One of my favorite films (easily, Top 5) is "American Beauty." The tagline for the film was "Look closer." It rings as a periodic reminder each time I am asked for my thoughts on a specific investment. Whenever someone asks my thoughts, my first question is never "how much are you putting in it?" Amounts are always relative. My first question is "will the amount you're putting in the investment be more than 5% of your overall balance?" If the answer is no, then I often encourage the investment with a mindful eye.
One term I learned from listening to Mo Ansari over the years is "exit strategy." When I left my last job, I formulated my exit strategy for almost 15 months before my actual departure. However, a job is not an investment (at least, not in these terms) and formulating an exit strategy at that point would have been heavily delayed. The best exit strategy is formed before you invest. And it is written. In case you haven't noticed, a lot of this blog has been written for my own use to remember what I was thinking at the time I made specific moves.
If you invest in a fund, you should know your tolerance for its success and its failure. "If the fund raises above 20%, immediately remove the gains." "If the fund falls 20%, immediately sell the position." Those are examples of flawed exit strategies. They lack a relative basis. The last time I added a new position to my portfolio, my exit strategy was to sell out if the fund under-performed the relative index fund for two consecutive years. The markets could gain or lose 20% in a given year, and it is not a reflection on the investment. Every investment has an opportunity cost, and that is the true measure for its success or failure.
For example, invest 2% of your bond index fund into a GNMA fund. The opportunity cost is measured by the performance of that bond index fund, because this money would be doing better or worse if you had left it in that investment. The true performance for your GNMA Fund would based on that bond index fund.
This complex mentality will block you from making three critical errors. First, you will never move your stock funds to a bond. The basis for comparison will be impossible to track (or more effort than it's worth). Second, the fund will have an established second home. If your fund is under-performing against your original expectations, then your exit strategy innately moves it to its base. Whether you invest in another experimental fund immediately thereafter is another story, but at least you will not stay on the fence with that experiment's conclusion. There is no agonizing over the conflicting thoughts of "it could move back up (yes, it could) but it could keep falling (also true)." Finally, your expectations will not fluctuate like your emotions. If you consider today what you think the market will do in 2012, but you do not write it down, then chances are your memory of today's expectations will be significantly different than what they will be when you recite them in December 2012. This is because emotions affect our expectations.
(to be continued... ??)
Tuesday, December 20, 2011
Friday, December 9, 2011
We Believes
During my time at Vanguard, I worked in our institutional processing department for six years. We had minimal interaction with investors, and as a result, many people in our department were not aware of the specifics of investing. Fortunately, I worked in the retail customer service department for several years beforehand, so I came into the department with sufficient exposure.
After the markets crashed in late-2008, a friend from the retail side and I were eating lunch and he mentioned the bore of reciting Vanguard's investment philosophy to every caller. The irony was that I had not thought about it since I left that division, and the more thought I gave it, the more I felt people in my new department should be aware of our company's investment beliefs. Therefore, I created a Powerpoint to present the concept to them in an abbreviated fashion.
Vanguard is a solid investment company, anchored by these sound strategies and beliefs. Some are how to succeed and some are how to not fail, but each of them is worth considering (and in the case of his entry, sharing) and I always appreciated the fact that it was never referred to as their "creed."
We Believe:
Investors should always remember that no method for predicting market returns is perfect. Past performance is not indicative of future results. Contrariwise, "you have to stand for something or else you'll fall for anything." That is especially true when it comes to a fool and his money.
After the markets crashed in late-2008, a friend from the retail side and I were eating lunch and he mentioned the bore of reciting Vanguard's investment philosophy to every caller. The irony was that I had not thought about it since I left that division, and the more thought I gave it, the more I felt people in my new department should be aware of our company's investment beliefs. Therefore, I created a Powerpoint to present the concept to them in an abbreviated fashion.
Vanguard is a solid investment company, anchored by these sound strategies and beliefs. Some are how to succeed and some are how to not fail, but each of them is worth considering (and in the case of his entry, sharing) and I always appreciated the fact that it was never referred to as their "creed."
We Believe:
- Investing is for meeting long-term goals; saving is better for short-term goals: Money that investors may need in the short-term (two years or less) should be kept in short-term investments which protect capital. These include money market funds (a fund that invests in short-term financial instruments such as cash), bank accounts, or government bonds (Gilts). Clients should only consider investments in the stock market or corporate bonds when they have money to put away to help meet a longer-term objective.
- Broad diversification, with exposure to all parts of the stock and bond markets, reduces risk: If an investment portfolio does not fairly reflect the overall investment market in terms of balanced asset allocation (the process of dividing investments amongst different asset classes such as stocks, bonds and cash) and investment style (such as growth or value), we believe clients are taking additional risk. We judge that this is unlikely to pay off over the long term.
- An investor's most important decision is selecting the mix of assets to be held in a portfolio, not selecting the individual investments themselves: Deciding on the mix and proportion of stocks, bonds, and cash in a portfolio is critically important - much more so than deciding on individual assets or funds. To work out the asset allocation that's best for each individual, investors need to consider factors such as their financial needs, their tolerance of risk and the length of time they want to invest.
- Consistently outperforming the financial markets is extremely difficult: Economic uncertainties, random market movements, and the rise and fall of individual companies mean it is extremely difficult for anyone - including professional investors - to beat the market in the long term. An active manager buys or sells shares (or bonds) in order to meet a particular investment objective. Therefore, typically actively managed funds have higher operating and transaction costs which can eat into returns. So we believe it makes sense to begin by considering funds that follow an index.
- Minimizing cost is vital for long-term investment success: Costs matter a great deal because investment returns are reduced pound for pound by the fees, commissions, transaction expenses and any taxes incurred. Investors as a group earn somewhat less than the market return after subtracting all those costs. Therefore, by minimizing costs, investors improve their odds of meeting their investment objectives.
- Investors should know how each investment fits into their plans, and why they own that particular asset: Investors need to be clear why they own each particular investment. Knowing the characteristics of each investment and the role it plays in a diversified portfolio increases investors' chances of selecting suitable investments that can be held for the long term.
Risk has many dimensions and investors should weigh 'shortfall risk' - the possibility that a portfolio will fail to meet longer-term financial goals - against 'market risk', or the chance that returns will fluctuate.
In the long run, what matters most is whether your investments enable you to meet your objectives. Earning enough to meet objectives is much more important than whether investments suffer interim declines or trail a market benchmark. But many investors react only to market risk. They may bulk up on stocks when markets are doing well, taking on more market risk than they realize. Conversely, they're tempted to reduce allocations to stocks in response to market downturns. In truth, to achieve long range goals, most investors need to accept some level of risk from equities. - Market-timing and performance-chasing are losing strategies: Market-timers who buy and sell frequently, hoping to 'catch the wave' as securities rise and fall, need to be very sure that their timing is right. Otherwise, they stand to lose money from market movements while also paying significant transaction costs. As many investors say: it's time in the markets that counts, not timing the markets. Also, market fashions change - often very suddenly. There is no guarantee that a performance-chasing strategy, asset class (a type of investment such as stocks, bonds or cash), or fund that has performed well will continue to perform well next year, next month - or even tomorrow.
- An investor should not expect future long-term returns to be significantly higher or lower than long-term historical returns for various asset classes and sub-classes: The major asset classes (equities, bonds, cash investments) have long histories and well established risk/reward characteristics. When estimating future returns for asset classes or sub-asset classes, long-term historical returns are a good place to start. Vanguard expects that returns from various sub-classes of the stock market will be similar to each other over long periods. Also, Vanguard expects that the long-term return for equities will be higher than that for bonds, and that bond returns will, in turn, exceed returns on cash investments over long periods.
Investors should always remember that no method for predicting market returns is perfect. Past performance is not indicative of future results. Contrariwise, "you have to stand for something or else you'll fall for anything." That is especially true when it comes to a fool and his money.
A lot of this article was reprinted from Vanguard.com
Tuesday, November 29, 2011
Investing 101
This evening I had a lengthy, perhaps unproductive conversation with my best friend about investing. She wants to have a nest egg for the future. She also does not want to spend all of the money that she has recently been able to acquire. Most importantly, she knows she is interested in investing, not just saving. Unfortunately, she does not know a lot about investing, but I gave her a quick crash course.
STOCKSWe talk about stocks all the time that as often as not the exact definition and even the concept can escape us. Just to clarify, stock are slices of ownership in a corporation. The ownership is split among thousands of investors, so the ownership is less than 1% of the company, but the performance of the stock reflects the success of the company, so if the company is turning a beautiful profit, your stock should reflect your proportion of ownership in the form of a dividend. Stocks pay dividends quarterly (sometimes less often like semi-annually or annually) to their owners.
Unfortunately, if a company is trading at $10/share, then investing only $100 to buy 10 shares is counter-productive (transaction costs alone would eliminate profits), so you would have to invest $1,000 to buy 100 shares and even then, you would only have shares in one company. At that rate, you would need at least $10,000 to invest in 10 different companies in order to maintain any adequate portfolio, and even then, ten companies is not a lot if you were investing strictly in stocks.
Therefore, I classify stocks as a rich-man's game. There are exceptions to that classification, and E*trade insists that everyone from smart-ass toddlers to their butlers should participate. Personally, I disagree.
BONDS
Whereas stocks are ownership in a corporation, bonds are the antithesis. They are company-issued debt. If a company needs an influx of cash, they will offer a 10-year bond (for example) and they would pay interest monthly on the bond, then pay the principal of the bond at maturity. While stocks fluctuate greatly with the success of the company to which it is associated, bonds have no variation. Therefore, they are a far more stable investment.
However, buying bonds has the same issue as above. If it is a $10,000 bond, then an investor would put the $10,000 out first, and then it would build. In the bond market, the price may trade below (or even above) the face value of the bond itself in which case terms like "premium" and "discount" come into play, but to keep it simple, a bond is company debt repaid at a later date and you benefit from monthly (sometimes quarterly) interest. The interest payments in bonds are similar to dividends in stocks.
MUTUAL FUND
The downside to both investments is that it requires a lot of money to begin investing. This deterrent would prevent several hundred thousands of people from investing if not for a mutual fund. A mutual fund was once defined to me as an investment vehicle where a group of people pool their money to invest in the stock market with the benefit of diversification and professional management, neither of which they could achieve individually.
Instead of an individual coming up with $10,000 to buy 10 stocks of 10 corporations trading at $10/share, a group can achieve this same feat and, even better, they can easily surpass those numbers. Mutual funds allow an individual to achieve genuine market diversification through a relatively small investment. In terms of which stocks to buy and when to sell them, each fund has a professional money manager to make those decisions to the otherwise uninformed shareholders.
The best benefit of mutual funds is their flexibility in terms of starting costs. While stocks trade at specific prices per share, and investors can only purchase whole shares, mutual funds can sell fractions of shares. Therefore, if a mutual fund were trading at $10, an investor could buy 12 and a half shares for $125. Although most investors undervalue this benefit, the beauty comes in with simplified reinvestment when the fund pays dividends.
INDEX FUND
As you may have guessed, professional management is not cheap. Mutual funds have many fees, sometimes called loads such as "front-end loads," to pay the professionals for their expertise and effort. Obviously, this is a sweet deal for the money manager but it adversely affects shareholders, especially since the market is too unpredictable and mutual funds require daily attention to the point that money managers do not add as much value to the fund as investors may suspect.
The idea is to "beat the market," i.e. earn returns in excess of the growth of the economy (or losses less than the market declines), but only half of the money managers succeed, and when they succeed, it is usually not by a substantial amount. Therefore, John Bogle ascertained that a mutual fund could seek to match the performance of the markets and it would not need professional management. This theory turned into the first index fund and John Bogle later founded The Vanguard Group, where I was employed for most of the past 10 years.
BALANCED FUND
Another type of investment vehicle combines all the aforementioned vehicles. It is a balanced fund, and they can be issued in a number of ways. It could be a mutual fund that invests strictly in other mutual funds (e.g. "fund of funds"). If those funds include bond funds (which buy numerous bonds and replace those bonds when other bonds mature), then it would be a balanced fund. The balanced fund may invest in index funds exclusively.
The benefit of a balanced fund (whether it is indexed or not) is that its focus is on the allocation. If it's allocation is 70% stock and 30% bonds, then it is going to re-balance daily. Throughout this blog, I expressed the importance of asset allocation and periodic re-balancing.
MY FAVORITE INVESTMENT
Now that we have all those terms defined, it seems that this new information should be put to some use. Therefore, I figured I could share my single favorite investment and explain why it is my favorite. It is the Vanguard STAR Fund, which is an actively managed balanced fund. The term "actively managed" means it is not an index fund. The mutual fund invests in 11 other mutual funds (all held by Vanguard) so it has exposure to stocks (60%) and bonds (40%) through 20 independently managed sub-portfolios with different yet complementary investment strategies. Also, it has a minimum initial investment of $1,000 (the average at Vanguard is $3,000).
But the real reason this fund is my favorite is that it puts the principles of a solid investment allocation first, and its returns are far less volatile than investments strictly in stocks or strictly in bonds. I never appreciated how useful this discipline was until I saw comparisons of hypothetical investments of $10,000 over the course of 10 years for this fund, compared to the Vanguard Total Stock Market Index Fund and the Vanguard Total Bond Market Index Fund. The difference was astounding because when the markets went up, this fund went up. When the markets went down, this fund went down. Contrasted mostly against the Vanguard Total Stock Market Index Fund, its declines were not nearly as drastic yet its gains seemed to be on par with the index fund. In other words, it had all the upside potential while minimizing the downside risk.
I put two months salary into the STAR Fund a while back because I was curious whether, if at an arbitrary point in the unforeseeable future, my investment balance would be more or less than two months salary at my job. I call it my "Engagement Ring Fund" for obvious reasons, but the investment experiment is virtually worthless to me now since I quit my job, so the comparison is no longer a gauge of time. Also, I've given up on finding a spouse so my arbitrary point in the unforeseeable future is irrelevant to me (P.S., please never use this blog for advice on love).
Included to the right are four charts showing the comparison of the Vanguard STAR Fund to its Total Bond Market Index Fund (Investor shares), Total Stock Market Index Fund (Investor shares), and the Prime Money Market Fund. The charts are from various 10-year periods, including January 2009, February 2009, May 2009, and November 2011.
STOCKSWe talk about stocks all the time that as often as not the exact definition and even the concept can escape us. Just to clarify, stock are slices of ownership in a corporation. The ownership is split among thousands of investors, so the ownership is less than 1% of the company, but the performance of the stock reflects the success of the company, so if the company is turning a beautiful profit, your stock should reflect your proportion of ownership in the form of a dividend. Stocks pay dividends quarterly (sometimes less often like semi-annually or annually) to their owners.
Unfortunately, if a company is trading at $10/share, then investing only $100 to buy 10 shares is counter-productive (transaction costs alone would eliminate profits), so you would have to invest $1,000 to buy 100 shares and even then, you would only have shares in one company. At that rate, you would need at least $10,000 to invest in 10 different companies in order to maintain any adequate portfolio, and even then, ten companies is not a lot if you were investing strictly in stocks.
Therefore, I classify stocks as a rich-man's game. There are exceptions to that classification, and E*trade insists that everyone from smart-ass toddlers to their butlers should participate. Personally, I disagree.
BONDS
Whereas stocks are ownership in a corporation, bonds are the antithesis. They are company-issued debt. If a company needs an influx of cash, they will offer a 10-year bond (for example) and they would pay interest monthly on the bond, then pay the principal of the bond at maturity. While stocks fluctuate greatly with the success of the company to which it is associated, bonds have no variation. Therefore, they are a far more stable investment.
