2013 Preview: Happy Last Year!

It's the end of the year as we know it, and I feel fine.

Rightly so with the DOW closing at 13,105.37, which was up about 7.25% (a bit off what I had predicted) after a highly volatile year, which saw the closer-than-expected re-election of President Obama and ended among fiscal cliff scares.  Even though the markets closed up, I admittedly expected a much higher gain than we actually enjoyed  (more along the lines of the S&P 500, which closed up 13%).  Lots of factors came into play that I had not anticipated, but in the end, the markets are just as unpredictable as always.  Most logic behind the market moves is superimposed in hindsight.  It would be like a "lottery analyst" providing reasoning behind the randomly generated winning numbers.

That said, predicting the market movements for the upcoming year is simply fun, and I'm not going to miss out on any fun this week!

I was heavily weighing the likelihood that the markets will decline in 2013.  When the market tanked in 2008 before bottoming out in February 2009 at 6,500, I said that it would fully recover in 7 years (snapping previous "fastest recovery"-time in half).  That was only four years ago, so if the markets went up another 10% in 2013, then it would reach a new high above 14,500.  It sounds unlikely, and unbelievable, and next to impossible.  It sounds like the words of a dreamer.

Then, there's reality.  The all-time high for the market was set over five years ago now.  In that short span, the markets went from 14,164 on October 9, 2007, to 6500 in February 2009 and back to 13,610 on October 5, 2012.  Why?  There's a different answer for each different investor, but when it gets right down to the facts, pulling money out of the stock market is a statement that there are better earning opportunities for money elsewhere.  Where?  When money comes out of stocks, then it will most likely go to bonds or money markets.  The return on money markets right now rounds down to $0 and the near-future of bonds is even more sketchy than that of stocks.  Where can that current money in the stock market (and new money coming in) go?  There are not many better options outside of stocks, so behind that reasoning, I expect the markets will post a positive return of less than 10% in 2013.

This situation almost begs the question when will money markets and other stable value options start offering significant returns again.  It stands to reason when the stock markets reach new highs will be the most likely time, but then again, the stock market retracted so quickly and recovered faster than expected, so its volatility has never been higher.  Simply offering a secured investment option may be luring enough for investors looking to avoid stocks for as long as the markets are this volatile.   If that observation has enough truth to it, then the answer is that money markets will not offer significant percent returns until the market is less volatile, and as great as it was for stockholders when the markets double in three years, there's no question that the huge spike was as volatile as the sharp fall.  Many analysts (perhaps the majority at this point) will admit that the markets are extremely volatile with few signs of gaining stability.

That said, the money markets may no longer need to offer a return on investment so long as they are guaranteeing a safe return of your investment.  At this point, it stands to reason, but the thought of it is still quite mind-blowing.  For all we've gained with the changes since the Internet ushered in the Information Age, there is plenty we have lost unexpectedly (sometimes, noticeably).  Getting 3-5% on a money market may be one of the casualties that few people notice.

Buy The Next McDonald's (MSN Money)

Buy the next McDonald's
The burger giant has delivered for investors for years, but there are signs its growth is stalling. Here are 5 competitors that could grow faster -- and the 2 best bets among them.
by Charley Blaine, MSN Money|11/27/2012 5:15 PM ET


McDonald's. The name means burgers and fries, Chicken McNuggets and Egg McMuffins -- to almost everyone in the world.

McDonald's (MCD -0.15%, news) also means a stock that jumped 148% in value between the end of 1999 and 2011, delivering for investors even in the worst of times. It was one of just two stocks in the Dow Jones Industrial Average ($INDU -0.56%) that finished the horrible year of 2008 with a gain.

But the company has hit a wall in 2012. Consumers are wary in a difficult economy. And McDonald's is so big that it's hard to find enough growth to move the needle. That makes it time for investors to look for companies with similar positives and lots more room to grow -- giving them the potential to outperform the Golden Arches over the next few years.

I've found five with that potential: Jack in the Box (JACK +0.54%, news), Sonic (SONC -0.95%, news), Yum Brands (YUM +0.24%, news), Chipotle Mexican Grill (CMG +0.78%, news) and Red Robin Gourmet Burgers (RRGB +1.20%, news). First we'll look at why McDonald's works -- then ask which of these five is most likely to grow into this "next McDonald's."

Why McDonald's is unique
First, we have to acknowledge McDonald's amazing position. The company has a market value of $84.4 billion, the most of any fast-food company and larger than its three largest competitors -- Starbucks (SBUX -0.78%, news), Yum Brands and Chipotle Mexican Grill -- combined.

Some 69 million people a day buy a meal at any of 34,000 McDonald's restaurants in 119 countries -- nearly 48,000 sales a minute. In 2011, company-owned and franchised restaurants generated nearly $86 billion in food sales.

The company has boosted net income nearly 14% a year for the past five years. Dividends have grown 20% a year for five years. If you're happy with a reliable stock paying a 3.6% dividend yield, it's still a solid stock to own.

Sure, performance has been stagnant of late, with Europe a particular problem. The stock is down 14% this year, third-worst among the 30 Dow stocks. Same-store sales fell 1.8% in October, the first monthly decline in nine years. But McDonald's has worked through downturns before. In 2003, for example, shares dipped to the $14 range. They were a steal at that price: They now go for $86.

If you'd bought 100 shares of McDonald's when it went public in 1965 at $22.50 a share and didn't sell through 12 splits, your stake would have grown to 74,358 shares worth about $6.41 million. That's a gain of roughly 285,000%, or 18.4% a year. The total return is larger if you include dividends.

There are three keys to McDonald's success:

Foolproof formula for franchisees. McDonald's has achieved its bulk -- OK, prominence -- by providing its franchisees a nearly foolproof formula for success. Sites are carefully chosen and usually owned by the company, which gets a cut of rents as well as sales.

Menus and preparation processes are standardized. A vast network of suppliers sells the raw ingredients following strict standards.

