airport for a business trip, but when traveling for leisure it can be very convenient to stay downtown near the action and sights. In a city like Paris or Rome, this can mean big bucks. With this card, I’ve stayed at $300 a night hotels like the W New York, Westin Madrid, and Westin Venice. Being able to stay up late into the night in Venice instead of having to leave was amazing. If you redeem for 4 nights in a row in a Category 3 or higher hotel, the 5th night is free.

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Cash and points option. Don’t miss “cash and points” opportunities. For example, I found a $400 room at the Westin Rome in Italy or W Hotel New York Times Square for 8,000 points + $150 a night. Run the numbers yourself using the booking engine at SPG.com and look for the “SPG Cash & Points” option. The value of 30,000 points can be easily greater than $500.

This last option is not the best value, but for the purposes of setting a last resort and baseline value, 9,500 Starpoints = $100 gift card at Amazon.com.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Recommended Reading List for Young Investors

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ifyoucanbookI just finished reading If You Can: How Millennials Can Get Rich Slowly, a free starter book on personal finance by respected author William Bernstein. As the PDF was only 16 pages long, you could probably finish it during a lunch hour or commute. I recommend it, but even Bernstein notes that his “inexpensive, small booklet” is more of a map than a complete book. Included were several book assignments to address specific topics. The idea is a young person could read all of these books over the span of a year or two and round out their financial education. In the meantime, start saving 15% of your income!

Here is the recommended reading list:

Bernstein thinks it tacky to recommend his own books, so let me do it. Back when I was a young lad with no investing knowledge (2004), my favorite introductory book was Four Pillars of Investing by William Bernstein. (The new edition is really just the old edition though, so buy a used copy of the old edition and save some money.) However, more recently I have heard good things about Investor’s Manifesto which supposedly has less math-y stuff.

I’ve read all but two of these books and agree that they were all excellent building blocks of knowledge. Most if not all of these books have been around for a while and should be readily available for free at your local library. Even if you pay for them, the return will be well worth the investment. I added a new copy of all seven books to my cart and it came to under $100 at Amazon ($91.48 to be exact). Good graduation gift ideas?

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Non-Traditional Retirements, or DIY Sabbaticals

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NPR Morning Edition featured a story today about non-traditional retirements: Seeing The (Northern) Light: A Temporary Arctic Retirement. Instead of waiting until 65, Winston Chen decided to stop working for an entire year mid-career and moved his family to a small Norwegian island in the Arctic Circle with only 180 residents.

The whole family got to do many things they’d never do otherwise. Financially, they offset their mortgage by renting out their Boston home completely as-is for a year to another family on a temporary work assignment. His wife Kristin was able to get a job teaching elementary school in Norway for a year, as it was a remote area that needed teachers. They could keep expenses low as the tiny village had no need for a car, no malls, and no restaurants. One of his pursuits ended up being an iPhone app that took off and now supports their entire family, although that wasn’t the goal.

The inspiration came from the TEDtalk “The power of time off” by designer Stefan Sagmeister. Here’s a screenshot (sorry for the poor quality) illustrating the traditional working timeline: learn for 25 years, work for 40 years, then retire for 25 years.

A commenter pointed out that this shows that our society seems to feel that education is for the young, work is for the middle-aged, and leisure is for the elderly. But what if you decided to snip 5 years from those retirement years and sprinkle them between your working years? This is essentially the idea of sabbaticals, usually associated with tenured professors taking a paid year off from their usual teaching and research duties. Every 7 years, Sagmeister completely shuts down his popular design shop for an entire year.

Both Sagmeister and Winston Chen add that if you do this, you shouldn’t just give yourself a year of nothing and expect to figure it out along the way. At the minimum, you should make a list of all the things that you want to try and/or accomplish (Chen’s included oil painting, photography, reading, learning Norwegian, and learning how to play the ukulele). Both broke it down into a daily schedule as well (Chen’s is below).

[Read more…]

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Total Economy Portfolio: Adding Small Value Stock, REIT Exposure

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In many investing books such as David Swensen’s Unconventional Success or Bill Schultheis’ The Coffeehouse Investor, you may see model portfolios that include an allocation to smaller companies and/or real estate investment trusts (REITs). Historically, adding these less-correlated asset classes have improved a portfolio’s overall return while reducing volatility. Author and portfolio manager Rick Ferri proposes another lens from which to view why such additions add value in his Forbes article called The Total Economy Portfolio.