However, buying bonds has the same issue as above. If it is a $10,000 bond, then an investor would put the $10,000 out first, and then it would build. In the bond market, the price may trade below (or even above) the face value of the bond itself in which case terms like "premium" and "discount" come into play, but to keep it simple, a bond is company debt repaid at a later date and you benefit from monthly (sometimes quarterly) interest. The interest payments in bonds are similar to dividends in stocks.
MUTUAL FUND
The downside to both investments is that it requires a lot of money to begin investing. This deterrent would prevent several hundred thousands of people from investing if not for a mutual fund. A mutual fund was once defined to me as an investment vehicle where a group of people pool their money to invest in the stock market with the benefit of diversification and professional management, neither of which they could achieve individually.
Instead of an individual coming up with $10,000 to buy 10 stocks of 10 corporations trading at $10/share, a group can achieve this same feat and, even better, they can easily surpass those numbers. Mutual funds allow an individual to achieve genuine market diversification through a relatively small investment. In terms of which stocks to buy and when to sell them, each fund has a professional money manager to make those decisions to the otherwise uninformed shareholders.
The best benefit of mutual funds is their flexibility in terms of starting costs. While stocks trade at specific prices per share, and investors can only purchase whole shares, mutual funds can sell fractions of shares. Therefore, if a mutual fund were trading at $10, an investor could buy 12 and a half shares for $125. Although most investors undervalue this benefit, the beauty comes in with simplified reinvestment when the fund pays dividends.
INDEX FUND
As you may have guessed, professional management is not cheap. Mutual funds have many fees, sometimes called loads such as "front-end loads," to pay the professionals for their expertise and effort. Obviously, this is a sweet deal for the money manager but it adversely affects shareholders, especially since the market is too unpredictable and mutual funds require daily attention to the point that money managers do not add as much value to the fund as investors may suspect.
The idea is to "beat the market," i.e. earn returns in excess of the growth of the economy (or losses less than the market declines), but only half of the money managers succeed, and when they succeed, it is usually not by a substantial amount. Therefore, John Bogle ascertained that a mutual fund could seek to match the performance of the markets and it would not need professional management. This theory turned into the first index fund and John Bogle later founded The Vanguard Group, where I was employed for most of the past 10 years.
BALANCED FUND
Another type of investment vehicle combines all the aforementioned vehicles. It is a balanced fund, and they can be issued in a number of ways. It could be a mutual fund that invests strictly in other mutual funds (e.g. "fund of funds"). If those funds include bond funds (which buy numerous bonds and replace those bonds when other bonds mature), then it would be a balanced fund. The balanced fund may invest in index funds exclusively.
The benefit of a balanced fund (whether it is indexed or not) is that its focus is on the allocation. If it's allocation is 70% stock and 30% bonds, then it is going to re-balance daily. Throughout this blog, I expressed the importance of asset allocation and periodic re-balancing.
MY FAVORITE INVESTMENT
Now that we have all those terms defined, it seems that this new information should be put to some use. Therefore, I figured I could share my single favorite investment and explain why it is my favorite. It is the Vanguard STAR Fund, which is an actively managed balanced fund. The term "actively managed" means it is not an index fund. The mutual fund invests in 11 other mutual funds (all held by Vanguard) so it has exposure to stocks (60%) and bonds (40%) through 20 independently managed sub-portfolios with different yet complementary investment strategies. Also, it has a minimum initial investment of $1,000 (the average at Vanguard is $3,000).
I put two months salary into the STAR Fund a while back because I was curious whether, if at an arbitrary point in the unforeseeable future, my investment balance would be more or less than two months salary at my job. I call it my "Engagement Ring Fund" for obvious reasons, but the investment experiment is virtually worthless to me now since I quit my job, so the comparison is no longer a gauge of time. Also, I've given up on finding a spouse so my arbitrary point in the unforeseeable future is irrelevant to me (P.S., please never use this blog for advice on love).
Included to the right are four charts showing the comparison of the Vanguard STAR Fund to its Total Bond Market Index Fund (Investor shares), Total Stock Market Index Fund (Investor shares), and the Prime Money Market Fund. The charts are from various 10-year periods, including January 2009, February 2009, May 2009, and November 2011.
As you may remember from personal experience or reading prior entries here, the stock markets took a sharp nosedive in late 2008, which bottomed out in March 2009. Additionally, the Tech Bubble busted in March 2000, and then the markets dropped further after September 11, 2001, reaching a bottom in November 2002 if I recall correctly.
Obviously, the Prime Money Market Fund was not phased by any of the volatility since it is a stable value fund. The Total Bond Market Index Fund went through its share of rewards and challenges over 10 years. But note the similarities in the Total Stock Market Index Fund to the STAR Fund. When things were bad, they were worse for the Total Stock Market Index Fund. When things were good, they seemed to be equally good for both funds. This is why the fund is my single favorite investment.
When I started working at Vanguard, I had a joke about the fund's name. It was STAR but, as far as we knew, it did not stand for anything. However, I suggested that the fund should be a pre-starter fund (a starter fund is the first investment selection for your portfolio) so the letters S-T-A-R represented the beginning of the word "Starter." Looking back now, I think it was a ridiculous yet valid observation.
Obviously, the Prime Money Market Fund was not phased by any of the volatility since it is a stable value fund. The Total Bond Market Index Fund went through its share of rewards and challenges over 10 years. But note the similarities in the Total Stock Market Index Fund to the STAR Fund. When things were bad, they were worse for the Total Stock Market Index Fund. When things were good, they seemed to be equally good for both funds. This is why the fund is my single favorite investment.
When I started working at Vanguard, I had a joke about the fund's name. It was STAR but, as far as we knew, it did not stand for anything. However, I suggested that the fund should be a pre-starter fund (a starter fund is the first investment selection for your portfolio) so the letters S-T-A-R represented the beginning of the word "Starter." Looking back now, I think it was a ridiculous yet valid observation.
Thursday, November 24, 2011
MSN MONEY: 'Father of 401k' disowns it
Ted Benna, who three decades ago seized on an IRS loophole to transform American retirement savings, says he's proud to be "father of the 401k." He also thinks he created a monster.
The plans, which he intended to be as simple for employees as pensions, now offer too many investing options and too many opportunities to make mistakes, he says. "I would blow up the system and restart with something totally different," he told SmartMoney. "Blowing up the existing structures is the only way we can simplify them."
In 1978, when Congress passed the section of IRS code for which the plans are named, lawmakers aimed to limit the scope of cash-deferred plans being offered by some companies, but had no intent to revolutionize retirement. Benna, then the co-owner of the Johnson Companies, a benefits consultancy in suburban Philadelphia, was developing such a plan for a bank client when he happened on the idea that section 401k could allow an entirely new option.
The original 401k plans "could be explained to employees in just a minute," Benna, now 69 and semiretired himself, says. "There were two options, a guaranteed fund and an equity fund," he says. "With the guaranteed investment fund, we'd tell them this is what you will have when you retire. With the equity fund -- which was usually something like the Fidelity Magellan fund -- we'd say, you might have more, but you might have less. Most people would split their contributions 50-50 between the two."
Plans became too complicated
As the plans were embraced by employers and financial institutions, Benna says 401k's were made so complex one needed to be an investing pro to make sense of them. "Now this monster is out of control. We went to three options, then to six, then to seven, then to 15 -- it is far beyond what most participants were able to deal with," Benna says. "And I am not convinced we have added value by getting more complicated."
Better education was supposed to be the solution to intricacies of the plans, Benna says. If employees understood the options, the power of compound interest and dollar-cost averaging, and the advantages of making pretax contributions, it was believed they would do the right thing. "We're throwing tons of money away trying to teach participants how to become skilled investors -- we said, we are going to make people smart and savvy enough to make the right investment decisions, but it just hasn't worked."
Benna blames the newfound complexity on what he says was the small percentage of employees who wanted it. "What triggered this whole mess is that some of the more sophisticated participants were a pain in the butt," he says. "You'd have these troublemaker loudmouths push human resources, and say, 'Why don't we have this "flavor of the month" fund?'" These sophisticated employees are also the ones taking advantage of the education and advice being offered, he says.
Overwhelmed, employees made mistakes
The consequence of all the complexity is twofold, he says. First, employees felt they could be more active investors. "There is too strong a potential for employees to do the worst thing ever, which is moving in the wrong direction, panicking when things are bad and cashing out after they have been battered." Secondly, the current plans induce "a kind of gridlock -- employees get so overwhelmed they do not participate -- they do nothing," he says.
Education didn't work to stop employees from sabotaging their own futures, he contends, but legislation might. "We need a legislative mandate that when you change jobs, the money needs to be retained in a retirement account -- there cannot be an option of 'here's a check, you decide,'" Benna says. He also advocates mandating all employees be auto-enrolled in the plans, and that their contributions be automatically increased one percentage point per year to a maximum of 10% to 15%.
Despite these misgivings, Benna insists the plans are benefiting millions of employees. He gets rankled whenever someone suggests the workforce would be better off had the 401k never been born, noting that the pension system was more fraught that many remember. "I am not anti-defined-benefit plan -- in fact I sold them for decades -- they are great, but only for those who stay with the same company for 20 or 30 years."
By Jeremy Olshan vai SmartMoney.com
http://money.msn.com/retirement-plan/article.aspx?post=eb9632ff-1d35-44ad-bf77-349f8492a081
The plans, which he intended to be as simple for employees as pensions, now offer too many investing options and too many opportunities to make mistakes, he says. "I would blow up the system and restart with something totally different," he told SmartMoney. "Blowing up the existing structures is the only way we can simplify them."
In 1978, when Congress passed the section of IRS code for which the plans are named, lawmakers aimed to limit the scope of cash-deferred plans being offered by some companies, but had no intent to revolutionize retirement. Benna, then the co-owner of the Johnson Companies, a benefits consultancy in suburban Philadelphia, was developing such a plan for a bank client when he happened on the idea that section 401k could allow an entirely new option.
The original 401k plans "could be explained to employees in just a minute," Benna, now 69 and semiretired himself, says. "There were two options, a guaranteed fund and an equity fund," he says. "With the guaranteed investment fund, we'd tell them this is what you will have when you retire. With the equity fund -- which was usually something like the Fidelity Magellan fund -- we'd say, you might have more, but you might have less. Most people would split their contributions 50-50 between the two."
Plans became too complicated
As the plans were embraced by employers and financial institutions, Benna says 401k's were made so complex one needed to be an investing pro to make sense of them. "Now this monster is out of control. We went to three options, then to six, then to seven, then to 15 -- it is far beyond what most participants were able to deal with," Benna says. "And I am not convinced we have added value by getting more complicated."
Better education was supposed to be the solution to intricacies of the plans, Benna says. If employees understood the options, the power of compound interest and dollar-cost averaging, and the advantages of making pretax contributions, it was believed they would do the right thing. "We're throwing tons of money away trying to teach participants how to become skilled investors -- we said, we are going to make people smart and savvy enough to make the right investment decisions, but it just hasn't worked."
Benna blames the newfound complexity on what he says was the small percentage of employees who wanted it. "What triggered this whole mess is that some of the more sophisticated participants were a pain in the butt," he says. "You'd have these troublemaker loudmouths push human resources, and say, 'Why don't we have this "flavor of the month" fund?'" These sophisticated employees are also the ones taking advantage of the education and advice being offered, he says.
Overwhelmed, employees made mistakes
The consequence of all the complexity is twofold, he says. First, employees felt they could be more active investors. "There is too strong a potential for employees to do the worst thing ever, which is moving in the wrong direction, panicking when things are bad and cashing out after they have been battered." Secondly, the current plans induce "a kind of gridlock -- employees get so overwhelmed they do not participate -- they do nothing," he says.
Education didn't work to stop employees from sabotaging their own futures, he contends, but legislation might. "We need a legislative mandate that when you change jobs, the money needs to be retained in a retirement account -- there cannot be an option of 'here's a check, you decide,'" Benna says. He also advocates mandating all employees be auto-enrolled in the plans, and that their contributions be automatically increased one percentage point per year to a maximum of 10% to 15%.
Despite these misgivings, Benna insists the plans are benefiting millions of employees. He gets rankled whenever someone suggests the workforce would be better off had the 401k never been born, noting that the pension system was more fraught that many remember. "I am not anti-defined-benefit plan -- in fact I sold them for decades -- they are great, but only for those who stay with the same company for 20 or 30 years."
By Jeremy Olshan vai SmartMoney.com
http://money.msn.com/retirement-plan/article.aspx?post=eb9632ff-1d35-44ad-bf77-349f8492a081
Wednesday, November 16, 2011
Failure Is Unlimited
I feel as though I would be remiss if I did not discuss Occupy Wall Street somewhere in this blog, so tag this entry with #OWS.
 |
| Too bad no one argued that banks were "Too big to bail." |
For the past several years, the phrase "too big to fail" has been a buzzword in these shaky markets. Certain corporations, especially in the banking and insurance industries, have been granted various benefits to keep the company afloat under the guise that they are too important to our economy to risk failing. It mostly started in the fall-out of the Lehman Brothers bankruptcy, and it was deemed a necessary measure to prevent the country from falling into an extensive recession or another "Great Depression."
It has been a controversial phrase in the finance industry since the beginning, mostly because it is a blatant oxymoron. While it has arguably been a success in keeping the economy going, the inherent flaw in the concept is destructive to long-term growth. The dissenting opinion of this tactic is that if large companies are endangered, then their structure is flawed and their collapse will see several new companies emerge from the ashes. Former Federal Reserve Chairman Alan Greenspan simplified it when he said, "if they're too big to fail, they're too big."
The Occupy Wall Street movement has pushed this issue and similar issues to the forefront recently. The(se) protest(s) is (are) mostly against this tactic and other methods to protect the country's wealth, which unfortunately has translated into protecting the country's wealthiest.
The Dow Jones Industrial Average (DJIA) or "The Dow" is comprised of 30 components. By components, we mean corporations or stocks. There are more than 2300 companies actively traded on the New York Stock Exchange. The reason the Dow is cited most often is that its history dates back to May 1896, so it compares today's markets to 100 years of history in a single measure. However, the reality is that while the DJIA is the most cited index, most index funds have far more than 30 stocks in them. Case in point, the Vanguard 500 Index Fund has 500 companies, mirroring the S&P 500. When one of those companies falls from the S&P 500, it is sold from the fund and the new company entering the S&P 500 is purchased. There is a constant "out with the old, in with the new" methodology built into the index fund itself. Likewise, the Vanguard Total Stock Market Index Fund has over 3,000 companies, so the Dow is quite literally 1% of the total stock market.
Unfortunately, the exact demands of OWS have been conceptual and the protests are unclear. Personally, I had a vague idea of the issues central to the movement, but I had to research OWS at length before I could discuss it. Most recently on "Market Watch with Mo Ansari" (an often-cited radio program), there was a guest who opposed "too big to fail" methods and proposed that what our country is facing would be the "lost decades," as opposed to the singular "lost decade" (2000-2010). At the center of his discussion, though, was a pitch for a plan to balance the country's budget in 10 years. He said several other groups tackled the proverbial Rubik's Cube known as the nation's deficit, and his proposal was the only one to wipe it out in 10 years (conversely, the average of most other proposals was 40 years).
Unfortunately, the exact demands of OWS have been conceptual and the protests are unclear. Personally, I had a vague idea of the issues central to the movement, but I had to research OWS at length before I could discuss it. Most recently on "Market Watch with Mo Ansari" (an often-cited radio program), there was a guest who opposed "too big to fail" methods and proposed that what our country is facing would be the "lost decades," as opposed to the singular "lost decade" (2000-2010). At the center of his discussion, though, was a pitch for a plan to balance the country's budget in 10 years. He said several other groups tackled the proverbial Rubik's Cube known as the nation's deficit, and his proposal was the only one to wipe it out in 10 years (conversely, the average of most other proposals was 40 years).