The assembly-line system of food preparation -- first developed by founders Richard and Maurice McDonald in the 1940s and expanded by Ray Kroc, who started as a franchisee and later bought out the brothers -- ensures a Big Mac in Tours, France, is the same as one in Montgomery, Ala.,

Evolving with the times. Success brings envy, controversy -- and evolution.

In the 1990s, its franchisees, who own 81% of the restaurants, complained that the company was selling too many franchises. McDonald's has been hit with repeated charges that mass consumption of Big Macs, french fries and related fare from other chains was responsible for growing obesity rates. And to social critics abroad, its omnipresent, standardized fare has represented the worst in American culture.

But Mickey D's has adapted. Existing franchises are being modernized with renovated or rebuilt stores, some 900 in 2011 and 1,000 expected this year. To answer dietary critics, it has broadened its menus to offer wraps, salads and fruit; it now sells more chicken sandwiches than burgers. Because McDonald's saw Starbucks' rapid growth as a threat, it now offers the McCafé line of gourmet coffees. And it bends its menus overseas to local tastes.

Financial strength. McDonald's backs up its franchisees with the cash to make improvements to stores and, as important, amazing marketing. It is one of the 15 largest advertisers in the world, with a $2.3 billion advertising budget that dwarfs those of Subway, Burger King (BKW +1.54%, news) and Wendy's (WEN +0.21%, news).

5 competitors, 5 strategies
The "next McDonald's" we're looking for won't look exactly like the one we have. Many of its rivals offer a different slant on fast food -- just as McDonald's reinvented fast food and franchising. One trend that's been growing in recent years is fast casual. You enter and order your food, which is prepared while you wait.

The financial game plans are different. Yum has a small dividend; Sonic, Jack in the Box, Chipotle and Red Robin don't offer dividends as yet.

Here's a look at our five contenders:

Yum Brands (YUM +0.24%, news). While McDonald's shares are down this year, Yum's shares are up about 22%. The company owns the KFC, Taco Bell and Pizza Hut chains and is making a huge and, so far, successful effort to be a major player in China. It has 38,000 restaurants already, mostly franchised, and is betting that its mix of chicken, Mexican food and pizza will succeed in Asia. There's ample room for growth, and while each brand has had problems over the years, all have improved in terms of image and quality.

Still, those brands aren't exactly new and different, so they could be a tough sell if consumers say "been there, done that." If China's economy truly falls apart, so will Yum shares.

Jack in the Box (JACK +0.54%, news). A storied name, Jack remains a small, mostly West Coast chain. The stock has been a pretty good performer, up 20% to $25.10 this year, but it has fallen 12.5% since mid-September when the overall market peaked. It has two lines of business -- Jack in the Box and the Qdoba chain, which offers fast-casual Mexican food.

Like Yum, it faces a potentially nagging problem in that its brand is already well-known. But the smaller footprint eases that worry.

Plus, the company has a lot of real estate, and, wrote Charles Sizemore of the Sizemore Investment Letter recently, Qdoba has the potential to grow quickly, capitalizing on consumer demands for fresher foods.

Sonic (SONC -0.95%, news). A classic drive-in burger chain, complete with carhops, the Oklahoma City company is smallish: only 3,500 stores, 88% franchise-owned. Revenue is less than $600 million a year. The stock, however, has been a winner so far this year, up nearly 38%. It's been digging itself out of a hole caused by the recession and a reputation as the poor man's McDonald's. It has growth prospects in the Northeast and northern Midwest and on the West Coast.

A warning, though: Volatility goes with these shares. They fell 74% between November 2007 and November 2008. They've ranged from $6.50 to $12 or so ever since. Analyst Paul Westra of Cowen & Co. thinks the chain is more vulnerable to the economy than others. Size is an issue. It also has a heavy 8-to-1 debt-to-equity ratio.

Chipotle Mexican Grill (CMG +0.78%, news). This fast-casual chain offers burritos and tacos. It grew from 16 restaurants when McDonald's bought into the company in 1998 to more than 500 when McDonald's sold its position in 2006. It has 1,200 locations in the United States, Canada and the United Kingdom. It is just starting to roll out a new concept: ShopHouse Southeast Asian Kitchen, featuring serving bowls and banh mi sandwiches

Here are the rubs:

• The company's comparable-store sales were up only 4.8% in the third quarter, compared with 8.3% for the first nine months and 11.3% a year ago.
• The company expects less robust growth for the fourth quarter and flat-to-low single-digit growth in 2013.

The stock jumped 1,020% between November 2008 and early April -- but has fallen 41% to as low as $233 before rebounding back to $275. It has lots of cash to finance new growth: nearly $410 million at the end of the third quarter. It has no debt. If you're interested, watch the stock's chart carefully for a bottom -- you want to go in at a relatively low price.

There are plenty of growth opportunities in Europe and Canada for Chipotle stores. It may get an additional boost if the Asian kitchen business works.

Red Robin Gourmet Burgers (RRGB +1.20%, news). Founded in Seattle, the Denver-based company has 463 full-service restaurants (331 are company-owned) concentrating on burgers and a few other entrees, plenty of fries and a full-service bar. On a Friday night, you'll find families celebrating birthdays on one side of the restaurant and couples enjoying a modestly priced night out on other.

The company saw revenue slip 3.2% in fiscal 2008 as the financial crisis hit and profit slid. Business rebounded in 2010 and 2011 and looks poised to finish 2012 with revenue approaching $950 million. The stock is up nearly 13% this year and up 250% from its bottom in November 2008.

Red Robin has lots of room to grow. Most of its restaurants are in the Western United States, British Columbia and Alberta. The company is carefully expanding into the Southeast and into the Northeast.

It is also experimenting with a fast-casual service concept. A number of analysts are watching to see how its Red Robin Burger Works concept fares. These basically offer burgers, fries and desserts that are cooked on the spot, much like Qdoba or Chipotle. They require less space to operate and are able to serve customers quickly. Red Robin has opened five -- four in the Denver area and a fifth near Ohio State University in Columbus. Four more are expected to open in the fiscal fourth quarter.