Briefly, Ferri points out that the number of publicly traded companies has fallen by over 50% in the last 16 years, and those public companies together earn only about half of the U.S. economy’s profits. What is missing, and what should we do to replace them?

The two main areas of the economy that are underrepresented on the stock market are small businesses and commercial real estate. That means increasing small company and real estate exposure in your portfolio should help you track the economy better. […] My “Economic Tilt Portfolio” is allocated 65% to the Wilshire 5000, 25% to the Russell 2000 small-cap value index and 10% to the Dow Jones U.S. Select Real Estate Investment Trust index.

The chart from the article below compares the total return of the Total US Stock Market (Wilshire 5000) vs. the Economic Tilt Portfolio:

[Read more…]

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Groupon: $8 For Domino’s Pizza, $20 For General Mills Combo

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Update 4/21: There is a new national deal for a General Mills sampler pack that include a whole bunch of random goodies like cereal and sn.acks, along with a coupon book. Over 1,000 bought already, partially I guess since cereal is so darn expensive these days

Groupon has a national deal (still valid 4/21) at Domino’s Pizza that gets you any large pizza with up to 10 toppings (online order, carryout only) for $8. Valid at all locations in lower 48. I haven’t tried their new revamped pizza yet… is it really better?

If you don’t have a Groupon account already, please use my sign-up link, and I’ll get some Groupon credit for referring you. (It feeds my dining-out addiction… literally.) Then visit the Domino’s pizza deal link.

You can save even more with cashback shopping sites like eBates ($5 new customer bonus), Mr. Rebates ($5 bonus), and BigCrumbs.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Target Asset Allocation for Investment Portfolio

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Asset allocation (AA) is an important part of portfolio design, and I like pinning down a target asset allocation for personal reference. This helps keep me focused as my portfolio shifts over time and makes it easy to re-balance back. For some educational posts on this topic, please refer to my asset allocation starter guide.

Below is my updated target asset allocation. Here is my target asset allocation from 2008. It’s not dramatically different, but I’ll try to explain the slight changes below. This is just my own AA, and I think everyone should develop their own based on their own beliefs and learning. If you just copy someone else’s without thinking, when things go awry you won’t have the foundation to stick to your guns. I have been strongly influenced by the writings of Jack Bogle, William Bernstein, David Swensen, Rick Ferri, and Larry Swedroe.

Stocks

I separate things out first into stocks and bonds, and then later it’s easy to go 60% stocks/40% bonds and so on. Here’s my stocks-only breakdown:

  • I now do a 50/50 split between US and International stocks. In general, I would like to mimic the overall world investment landscape. On a market cap basis, the US stock market is now about 45% of the world, while everyone else takes up 55%. 50/50 is just simpler, with a slight tilt towards domestic stocks.
  • I consider REITs a separate real estate asset class. I used to put Real Estate under US stocks since I only held US Real Estate Investment Trusts (REITs), but in the future I would be open to investing in foreign real estate as property laws improve and investing costs drop.
  • On the US side, I add some extra small-cap value companies. Historically, adding stocks of smaller companies with value characteristics (as opposed to growth) has improved the returns of portfolios while lowering volatility. There is debate amongst portfolio theories as to why this happened and if it will continue.

    If you buy a “total market” mutual fund or ETF, you’ll already own many of these types of companies (although many will not be held due to their small size relative to the big mega-corporations). I feel this adds a bit of diversification.

  • On the international side, I add a little extra exposure to emerging markets. You may be surprised to know that “emerging” countries like China, Brazil, Korea, India, Russia, and Taiwan already make up 26% of the world’s markets when you remove the US. These are countries that have a greater potential for growth, but also lots of ups and downs. I add a little bit more than market weight for these as well.

Bonds

I try to keep things simple for bonds, partially due to the fact that they are currently a smaller portion of my portfolio.