Social Security would continue, he promised, but it would be limited to the population who needed assistance, and the population who did not need the financial assistance would stop receiving the benefits. At that point, I had to wonder: where is the incentive to be a productive member of society? I stopped listening to the guest and started pondering the question for myself. I remembered when my ex-girlfriend told me that she had to pay income tax, and I was genuinely excited for her! She moved out of state and started paying all her bills herself for the first time in her life. On top of that, she was earning enough that she owed taxes at the end of the year. Every single part of that filled me with vicarious joy. She, on the other hand, was not excited.
It seems most conversations about Occupy Wall Street begin and end at this troubling concept.
 |
| What exactly was the one demand? |
Since the guest on the program mentioned lost decades, it is only appropriate to debunk that misconception as well. If a mutual fund (or individual stock) were trading at $10 today and you invested $1,000, then you would obviously have 100 shares. If the fund (or stock) rose to $17 in five years and then fell to $9 two years later, but then rallied back to $10 three years after that, then it seems as though you would have the same $1,000 again from ten years ago.
Except each year, sometimes each month or each quarter, the fund (or stock) will pay a dividend. For bonds, this is the interest earned on the debt. For stocks, it is a portion of the profit paid out to the owners of the company (stockholders). If you are investing in a tax shelter, such as a 401(k) or IRA, then you are most likely reinvesting dividends. This may not apply to complex portfolios, but the assumption of reinvesting dividends is usually a safe bet.
Therefore, you spent 10 years going between $9 and $17 per share, but your $1,000 investment is substantially higher because, periodically, the fund paid dividends and put money back into itself in the form of more shares. Ten years ago, you had 100 shares trading at $10. Ten years later, you could have 125 shares trading at $10. The investment's earnings would be 0%, but your actual return would be 25%.
However, these "cumulative returns" are often overlooked. While the media is viewing the markets at a 0% return and naming it a lost decade, your wealth has grown 25% in this single investment. The first investment in my Roth IRA was on March 11, 2003, and it went into the Vanguard 500 Index Fund. Lucky for me, that day was the lowest point in the market of the year. I did not invest any more money into that particular fund (future Roth IRA contributions went into other funds) but this investment has given me a bird's eye view of cumulative returns, so trust me when I say it was not lost time for me. The only real "losers" of the Lost Decade were the people sitting on the bench and not getting into the game.
Catchphrases and hooks grab attention. Personally, where my money is and what it is doing is enough to get my attention. And I don't have to outsource that attention to the financial media. "Too big to fail" and "lost decades" are worth discussing, but they should never drive personal investment decisions. Like Mo Ansari often reminds his listeners, you have to invest based on what the markets do, not what they should do. Which is to say, the markets rarely listen to the what financial media says. Follow the market, not the media.
Tuesday, October 25, 2011
How The Rich Get Richer
In recent weeks, there have been a large number of financial articles written to mark the three-year anniversary of the day Lehman Brothers filed for bankruptcy. Calling it "unexpected" news was an understatement for most finance professionals. There were cracks in the armor, and the possibility was discussed heavily on the Friday afternoon heading into that fateful weekend, but most people in finance do not watch the market daily and they are not aware of all the news affecting the industry.
However, everyone took notice on Monday, September 15, 2008, because the Dow closed at 10,900, down 500 points in one day. The peak of the market was in October 2007, so the markets had been on a slow decline for several months already, but this day was different because it was triggered by a specific event, one which truly shook the confidence of the most seasoned investors. Not just investors, the rich investors.
At this point, I should define a couple insensitive terms. The individuals I have classified as the "rich" are by no definition evil or manipulative. Their actions were not greedy and there was no intent to harm others. They are the individuals who have amassed wealth by various means, and one of their top financial goals is maintaining existing assets. I would not even classify them as risk-adverse, but rather very risk-aware. Likewise, the "poor" are by no means living on the streets. In fact, they probably are not living paycheck-to-paycheck either. They are educated individuals who are either uneducated on the finer points of investing or (equally likely) undisciplined on maintaining the finer points they know.
Immediately after Lehman filed for bankruptcy, the markets tumbled and tumbled, and then, they tumbled even further. They turned around eventually, and today the markets are currently at 11,300, just about the same level where these events began. There are thousands of explanations and theories by professionals on how and why the markets reacted the way they did, but in hindsight of three years later, I believe part of it was the quintessential tale by which the rich get richer and the poor get poorer.
The Lehman Brothers was the fourth largest investment bank in the United States at the time of its bankruptcy. At that point, I knew the Lehman Brothers for its bond ratings because they were the most respected in the industry. In fact, I could not even name another bond rating. All I knew was Lehman Brothers. The idea of the Lehman Brothers filing for bankruptcy baffled me immediately. Ignorance was bliss. For those in the know, it frightened them greatly. As a result, they continued to shift their investments from stocks and bonds to money markets, the safest investment option by far.
Personally, I don't remember what the Vanguard Prime Money Market fund was yielding back in September 2008, but I would guess that it was probably a 3% yield. It did not matter though. The fact that investors could protect what they had without incurring further losses was the main attraction. Indeed, those savvy investors acted correctly in their movement.
Speaking again in my defined yet generalized terms, the rich were the first to move their money because they had the most to lose. Perhaps they were the most informed as well, or at least, they had the most informed professionals managing their investments. At the time, I know skeptics of the purported "worst case scenario" dismissed the initial decline as "sour grapes" over the 2008 election in which Barack Obama was elected to replace the "rich"-friendly Bush on a platform of change.
Regardless, the stock markets declined at a rapid pace, falling to 8,775 by the end of the year. Looking back now, I believe that the high net worth investors were protecting their investments at a rapid pace, which pushed the markets down as rapidly. The fourth quarter is often the strongest of the year, so for the markets to fall at least 3,000 points in the fourth quarter worried more than just the rich investors.
As 2009 began, I believe more of the average investors were caught up to speed. Perhaps fueled by the advice of some wealthier neighbors, or more likely, emotionally reacting to their declines, they started to place their own money from stocks to the safer money markets. The markets continued to fall, reaching 6,547 on March 9, 2009. At that point, the markets inexplicably started to turn around. The reasons why it happened at that point remain a mystery for random speculation. And I have my own theory.
In my belief, the rich realized the probability of the markets increasing was much higher than the probability that the markets would continue to fall. Maybe not even "much higher," but simply higher. In fact, we can put it in terms of money, and think through it logically. Those money markets where the rich had placed the bulk of their assets in October were offering less than 1% so stocks would only have to gain 1% to be a more profitable investment. While it's true that the markets could have fallen from 6,500 to 5,000 or lower, that possibility is the nature of the beast. Investors cannot escape risk. But when money markets pay less than 1% interest, there is no incentive to be stock-adverse regardless how risk-aware you are.
The rich understood this shift. However, the poor could not afford to lose more. In my prior scenario, the poor had already lost 60¢ on every invested dollar. Meanwhile, the rich shifted to a stable investment when (or before) their portfolio fell 30%. As things changed, the poor stayed in the money markets to protect what was left but the rich risked losing their 70¢ to gain a little more. In this case, it was a lot more! The markets went from a low of 6,547 in March 2009 back to 10,000 a mere 7 months later. The markets continued to climb, so once again, the rich had $1.07 on every invested dollar while the poor continued to protect the remaining 40¢ of every invested dollar. At the end of this scenario, the rich now have three times as much as the poor for every invested dollar. No greed, no deception, and no malicious intent were involved.
Considering the Vanguard Prime Money Market fund yields 0.03% today (not 3% but 0.03%), there is a strong likelihood that there are many people who are still protecting the 30¢ left from each dollar. When they do venture back into stocks, they will be buying higher than the rich did when they shifted back into stocks. And most likely, their gains will not be as phenomenal as the rise was in those 7 months of 2009.
The key to successful investing is simply to "buy low, sell high," but this cautionary tale epitomizes how investors can innocently "buy high, sell low." To avoid this pitfall, revisit a few of the other entries in this blog, especially the quarterly updates discussing asset allocations and the importance of a periodic rebalance. As luck would have it, I started this blog on February 10, 2009, four weeks before the infamous 6,547 closing.
Monday, October 17, 2011
Making An Asset Calculator
I just created a calculator tool for myself to use to track all my future asset allocations. Therefore, I can determine how much I need to move and where within 5 minutes, such as I did this afternoon before the market closed down 2.15% today. This calculator is a useful tool, because it simplifies the work that you need to do to maintain your asset allocation. If you want to create this calculator for your own use but you are unsure exactly what you're doing (either on Microsoft Excel or with investing in general), then follow these simple steps:
The first row is going to establish the following columns: Fund (Name), Current (Balance), Target (Amount), and Change.
The first column is going to list the funds you own (and want to own) in your portfolio. There may be as few as two funds or as many as 10 funds (keep in mind, sometimes less is more), but list their names down the first column.
In the next column (B), you simply list the balance of each fund. This cell is going to be where you change information each time you visit the calculator in the future. Below the last fund, input the following formula into the cell "=SUM(B2:BX)" with X standing for the cell number of your last fund.
In the next column (C), you are going to input a formula to determine what the target amount in each fund should be based on your asset allocation. If I listed my first fund as the Vanguard Total Stock Index fund in Cell A2, then I would want 25% of my portfolio's balance in this fund. Therefore, I would input this formula into Cell C2: "=$B$X+1*.25" with X+1 standing for the cell number where your formula is for the "=SUM(B2:BX)" balance.
You may need to read that part a couple times before it makes sense, but here is an example to ensure you have done it correct. If you have six funds in your portfolio, then Cell B2 through Cell B7 are going to be where your balance in each of the six funds is listed. Cell B8 is going to be the sum of those cells. On Cell C2, you would want the formula "=$B$8*.25" listed.
In the formula, the .25 designates 25%. For each cell in Column C, you want the formula reflecting each respective fund's target percent. The "=$B$X+1*." portion of the formula will not change. For example, if Column A were listing Total Stock Market Index Fund, Total Bond Market Index Fund, Total International Stock Market Index Fund, and GNMA Bond Fund, and your asset allocation were 75%, 10%, 5%, and 10%, respectively, then your spreadsheet would have "=$B$6*.75" in C2, "=$B$6*.1" in C3, "=$B$6*.05" in C4, and "=$B$6*.1" in C5.
Finally, the last column (D) will simply determine how much money you need to move. Column B represents how much money you have in each fund. Column C represents how much of your current balance you want in each fund. The formula for the first row is "=C2-B2" inputted to D2. If the amount in D2 is positive, you want to move money into that fund. If the amount in D2 is negative, then remove money from that fund.
The first row is going to establish the following columns: Fund (Name), Current (Balance), Target (Amount), and Change.
The first column is going to list the funds you own (and want to own) in your portfolio. There may be as few as two funds or as many as 10 funds (keep in mind, sometimes less is more), but list their names down the first column.
In the next column (B), you simply list the balance of each fund. This cell is going to be where you change information each time you visit the calculator in the future. Below the last fund, input the following formula into the cell "=SUM(B2:BX)" with X standing for the cell number of your last fund.
In the next column (C), you are going to input a formula to determine what the target amount in each fund should be based on your asset allocation. If I listed my first fund as the Vanguard Total Stock Index fund in Cell A2, then I would want 25% of my portfolio's balance in this fund. Therefore, I would input this formula into Cell C2: "=$B$X+1*.25" with X+1 standing for the cell number where your formula is for the "=SUM(B2:BX)" balance.
You may need to read that part a couple times before it makes sense, but here is an example to ensure you have done it correct. If you have six funds in your portfolio, then Cell B2 through Cell B7 are going to be where your balance in each of the six funds is listed. Cell B8 is going to be the sum of those cells. On Cell C2, you would want the formula "=$B$8*.25" listed.
In the formula, the .25 designates 25%. For each cell in Column C, you want the formula reflecting each respective fund's target percent. The "=$B$X+1*." portion of the formula will not change. For example, if Column A were listing Total Stock Market Index Fund, Total Bond Market Index Fund, Total International Stock Market Index Fund, and GNMA Bond Fund, and your asset allocation were 75%, 10%, 5%, and 10%, respectively, then your spreadsheet would have "=$B$6*.75" in C2, "=$B$6*.1" in C3, "=$B$6*.05" in C4, and "=$B$6*.1" in C5.
Finally, the last column (D) will simply determine how much money you need to move. Column B represents how much money you have in each fund. Column C represents how much of your current balance you want in each fund. The formula for the first row is "=C2-B2" inputted to D2. If the amount in D2 is positive, you want to move money into that fund. If the amount in D2 is negative, then remove money from that fund.
Wednesday, September 14, 2011
Manic Money
I used to think chronically poor people were just financially ignorant. Nowadays I am beginning to realize they may be closer to financially depressed. For the past eight years, I have been living (way) below my means. As a result, I was able to quit my job and self-financed a return to school. Although I have money in my name, I have no current income, so living below my means would leave me without basic necessities.
It occurred to me when I was making another cash payment for my house that those payments were starting to feel as though they were getting closer and closer. Most recently, I was tempted to take the $2.02 from my overpayment and buy something entirely frivolous (specifically a candy bar) since it would mean more to me now than it would mean to my mortgage in the long run. I equated the thought immediately with countless tales and occurrences I have heard and seen; all concepts that I never quite understood before that urge.
From this point onward, I may be way off-base. Now I don't plan to drain my portfolio to find out, but it seems to me that coming into money is where most people make missteps, overvaluing the security of the sum, and the inevitable splurging puts them right back where they have always been. In its most extreme form, it's seen as the "curse of the lottery." I once heard the description that money will not change a person, it will just lead them to be more themselves. Honestly, I still don't know what to think about the financial yo-yo, where people catch a break and spend it on themselves before they have to give it to others in the form of payments (usually for items that they have already purchased). All I can do is thank God that I was born to a father who knew otherwise.
In the simplistic words of John "Bradshaw" Layfield in Have More Money Now, "you can have when you have." I believe what the financially depressed are truly under-valuating is how the money that they're turning over to others before they even get their own hands on it is repayment for a pleasure that has already been received (and maybe already forgotten). Whether they are paying off a mortgage or a car loan, all the way down to the more forgettable purchases made on a credit card. There is an innate dissatisfaction when you get something before it has been earned.
Not that I am faulting people who fall into this mindset. At least once, I was one of them.
It occurred to me when I was making another cash payment for my house that those payments were starting to feel as though they were getting closer and closer. Most recently, I was tempted to take the $2.02 from my overpayment and buy something entirely frivolous (specifically a candy bar) since it would mean more to me now than it would mean to my mortgage in the long run. I equated the thought immediately with countless tales and occurrences I have heard and seen; all concepts that I never quite understood before that urge.
From this point onward, I may be way off-base. Now I don't plan to drain my portfolio to find out, but it seems to me that coming into money is where most people make missteps, overvaluing the security of the sum, and the inevitable splurging puts them right back where they have always been. In its most extreme form, it's seen as the "curse of the lottery." I once heard the description that money will not change a person, it will just lead them to be more themselves. Honestly, I still don't know what to think about the financial yo-yo, where people catch a break and spend it on themselves before they have to give it to others in the form of payments (usually for items that they have already purchased). All I can do is thank God that I was born to a father who knew otherwise.
In the simplistic words of John "Bradshaw" Layfield in Have More Money Now, "you can have when you have." I believe what the financially depressed are truly under-valuating is how the money that they're turning over to others before they even get their own hands on it is repayment for a pleasure that has already been received (and maybe already forgotten). Whether they are paying off a mortgage or a car loan, all the way down to the more forgettable purchases made on a credit card. There is an innate dissatisfaction when you get something before it has been earned.
Not that I am faulting people who fall into this mindset. At least once, I was one of them.
Thursday, August 25, 2011
The Hardest Answer
If you have a handsome amount of money built up inside your portfolio, or even just your savings account, then you may find yourself approached with one of the hardest questions to answer financially. When a good friend asks, "is there any way at all you can loan me some money?" If that were the exact phrase of the question, then I strongly advise answering no -- but if the actual question were tied to a specific sum of money (and in cases of sincerity, it usually is), then the request becomes more difficult to decline.