Take Jack in the Box and Red Robin
McDonald's has three advantages over all these companies: Size, brand and a 3.6% dividend. The cautious investor will still find these shares attractive. The company, however, does face increasingly intense competition from just about everyone from Burger King and Wendy's to Chipotle, Panera Bread (PNRA +0.06%, news) and Starbucks, Lazard Capital analyst Matthew DiFrisco wrote Monday as he cut his rating on the stock to "neutral" from "buy."

So if you're looking for equally solid returns and better growth in the next few years, the best bets look like Jack in the Box and, especially, Red Robin. The other three have bigger question marks to go with their possibilities.

Jack in the Box is in the midst of what appears to be a successful turnaround, with a new brand -- Qdoba -- providing additional growth. Red Robin looks to have a solid strategy that appears to weather economic stress well, and its Burger Works looks to be an innovation with potential.

Burrito Battle: Taco Bell vs. Chipotle (MSN Money)

Burrito battle: Taco Bell vs. Chipotle
The success of upscale offerings from a celebrity chef has Taco Bell eating into the upstart's business. That's showing up in stock prices as once-hot Chipotle faces tough times.
by Michael Brush, MSN Money|12/4/2012 6:45 PM ET

To most people, burritos are just a tasty lunch treat.

But to a couple of lunchtime giants, burritos are the weapon of choice in a fierce fast-food battle.

The battle broke out last summer when Taco Bell, a division of Yum Brands (YUM +0.28%, news), rolled out its new Cantina Bell menu.

Developed by celebrity chef Lorena Garcia, of Bravo's Top Chef Masters fame, the Cantina menu features a premium burrito with black beans, cilantro rice and marinated chicken or beef for under $5, plus new sides like corn salsa. (Search for details on Cantina Bell menus on Bing.)

Based on recent company numbers, Taco Bell clearly scored a win with these upscale offerings. And it's no wonder. They are an unabashed imitation of the extremely popular offerings of Chipotle Mexican Grill (CMG +0.65%, news), known for upscale burritos packed with fresh ingredients and hormone-free meat.

Yum Brands executives have no problem admitting they borrowed a key insight from Chipotle -- that customers will pay more for better quality, fast-casual Mexican food. "That's what Taco Bell can deliver, and at two-thirds the price of our fast-casual competitors," CEO David Novak said on a recent earnings call.

Now, this victory is probably not the only reason Yum's stock is up 5% since July 1, despite a drop last week, while Chipotle shares -- once hotter than jalapeños -- have fallen some 30%. But in the fiercely competitive world of fast food, consumer buzz is critical. And Taco Bell has it right now.

Chipotle's problem: A 'resurgent' Taco Bell
Many analysts -- and Chipotle itself -- maintain Taco Bell's new burritos are no threat to Chipotle, because their customers are so different. The customers who buy Chipotle's burritos, at $7 or so each, typically make more money. They appreciate Chipotle's ambience and careful sourcing of fresh ingredients, as a lifestyle choice.

Theoretically, at least, this is supposed to prevent them from crossing over to Taco Bell, with its more downscale, run-for-the-border, midnight-munchie reputation. There's also a been there, done that issue with Taco Bell, which can trace its history to 1946 (it went public in 1970); Chipotle got started in 1993 and is still fresh to many people, as it's still rolling out lots stores each year to new regions."We don't see Taco Bell as being a threat at all," Chipotle spokesman Chris Arnold told The Wall Street Journal in early October. "There's a lot more to what we do than grilled chicken and corn salsa, and we believe customers see the difference."

But legendary hedge fund manager David Einhorn disagrees. Einhorn, of course, is well known for highly successful negative bets against Green Mountain Coffee Roasters (GMCR -0.99%, news) and Lehman Brothers before each tanked. At a New York City investor conference on Oct. 2, the Greenlight Capital hedge fund manager laid out his case against Chipotle, which he's had negative bets against this year.

The bottom line: A "resurgent" Taco Bell endangers once-hot Chipotle.

Einhorn says a survey his hedge fund conducted found that Chipotle and Taco Bell customers actually don't see much difference between the two chains. And his survey found that 75% of Chipotle customers go to Taco Bell. "Taco Bell has started to eat Chipotle's lunch," he said at the conference. "Less long exposure to Chipotle stock is a good idea."

Though fast-food experts -- and Chipotle -- dismissed Einhorn at the time, his case suddenly seemed to make a lot more sense on Oct. 19, when Chipotle announced a slowdown in sales that tanked its stock.

On the earnings call, Chipotle managers denied the slowdown had anything to do with Taco Bell.

"There was a lot of noise during the quarter about somebody taking market share away from us," said co-CEO Montgomery Moran. "We're not seeing any kind of loss whatsoever in our transactions moving from us to any other competitor."

But I think Chipotle and the analysts may be wrong, and that Einhorn is on to something. Here's why.

Driving diners loco
First, Chipotle's explanation that a weak economy caused its sales slowdown doesn't ring true, since the economy was weak a year ago when Chipotle growth was going gangbusters.

But more important, consider some interesting results from a survey of fast-food diners conducted by Goldman Sachs in late September -- almost three months after Taco Bell's new Cantina Bell burritos were launched.

The survey found that Chipotle's "brand equity" score among consumers fell sharply to 65.8 from 70.4. Meanwhile, Taco Bell's score rose to 64.8 from 62.1.

Two other insights stand out. One is that Chipotle's score fell "meaningfully" across all demographics. This seems to confirm Einhorn's findings that well-heeled customers who are supposedly loyal to Chipotle may have no problem defecting.

Second, Taco Bell is clearly on a roll in coming out with innovative dishes that customers love. Its brand-equity score was a lowly 58 a year ago. (All fast-food joints score in a range of 53 to 71.)

Taco Bell came out with a big hit in March -- it's Doritos Locos Tacos, which have shells made of Nacho Cheese Doritos. The chain sold an astonishing 100 million of these tacos in the first 10 weeks. And now the new Cantina Bell menu is obviously a hit. Taco Bell sales at stores open more than a year grew by 7% in the third quarter. In contrast, Chipotle's growth was 4.8%.