  • I like a 50/50 split between inflation-linked bonds and nominal bonds. Inflation-protected bonds provide a yield that is guaranteed to be a certain level above inflation. Nominal bonds pay a stated rate that is not adjusted for inflation. I like to balance the benefits of both.
  • Instead of only short-term US Treasuries for nominal bonds, I added some flexibility. I used to invest only in short-term US treasuries, as they provided the best buffer in my portfolio as they were of the highest quality and had a low sensitivity to interest rate fluctuations. Both TIPS and nominal Treasuries did great during the 2009 crash and the subsequent flight-to-quality, but now the yield on Treasuries is just too low in my opinion. There are trillions of dollars from countries and huge institutions around the world that are tucking their money away under the safe Treasury mattress. By venturing into other places they won’t with my tiny portfolio, I feel I can stay relatively safe yet increase my yield significantly. Possibilities include bank CDs, stable value funds, and high-quality municipal bonds.

Want more examples? Here are 8 model portfolios from respected sources, an updated Swensen portfolio, one from PIMCO’s El-Erian, and Ferri’s personal portfolio. Have fun!

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Surviving the Great Baseball Card Bubble

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

From the 1630s tulip mania to the Roaring 1920s to the Dot-com Bust to Real Estate, I thought I had read about all the bubbles. But it seems that I forgot that I was right in the middle another one – the baseball card craze of the late 1980s and early 1990s.

I was about 10-14 during these years, in which I had just the right combination of a little bit of spending money, a love of sports, and greed. All my friends collected cards, and we traded them daily. Baseball cards were our form of currency. You could buy homework answers, protection from bullies, or even temporary popularity. I would secretly only spend half of my lunch money and go hungry for a few hours before running home to buy another pack of cards.

In the new book Mint Condition: How Baseball Cards Became an American Obsession, James Davieson tells the story of how this bubble formed and subsequently popped. This Slate article The Great Baseball Card Bubble includes a few excerpts. This one hit especially close to home:

American boys growing up in the 1980s approached Beckett Baseball Card Monthly with something like religious reverence. For many of us, it was the first magazine we bought and the only one we leafed through regularly. The magazine’s circulation eventually reached about 1 million, with many of those issues no doubt destined for the book bags of young boys. We walked the school hallways in the ’80s with our Becketts sandwiched between our textbooks, and we followed the price fluctuations of our favorite players with slavish devotion. Beckett’s valuations served as the foundation for all card trades.

To this day, I have about 3 years of worn out Becketts stacked up in my parent’s house. Looking back it was basically the stock market for kids, except instead of real-time quotes we only had monthly updates. Quality downgrades, riding momentum, pure speculation, it was all there. And just like mortgage-backed securities, when the mass media starts calling something a legitimate investment, a crash is soon to follow.

By the ’80s, baseball card values were rising beyond the average hobbyist’s means. As prices continued to climb, baseball cards were touted as a legitimate investment alternative to stocks, with the Wall Street Journal referring to them as sound “inflation hedges” and “nostalgia futures.” Newspapers started running feature stories with headlines such as “Turning Cardboard Into Cash” (the Washington Post), “A Grand Slam Profit May Be in the Cards” (the New York Times), and “Cards Put Gold, Stocks to Shame as Investment” (the Orange County Register). A hobby bulletin called the Ball Street Journal, claiming entrée to a network of scouts and coaches, promised collectors “insider scouting information” that would help them invest in the cards of rising big-league prospects. Collectors bought bundles of rookie cards as a way to gamble legally on a player’s future.

Of course I had to idea what inflation hedges were back then, but I did view them as an investment. Baseball cards were a store of value, and were sure to only increase as time went on, right? Even now, I still have a few unopened packs of 1989 Upper Deck, the first “premium” baseball card. I used to fight the urge to open them, balancing the curiosity of whether I had a Ken Griffey, Jr. rookie card, or whether it was better to keep it an unopened mystery.

I suppose I did learn a few things about personal finance in those days. But after reading all this, I figure I can complete my Nolan Ryan 1968-1993 Topps collection on the cheap. 🙂

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Revitalize Your Aging PC With a Fresh Installation of Windows

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I apologize for the recent lack of posts, I’ve been having some computer issues. I’ve been experiencing the usual sluggishness that happens after you’ve had Windows for a while, but recently it had been unbearably slow. Even after running multiple anti-virus and anti-malware software, defrag utilities, registry cleaners, I just gave up and had to re-install the operating system. Of course, I’m bad and only make sporadic backups so it took me a while to organize my files and make proper backups.