Unfortunately, there is no easy answer in this case, but I can share some of my own experiences and leave the actual response to your own preference since the best answer is neither "yes" nor "no" but rather whatever response enables you both to maintain the friendship comfortably thereafter.
It is no secret that financial strife is often listed as the number one cause of divorces, and I would imagine it is just as damanging to friendships as well. Therefore, my automatic answer is no for the most part. There have been exceptions, however, and there are a few steps to making the request a positive experience. The first is deciding on your own personal maximum, whether it is $1,000 or $100. Ideally, this number should be a direct reflection of your own financial security, but to assume you are financially independent, then this number would be determined by your own feelings of being used or abused (or, more frankly, when you feel as though you are being taken advantage of).
First off, you should donate to charity if you are financially comfortable. Aside from the good it does both for society and for yourself, it is also a good way to protect yourself against scams and other abuse, because it gives you a buffer of (what I call) "forgiveness protection." Whenever I am cheated out of money, I have the ability to reduce my donations by that amount so it does not affect my life at all. Unfortunately, there are people who will understand that mentality and other people who will misunderstand it. If it makes perfect sense to you, then hopefully you are already in practice of it to some degree. If it sounds like flawed logic, then you are probably in the latter half so please don't apply it to your life.
When you loan money to friends, take it from this amount of charitable donations. When your friend pays you back, then the amount goes to charity. Keep in mind that this buffer will not ease your feelings of potential mistreatment, so never give beyond that original amount with which you are comfortable. Ever!
I have given to friends who paid me back and I give the money directly to charity because, for all intents and purposes, my giving it to them was my charitable donation. The first time I loaned a friend a substantial sum of money and she paid me back, I just gave it directly to another charity. It immediately made me feel as though I got twice as much mileage from that charity by loaning it to a friend first (mind you, this logic only prevails if all goes well, so do not bank on that as justification for loaning money to friends).
In another instance, I once loaned a friend money and then I lost my job several months later (about 15 months later). She started paying me back when I was between jobs, so the money came back to me when I needed it most. The money I was getting back then was not money that I would have held in a saving account without loaning it to her. It was money that I would have given away to charity already. Therefore, when I got a new job, I increased my charitable donations to cover that amount as well. In that case, I was my own charity, and the money got thrice as much mileage. But that was an exception, not an expectation.
When you loan money by this philosophy, then this next point should be a no-brainer: never charge interest for a loan! If you need any further evidence of that advice, then refer to Deuteronomy 3:19-20. Sure, banks do it all the time, but that's their business model. Investors do it all the time as their incentive. You are not in the business of profiting off friends. You are in a friendship with a person who is less financially stable than you are. If you give $1,000 and ask for $125/mo. for 10 months, then you have taken $250 more from your friend than they could really afford (extenuating circumstances aside). Potentially, your friend may offer to pay interest on top of the original amount (i.e. paying $100+ for 10 months for borrowing $1,000), but do not use that profit as incentive for giving the loan. Consider it your friend's gratitude for helping out in a time of need. The big difference here is that you are not entitled to the additional interest, so if your friend skimps on that amount, then consider yourself lucky to get the full principle returned.
Finally, the most important aspect of loaning money to friends is to never, ever ask for them to pay you back. Do not loan money you cannot afford to lose, and when you loan out money, do not assume control of when you will get it back. Truthfully, this aspect could be a real deal-breaker in most cases, and it is the reason for my first advice of the standard answer of "no" to most requests. There are ways to create payment plans and other such arrangements in order to stay on track, but they violate the "forgiveness protection" buffer, so you can never be sure. I have loaned money to a friend where we set up a payment plan, and invariably, there was often a reason why the payments had to be delayed. In the interest of full disclosure, it was actually he who insisted on the payment plan. And to my friend's credit, I got all the money back (but I told him to pay me whatever he could when he could, and it took about twice as long as he had originally designed).
Regardless, we are still friends today. And, perhaps surprisingly, he has not asked to borrow money since the loan was repaid. And that is the surest sign that I made the decision in that situation.
There are times when loaning money to a close friend is the best thing to do. But don't cloud your judgment with the best case scenario or swerve your expectations when you weigh the decision. Your friend's sincerity will not increase the likelihood of full repayment. It could just as easily end the friendship.
Unfortunately, there is no easy answer in this case, but I can share some of my own experiences and leave the actual response to your own preference since the best answer is neither "yes" nor "no" but rather whatever response enables you both to maintain the friendship comfortably thereafter.
It is no secret that financial strife is often listed as the number one cause of divorces, and I would imagine it is just as damanging to friendships as well. Therefore, my automatic answer is no for the most part. There have been exceptions, however, and there are a few steps to making the request a positive experience. The first is deciding on your own personal maximum, whether it is $1,000 or $100. Ideally, this number should be a direct reflection of your own financial security, but to assume you are financially independent, then this number would be determined by your own feelings of being used or abused (or, more frankly, when you feel as though you are being taken advantage of).
First off, you should donate to charity if you are financially comfortable. Aside from the good it does both for society and for yourself, it is also a good way to protect yourself against scams and other abuse, because it gives you a buffer of (what I call) "forgiveness protection." Whenever I am cheated out of money, I have the ability to reduce my donations by that amount so it does not affect my life at all. Unfortunately, there are people who will understand that mentality and other people who will misunderstand it. If it makes perfect sense to you, then hopefully you are already in practice of it to some degree. If it sounds like flawed logic, then you are probably in the latter half so please don't apply it to your life.
When you loan money to friends, take it from this amount of charitable donations. When your friend pays you back, then the amount goes to charity. Keep in mind that this buffer will not ease your feelings of potential mistreatment, so never give beyond that original amount with which you are comfortable. Ever!
I have given to friends who paid me back and I give the money directly to charity because, for all intents and purposes, my giving it to them was my charitable donation. The first time I loaned a friend a substantial sum of money and she paid me back, I just gave it directly to another charity. It immediately made me feel as though I got twice as much mileage from that charity by loaning it to a friend first (mind you, this logic only prevails if all goes well, so do not bank on that as justification for loaning money to friends).
In another instance, I once loaned a friend money and then I lost my job several months later (about 15 months later). She started paying me back when I was between jobs, so the money came back to me when I needed it most. The money I was getting back then was not money that I would have held in a saving account without loaning it to her. It was money that I would have given away to charity already. Therefore, when I got a new job, I increased my charitable donations to cover that amount as well. In that case, I was my own charity, and the money got thrice as much mileage. But that was an exception, not an expectation.
When you loan money by this philosophy, then this next point should be a no-brainer: never charge interest for a loan! If you need any further evidence of that advice, then refer to Deuteronomy 3:19-20. Sure, banks do it all the time, but that's their business model. Investors do it all the time as their incentive. You are not in the business of profiting off friends. You are in a friendship with a person who is less financially stable than you are. If you give $1,000 and ask for $125/mo. for 10 months, then you have taken $250 more from your friend than they could really afford (extenuating circumstances aside). Potentially, your friend may offer to pay interest on top of the original amount (i.e. paying $100+ for 10 months for borrowing $1,000), but do not use that profit as incentive for giving the loan. Consider it your friend's gratitude for helping out in a time of need. The big difference here is that you are not entitled to the additional interest, so if your friend skimps on that amount, then consider yourself lucky to get the full principle returned.
Finally, the most important aspect of loaning money to friends is to never, ever ask for them to pay you back. Do not loan money you cannot afford to lose, and when you loan out money, do not assume control of when you will get it back. Truthfully, this aspect could be a real deal-breaker in most cases, and it is the reason for my first advice of the standard answer of "no" to most requests. There are ways to create payment plans and other such arrangements in order to stay on track, but they violate the "forgiveness protection" buffer, so you can never be sure. I have loaned money to a friend where we set up a payment plan, and invariably, there was often a reason why the payments had to be delayed. In the interest of full disclosure, it was actually he who insisted on the payment plan. And to my friend's credit, I got all the money back (but I told him to pay me whatever he could when he could, and it took about twice as long as he had originally designed).
Regardless, we are still friends today. And, perhaps surprisingly, he has not asked to borrow money since the loan was repaid. And that is the surest sign that I made the decision in that situation.
There are times when loaning money to a close friend is the best thing to do. But don't cloud your judgment with the best case scenario or swerve your expectations when you weigh the decision. Your friend's sincerity will not increase the likelihood of full repayment. It could just as easily end the friendship.
Wednesday, August 10, 2011
Mid-3Q Update
Today is August, 10, 2011, which is the day I should have rebalanced my portfolio. However, if you recall from my last "Full Motley" entry, I started by noting how quickly the trigger date had arrived. Well, I was a full month ahead of schedule! The most interesting part is that if I had waited the month, then I would have made my adjustments today as the market closed around 10,700, instead of the 12,600 mark where it was a month ago. I also would not have ceased my contributions into my Roth IRA, which was the right move to make in my opinion for my daily finances.
Most likely, I will move a portion of bonds from my Roth IRA to the stocks during this valley. Also, I will have an unrelated entry later this month (that is, unrelated to my personal portfolio and the markets in general), but for now, let's continue tracking the Dow's third-quarter freefall....
No rest for investors: Dow plunges 520
http://money.cnn.com/2011/08/10/markets/markets_newyork/index.htm?iid=Lead
NEW YORK (CNNMoney) -- After a one-day respite, U.S. stocks plunged sharply yet again Wednesday as investors were confronted with mounting fears about Europe's ongoing debt crisis, this time in France.
The Dow Jones industrial average lost 520 points, or 4.6%, to 10,720. The index ended the day near session lows.
The S&P 500 fell 52 points, or 4.4%, to 1,121; and the Nasdaq composite lost 101 points, or 4.1%, to 2,381.
Stocks were led lower by the financial sector. On Wednesday afternoon CEO of embattled Bank of America Brian Moynihan tried to reassure investors that conditions at the bank and in the country are much better than they were four years ago when the financial crisis hit. The comments were made during a call hosted by investor Bruce Berkowitz of Fairholme Capital Management.
But the comments were not enough. Shares of the Dow component plunged 11% on the day. BofA has fallen nearly 50% so far this year.
Other names in the financial sector were hit just as hard. Shares of Citigroup, Goldman Sachs and Morgan Stanley dropped about 10%. Shares of Wells Fargo, UBS and JPMorgan Chase were down around 7%.
Along with BofA's problems, investors remain worried about the Europe's ongoing sovereign debt crisis.
Ever since Standard & Poor's stripped the U.S. of its AAA credit rating on Friday, fears have been building that rating agencies may also downgrade AAA-rated nations in Europe, since they are also struggling with massive debt problems.
On Wednesday, shares of French bank Societe Generale tumbled 15% on the Paris stock exchange amid speculation that France, Europe's second-largest economy after Germany, may be first to face a rating cut.
European banking shares also fell sharply. Deutsche Bank's stock dropped 12% while Spanish bank Banco Santandedr dropped 9.5%.
Most likely, I will move a portion of bonds from my Roth IRA to the stocks during this valley. Also, I will have an unrelated entry later this month (that is, unrelated to my personal portfolio and the markets in general), but for now, let's continue tracking the Dow's third-quarter freefall....
No rest for investors: Dow plunges 520
http://money.cnn.com/2011/08/10/markets/markets_newyork/index.htm?iid=Lead
NEW YORK (CNNMoney) -- After a one-day respite, U.S. stocks plunged sharply yet again Wednesday as investors were confronted with mounting fears about Europe's ongoing debt crisis, this time in France.
The Dow Jones industrial average lost 520 points, or 4.6%, to 10,720. The index ended the day near session lows.
The S&P 500 fell 52 points, or 4.4%, to 1,121; and the Nasdaq composite lost 101 points, or 4.1%, to 2,381.
Stocks were led lower by the financial sector. On Wednesday afternoon CEO of embattled Bank of America Brian Moynihan tried to reassure investors that conditions at the bank and in the country are much better than they were four years ago when the financial crisis hit. The comments were made during a call hosted by investor Bruce Berkowitz of Fairholme Capital Management.
But the comments were not enough. Shares of the Dow component plunged 11% on the day. BofA has fallen nearly 50% so far this year.
Other names in the financial sector were hit just as hard. Shares of Citigroup, Goldman Sachs and Morgan Stanley dropped about 10%. Shares of Wells Fargo, UBS and JPMorgan Chase were down around 7%.
Along with BofA's problems, investors remain worried about the Europe's ongoing sovereign debt crisis.
Ever since Standard & Poor's stripped the U.S. of its AAA credit rating on Friday, fears have been building that rating agencies may also downgrade AAA-rated nations in Europe, since they are also struggling with massive debt problems.
On Wednesday, shares of French bank Societe Generale tumbled 15% on the Paris stock exchange amid speculation that France, Europe's second-largest economy after Germany, may be first to face a rating cut.
European banking shares also fell sharply. Deutsche Bank's stock dropped 12% while Spanish bank Banco Santandedr dropped 9.5%.
Thursday, August 4, 2011
MSN MONEY: Dow plunges 513 points; 2011 gains are wiped out
Stocks plunged, with the Dow Jones Industrial Average ($INDU -4.31%) tumbling 513 points, their worst one-day loss since December 2008 and ninth-worst point loss, as investors worried that the U.S. economy may be slipping back into a recession. The overall market carnage wiped out all of the 2011 gains for the major averages.
The market rout was prompted in part by concerns that the Federal Reserve won't try to boost the economy again and the prospects of little -- if any -- help on the way from the federal government. A huge concern was what Friday's big jobs report will say. In addition, there were deep fears about the health of the European financial system; stocks on the continent fell sharply. Stocks in Brazil were down nearly 6%.
With today's losses, the market is now in a correction, with the Dow, Standard & Poor's 500 Index ($INX -4.78%) and the Nasdaq Composite Index ($COMPX -5.08%) all down more than 11% from the closing highs for 2011, reached on April 29. Nearly all of the declines for the indexes have come since July 21; the Dow's loss in that time is about 1,340 points.
Gold briefly surged above $1,680 an ounce for the first time and then sold off, and crude oil dropped below $88 a barrel for the first time since mid-February.
The Dow closed down 513 points, or 4.3%, to 11,384. The S&P 500 was off 60 points, or 4.8%, to 1,200, its lowest level since Nov. 30, 2010. The Nasdaq was off 137 points, or 5.1%, to 2,556, its lowest level since Dec. 1, 2010. The Nasdaq 100 Index ($NDX -4.57%) was down 106 points, or 4.6%, to 2,207.
While gold fell back, investors bid hotly for Treasurys. The 10-year Treasury yield fell to 2.458% from Wednesday's 2.599%.
Gold settled down $7.30 to $1,659 an ounce after reaching as high as $1,684.90. Silver was off $2.33 to $39.43 an ounce, a decline of 5.6%. Crude oil was down $5.30, or 5.8%, to $86.63 a barrel, its lowest level since Feb. 18 as the Egyptian revolution neared its climax. It had reached as low as $86.04.
What started the blow-off?
The number raised the worries for Friday's nonfarm payrolls and unemployment report. The report, which will come out at 8:30 a.m. ET, is expected to show little change in the unemployment rate, which was 9.2% in June, and maybe an 85,000 gain in nonfarm payrolls.
But there were other big issues, including a move by the Bank of Japan to push the yen lower against major currencies, especially the dollar.
In addition, European stocks plunged on worries that debt problems for Greece, Portugal, Italy and Ireland were worsening. The European Central Bank unexpectedly began large-scale intervention in the eurozone debt markets, the first time since March, buying bonds in an apparent attempt to prevent the region's sovereign debt crisis from engulfing Italy.
The market tensions also set off a furious battle between investors wanting safety in Swiss francs and the Japanese yen and the central banks of those countries, which don't want their economies priced way too high.