None of this proves Chipotle customers have turned to Taco Bell. But the ratings changes in the Goldman Sachs survey coincide with a sharp decline in growth at Chipotle and an increase in growth at Taco Bell, suggesting that something like this is going on.

Plus Goldman Sachs says Taco Bell's growth was driven by an increase in traffic, and not just increased spending and visits by regulars. "Taco Bell is now attracting more new customers than either Chipotle or Qdoba, its primary Mexican peers," concluded Goldman Sachs analyst Michael Kelter. The number of people saying they've eaten at Taco Bell rose sharply this year, while it declined at Chipotle, the survey found.

Taco Bell's 2012 success is part of a larger trend. Over the past five years, Taco Bell customer satisfaction has jumped sharply, according to American Customer Satisfaction Index surveys. "Their improvement over the last five years is the biggest in the industry," says ACSI director David VanAmburg. "It's pretty impressive."

Chipotle's burrito bummer
None of this is good news for Chipotle, which faces a rough outlook for two reasons:

* The Goldman Sachs survey found that restaurants are at the top of the list of things consumers are cutting out, and that when they do eat out, price is the one of the main factors in deciding where to go. This plays into the Taco Bell strategy of offering Chipotle-quality Mexican food, but at a lower price
* Emboldened by its success, Taco Bell is not done taking shots at Chipotle with upscale Mexican. Chef Garcia is developing new burritos, a roasted tomato and garlic salsa and new steak offerings, as well as continued work as spokeswoman for the chain.

Yummy sales
Garcia's success so far has been much-needed good news for Yum Brands. True, Taco Bells make up only about a third of the U.S. fast food joints run by Yum, which also operates Pizza Hut and KFC. And U.S. sales account for only 26% of operating earnings at Yum Brands, which has a big presence around the world, especially in China.

But Taco Bell's success matters because it moves the needle.

Indeed, given the surprising China slowdown that Yum just announced, the Taco Bell burrito wars are now more important than ever for the company. On Nov. 29, Yum surprised investors by saying China sales will contract 4% in the fourth quarter, compared with 21% growth a year ago. The stock fell from above $74 a share to below $68. Yum now expects to report 6% same-store sales growth in China for this year. Thus Taco Bell's 7% growth in the third quarter was not only better than growth at Pizza Hut (6%) and KFC (4%), but it's also doing better than China, once considered the sweet spot for the company.

The key investing takeaways
Once the dust settles in the current burrito battle, it will be clear that both companies still have solid potential.

Chipotle remains a great fast-food concept, with plenty of room to open new stores. It plans to open 165 to 180 restaurants next year, on a base of about 1,300.

"If you have a concept that has proven out and you can just keep opening stores with a rate of return that is reliable, that is a very compelling growth story," says Sarah Henry, an analyst for Manulife Asset Management. Chipotle has also hinted it may take a shot back at Taco Bell by introducing drive-through stores, long a favored Taco Bell format. Plus Chipotle is expanding its approach, with its ShopHouse Southeast Asian Kitchen fast-food restaurants. In short, Chipotle stock may well lose more ground as the ongoing burrito wars play out. So you'll probably be able to buy it lower. But Chipotle is not out of the game.

At Yum, the sharp downturn in China is more of a mystery. But my guess is that as China's economic growth shores up, Yum will be OK. It too has plenty of room to grow by opening new stores in China.

"We very much like the China story," says Di Zhou, an equity research analyst for the Thornburg Value Fund (TVAFX -0.41%, news). One reason is that China has a population of 1.34 billion. "That is many mouths to feed." She says Yum has done a good job of adding local fare, such as soy milk, Chinese porridge and doughnuts, to its standard KFC chicken offerings.

Zhou also believes Yum will continue to benefit from China's growing middle class and ongoing urbanization. Morgan Stanley estimates that consumer spending in China will triple within a decade, which has got to be good news for Yum.

As investors wait for China growth to kick in again, Taco Bell's success in the U.S. burrito battle will continue to help support earnings, and Yum stock.

Fast-food stocks at slow-food prices
Neither of these stocks, however, will be hits with value investors looking for relatively low prices, even considering the recent stock declines.

Chipotle trades for 25 times its forward 12-month earnings. This gives it a price/earnings-to-growth ratio of 1.4. Developed by investing icon Peter Lynch, the PEG ratio adjusts a company's valuation for its growth rate. Generally, a PEG ratio above 1.5 makes a growth company look pretty fairly valued.

Yum Brands trades for 18.1 times forward earnings, and an even richer PEG ratio of 1.58.

In contrast, McDonald's (MCD -0.15%, news) trades for 10 times forward earnings and a PEG ratio of about 1.

These fairly rich valuations don't mean these stocks can't do well. They should, because of the bullish expansion potential. But Chipotle still may go lower because of the ongoing burrito battle, while Yum gets back on track and moves higher.

At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column. 

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.

CNNFN: Jack Bogle, Vanguard's $2.2 Trillion Man

Jack Bogle: Vanguard's $2.2 trillion man
There are many steps to managing your money wisely. A good way to start: a visit with the father of indexing, Vanguard's Jack Bogle.
By Andy Serwer, managing editor

FORTUNE -- What if your life's work could be measured by one simple number, and what if that number was 2.2 trillion? As in dollars. I walked into an upscale Midtown Manhattan restaurant looking for such a man. He was easy to spot. Not because he was oozing wealth from every pore and surrounded by an entourage -- but because he wasn't. Over there in the corner, he's the older fellow in a plain suit and a boring tie who looks a tad uncomfortable in a place that serves up Spanish Octopus a la Plancha, with sofrito, cocoa beans, marble potatoes, and serrano ham. (He would have a hamburger -- hold the pickled ramp dressing.)