Although not directly related to finances, I found that re-installing a fresh copy of Windows on your computer can make a huge difference in speed and usability, so much so that you can delay buying a new computer for a while (within reason). This post is somewhat specific to Dell laptops since that is what I have, but much of it is still applicable to all Windows PCs.

According to this How To Restore or Reinstall Microsoft Windows page at Dell, I had a few choices after backing up all my data:

System Restore
This is a Windows OS feature, so it should available across all PC laptop brands. It allows you to revert back to certain setpoints in your system’s past, hopefully back to a date in which everything was running smoothly. But I had been experiencing a slow and gradual decline, and none of the dates I picked improved my situation. It might work better for other folks. The good news is that you can also switch back to your original state.

Restore From Hidden Partition
Most recent Dell laptops have a hidden partition on the hard drive that contains a backup copy of your computer’s original factory software. The official name is Dell PC Restore by Symantec. You just have to hold Ctrl+F11 during start-up. I’m sure this would be great for most people. Unfortunately, my attempt failed. “Your installation was unsuccessful. Please call Dell Support”. Grrr.

Most other companies have a similar setup. For example, I did a successful factory reset on a family member’s Acer computer with Alt+F10. All I had to do was backup their pictures, and I was done in under an hour.

Restore from Recovery OS Disc
I was then left with the final option of manually re-installing the operating system with my Windows XP CD. Two houses and three years ago, I probably had it. Now, it’s nowhere to be found. (Side note: Some computer have you make the recovery CDs yourself. Do it before it crashes!) Luckily, I found that you can request a new recovery CD from Dell:

Dell Customers can now request a set of backup discs containing the factory-installed operating system as well as the device drivers and utilities specific to your system. Requests are limited to one (1) set of backup discs per system purchased.

There was no mention of needing a warranty, which made me hopeful since mine had already expired. After submitting my request, I received an e-mail saying that they would send me a Recovery CD for free, though they did make it very clear they didn’t have to since my warranty had expired. Still, they did FedEx it to me overnight at no charge, so I was very pleased with the service in this situation. Other brands may charge a nominal fee.

Final Result: Laptop that feels like new. Total Cost: $0. 🙂 I am now back up and running, and it is amazing how much difference a fresh install makes. The cobwebs and grimy buildup is gone! I did spend hours on the backup and everything, but even if I bought a new laptop, I’d still have to spend hours reinstalling new apps and transferring files.

More Links
HP Notebook PCs – Repairing or Reinstalling The Operating System

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Weekend Reading: Bear Markets, Changing Asset Allocation, and Stock Picking

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Here are some good reads about investing from this week:

How to Survive and Succeed Through a Bear Market
This letter to shareholders is written by John Montgomery, founder of Bridgeway Funds, which are a group of actively managed mutual funds with a reputation of high ethical standard and putting shareholders first. It provides his insights into investing and reminds us that there is also a risk when we only invest in safe investments. An excerpt:

This is my fourth* bear market as an investor, three of which have happened since I founded Bridgeway Capital Management in 1993. Even before the last three bear markets, I studied stock market data in detail going back to 1926. I spent quite a bit of time focusing on the downturns and thinking about how to survive them and why stock market investing is still very attractive even when predictably it doesn’t feel that way. From this research I formed five principles of long-term investing that became part of Bridgeway’s investment philosophy and are interwoven into our investment process. […] I thought I’d share what I learned with our investors.

When should you change your asset allocation strategy?
This post on the Bogleheads forum was written by Rick Ferri, investment portfolio manager at Portfolio Solutions and author of several good books on index and passive investing (including All About Asset Allocation). As a portfolio manager, of course he’s been fielding a lot of phone calls recently. Here are his thoughts for the general investor. An excerpt:

Significant changes to your stock and bond asset allocation strategy is a major decision and can be compared to changing careers. There are several good reasons to change your asset allocation strategy along life’s journey. Below are three reasons I believe a person has a legitimate reason to make an asset allocation change:

1) Your target retirement goal is well within reach.
2) You realize that you will not need all your money during your lifetime.
3) You have realized that your tolerance for risk is not as high as you once thought.