Posted 8/4/2011, 5:19 PM ET, by Charley Blaine
The market rout was prompted in part by concerns that the Federal Reserve won't try to boost the economy again and the prospects of little -- if any -- help on the way from the federal government. A huge concern was what Friday's big jobs report will say. In addition, there were deep fears about the health of the European financial system; stocks on the continent fell sharply. Stocks in Brazil were down nearly 6%.
With today's losses, the market is now in a correction, with the Dow, Standard & Poor's 500 Index ($INX -4.78%) and the Nasdaq Composite Index ($COMPX -5.08%) all down more than 11% from the closing highs for 2011, reached on April 29. Nearly all of the declines for the indexes have come since July 21; the Dow's loss in that time is about 1,340 points.
Gold briefly surged above $1,680 an ounce for the first time and then sold off, and crude oil dropped below $88 a barrel for the first time since mid-February.
The Dow closed down 513 points, or 4.3%, to 11,384. The S&P 500 was off 60 points, or 4.8%, to 1,200, its lowest level since Nov. 30, 2010. The Nasdaq was off 137 points, or 5.1%, to 2,556, its lowest level since Dec. 1, 2010. The Nasdaq 100 Index ($NDX -4.57%) was down 106 points, or 4.6%, to 2,207.
While gold fell back, investors bid hotly for Treasurys. The 10-year Treasury yield fell to 2.458% from Wednesday's 2.599%.
Gold settled down $7.30 to $1,659 an ounce after reaching as high as $1,684.90. Silver was off $2.33 to $39.43 an ounce, a decline of 5.6%. Crude oil was down $5.30, or 5.8%, to $86.63 a barrel, its lowest level since Feb. 18 as the Egyptian revolution neared its climax. It had reached as low as $86.04.
What started the blow-off?
The supposed trigger was a weak report on initial jobless claims. They were down 1,000 to 400,000. A week ago's estimate of 398,000 was revised to 401,000.
The number raised the worries for Friday's nonfarm payrolls and unemployment report. The report, which will come out at 8:30 a.m. ET, is expected to show little change in the unemployment rate, which was 9.2% in June, and maybe an 85,000 gain in nonfarm payrolls.
But there were other big issues, including a move by the Bank of Japan to push the yen lower against major currencies, especially the dollar.
In addition, European stocks plunged on worries that debt problems for Greece, Portugal, Italy and Ireland were worsening. The European Central Bank unexpectedly began large-scale intervention in the eurozone debt markets, the first time since March, buying bonds in an apparent attempt to prevent the region's sovereign debt crisis from engulfing Italy.
The market tensions also set off a furious battle between investors wanting safety in Swiss francs and the Japanese yen and the central banks of those countries, which don't want their economies priced way too high.
Posted 8/4/2011, 5:19 PM ET, by Charley Blaine
- Stocks plunge as worries about global growth cause traders to dump stocks and seek safety.
- Gold briefly tops $1,680 but falls back.
- Treasury yields fall as the dollar rises.
Friday, July 29, 2011
REUTERS: U.S. Stock Market Ends Its Worst Week In A Year
(Caroline Valetkevitch) - Stocks ended the worst week in a year as time runs out on Washington to reach agreement before the government loses its ability to borrow money.
The S&P 500 fell every day this week and was down 3.9 percent for the week as legislators failed to work out an agreement to raise the federal borrowing limit, which expires on Tuesday. Investors also worry about the likelihood of a U.S. credit downgrade.
The CBOE Market Volatility Index .VIX, a gauge of investor fear, jumped as much as 9 percent to its highest level since mid-March before paring its rise.
Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, said investors are taking a more defensive stance, possibly moving more into cash.
"It's frustrating for investors and for U.S. citizens to see this unfold in the way it has been," she said.
"From an overall asset allocation standpoint, in an environment like this, you get bigger moves into cash and safe havens."
The Dow Jones industrial average .DJI was down 96.87 points, or 0.79 percent, at 12,143.24. The Standard & Poor's 500 Index .SPX was down 8.39 points, or 0.65 percent, at 1,292.28. The Nasdaq Composite Index .IXIC was down 9.87 points, or 0.36 percent, at 2,756.38.
President Barack Obama told Republicans and Democrats to find a way "out of this mess." The United States will be unable to borrow money to pay its bills if Congress does not raise the debt limit by August 2.
A second attempt for a vote in the House of Representatives is expected after the close of trading on Friday after a bill was modified to try to win over more conservative lawmakers. The measure has little chance of passing in the Senate, however.
At least one credit rating agency has said it is likely to lower the United States' prized tripe-A rating if the cuts in Washington don't go far enough.
"Will the deal be enough to satisfy the credit rating agencies is really what's at stake here," Trunow said, whose firm manages about $14.8 billion.
The S&P utility index .GSPU is down 2.1 percent for the week, while the Dow is down 4.2 percent and the Nasdaq is down 3.6 percent for the week.
The S&P 500 briefly fell below its 200-day moving average, seen as key support, and bounced back from its worst levels of the day.
Weak economic data also weighed on equities. The U.S. economy stumbled badly in the first half of this year and came dangerously close to contracting in the January-March period.
Among declining stocks, Chevron Corp (CVX.N), the second-largest U.S. oil company, fell 1 percent to $104.02 despite reporting a 43 percent jump in quarterly profit that beat estimates.
(Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)
The S&P 500 fell every day this week and was down 3.9 percent for the week as legislators failed to work out an agreement to raise the federal borrowing limit, which expires on Tuesday. Investors also worry about the likelihood of a U.S. credit downgrade.
The CBOE Market Volatility Index .VIX, a gauge of investor fear, jumped as much as 9 percent to its highest level since mid-March before paring its rise.
Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, said investors are taking a more defensive stance, possibly moving more into cash.
"It's frustrating for investors and for U.S. citizens to see this unfold in the way it has been," she said.
"From an overall asset allocation standpoint, in an environment like this, you get bigger moves into cash and safe havens."
The Dow Jones industrial average .DJI was down 96.87 points, or 0.79 percent, at 12,143.24. The Standard & Poor's 500 Index .SPX was down 8.39 points, or 0.65 percent, at 1,292.28. The Nasdaq Composite Index .IXIC was down 9.87 points, or 0.36 percent, at 2,756.38.
President Barack Obama told Republicans and Democrats to find a way "out of this mess." The United States will be unable to borrow money to pay its bills if Congress does not raise the debt limit by August 2.
A second attempt for a vote in the House of Representatives is expected after the close of trading on Friday after a bill was modified to try to win over more conservative lawmakers. The measure has little chance of passing in the Senate, however.
At least one credit rating agency has said it is likely to lower the United States' prized tripe-A rating if the cuts in Washington don't go far enough.
"Will the deal be enough to satisfy the credit rating agencies is really what's at stake here," Trunow said, whose firm manages about $14.8 billion.
The S&P utility index .GSPU is down 2.1 percent for the week, while the Dow is down 4.2 percent and the Nasdaq is down 3.6 percent for the week.
The S&P 500 briefly fell below its 200-day moving average, seen as key support, and bounced back from its worst levels of the day.
Weak economic data also weighed on equities. The U.S. economy stumbled badly in the first half of this year and came dangerously close to contracting in the January-March period.
Among declining stocks, Chevron Corp (CVX.N), the second-largest U.S. oil company, fell 1 percent to $104.02 despite reporting a 43 percent jump in quarterly profit that beat estimates.
(Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)
Friday, July 8, 2011
The Full Motley: 3Q 2011
Wow, things have been moving along at such a fast pace that I am surprised how soon I am to my rebalancing again. Sunday will be July 10, 2011, so I can submit my changes today or on Monday. Based on the amount of homework I have to finish, I opted to distract myself by rebalancing today.
When I logged onto my accounts today, I saw this as my current allocations:
Fund # - Real / Current / Target
Fund 24 - 25% / 0% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 25% / 0% / 25%
Fund 84 - 10% / 0% / 10%
Fund 85 - 25% / 0% / 25%
Fund 113 - 11% / -1% / 10%
Due to rounding, I had 101% of allocations in my 401(k) and I had no discernable means of moving the excess 1% anywhere. Obviously, this glitch was due to rounding. When I got into the more specific details of the funds, I ascertained that the following moves were needed:
Once again, not much activity, but the gain in the Vanguard Total International Stock Index Fund was removed from the fund and dispersed amongst other funds that have fallen. The overall expectations of the domestic markets right now is that they will fall through October and then hit a sharp rise, although that has not happened quite to the extreme that I have been anticipating. The markets have been going up lately and they are still above where they were in January 2011, which is especially surprising to me. My prediction was that the markets would gain under 10% for the year. At this point, it looks like they are in position to gain 10-15% for the year.
Therefore, I have a decision to make. I can either continue contributing to my Roth IRA or I can suspend contributions until later. After a couple days of consideration, I opted to suspend contributions because (A) I was expecting the market would be well below 12,000 (maybe even below 11,000), and (B) I need liquid assets in case I am unable to get part-time work (or if I decide against pursuing work) before I complete my degree.
When I logged onto my accounts today, I saw this as my current allocations:
Fund # - Real / Current / Target
Fund 24 - 25% / 0% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 25% / 0% / 25%
Fund 84 - 10% / 0% / 10%
Fund 85 - 25% / 0% / 25%
Fund 113 - 11% / -1% / 10%
Due to rounding, I had 101% of allocations in my 401(k) and I had no discernable means of moving the excess 1% anywhere. Obviously, this glitch was due to rounding. When I got into the more specific details of the funds, I ascertained that the following moves were needed:
- Vanguard High-Yield Corporate Fund (add small amount)
- Vanguard PRIMECAP Fund Investor (add small amount)
- Vanguard Total Int'l Stock Index Fund (remove 1%)
- Vanguard Total Bond Market Index Fund (add <1%)
- Vanguard Total Stock Market Index Fund (remove small amount)
Once again, not much activity, but the gain in the Vanguard Total International Stock Index Fund was removed from the fund and dispersed amongst other funds that have fallen. The overall expectations of the domestic markets right now is that they will fall through October and then hit a sharp rise, although that has not happened quite to the extreme that I have been anticipating. The markets have been going up lately and they are still above where they were in January 2011, which is especially surprising to me. My prediction was that the markets would gain under 10% for the year. At this point, it looks like they are in position to gain 10-15% for the year.
Therefore, I have a decision to make. I can either continue contributing to my Roth IRA or I can suspend contributions until later. After a couple days of consideration, I opted to suspend contributions because (A) I was expecting the market would be well below 12,000 (maybe even below 11,000), and (B) I need liquid assets in case I am unable to get part-time work (or if I decide against pursuing work) before I complete my degree.
Sunday, June 5, 2011
AOL: Feds Sue 'Winning in the Cash Flow Business' Infomercial Huckster
Feds Sue 'Winning in the Cash Flow Business' Infomercial Huckster
http://www.walletpop.com/2011/06/02/feds-sue-winning-in-the-cash-flow-business-infomercial-huckste/?a_dgi=aolshare_twitter
by Jorgen Wouters
The mastermind behind a get-rich-quick scheme whose infomercials lured hundreds of thousands of victims is being sued by the Federal Trade Commission for defrauding consumers.
Russell Dalbey, CEO and founder of the company behind the "Winning in the Cash Flow Business" program, swindled consumers with fake claims about the fast, easy, big money they could make finding, brokering and earning commissions on seller-financed promissory notes, the FTC charged.
Although consumers paid as little as $40 to get started, they were pressured into spending far more on worthless products, the FTC charged, with many consumers losing thousands of dollars.
"'Winning in the Cash Flow Business' was a real loser for hundreds of thousands of consumers nationwide," David Vladeck, director of the FTC's Bureau of Consumer Protection, said in a statement.
"When someone is selling a program designed to help people make money, they have to accurately describe how much consumers can expect to make and be truthful about how quickly they will be able to do so," Vladeck added. "None of that happened in this case, and people who bought the program paid the price."
The FTC's complaint against Dalbey and others involved in marketing the program, which was filed jointly with Colorado Attorney General John W. Suthers, accuses the defendants of misleading consumers about the amount of money they could earn using the program, as well as how quickly and easily they could rake it in.
The FTC and the state of Colorado are seeking a court order to stop Dalbey, his wife and their businesses from making misleading claims, as well as to recover money to refund their victims. Defendants include Russell T. Dalbey; DEI LLLP; Dalbey Education Institute LLC; IPME LLLP; Catherine L. Dalbey; and Marsha Kellogg, a consumer who provided a false testimonial for the service.
Dalbey began pitching his "wealth building" program on the Internet and via direct mail in 1996, and since 2002, millions of consumers nationwide have been bombarded with 30-minute infomercials for the "Winning in the Cash Flow Business" program, which were hosted by TV personality and repeat DUI offender Gary Collins.
The program promised to teach consumers how to find, broker and earn commissions on seller-financed promissory notes -- privately held mortgages or notes that are often secured by the home or land. The infomercial claimed consumers could successfully earn substantial income brokering promissory notes in three easy steps -- "Find 'Em," "List 'Em" and "Make Money."
"[Y]ou'll be amazed at just how easy it is to generate a stream of extra income every month. Build financial freedom and a better quality of life in just minutes a day. Or even retire earlier than you ever dreamed possible. Order now and you'll be ready to profit in minutes," the infomercials claimed.
These claims were supported by "testimonials" from consumers who claimed to have made "$1.2 million in 30 days," "$79,000 in a few hours" and "$262,216 part time," according to some. "In less than 30 days, I closed two transactions, and I netted 1 point – a little bit over $1.2 million," a testimonial by "Don B." from New York stated.
Those who fell for the infomercial's spiel shelled out approximately $40 to $160 on the initial program but were soon encouraged to spend hundreds or thousands of dollars more on multi-day seminars, coaching sessions and promissory note holder lead lists. Very few of these consumers ever made the money Dalbey promised them, the FTC said.
The complaint accuses Dalbey and his co-defendants of violating the FTC Act and Colorado law by making false and unsubstantiated claims about the "Winning in the Cash Flow Business" program, as well as their coaching programs, workshops, seminars and note holder leads.
Although Dalbey claims to have made big money in the promissory note business, the FTC charged, most of his note-related income for the past two decades came from pitching products and services that purportedly teach consumers how to find and broker these notes.
The defendants are also accused of inflating the success customers could expect with the program in the consumer testimonials. One of these customers, Marsha Kellogg, claimed in one testimonial that she earned $79,975.01 from a single promissory note transaction, while she actually earned $50,000 less.
Kellogg agreed to an order settling the FTC charges against her -- the first time the FTC ever charged a consumer with making misrepresentations in a product or service testimonial. The order forbids Kellogg from making future misrepresentations, and she has agreed to cooperate in the case against Dalbey and his co-defendants.
Consumer information from the FTC about how to spot and avoid investment fraud, "get-rich-quick" schemes and other types of wealth-building scams can be found at the link below:
http://www.ftc.gov/bcp/edu/microsites/moneymatters/jobs-wealth-building.shtml
http://www.walletpop.com/2011/06/02/feds-sue-winning-in-the-cash-flow-business-infomercial-huckste/?a_dgi=aolshare_twitter
by Jorgen Wouters
The mastermind behind a get-rich-quick scheme whose infomercials lured hundreds of thousands of victims is being sued by the Federal Trade Commission for defrauding consumers.
Russell Dalbey, CEO and founder of the company behind the "Winning in the Cash Flow Business" program, swindled consumers with fake claims about the fast, easy, big money they could make finding, brokering and earning commissions on seller-financed promissory notes, the FTC charged.
Although consumers paid as little as $40 to get started, they were pressured into spending far more on worthless products, the FTC charged, with many consumers losing thousands of dollars.