John C. "Jack" Bogle, 83, didn't build Vanguard into one of the biggest companies in the world by sitting around eating fancy Spanish octopus. He's all about keeping things simple. And he's a fighter, a cantankerous iconoclast, and more than a bit of a zealot. He officially retired in '99 and hasn't been in the best of health for a while, but he still believes adamantly that conservative, low-cost index funds are the best way -- nay, the only way -- to invest. And now so, too, do millions of Vanguard customers around the world. They've invested $2.2 trillion in the house that Jack built from scratch 37 years ago.

This is the third time I've written about Vanguard in my career at Fortune. The first was in 1991, when the company had around $80 billion under management; then again in 2001, when it had $540 billion; and now, after it has quadrupled in size over the past 11 years. (I know, I'm a year behind schedule.) In that time Vanguard has quietly become one of the greatest business success stories of our time. And over the decades I've come to realize a thing or two about the company -- namely, that it is truly unique and seemingly inexorable. Vanguard has grown in every kind of market as enlightened investors beat a path to its door.

In case you don't know, here's how Vanguard works: The company sells low-cost mutual funds (primarily index funds) and ETFs directly to investors, thereby bypassing brokers and their markups and marketing fees. The most important distinction, though, is that Vanguard is able to operate with the lowest margins in the business because, like a mutual insurance company, it is owned by its customers. (In Vanguard's case: investors in its funds.) Of course Vanguard pays its managers and executives. But instead of paying out profits to an owner or shareholders, the company's gains are instead realized by lowering costs. Got it? Meaning Bogle has built Vanguard into a global behemoth and yet not become fabulously wealthy. Which is a big reason no one else has seen fit to create another Vanguard. To do so, you'd have to be a true believer. And not many people are.

Bogle has met me to talk about his new book, The Clash of the Cultures: Investment vs. Speculation, in which he eviscerates most investing practices and much of what happens on Wall Street. "I don't pay attention to what others say. I say what I think," he tells me, while warily eyeing my Fall Roasted Root Vegetable Salad with petite lettuce, goat cheese, duck confit, figs, apple, and carrot vinaigrette. "I don't know how to do otherwise." (I think he wants to say something about my salad, but Jack does have some limits.)

The fundamental principles that Jack has always emphasized, and still does -- getting diversified market exposure, not giving your profits away in fees -- are the building blocks of success for the average investor. There is a lot of sophisticated advice in this year's Investor's Guide. And all of it -- stock picks from elite managers, market insight from seasoned pros, tips on buying real estate in your IRA -- can help give you a boost. But that doesn't mean we should ever lose sight of the basic, commonsense approach that works for Vanguard.

As I help Jack hail a cab to take him to Penn Station (no Town Cars or limos for him) to catch his train back to Philadelphia, I realize that when you boil it down, his success is a result of the power of independent thinking. Jack has consistently gone his own way and made up his own mind. It's an important point to remember when considering how to invest. Very few of us have the same ability as Jack. We need help and advice. But you should always ask yourself, What do I really think about, say, Apple's stock (AAPL) or a particular bond fund? Does investing my money there make sense to me? You may not build quite what Jack has, but thinking a bit more like him is sure to help you succeed.

This story is from the December 24, 2012 issue of Fortune.

CNNFN: Bond Investors, Beware!

Bond Investors, Beware
By Kim Clark @Money December 3, 2012: 6:03 AM ET
(Money Magazine) -- As Chief Investment Officer of Vanguard, George U. "Gus" Sauter, 58, is responsible for a staggering amount of fund investors' money -- some $1.9 trillion.

More important, he's saved a lot of investors' money. Almost 60% of Vanguard's assets are in passively managed index funds, so Sauter's biggest job has been to pare costs so shareholders keep more of their return. (It may not be glamorous, but it has paid off in performance.)

Along the way, Sauter guided the company into a booming market for exchange-traded funds, the portfolios that can be traded like stocks.

His perch as top investor at the country's largest fund manager has also given him a sharp view of the big picture. And part of that picture today is that bond investors -- who added $27 billion to Vanguard funds alone so far this year -- may be in for a bumpy ride.

Sauter retires from Vanguard at the end of the year. He spoke with MONEY senior writer Kim Clark; their conversation has been edited.

In the past five years, we've had a crisis on Wall Street, wild volatility, and outflows from equity funds. Are investors losing faith?

We're worried about that. But we do not think the markets are broken. I can't recall too many periods in my 25 years here where we didn't experience volatility. The market was down 21% on Oct. 19, 1987. And then the Asian contagion in the fall of '97, the Russian debt crisis, the tech bubble bursting.

Now we've got European debt, and we've got the fiscal cliff. Still, that does not convince us at all that you won't get normal returns going forward.

Why? Seems like there's a lot of economic danger ahead.

It turns out equity returns are not related to economic growth. The best predictor of future returns over the long term -- over, let's say, a five-or 10-year horizon -- tends to be current valuations. The market is priced at about 13 times [expected] earnings, and that is a little bit cheaper than normal.

What about bonds?

The best predictor of bond returns is the yield to maturity of the 10-year bond. The 10-year Treasury is at less than 2%, so returns would probably be 2%, maybe 3%. Historically bonds have returned about 6%. It's difficult to see how we could get that.

You've seen big inflows into your bond funds. Are you concerned investors are overdoing it?

Yeah. We're trying to educate clients to be aware of the risks. A rise in rates will negatively impact their principal. At the same time, we do believe that even with lower expected returns, bonds play an important part in the portfolio: diversification. You want to have that anchor.

Vanguard founder Jack Bogle has criticized overuse of exchange-traded funds. You've created dozens of them.

We think that ETFs are just a different way to distribute an index fund. You can invest in our Total Stock Market Index fund (VTI) either through the conventional share class or you can invest in the ETF.

It comes down to investor choice. Jack is concerned that people become market timers with ETFs. We have some research that is contrary to his view. Our ETF investors [in broad-based funds] do not have substantially different time horizons than our conventional shareholders.

I think Bogle's concern is about all the ETFs that focus on just a narrow slice of the market. Aren't those likely to be used by market timers?

I certainly share the concern with the proliferation of ETFs in the marketplace. We have data that show that with narrowly defined investments, investors are not invested in them on the way up. They pile in at the top and then ride them on the way down.