Why stock picking is a losing game
This article on CNN Money is by William Bernstein, another well-known portfolio manager and author of investment books such as the Four Pillars of Investing. Here he tries to remind us that just because the indexes are dropping, it doesn’t mean it’s time to switch to something that sounds better.

I’m sure you’ve heard that while it’s fine to ride the market’s gains when times are good, you need an expert stock picker when the bear roars. Wrong: Active money managers do not suddenly gain an extra 20 IQ point advantage over the rest of the market just because the Dow is falling. The record shows that their funds have trouble competing with the index in the bad times too.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

$100 Bonus from Suze Orman and TD Ameritrade

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While skimming my new Suze Orman eBook, I ran across her SaveYourself promotion that I blogged about almost a year ago, but is still going on for a little while longer.

You can get a $100 bonus after one year (expired) if you open an account at Ameritrade by March 31, 2008 and set up an automatic deposit of at least $50 per month for 12 consecutive months. This deal isn’t bad as a mandatory cash savings vehicle if you don’t need to withdraw the money. They even offer a special money market rate much higher than their usual piddly 0.05% rate:

Get started on Suze’s Save Yourself Plan by opening a new account with TD AMERITRADE, featuring a special high-yield deposit account with a 2.78% Annual Percentage Yield (as of February 1, 2008). Your cash is held in an FDIC-insured Money Market Deposit Account (MMDA) at TD Bank USA, N.A.

There are no maintenance fees on the account, plus you receive the $100 offer for making 12 monthly automatic deposits of at least $50 each to help you build up your account balance. […] Should you need to withdraw the money prior to the twelve-month commitment, you may withdraw all of your deposits, plus the interest earned. However, you will forfeit the $100 bonus.

Doing the math
Looked at one way, if you just put in the minimum $50 in each month, at the end of a year you will effectively have earned 35% interest on your money. If you are truly starting out on a savings plan, this is a pretty nice guaranteed return. $50 a month isn’t too painful, and at the end of the year you’ll end up with over $700 tucked away for your emergency fund, Roth IRA contribution, or whatever. It’s a good incentive to get in the habit of saving.

Alternatively, if you’re already saving all you want in high-yield savings accounts, you’ll still be ahead by about $90 in extra interest.

I wouldn’t necessarily stay and invest with TD Ameritrade, though. They are alright, but at $10 per trade with potentially small balances, here are a few alternatives that I suggest exploring. Note that TD Ameritrade has a $75 fee for transferring out your account directly to another broker. Keep your money in cash, and then simply withdraw it and close your account with no fee when you wish to leave.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Choosing An Asset Allocation, Step 3: Considering The Diversification Benefit Of Small and Value Stocks

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So far we’ve looked into the stock/bond ratio and the domestic/international ratio. Instead of taking these total stock markets as whole, you can further subdivide them into “styles” or additional asset classes. Although these vary in specific definition, in the general layout is shown by the Morningstar style box shown to the top right.

Value vs. Growth Stocks
Value stocks are those that tend to trade at a lower price relative to objective measures like dividend yield, earnings, sales, or book value. For example, you could screen by low P/E ratio. To generalize, value stocks tend to have low growth prospects or are in unglamorous industries. On the other side are growth stocks, which have high relative valuations. Again to generalize, these companies tend to have big growth expectations like Google or Apple.

If you look across long periods of history, it actually turns out that value stocks outperform growth stocks as a whole. People use different ways to explain this phenomenon. One camp says that value stocks are riskier because they are more likely to fail due to poor prospects, so obviously they should have higher return. Others use a behavioral view, saying that since they are “boring” or “ugly” stocks then they tend to be undervalued by investors in general.

Either way, including value stocks as part of a portfolio has also historically provided a diversification benefit, as can be shown by this graph from the excellent book All About Asset Allocation:
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How Often Should I Rebalance My Investment Portfolio? A Brief Article Review

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I feel like my last post about rebalancing wasn’t as thorough as I’d have liked it to be, so here I go again, adding some quick definitions and including a review of several research articles about the subject.