"'Winning in the Cash Flow Business' was a real loser for hundreds of thousands of consumers nationwide," David Vladeck, director of the FTC's Bureau of Consumer Protection, said in a statement.
"When someone is selling a program designed to help people make money, they have to accurately describe how much consumers can expect to make and be truthful about how quickly they will be able to do so," Vladeck added. "None of that happened in this case, and people who bought the program paid the price."
The FTC's complaint against Dalbey and others involved in marketing the program, which was filed jointly with Colorado Attorney General John W. Suthers, accuses the defendants of misleading consumers about the amount of money they could earn using the program, as well as how quickly and easily they could rake it in.
The FTC and the state of Colorado are seeking a court order to stop Dalbey, his wife and their businesses from making misleading claims, as well as to recover money to refund their victims. Defendants include Russell T. Dalbey; DEI LLLP; Dalbey Education Institute LLC; IPME LLLP; Catherine L. Dalbey; and Marsha Kellogg, a consumer who provided a false testimonial for the service.
Dalbey began pitching his "wealth building" program on the Internet and via direct mail in 1996, and since 2002, millions of consumers nationwide have been bombarded with 30-minute infomercials for the "Winning in the Cash Flow Business" program, which were hosted by TV personality and repeat DUI offender Gary Collins.
The program promised to teach consumers how to find, broker and earn commissions on seller-financed promissory notes -- privately held mortgages or notes that are often secured by the home or land. The infomercial claimed consumers could successfully earn substantial income brokering promissory notes in three easy steps -- "Find 'Em," "List 'Em" and "Make Money."
"[Y]ou'll be amazed at just how easy it is to generate a stream of extra income every month. Build financial freedom and a better quality of life in just minutes a day. Or even retire earlier than you ever dreamed possible. Order now and you'll be ready to profit in minutes," the infomercials claimed.
These claims were supported by "testimonials" from consumers who claimed to have made "$1.2 million in 30 days," "$79,000 in a few hours" and "$262,216 part time," according to some. "In less than 30 days, I closed two transactions, and I netted 1 point – a little bit over $1.2 million," a testimonial by "Don B." from New York stated.
Those who fell for the infomercial's spiel shelled out approximately $40 to $160 on the initial program but were soon encouraged to spend hundreds or thousands of dollars more on multi-day seminars, coaching sessions and promissory note holder lead lists. Very few of these consumers ever made the money Dalbey promised them, the FTC said.
The complaint accuses Dalbey and his co-defendants of violating the FTC Act and Colorado law by making false and unsubstantiated claims about the "Winning in the Cash Flow Business" program, as well as their coaching programs, workshops, seminars and note holder leads.
Although Dalbey claims to have made big money in the promissory note business, the FTC charged, most of his note-related income for the past two decades came from pitching products and services that purportedly teach consumers how to find and broker these notes.
The defendants are also accused of inflating the success customers could expect with the program in the consumer testimonials. One of these customers, Marsha Kellogg, claimed in one testimonial that she earned $79,975.01 from a single promissory note transaction, while she actually earned $50,000 less.
Kellogg agreed to an order settling the FTC charges against her -- the first time the FTC ever charged a consumer with making misrepresentations in a product or service testimonial. The order forbids Kellogg from making future misrepresentations, and she has agreed to cooperate in the case against Dalbey and his co-defendants.
Consumer information from the FTC about how to spot and avoid investment fraud, "get-rich-quick" schemes and other types of wealth-building scams can be found at the link below:
http://www.ftc.gov/bcp/edu/microsites/moneymatters/jobs-wealth-building.shtml
Friday, May 27, 2011
The Full Motley: 2Q 2011
I will be honest: after quitting my job last month, I haven't paid attention to what the markets have been doing this quarter. Case in point, I drafted this article a couple weeks ago and then I forgot to update this quarter's rebalance as described below and publish the entry until today. However, the vast majority of investors (especially those investors exclusively in their employer-sponsored plan) do not follow daily market performance either. They are too busy living their own lives, which do not revolve around how much money they will have at retirement upwards of 30 years away. However, I have said numerous times thorughout this blog that the most important element in personal investing is not what the markets do daily (or weekly, even annually) but how your account is allocated across the investments and your ability to maintain the percent you have earmarked previously in each investment.
For the specifics actions required for the maintenance of my 401(k) account this quarter, here is my new breakdown:
Fund # - Real / Current / Target
Fund 24 - 25% / 0% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 19% / +5% / 25%
Fund 84 - 10% / 0% / 10%
Fund 85 - 34% / -9% / 25%
Fund 113 - 9% / +1% / 10%
This graph may have looked slightly different in the past quarters. In the past entries, the "current" column was used to represent the allocations of money coming into the account, but because I am not currently employed, there is no incoming money. Therefore, the "current" column represents how much money is going to be moved in the current transaction.
Obviously, the Total Stock Market Index fund needs to have about 10% removed and it should be split (although, obviously not evenly) into the PRIMECAP Fund and Total International Stock Index. In this instance, I split the money I moved from Fund 85 and put the majority of it to Fund 59 and the remainder into Fund 113 (in previous installments, I didn't touch Fund 59 since I was building it up completely through Dollar Cost Averaging to its target, but once you leave your employer, you cannot put new money into the account so my opportunity to build the fund is over).
Notice how the vast majority of these quarterly rebalancing transactions only affects three funds on average and the amounts moved are usually less than 10% of the overall balance. Most professionals recommend rebalancing accounts on an annual basis, but I am reviewing it quarterly because when the markets move harshly, it happens quickly so I would rather make changes in amid that market movement, but during normal market conditions (which 2011 should exemplify nicely), reviewing your accounts annually is sufficient.
In the coming months and years, it will be interesting for me to see how well I stay abreast on the changes to my 401(k) account and my quarterly rebalancing as my studies continue and when I adopt a new job outside of the financial field.
For the specifics actions required for the maintenance of my 401(k) account this quarter, here is my new breakdown:
Fund # - Real / Current / Target
Fund 24 - 25% / 0% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 19% / +5% / 25%
Fund 84 - 10% / 0% / 10%
Fund 85 - 34% / -9% / 25%
Fund 113 - 9% / +1% / 10%
This graph may have looked slightly different in the past quarters. In the past entries, the "current" column was used to represent the allocations of money coming into the account, but because I am not currently employed, there is no incoming money. Therefore, the "current" column represents how much money is going to be moved in the current transaction.
Obviously, the Total Stock Market Index fund needs to have about 10% removed and it should be split (although, obviously not evenly) into the PRIMECAP Fund and Total International Stock Index. In this instance, I split the money I moved from Fund 85 and put the majority of it to Fund 59 and the remainder into Fund 113 (in previous installments, I didn't touch Fund 59 since I was building it up completely through Dollar Cost Averaging to its target, but once you leave your employer, you cannot put new money into the account so my opportunity to build the fund is over).
Notice how the vast majority of these quarterly rebalancing transactions only affects three funds on average and the amounts moved are usually less than 10% of the overall balance. Most professionals recommend rebalancing accounts on an annual basis, but I am reviewing it quarterly because when the markets move harshly, it happens quickly so I would rather make changes in amid that market movement, but during normal market conditions (which 2011 should exemplify nicely), reviewing your accounts annually is sufficient.
In the coming months and years, it will be interesting for me to see how well I stay abreast on the changes to my 401(k) account and my quarterly rebalancing as my studies continue and when I adopt a new job outside of the financial field.
Saturday, April 16, 2011
Career Changes
I am going through a major career change right now, and I realized last week that this is the perfect addition to any financial blog since uncertainty of money and future cashflow is often what keeps people staying in a bad situation for longer than they should. I worked in the financial industry for 10 years, and 8 1/2 of those years were with the same company (through which I had 6 years of perfect attendance), so I know all about finding a comfort zone and riding through it. And I am by no means endorsing frequent career changes here either, but unless you spend 10+ years in school for a specific career, then there is no harm in learning another industry.
Of course, going from comfortable employment like you get from an employer of 8+ years to unemployment is a scary thing. But I have been planning this change for a long time, and it was in the back of my mind even before any planning began, so here are some things that I have done:
Make sure that your savings account reflects 3 months of your CURRENT salary. Sometime last year (or was it is 2009), I realized that my savings account (I call it my "base" account and I don't include it in my investment decisions) reflected three months of my starting salary, which would have only gotten me through a couple months at most if I let it be. Increasing money in your savings account is not hard to do if you have incoming money and you are actively contributing to retirement accounts. Put a slight priority on it over the retirement investing, and you're good to go in a few paychecks.
Find the right banking account for your new situation. This was one of the last steps I made, but my existing bank account was ideal for my years of employment. It was with the branch closest to my employer and it waived monthly fees if there were more than $500 in direct deposit. Unfortunately, quitting the job would result in forgoing the direct deposit. Therefore, I had to shop around and move my money to another bank to avoid getting fees on my checking accounts (and if you have to change banks, do not forget to alert any companies who automatically pull money from your accounts).
Scale back on your 401(k) contributions. I would not advise going below the full benefit of your company match, but if you were contributing a handsome amount to your 401(k), which I started doing when the markets tanked and all the stocks were incredibly low, then scaling back on them will abed you in the near future. If I am able to get in a comfortable position sooner than I expect, then I can put the money I missed from my 401(k) into an IRA. What I am determined to avoid is getting hit with a 10% penalty from the IRS for an early withdrawal of my retirement funds.
Time your departure. If your company provide company profit sharing or, even better, an annual bonus, then consider staying with the company to take full advantage of that extra money. In my case, my annual bonus is in June, which was too far for me. But we also have a quarterly company match paid directly into our 401(k) at the end of each quarter. Therefore, I put in my two-weeks notice my first day back after the March 31st profit sharing payment.
Network. Facebook is more than kids' games. It is a useful tool for getting and staying in touch with old friends, and that includes those former employees whom you promised to stay in touch with but never did. You can find out what paths they took after their position with your company, especially if you are more interested in changing jobs than re-careering.
All in all, the right move is the one that is best for you. Sometimes you have the luxury of quitting your job, sometimes it happens abruptly (I cleared out my personal trinkets from my desk months ago in case I came into work one day and decided I could not stay there for another one). In my case, I am ready to begin back at Square One, for the first time in 8 1/2 years. I feel my past will provide enough credentials to get me to where I want to go next, and my friends are not going to let me stay unemployed for long either.
I have two more days left at my current position, and I truly feel at peace with this decision and I am ready to make the next steps.
Of course, going from comfortable employment like you get from an employer of 8+ years to unemployment is a scary thing. But I have been planning this change for a long time, and it was in the back of my mind even before any planning began, so here are some things that I have done:
Make sure that your savings account reflects 3 months of your CURRENT salary. Sometime last year (or was it is 2009), I realized that my savings account (I call it my "base" account and I don't include it in my investment decisions) reflected three months of my starting salary, which would have only gotten me through a couple months at most if I let it be. Increasing money in your savings account is not hard to do if you have incoming money and you are actively contributing to retirement accounts. Put a slight priority on it over the retirement investing, and you're good to go in a few paychecks.
Find the right banking account for your new situation. This was one of the last steps I made, but my existing bank account was ideal for my years of employment. It was with the branch closest to my employer and it waived monthly fees if there were more than $500 in direct deposit. Unfortunately, quitting the job would result in forgoing the direct deposit. Therefore, I had to shop around and move my money to another bank to avoid getting fees on my checking accounts (and if you have to change banks, do not forget to alert any companies who automatically pull money from your accounts).
Scale back on your 401(k) contributions. I would not advise going below the full benefit of your company match, but if you were contributing a handsome amount to your 401(k), which I started doing when the markets tanked and all the stocks were incredibly low, then scaling back on them will abed you in the near future. If I am able to get in a comfortable position sooner than I expect, then I can put the money I missed from my 401(k) into an IRA. What I am determined to avoid is getting hit with a 10% penalty from the IRS for an early withdrawal of my retirement funds.
Time your departure. If your company provide company profit sharing or, even better, an annual bonus, then consider staying with the company to take full advantage of that extra money. In my case, my annual bonus is in June, which was too far for me. But we also have a quarterly company match paid directly into our 401(k) at the end of each quarter. Therefore, I put in my two-weeks notice my first day back after the March 31st profit sharing payment.
Network. Facebook is more than kids' games. It is a useful tool for getting and staying in touch with old friends, and that includes those former employees whom you promised to stay in touch with but never did. You can find out what paths they took after their position with your company, especially if you are more interested in changing jobs than re-careering.
All in all, the right move is the one that is best for you. Sometimes you have the luxury of quitting your job, sometimes it happens abruptly (I cleared out my personal trinkets from my desk months ago in case I came into work one day and decided I could not stay there for another one). In my case, I am ready to begin back at Square One, for the first time in 8 1/2 years. I feel my past will provide enough credentials to get me to where I want to go next, and my friends are not going to let me stay unemployed for long either.
I have two more days left at my current position, and I truly feel at peace with this decision and I am ready to make the next steps.
Friday, March 4, 2011
CNNFN: Happy 2nd Birthday!
Happy 2nd birthday, bull market! What now?
http://money.cnn.com/2011/03/04/markets/bull_market_sector_rotation/index.htm
By Hibah Yousuf, staff reporter
NEW YORK (CNNMoney) -- The bull market is celebrating its second birthday. Banks and retail stocks have led the way but investors may want to think about changing their bets if they think the party is going to continue.
The S&P 500 has doubled in value from the bear market low of 666.79 on March 6, 2009. All ten sectors in that index have rallied, according to Standard & Poor's Equity Research.
But if the economic recovery continues to pick up steam, different sectors of the market will begin to take the lead.
"It's important for investors to understand how different sectors perform during different periods of a stock market's cycle and as the economic recovery matures," said James Stack, a market historian and president of InvesTech Research.
According to Stack, the average period between the start of a bull market and the start of the subsequent bear market is less than four years.
"As we come upon the bull market's second birthday, we're moving into the latter half of this rally," he said.
By historical standards, that means financial firms and consumer discretionary companies, which have been among the current bull market's biggest winners, may lose some of their luster.
"Financial companies suffered the most severe pain during the recession and have bounced back to become the best performing sector because the government stepped into to offer support," said Christian Hviid, chief market strategist at Genworth Financial Asset Management.
That includes AIG (AIG, Fortune 500), which nearly collapsed in September 2008 before the government bailed it out with $182 billion. The insurer's stock has shot up a remarkable 430% since the market bottomed and is among the S&P 500's best performers during the past two years.
While they may not shine as brightly, Hviid said financial company shares will continue to deliver solid returns.
"The financial sector is still unloved, so it may be a good contrarian play," he said. "Banks are still trading at deep discounts, and it seems like we're turning a corner in terms of loan growth and charge-offs."
Meanwhile, the retail sector, which has surged nearly 150% from two years ago, won't continue its stellar run, Hviid said. He thinks profit margins will come under pressure from higher commodity costs.
Technology stocks are also typically strong performers in the early part of a bull market, but since consumer and business spending has been only slowly recovering, the sector has barely outperformed the broader market.
But as consumers and corporations begin to loosen their purse strings, experts say tech stocks will continue to rise.
Take me to your new leaders
As the bull market continues its course, energy stocks, which have thus far underperformed the market, are likely to take the spotlight.
"Investors are already looking at the energy sector because of surging oil prices, but the sector will do well even beyond the unrest in the Middle East," Hviid said. "It's attractive based on global growth outlooks, especially as energy consumption increases in emerging markets."
Materials, industrials and telecom stocks are also poised for solid gains, InvesTech Research's Stack said.
While the health care sector is usually a defensive pick during a falling market, the sector may begin to surprise investors a bit earlier.
"Health care stocks didn't have a good 2010, but we're past the aftermath of health care reform," said Joe Milano, portfolio manager of T. Rowe Price's New America Growth Fund (PRWAX). Health care companies, including Covance (CVD) and WellPoint (WLP, Fortune 500), represent about 10% of the fund's holdings.