But you created funds for sectors like energy and health care.

We have funds for broad sectors, but we don't have industry funds or single-country funds. There's a level where you have to call it quits.

I was telling somebody I was going to interview the guy in charge of the big index funds, and he asked, "How can that be a full-time job?"

You want to see the number of people we have? [Laughs.] Indexes change more often than you might imagine. There's a lot of trading involved. On a given day, we'll do 5,000, maybe 10,000 trades.
Your last hurrah has been to change the indexes tracked by many Vanguard funds, including Total Stock Market. What exactly did you do and why?

We changed index providers. Index licensing fees have been a very rapidly growing component of costs, and we found a way to reduce that by switching. It will save hundreds of millions of dollars [for our clients] over time.

How does it change the funds?

For example, the index provider we will use for international funds classifies South Korea as a developed market, whereas the current index considers it an emerging market. Every person I know who knows anything about South Korea says it's a developed country. As a result, our developed markets index funds will now include South Korean stocks.

Are there any changes with the funds that follow U.S. stocks?

The Center for Research in Security Prices, which created the new U.S. indexes, have a process they call "packeting." Say a stock is transitioning from being a small- cap stock to midcap. Normally, Vanguard Small Cap Index would have to sell the stock, and then Mid-Cap Index would have to buy it.

With packeting, only half of the weight moves into that new classification. In the next quarter, if the stock remains above that band, only then does the remainder move. When you're at the border, you don't want to flip-flop back and forth. This cuts turnover by about 25%, and that means lower transaction costs.

Last question: Why retire so young?

As they say, it's the miles, not the years. And I wanted to have time to do other things.

The Full Motley: "In Prez We Trust" 4Q, 2012

Now that the elections are over, we citizens are once again freed from incessant exposure to the biggest waste of financial resources.  Whether that ranking is accurate or not is secondary to the fact that the Presidential campaigns is a celebration of ignorance in America.  The majority of statistics thrown about against an incumbent President (like Barack Obama was this year) are either inaccurate or (far more often) irrelevant, and the most commonly referenced ones are that of the Dow Jones Industrial Average (known throughout the media as "the stock market").

All too often observers indicate what the markets have done during a President's tenure as a reflection of the President's effectiveness.  Nothing could be further from the truth.  Market trends are rarely reflective of the President; the President's role is reactive to market trends.  Notwithstanding, the markets popped up more than 2% on Election Day, only to retreat the same 2% the next day.  Lucky for me, I sold out of the remainder of my STAR Fund earnings as I had been planning to do all year.  Let's see if the markets close higher at any point in the remaining in the year than they were on Election Day.

Maybe due to Election Day or maybe due to only being one month into my new job, I forgot to rebalance my portfolio on Friday, November 9, 2012, but my actual target date is November 10th, so I have a rebalance in place for Monday, November 12, 2012, so I am considering that date just as good as Friday's date.  Especially considering the amount moving is only 0.37% of my portfolio balance (not 37%, not 3.7%, but less than one-half of one percent of my account balance).

I won't trot out the spreadsheet that I usually have of how much moved since so little did.  Maybe February 2013 will have more significant moves.  Probably not.  Without adding money to my retirement account leaves minimal affect to my portfolio, hence the reason professionals recommend rebalancing annually, not quarterly.

Job Safari: Most Dangerous Game

It's well-known that Americans today are earning less than their parents did.  This number is not even adjusted for inflation (although reports boasting the opposite truth disclose that it is leveled by two-worker households and/or working more hours, so while Gross earnings before taxes is higher, they still earn less hourly).  Were Americans overpaid in the '50s and '60s or is the Land of Opportunity drying up?  I think the answers are "both, yet neither."  These aren't mutually exclusive, and "Land of Opportunity" is a misnomer as it originally referred to the opportunity to start your own business and be successful.

Regardless, the American economy is nowhere as strong as it once was.  Whether that is the result of a globalizing economy or our national class disparity is a matter of some conjecture, but most experiences are that college is not worth the investment of time or money, and many job hunting methods have become so structured and scientific that they are almost worthless.

The advances in technology come rapidly.  Consider what that means to a four-year degree.  If you started a degree four years ago, then how much of that information is valid by the end of the program?  Then double it for eight-year degrees.  Granted, professional degrees (especially in the medical field) require continuing education to keep practitioners informed of these advances, but if it took more than four years to complete the Bachelor's Degree, then that point is a serious issue.

Fortunately, most employers do not give weight to those considerations as they have been conditioned to only look for the fact that an applicant is a college graduate.  The year matters less, even though there may be more relevance to the year than most other considerations.  The bigger flaw exists in the methods of job hunting promoted these days.

As I have noted frequently, I left my job in April 2011 to start a Paralegal Studies Program at Phoenix College.  I completed that program in August 2012, and then I spent most of the next two months hunting for a job.  Although the job openings were numerous, the actual opportunities were minimal.

The way I figured, CareerBuilder.com and Monster.com generate at least 200 applicants for every position (people "in-the-know" may scoff at that number as ridiculously low), and hiring managers probably read 50 of those resumes, then interview five people for each job opening.  These websites are a glorified lottery, except you can tilt your chances by reusing keywords and overstating qualifications.

I borrowed "New Job, New You" from the local library, and the author referenced her own preference towards writing fiction so often that any critical mind could decipher the text to mean "I'm just releasing this book for the money."  It was devoid of any genuine insight and the examples I read of successful job transitions (almost unanimously from public sectors to a private sector) were only useful to the people following identical paths.  I think the book's target market was the actual people featured in the text, and of course, their friends & family.

My study partner texted me today, "it's a sad day when job placement companies cannot even find work."

Fortunately, I am a lucky one!  I spent over six weeks sending out at least one application per day, and in that time, I only heard back from one employer (mainly because I forgot to attach my resume, but my cover letter sounded interesting enough that she wanted to know more).  My results were both frustrating and depressing.  A concerned friend asked me whether I thought I was being too hard on myself considering the current economy and that I was moving into a new career with no professional network to leverage.  I defiantly said that I would push harder than expect less.