What is Rebalancing?
Let say you examine your risk tolerance and decide to invest in a mixture of 70% stocks and 30% bonds. As the years go by, your portfolio will drift one way or another. You may drop down to 60% stocks or rise up to 90% stocks. The act of rebalancing involves selling or buying shares in order to return to your initial stock/bond ratio of 70%/30%.

Why Rebalance?
Rebalancing is a way to maintain the risk/reward ratio that you have chosen for your investments. In the example above, doing nothing may leave you with a 90% stock/10% bond portfolio, which is much more aggressive than your initial 70%/30% stock/bond mix.

In addition, rebalancing also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). This is the exact opposite behavior of what is shown by many investors, which is to buy in when something is hot and over-performing, only to sell when the same investment becomes out of style (buy high, sell low).

However, in taxable accounts, rebalancing will create capital gains/losses and therefore tax consequences. In some brokerage accounts, rebalancing will incur commission costs or trading fees. This is why, if possible, it is a good idea to redirect any new investment deposits in order to try and maintain your target ratios.

How Often Should I Rebalance My Portfolio?
Some people rebalance on a certain time-based schedule – for example, once every 6-months, every year, or every 2 years. Others wait until certain asset classes shift a certain amount away from their desired targets before taking any action. A good source of research articles about which method is optimal can be found at the AltruistFA Reading Room. I’ve been reading through them the past few days, and I’ll try to provide a very general overview of the articles here.

So what is best? You may be surprised by the fact that not only is there no clear agreement on the answer to this question, but many of the articles actually contradict each other! For instance, compare this Journal of Investing article:

Over this period, regular monthly rebalancing returns dominated less active approaches. Should one infer that daily rebalancing is better still? Our data cannot say, but it seems plausible.

with this excerpt from an Efficient Frontier article:

So, what can we conclude from all this? Monthly rebalancing is too frequent. There are small rewards to increasing one’s rebalancing frequency from quarterly up to several years, but this comes at the price of increased portfolio risk.

Eh? I believe that this is because their results vary significantly with the time period chosen and asset classes being used in their back-tested scenarios.

Then there is this paper from Financial Planning magazine, which used the 25 year period from Oct. 1977-Sept. 2002 and a 60% Stock (S&P 500 Index) and 40% Bond (Lehman Bros. Gov’t Index) as the starting/target allocation. Here are the results for various rebalancing frequencies:

altext

The various rebalancing periods showed minimal performance differences, although annual rebalancing held a slight return margin and a higher risk margin.

Because the risk-adjusted performance differences among the portfolios were small, the answer to the question of when to rebalance–monthly, quarterly, semi-annually, or annually–depends mainly on the costs to the investor of rebalancing.

Efficient Frontier’s Bernstein also agreed in the this last respect, stating “The returns differences among various rebalancing strategies are quite small in the long run.”

In the “wait for a significant shift before taking action” camp is author Larry Swedroe, who I think also presents a very reasonable solution. From a WSJ article:

With major holdings like U.S. stocks, foreign stocks and high-quality U.S. bonds, consider rebalancing whenever your fund holdings get five percentage points above or below your targets, suggests Larry Swedroe, research director at Buckingham Asset Management in St. Louis. For instance, if you have 40% earmarked for bonds, you would rebalance if your bonds got above 45% or fell below 35%.

Meanwhile, for smaller positions in sectors like emerging markets and real-estate investment trusts, Mr. Swedroe recommends a 25% trigger. So if you have 5% targeted for emerging-market stocks, you’d rebalance if emerging markets balloon above 6.25% or fall below 3.75%. “You definitely want to be rebalancing, but you don’t want to be doing it too often,” Mr. Swedroe says. “You want to let stocks go up a bit before you sell, but not so much that you lose control of risk.”

Summary
Since it seems that there is no concrete right answer, I think the most important thing is to just make sure you set up some way to rebalance that does not involve any emotions or market timing. Don’t worry about the details, but don’t let your portfolio run off on its own either. I think the subtitle of one of the articles above sums it up quite well… ‘Tis Better To Have Rebalanced Regularly Than Not At All.

I have personally chosen to rebalance annually. This method keeps it simple while still controlling risk and offering potential extra return. If I recall correctly, it is also recommended in Ferri’s book All About Asset Allocation (review).

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