Plus, even though experts largely agree that the broader market has yet to peak, it's never too early to play it a little safe.
"We have all the ingredients for the bull market to continue," Stack said. "But we know it won't last forever, and it's better to add some defensive positions on a gradual basis than it is to make a dramatic move after all the warning flags pop up."
http://money.cnn.com/2011/03/04/markets/bull_market_sector_rotation/index.htm
By Hibah Yousuf, staff reporter
NEW YORK (CNNMoney) -- The bull market is celebrating its second birthday. Banks and retail stocks have led the way but investors may want to think about changing their bets if they think the party is going to continue.
The S&P 500 has doubled in value from the bear market low of 666.79 on March 6, 2009. All ten sectors in that index have rallied, according to Standard & Poor's Equity Research.
But if the economic recovery continues to pick up steam, different sectors of the market will begin to take the lead.
"It's important for investors to understand how different sectors perform during different periods of a stock market's cycle and as the economic recovery matures," said James Stack, a market historian and president of InvesTech Research.
According to Stack, the average period between the start of a bull market and the start of the subsequent bear market is less than four years.
"As we come upon the bull market's second birthday, we're moving into the latter half of this rally," he said.
By historical standards, that means financial firms and consumer discretionary companies, which have been among the current bull market's biggest winners, may lose some of their luster.
"Financial companies suffered the most severe pain during the recession and have bounced back to become the best performing sector because the government stepped into to offer support," said Christian Hviid, chief market strategist at Genworth Financial Asset Management.
That includes AIG (AIG, Fortune 500), which nearly collapsed in September 2008 before the government bailed it out with $182 billion. The insurer's stock has shot up a remarkable 430% since the market bottomed and is among the S&P 500's best performers during the past two years.
While they may not shine as brightly, Hviid said financial company shares will continue to deliver solid returns.
"The financial sector is still unloved, so it may be a good contrarian play," he said. "Banks are still trading at deep discounts, and it seems like we're turning a corner in terms of loan growth and charge-offs."
Meanwhile, the retail sector, which has surged nearly 150% from two years ago, won't continue its stellar run, Hviid said. He thinks profit margins will come under pressure from higher commodity costs.
Technology stocks are also typically strong performers in the early part of a bull market, but since consumer and business spending has been only slowly recovering, the sector has barely outperformed the broader market.
But as consumers and corporations begin to loosen their purse strings, experts say tech stocks will continue to rise.
Take me to your new leaders
As the bull market continues its course, energy stocks, which have thus far underperformed the market, are likely to take the spotlight.
"Investors are already looking at the energy sector because of surging oil prices, but the sector will do well even beyond the unrest in the Middle East," Hviid said. "It's attractive based on global growth outlooks, especially as energy consumption increases in emerging markets."
Materials, industrials and telecom stocks are also poised for solid gains, InvesTech Research's Stack said.
While the health care sector is usually a defensive pick during a falling market, the sector may begin to surprise investors a bit earlier.
"Health care stocks didn't have a good 2010, but we're past the aftermath of health care reform," said Joe Milano, portfolio manager of T. Rowe Price's New America Growth Fund (PRWAX). Health care companies, including Covance (CVD) and WellPoint (WLP, Fortune 500), represent about 10% of the fund's holdings.
Plus, even though experts largely agree that the broader market has yet to peak, it's never too early to play it a little safe.
"We have all the ingredients for the bull market to continue," Stack said. "But we know it won't last forever, and it's better to add some defensive positions on a gradual basis than it is to make a dramatic move after all the warning flags pop up."
Thursday, February 10, 2011
The Full Motley: 1Q 2011
Well, well, well, the markets hit the ground running in 2011. I am expecting the markets to rise less than 10% this year, which means the next 10 months are going to be extremely mediocre or we will experience a serious retraction. For those familiar with the Halloween indicator, it would seem as though this year is going to be one in which the theory to "sell in May and go away, buy back on St. Ledger's Day" (which is an English holiday around the time of Halloween) will be beneficial.
Personally, I am banking on it. Literally. I am directing all of my IRA contributions in those months. I can let you know how it turns out in the fourth quarter, but so far, this year is in the red all over as the Dow even surpassed 12,000 in the past couple weeks. Well, not all over. Remember, my "Double Bubble" expectations. After the first month of the year, the Vanguard Precious Metals & Mining fund showed a YTD return of -9.72%. Conversely, the Vanguard Total Bond Market Index fund wasn't doing too bad -- or too good. In fact, it isn't doing much of anything with a flat YTD return of .08%.
In terms of my new foray into active management, the Vanguard Total Stock Market Index fund is showing a YTD return of 2.19% at the end of January whereas the Vanguard PRIMECAP Fund is showing 2.71% for the same time period.
For the specifics actions required for my maintenance of my 401k account for this quarter, here is my breakdown:
Fund # - Real / Current / Target
Fund 24 - 26% / 10% / 25%
Fund 29 - 4% / 0% / 5%
Fund 59 - 16% / 50% / 25%
Fund 84 - 9% / 0% / 10%
Fund 85 - 36% / 35% / 25%
Fund 113 - 10% / 5% / 10%
Based on these numbers, the rebalance was simple enough. I moved $500 from Fund 24 to Fund 29 and $800 from Fund 85 to Fund 84 (I didn't want to touch Fund 59 yet since I am still building it to its target).
Obviously, the biggest issues facing the Dow right now are overseas in Egypt. While it seems to have had a minimal effect since the markets have been positive so far, but the adverse impact is questionable since it could have limited the gains, but I have to think this recovery has been so fragile that any adversity should send it downward. Then again, it could always happen tomorrow.
Personally, I am banking on it. Literally. I am directing all of my IRA contributions in those months. I can let you know how it turns out in the fourth quarter, but so far, this year is in the red all over as the Dow even surpassed 12,000 in the past couple weeks. Well, not all over. Remember, my "Double Bubble" expectations. After the first month of the year, the Vanguard Precious Metals & Mining fund showed a YTD return of -9.72%. Conversely, the Vanguard Total Bond Market Index fund wasn't doing too bad -- or too good. In fact, it isn't doing much of anything with a flat YTD return of .08%.
In terms of my new foray into active management, the Vanguard Total Stock Market Index fund is showing a YTD return of 2.19% at the end of January whereas the Vanguard PRIMECAP Fund is showing 2.71% for the same time period.
For the specifics actions required for my maintenance of my 401k account for this quarter, here is my breakdown:
Fund # - Real / Current / Target
Fund 24 - 26% / 10% / 25%
Fund 29 - 4% / 0% / 5%
Fund 59 - 16% / 50% / 25%
Fund 84 - 9% / 0% / 10%
Fund 85 - 36% / 35% / 25%
Fund 113 - 10% / 5% / 10%
Based on these numbers, the rebalance was simple enough. I moved $500 from Fund 24 to Fund 29 and $800 from Fund 85 to Fund 84 (I didn't want to touch Fund 59 yet since I am still building it to its target).
Obviously, the biggest issues facing the Dow right now are overseas in Egypt. While it seems to have had a minimal effect since the markets have been positive so far, but the adverse impact is questionable since it could have limited the gains, but I have to think this recovery has been so fragile that any adversity should send it downward. Then again, it could always happen tomorrow.
Monday, January 31, 2011
Facebook: Pay or get out
Facebook: Pay our way or get out
http://tech.fortune.cnn.com/2011/01/28/facebook-pay-our-way-or-get-out/
By Chadwick Matlin, contributor
As Facebook starts to host all sorts of commerce -- and is now mandating the use of its currency -- perhaps it's time to stop thinking of it as a company and start thinking of it as a country.
"The strength of a nation's currency is based on the strength of a nation's economy." Richard Nixon, circa 1971, announcing that foreign governments could no longer convert U.S. dollars into gold.
"If you're a very large company, and supporting you is going to cost us tens of millions of dollars, then we want to at least have an understanding of how you're going to use what we're doing, and that you're not going to just import the data but also contribute back to the ecosystem and make peoples' Facebook experience better." —Mark Zuckerberg, circa 2010, explaining its agreements with social game companies that bring in 30% revenue cuts to Facebook.
Earlier this week, Facebook announced that by July 1 developers that have apps on the site must make their users pay for virtual goods using Facebook's official currency, Facebook Credits. Along with Credits come fees: 30% of every credit spent goes to Facebook.
Smaller developers, of course, aren't pleased. They would rather avoid paying Facebook altogether. Facebook, meanwhile, would rather avoid being a site that confuses its users with dozens of currencies.
At first glance, the move suggests Facebook has become a monetary autocracy, forcing the companies critical to its success to use its currency, and to pay a fee for doing so. But on second thought, isn't that more or less how taxes work? As Facebook grows and starts to host all sorts of commerce, perhaps it's time to stop thinking of the social network as a company. Maybe it's best to think of it as a country.
Imagine, for a moment, that you're the central banker of a country with nearly 600 million residents. Your economy is growing quickly, and the bigger it gets, the more foreign investors are knocking at your door, trying to hawk their wares and build within your borders. Nobody knows how much your economy is actually worth -- some place the GDP at $50 billion, making it the 73rd largest economy in the world, though everyone agrees that your country will be a global force for years to come.
But there's one sector of your economy that won't fall in line. By the end of the year, it'll be worth over a billion dollars and it has proved to be sustainable even during an economic downturn. But a lot of the companies that make up the industry don't want to use the national currency. They'd rather use their own currencies and avoid a hefty 30% tax on all transactions.
But, as a wise central banker, you know that for a country to grow its economy, it needs a singular currency so the proletariat doesn't get confused. You've been able to convince the largest companies to use the national currency, but rogue stragglers remain. What do you do?
Tell them they can either use the currency or get the hell out.
It's a raw deal, but it's one the social game companies can't decline. They're trapped within Facebook for the same reason the rest of us are -- it's still the largest social media site in the world, which means it's also the most powerful. Facebook knows it can force them to pay taxes because there are no other places to earn the kind of money they'll earn within Facebook.
Facebook, already a technological and cultural hegemon, is becoming an economic one as well. A key feature of Facebook's decree is that developers can still use their own currencies; they'll just have to peg the local currency to Facebook Credits.
This, too, should sound familiar. Plenty of foundering countries peg their currencies to the dollar or Euro to help stabilize their economy and encourage trade. Two differences of note:
1. Foreign currencies get pegged to a hegemon's through a de facto process. Facebook's Credits scheme is de jure.
2. Facebook is still forcing the developers to pay taxes, something that, say, Saudi Arabia, doesn't (directly) pay to the U.S.
All of this leads us back to the 30% fee/tax, something that should also sound familiar for another tech hegemon. Apple (AAPL) has established just as strong of a hold on its app market as Facebook's, and largely for the same reasons: it has a critical mass of users, an easy payment system that users trust, and a rule that developers must agree to use Apple's storefront to sell its apps on iPhones, iPods, and iPads. Apple skips the step of translating dollars into its own specialized currency, but the mentality is the same. If a company is going to operate within our borders, they're going to pay us for the privilege.
So to understand what this means for Facebook's future, let's look to the future of Apple. Along with Facebook's announcement this week came an expected and reliable report that the next generation of iPhones will act as credit cards, using iTunes accounts to make all sorts of payments that have nothing to do with iTunes.
If iPhones become credit cards, what's to prevent Facebook from becoming PayPal? Paying friends back online; buying goods from vendors; wiring money as soon as it's needed. That's PayPal, but there's no reason it can't become Facebook, and there's no reason Facebook, with its social features, wouldn't be a better at it.
For that to happen, Facebook Credits has to reach a critical mass. And the only way for Facebook to ensure that happens? By getting its citizens to adopt its currency.
http://tech.fortune.cnn.com/2011/01/28/facebook-pay-our-way-or-get-out/
By Chadwick Matlin, contributor
As Facebook starts to host all sorts of commerce -- and is now mandating the use of its currency -- perhaps it's time to stop thinking of it as a company and start thinking of it as a country.
"The strength of a nation's currency is based on the strength of a nation's economy." Richard Nixon, circa 1971, announcing that foreign governments could no longer convert U.S. dollars into gold.
"If you're a very large company, and supporting you is going to cost us tens of millions of dollars, then we want to at least have an understanding of how you're going to use what we're doing, and that you're not going to just import the data but also contribute back to the ecosystem and make peoples' Facebook experience better." —Mark Zuckerberg, circa 2010, explaining its agreements with social game companies that bring in 30% revenue cuts to Facebook.
Earlier this week, Facebook announced that by July 1 developers that have apps on the site must make their users pay for virtual goods using Facebook's official currency, Facebook Credits. Along with Credits come fees: 30% of every credit spent goes to Facebook.
Smaller developers, of course, aren't pleased. They would rather avoid paying Facebook altogether. Facebook, meanwhile, would rather avoid being a site that confuses its users with dozens of currencies.
At first glance, the move suggests Facebook has become a monetary autocracy, forcing the companies critical to its success to use its currency, and to pay a fee for doing so. But on second thought, isn't that more or less how taxes work? As Facebook grows and starts to host all sorts of commerce, perhaps it's time to stop thinking of the social network as a company. Maybe it's best to think of it as a country.
Imagine, for a moment, that you're the central banker of a country with nearly 600 million residents. Your economy is growing quickly, and the bigger it gets, the more foreign investors are knocking at your door, trying to hawk their wares and build within your borders. Nobody knows how much your economy is actually worth -- some place the GDP at $50 billion, making it the 73rd largest economy in the world, though everyone agrees that your country will be a global force for years to come.
But there's one sector of your economy that won't fall in line. By the end of the year, it'll be worth over a billion dollars and it has proved to be sustainable even during an economic downturn. But a lot of the companies that make up the industry don't want to use the national currency. They'd rather use their own currencies and avoid a hefty 30% tax on all transactions.
But, as a wise central banker, you know that for a country to grow its economy, it needs a singular currency so the proletariat doesn't get confused. You've been able to convince the largest companies to use the national currency, but rogue stragglers remain. What do you do?
Tell them they can either use the currency or get the hell out.
It's a raw deal, but it's one the social game companies can't decline. They're trapped within Facebook for the same reason the rest of us are -- it's still the largest social media site in the world, which means it's also the most powerful. Facebook knows it can force them to pay taxes because there are no other places to earn the kind of money they'll earn within Facebook.
Facebook, already a technological and cultural hegemon, is becoming an economic one as well. A key feature of Facebook's decree is that developers can still use their own currencies; they'll just have to peg the local currency to Facebook Credits.
This, too, should sound familiar. Plenty of foundering countries peg their currencies to the dollar or Euro to help stabilize their economy and encourage trade. Two differences of note:
1. Foreign currencies get pegged to a hegemon's through a de facto process. Facebook's Credits scheme is de jure.
2. Facebook is still forcing the developers to pay taxes, something that, say, Saudi Arabia, doesn't (directly) pay to the U.S.
All of this leads us back to the 30% fee/tax, something that should also sound familiar for another tech hegemon. Apple (AAPL) has established just as strong of a hold on its app market as Facebook's, and largely for the same reasons: it has a critical mass of users, an easy payment system that users trust, and a rule that developers must agree to use Apple's storefront to sell its apps on iPhones, iPods, and iPads. Apple skips the step of translating dollars into its own specialized currency, but the mentality is the same. If a company is going to operate within our borders, they're going to pay us for the privilege.
So to understand what this means for Facebook's future, let's look to the future of Apple. Along with Facebook's announcement this week came an expected and reliable report that the next generation of iPhones will act as credit cards, using iTunes accounts to make all sorts of payments that have nothing to do with iTunes.
If iPhones become credit cards, what's to prevent Facebook from becoming PayPal? Paying friends back online; buying goods from vendors; wiring money as soon as it's needed. That's PayPal, but there's no reason it can't become Facebook, and there's no reason Facebook, with its social features, wouldn't be a better at it.