After turning my resume into a job placement company, I bolted across the street to Half Price Books to see what they had available.  I realized that spending money was not something I could afford, but I did read a book by someone calling herself "The Job Whisperer."  In lieu of purchasing her book, I decided to rent it from the library.  Albeit, not before checking their DVD section and finding a Montreal Canadiens DVD set. It was priced at $25, but I decided that spending money was not something I could afford.  But that DVD set certainly made a nice incentive!

The next day, I went to the library to check out that book, and I saw a computer set up specifically for job hunting.  I inquired about it ("if something seems too good to be true, it usually is") and the rep told me that they had recently hired a job search specialist, and she set up the computer and loaded it with helpful programs.  This specialist also hosted seminars and she was available for individual meetings.  I figured that I could still do things myself, and anything the job search specialist had to offer could be found in books, but then, there was also the simplicity of it, so I requested her number and, a few days later (of no requests for interviews), I contacted her to schedule an appointment.  If for no other reason than to ensure that my email would actually *receive* messages.

By that time, I had quantified my bullet points and related them to the paralegal requirements to show that they were transferable skills.  Unfortunately, the job search specialist's first comment when we sat down was that my resume did not reflect a paralegal's resume one iota!  She said the transferable skills are there, but they were too obliquely embedded in unrelated jobs.  She introduced me to the Functional Resume.  Contrariwise to a traditional resume, the Functional resume was a newfangled approach that focused on the skills required from the job application.  In place of my job history, I needed to list the required skills with tasks I had done displaying those skills in the bullet points, and prospective employers would see exactly what they're looking for.

Rewriting my resume was the last thing I wanted to do, next to staying unemployed, so I did it.  There was a company where I wanted to work that posted a job opening in August, but I never heard back from them.  Then, they posted another job opening this last week of September and I wanted to reapply, but I didn't want to resend the same resume.  If for no other reason, I created my Functional Resume for this job and I sent my application on Sunday.

More resumes were sent, but I heard nothing back on Monday and nothing back on Tuesday.  Or so I thought.  As it turned out, there was a message left for me on my voicemail on Tuesday afternoon, but I had been so wrapped up in submitting more resumes online and researching other ideas that I missed the call.  It was from the company that I had not heard from the previous month.  They were calling me in for a job interview, so I returned their call first thing Wednesday morning.  Later that night, I heard back from another place where I had sent my resume on Wednesday morning (because the job posting was nearly identical to one I had replied to the day before, except this one sweetened the deal because the company practiced in civil litigation and family law in addition to bankruptcy).

I landed two interviews in the first week of switching to a Functional Resume.  Was it the switch, or was it just these employers?  Obviously we will never know, but I choose to credit the Functional Resume myself.  If you read independently about Functional Resumes, there are a lot of criticisms about how they feel suspicious to employers.

Lots of a ideas on job hunting exist, from resumes to interview skills, but there's only one truism in all of it..... DO NOT BUY ANY OF IT!

To clarify, I literally mean "purchase" when I said "buy."  Do not pay for a resume seminar.  Do not pay for mock interviews with a self-proclaimed expert.  Do not even buy books on the subject.  The reason why not is that the information is already online.  All of it!  Also, visit the local library like I did for books and check its event calendar, because they may be running seminars on job hunting.

In job hunting, there's a why-not for every how-to.  Sadly, both are usually correct.  There is no science behind job hunting.  There is no sure-fire success.  There is only persistence, and trying harder instead of expecting less.




Recommended reading:

• The New Job Search: Break All The Rules. Get Connected. And Get Hired Faster For The Money You're Worth. (Molly Wendell)
• A Foot In The Door: Networking Your Way Into The Hidden Job Market! (Katherine Hansen)
• The Job Search Solution: The Ultimate System For Finding A Great Job Now! (Tony Beshara)

"I Ate The Marshmallow"

Recently my girlfriend told me, "I ate the marshmallow," seemingly off-subject during a discussion of self-discipline, before explaining that it was a popular reference to a 1960s psychological experiment.  She was surprised that I had not heard of it.  After I did a little research on the subject, I was quite surprised as well.  It was right down my alley!

The experiment was hosted by Walter Mischel who set out to gauge will power and self-control by sequestering several children under the age of six (one at a time), and then providing him or her with one marshmallow and a challenge that he would be back in 15 minutes, and if the child had not eaten the marshmallow, then the child would receive an additional marshmallow.

The results were that most children (70%) ate the marshmallow before the 15 minutes expired; most caved within the first three minutes.  Years later, though, Mischel noted a correlation between school performance and the individual results from the preschool experiment.  Those children who displayed self-control were getting higher grades and performing better on the SAT by upward of 210 points.  Inspired by the oblique benefits from this old experiment, Mischel and company resumed tracking many of the participants into their late-30s.

"What we're really measuring with the marshmallows isn't will power or self-control," Mischel said. "It's much more important than that.  This task forces kids to find a way to make the situation work for them.  They want the second marshmallow, but how can they get it? We can't control the world, but we can control how we think about it."

For most of us, especially for those who are notably impatient, saving and investing would be a lot like these children eating marshmallows.  As soon as I read through the experiment, I immediately compared it to investing myself because of its focus on delayed gratification through increased self-control.  In reality, each of the children equally wanted as many marshmallows as he/she could get, but not all of them were willing to pay the same price.

In this case, the cost was valued in time and many people overlook time as a currency.  Truly, calling time a currency would be a misnomer, but it certainly is a fair way of viewing it.  Re-envision the experiment to run several hours, and every 15 minutes, the number of marshmallows present would double.  Each child would still start with one marshmallow, and after 15 minutes, the more patient children would have two.  If those children waited another 15 minutes without eating one or both marshmallows, then they would get two more.  If they ate one, then they would still have the remainder doubled every 15 minutes.