For that to happen, Facebook Credits has to reach a critical mass. And the only way for Facebook to ensure that happens? By getting its citizens to adopt its currency.
Tuesday, January 11, 2011
CNNFN: Interview with Jack Bogle
From the editors of Money Magazine as an Investor's Guide 2011 feature, this interview by Walter Updegrave with Jack Bogle was recently added to Money.CNN.com on December 31, 2010. It got quite a bit of attention for its headline/one-quote summary "This is the Most Difficult Time to Invest." I am not sure the case was made to warrant that headline, at least not in what was included on the website (albeit, I invest in mutual funds instead of individual stocks, so by that token, cookie-cutter stock selections might be the crux of the quote and I just cannot empathize), but I truly have the utmost respect for both men and, alongside Mo Ansari, I doubt there are three men who have had more influence on my financial mindset (outside of family).
It was a good, quick read, and I have a feeling that I may reference it in my own future entries, so I wanted to include it here.
(MONEY Magazine) -- Great careers in investing often end in tears. A fund manager may run up a string of winning years and then blow it all on one bold bet.
In 1975, Jack Bogle made his own risky move, launching the fund known today as Vanguard 500. The premise was simple but radical: Instead of chasing returns in the latest hot sector -- or trying to pick the unloved stocks that the market will embrace tomorrow -- just buy every blue-chip stock on the market and pay as little as possible to the middlemen.
The venture paid off.
Vanguard, which is owned by its funds' shareholders, in 2010 became the largest mutual fund manager in the country. And the firm's flagship indexers -- 500 and Total Stock -- have both outperformed more than 60% of their peers over 15 years.
Bogle, now 81, retired as Vanguard's senior chairman in 2000, but he's remained a leading advocate for small investors and tough critic of his own industry. (Some of his broadsides are collected in his new book Don't Count on It!)
Even as indexing has triumphed, Bogle says, Wall Street has become more hazardous for individuals trying to build their wealth and save for retirement. "This is the most difficult time to invest in my career," he tells MONEY senior editor Walter Updegrave.
An edited version of their conversation follows.
Why do you say that this is the most difficult time to invest in your entire career?
Well, just look at the dividend yields stocks are offering. We almost don't talk about yields in equities anymore, but yields are a pretty firm anchor for returns. I remember in 1974 writing an annual report saying you really can't go wrong when stocks are yielding 6.5%. Unbelievable!
It's a bad period for this philosophy. In 2008 we had one of the largest cuts in dividends in the history of the S&P 500. Now the dividends don't seem to be coming back, even though the earnings have.
What are the corporations trying to tell us? I don't know. Maybe they're trying to tell you that these earnings are phony, and we don't have money to pay you dividends.
Phony how?
Corporations play games with earnings. I just don't believe them. Operating earnings are always higher than reported earnings after write-offs, because corporations are always making investment decisions that are bad. They always have write-offs and tell us they're "nonrecurring." Except they recur year after year after year.
So what does today's average dividend yield of 2% or so say about future returns?
Our economy grows at about 5% before inflation. So I think we can assume that the economy grows at no more than around 5% a year over the next 10 years, and corporate earnings should grow at about the same rate. Add in the dividend, and you can expect the investment return on stocks to be close to 7% or perhaps 8%. [The long-term return on stocks has been 10%.]
That's if things don't fall totally apart, and I don't think there's any predicting that. I think there's at least a 1-in-15 chance that we'll face even more serious economic problems.
What about bonds?
That's the biggest problem today: There's nowhere to hide. Bond yields at roughly 3% are so poor it's hard to believe. I wouldn't call it a bubble, though, because if you hold for 10 years you will get that 3%.
So what should investors do?
First, don't reach for more than the market return. You could try leverage, or buying commodities and gold. And maybe you'll do well -- but who really knows?
Those alternative investments have no internal return. They are 100% speculation. You are speculating you can sell to someone for more than you paid. They're like stocks that pay you no dividends and offer no earnings growth.
The second thing is to try to give the lowest possible share of what you are going to earn to Wall Street. And that of course means going with the lowest cost.
Those would be index funds. Critics of indexing point to the past decade, when stock index funds like Vanguard 500 have barely broken even. Why would I buy a fund that goes down right along with the market?
That's what all mutual funds do. When the S&P went down 37% in the crash, the average equity fund was down 39%, the average international fund was down 45%, and the average emerging-market fund was down 54%. If you don't want funds that fall with the market, why would you buy any of them?
Index investing assumes markets are rational and "efficient" -- meaning prices reflect everything the market knows. But hasn't the financial crisis taught us that markets can act irrationally?
You don't need the efficient-market theory to justify indexing. Indexing wins whether markets are efficient or inefficient. In an inefficient market, a good manager may be able to win by five percentage points a year over a decade.
But by definition, a bad manager must lose by the same amount. It all has to average out. So even if the market is very inefficient, the index will still capture your share of the market return.
So I don't rely on the efficient-markets hypothesis. I go by the "cost matters" hypothesis: Whatever the market returns, on average you will beat your rivals if you lower your costs. And that's what index funds do. I know I can sound like a Johnny One Note on this, but somebody, please tell me that I'm wrong.
But cost matters only if I'm getting the average return. What about the investors who can do better?
Well, if you're not indexing, you've got problems. First, a stock selection problem -- maybe you'll pick good stocks, maybe you won't. Then a market sector problem -- will growth do better than value? Finally a manager selection problem, which is the worst because the only way people have found to pick good managers is to look at past performance. That's not a reliable gauge.
Indexing has become even more popular lately thanks to exchange-traded funds. Good thing?
There's no denying ETFs are one of the great marketing ideas of this decade. The question is whether they're a good investment idea. They give you the ability to trade all day long in real time.
But if you want to trade anything frequently -- all the market sectors, different countries, portfolios that offer three times as much on the upside or the downside -- that's turning investing into a casino.
I like the Vanguard Total Stock Market mutual fund, but if you want to buy the ETF version of it and hold it for a long, long time, up to forever, how could I argue against that?
The trouble is, when you buy something for the short term, or something that's concentrated as distinct from something diversified, that's really speculating, which is a loser's game.
Besides the lousy stock and bond yields, how else has investing changed over your 60-year career?
We've moved from the wisdom of long-term investing to the folly of short-term speculation. When I wrote my senior thesis in college, turnover in the stock exchange [a measure of how frequently shares are traded] was about 20% a year, and now it's so high there's not really any point in counting it.
Mutual funds had a redemption rate of 8%, meaning investors had a holding period of 12 years. Now it's a three-year holding period. And we have this appalling thing where 40% of the mutual funds that were in business 10 years ago are gone.
How the heck can you capitalize on the wisdom of long-term investing when the odds are almost one out of two your fund won't be here at the end of the decade?
But can investors afford to just buy and hold their investments? Sometimes certain sectors, or the whole market, can seem wildly overvalued. Let's just think about the stock market for a moment.
We're all buy-and-hold investors because collectively we all own the market. So, as a group, investors are buying and holding. The only question is: Can I out-trade the other guy? Am I really smarter than the guy I'm selling Microsoft to or planning to buy it from?
Well, one of you is going to prove to be smarter. And I'd say that was a flip of the coin -- except for the cost of trading.
And how many funds do you think someone needs in this buy-and-hold stock and bond portfolio?
Well, the answer is so counterintuitive to the way people think. You can do it with one fund, a balanced fund that's 60% stocks and 40% bonds.
Another simple strategy is a target-date fund, in which you get more bond exposure as you get older. But you don't need to put your money into eight different mutual funds.
You didn't mention international funds. You don't need them, but if you think you do, invest up to 20% in international index funds. My reasoning: The S&P 500 is dominated by international companies.
So you're already international. I think it's always the best bet that the U.S., foreign developed markets, and emerging markets will have the same return over the long run. Because markets aren't stupid. So if emerging markets have all this potential we read about, that's in today's price.
You often cite a pretty conservative rule of thumb: Own your age in bonds, meaning 60% of your portfolio if you're 60 years old. Is that still true, given the low yields?
It's a very rough guide just to start you thinking about the problem. When you retire, you start to rely on investment capital rather than your human capital. And you've got more wealth at stake and less time to recoup it, which means you're going to take these fluctuations more seriously.
I think I can speak for other people in their antique years -- you get more nervous. The bond position means you're less sensitive to behavioral factors. It gives you an anchor to windward.
It was a good, quick read, and I have a feeling that I may reference it in my own future entries, so I wanted to include it here.
(MONEY Magazine) -- Great careers in investing often end in tears. A fund manager may run up a string of winning years and then blow it all on one bold bet.
In 1975, Jack Bogle made his own risky move, launching the fund known today as Vanguard 500. The premise was simple but radical: Instead of chasing returns in the latest hot sector -- or trying to pick the unloved stocks that the market will embrace tomorrow -- just buy every blue-chip stock on the market and pay as little as possible to the middlemen.
The venture paid off.
Vanguard, which is owned by its funds' shareholders, in 2010 became the largest mutual fund manager in the country. And the firm's flagship indexers -- 500 and Total Stock -- have both outperformed more than 60% of their peers over 15 years.
Bogle, now 81, retired as Vanguard's senior chairman in 2000, but he's remained a leading advocate for small investors and tough critic of his own industry. (Some of his broadsides are collected in his new book Don't Count on It!)
Even as indexing has triumphed, Bogle says, Wall Street has become more hazardous for individuals trying to build their wealth and save for retirement. "This is the most difficult time to invest in my career," he tells MONEY senior editor Walter Updegrave.
An edited version of their conversation follows.
Why do you say that this is the most difficult time to invest in your entire career?
Well, just look at the dividend yields stocks are offering. We almost don't talk about yields in equities anymore, but yields are a pretty firm anchor for returns. I remember in 1974 writing an annual report saying you really can't go wrong when stocks are yielding 6.5%. Unbelievable!
It's a bad period for this philosophy. In 2008 we had one of the largest cuts in dividends in the history of the S&P 500. Now the dividends don't seem to be coming back, even though the earnings have.
What are the corporations trying to tell us? I don't know. Maybe they're trying to tell you that these earnings are phony, and we don't have money to pay you dividends.
Phony how?
Corporations play games with earnings. I just don't believe them. Operating earnings are always higher than reported earnings after write-offs, because corporations are always making investment decisions that are bad. They always have write-offs and tell us they're "nonrecurring." Except they recur year after year after year.
So what does today's average dividend yield of 2% or so say about future returns?
Our economy grows at about 5% before inflation. So I think we can assume that the economy grows at no more than around 5% a year over the next 10 years, and corporate earnings should grow at about the same rate. Add in the dividend, and you can expect the investment return on stocks to be close to 7% or perhaps 8%. [The long-term return on stocks has been 10%.]
That's if things don't fall totally apart, and I don't think there's any predicting that. I think there's at least a 1-in-15 chance that we'll face even more serious economic problems.
What about bonds?
That's the biggest problem today: There's nowhere to hide. Bond yields at roughly 3% are so poor it's hard to believe. I wouldn't call it a bubble, though, because if you hold for 10 years you will get that 3%.
So what should investors do?
First, don't reach for more than the market return. You could try leverage, or buying commodities and gold. And maybe you'll do well -- but who really knows?
Those alternative investments have no internal return. They are 100% speculation. You are speculating you can sell to someone for more than you paid. They're like stocks that pay you no dividends and offer no earnings growth.
The second thing is to try to give the lowest possible share of what you are going to earn to Wall Street. And that of course means going with the lowest cost.
Those would be index funds. Critics of indexing point to the past decade, when stock index funds like Vanguard 500 have barely broken even. Why would I buy a fund that goes down right along with the market?
That's what all mutual funds do. When the S&P went down 37% in the crash, the average equity fund was down 39%, the average international fund was down 45%, and the average emerging-market fund was down 54%. If you don't want funds that fall with the market, why would you buy any of them?
Index investing assumes markets are rational and "efficient" -- meaning prices reflect everything the market knows. But hasn't the financial crisis taught us that markets can act irrationally?
You don't need the efficient-market theory to justify indexing. Indexing wins whether markets are efficient or inefficient. In an inefficient market, a good manager may be able to win by five percentage points a year over a decade.
But by definition, a bad manager must lose by the same amount. It all has to average out. So even if the market is very inefficient, the index will still capture your share of the market return.
So I don't rely on the efficient-markets hypothesis. I go by the "cost matters" hypothesis: Whatever the market returns, on average you will beat your rivals if you lower your costs. And that's what index funds do. I know I can sound like a Johnny One Note on this, but somebody, please tell me that I'm wrong.
But cost matters only if I'm getting the average return. What about the investors who can do better?
Well, if you're not indexing, you've got problems. First, a stock selection problem -- maybe you'll pick good stocks, maybe you won't. Then a market sector problem -- will growth do better than value? Finally a manager selection problem, which is the worst because the only way people have found to pick good managers is to look at past performance. That's not a reliable gauge.
Indexing has become even more popular lately thanks to exchange-traded funds. Good thing?
There's no denying ETFs are one of the great marketing ideas of this decade. The question is whether they're a good investment idea. They give you the ability to trade all day long in real time.
But if you want to trade anything frequently -- all the market sectors, different countries, portfolios that offer three times as much on the upside or the downside -- that's turning investing into a casino.
I like the Vanguard Total Stock Market mutual fund, but if you want to buy the ETF version of it and hold it for a long, long time, up to forever, how could I argue against that?
The trouble is, when you buy something for the short term, or something that's concentrated as distinct from something diversified, that's really speculating, which is a loser's game.
Besides the lousy stock and bond yields, how else has investing changed over your 60-year career?
We've moved from the wisdom of long-term investing to the folly of short-term speculation. When I wrote my senior thesis in college, turnover in the stock exchange [a measure of how frequently shares are traded] was about 20% a year, and now it's so high there's not really any point in counting it.
Mutual funds had a redemption rate of 8%, meaning investors had a holding period of 12 years. Now it's a three-year holding period. And we have this appalling thing where 40% of the mutual funds that were in business 10 years ago are gone.
How the heck can you capitalize on the wisdom of long-term investing when the odds are almost one out of two your fund won't be here at the end of the decade?
But can investors afford to just buy and hold their investments? Sometimes certain sectors, or the whole market, can seem wildly overvalued. Let's just think about the stock market for a moment.
We're all buy-and-hold investors because collectively we all own the market. So, as a group, investors are buying and holding. The only question is: Can I out-trade the other guy? Am I really smarter than the guy I'm selling Microsoft to or planning to buy it from?
Well, one of you is going to prove to be smarter. And I'd say that was a flip of the coin -- except for the cost of trading.
And how many funds do you think someone needs in this buy-and-hold stock and bond portfolio?
Well, the answer is so counterintuitive to the way people think. You can do it with one fund, a balanced fund that's 60% stocks and 40% bonds.
Another simple strategy is a target-date fund, in which you get more bond exposure as you get older. But you don't need to put your money into eight different mutual funds.
You didn't mention international funds. You don't need them, but if you think you do, invest up to 20% in international index funds. My reasoning: The S&P 500 is dominated by international companies.
So you're already international. I think it's always the best bet that the U.S., foreign developed markets, and emerging markets will have the same return over the long run. Because markets aren't stupid. So if emerging markets have all this potential we read about, that's in today's price.
You often cite a pretty conservative rule of thumb: Own your age in bonds, meaning 60% of your portfolio if you're 60 years old. Is that still true, given the low yields?
It's a very rough guide just to start you thinking about the problem. When you retire, you start to rely on investment capital rather than your human capital. And you've got more wealth at stake and less time to recoup it, which means you're going to take these fluctuations more seriously.
I think I can speak for other people in their antique years -- you get more nervous. The bond position means you're less sensitive to behavioral factors. It gives you an anchor to windward.
Stock-picking pros aren't stupid. They're just expensive.
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