In theory, the most patient (and arguably, greedy) children would eventually have enough marshmallows that he/she could begin to eat comfortably without it affecting their accumulation.  This comparison is a lot like the time value of money.  I think one turn-off to investing is the presentation.  It is too honesty and too money-hungry.  It uses graphs based on past performance usually, so telling a new graduate that he/she should wait another 40 years to have a cushy nest-egg on which to retire is counter-intuitive.  Sure, everyone wants a nice retirement, but sacrificing over the next 40 years will make a rather dull 60-year-old without very many fun life experiences.

In reality, there is a point where enough should be enough (this excludes the greedy).  Not necessarily enough for a lifetime, but enough for that current point in life.  If a tightwad feverishly sacrificed to accumulate vast amounts of wealth by his/her mid-30s, then it would be hard to imagine having a happy life up until that point.  But if those could-be "tightwads" loosened their purse strings along the way, then they would enjoy the best of both worlds.  They would have both enough in the bank and plenty to spend, like a child with a dozen marshmallows would have plenty to eat.

At that point, there is a paradigm shift in the term "self-control."  With little, "self-control" automatically means controlling yourself by refraining from various actions to result in a better life down the line.  With enough, "self-control" starts to mean that you have control over more things yourself.  You don't have to work a horrible job, because you have enough financial stability to take greater risks and to find a better job.  You don't have to miss big events because your latest paycheck has not posted.  You have a better sense of choice because you have more power to choose.

At work, my youngest co-worker told me to "feed the pig," referencing American Institute of Certified Public Accountants (AICPA) mascot Benjamin Bankes.  In 2006, there was a recognized push to encourage people to start saving more.  A website was created (www.feedthepig.org) and commercials started airing, and I guess it was moderately successful, especially if my 20-year-old colleague is now open-minded to saving enough to discuss it intelligently.

Unfortunately, I see a glaring error between their message and their goal, which is that people who don't save have a different interpretation of money than those who save.  At a certain point, it is like they are speaking two different languages.  When people who don't save hear about how to building up a lot of money, I'm not sure they understand what the indirect benefits of having a lot of money are.  In fact, I'm fairly certain "having a lot of money" to people who don't save simply means "being able to purchase a lot."  If that's the case, then I understand the lull in savers.

I wonder what would happen if their message went from "save to build up a lot of money" to "save to seize more control over your life."  Would that increase the desired savings lacking among our population?  Or would the lure of that self-sustained freedom still be overpowered by instant gratification?

Personally, I think life's too short for instant gratification.




Read more about Walter Mischel and the results of his marshmallow experiment at http://www.newyorker.com/reporting/2009/05/18/090518fa_fact_lehrer#ixzz248Bs2pkh

The Full Motley: 3Q, 2012

I heard an interesting experiment about marshmallows and self-control, and how it links to success, but I will save my thoughts on that for next month.  Today, I re-balanced my 401(k) amidst a strong market climb.  If you disregard the notable exceptions of 2000 and 2008, then most election years have seen gains in the market.  From the market activity we have seen hitherto this year, 2012 is unlikely to join 2000 and 2008 as a notable exception.

If anything, this year has been extra normal.  My movement for this quarter reflects that point nicely.

Vanguard Explorer Fund 24% / -1% / 25%
Vanguard High-Yield Corporate Fund 5% / x /  5%
Vanguard Total Stock Market Fund 25% /  x  / 25%
Vanguard PRIMECAP Fund 26% / +1% / 25%
Vanguard Total Bond Market Fund 10% /  x  / 10%
Vanguard Total Int'l Stock Fund  10% /  x  / 10%

Although only 1% of movement was actually required (my actively-managed PRIMECAP fund made up what my aggressive Explorer fund has been lacking), I really pulled from four funds slightly above their target and put it into two funds: the aforementioned Explorer fund and the Total Bond Market Fund.

Obviously, there has not been too much movement in the major markets, which is a good sign, especially in contrast to all the "gloomers & doomers" (as Mo Anari calls them) expecting the bond market to retreat sharply into a freefall (as Mo Ansari himself is predicting).  Not that I argue with that mentality; since December 2010, I have been expecting the bond market to retreat as well.  Ditto for the precious metals, which as a whole have seen a far worse annual return (arguably) than almost any bond fund, especially these past 12 months.

Regardless, this quarterly update is a strong indicator that my quarterly re-balancing is not essential to successfully self-managing a financial portfolio.  Most experts advise an annual re-balance is sufficient, and a quick review of the nominal movements made in my past several quarterly updates, it is easy to support that logic.  But, finance is my hobby so I personally enjoy re-balancing more frequently.  The professionals managing mutual funds re-balance every single day, so it is my self-serving belief that re-balancing quarterly will not harm my portfolio.

I noticed Walter Updegrave responded to a question last month on Money.CNN.com from a 25-year-old investor concerned about making a poor decision that could cost hundreds of thousands of dollars by retirement.  I especially like the reply, citing a few key principles "like keeping it simple, holding the line on costs, diversifying broadly, and ignoring the jabber pundits who advocate buying & selling, any flubs you make aren't likely to wreak mortal damage."  He also noted that "even though many (professionals) like to make investing seem complicated(,) it's really not all that difficult."

Having started my retirement investing on the day I turned 25 myself, I understand exactly what he means.  Perfection will not be achieved in investing any sooner than it will be achieved in any other endeavor, but for all the complexity above the basics, it is only necessary to understand that basics.  I usually support concepts supporting "less is more," and investment knowledge may fit that mentality nicely.  Understanding investments fully will not always generate success.  And the difference in returns between people who simply understand the basics to those who have a solid understanding behind more of the complexities is a strong argument against investing in the time to understand the markets better.

When I first started in finance, someone at my first job told the story about a client asking an adviser for the next hot stock tip, and the professional replied, "even if I told you, you wouldn't know what to do with it."  I think I was the only one in the room to understand what that meant: knowing what you don't know is safer than only partly learning things.

After the basics, your personal finances can be as complex or as simple as you want to make them.

The Full Motley: 2Q, 2012

Another quarter has passed, and the markets have not had much activity lately.  They've gone up, and they've gone down as normal, but nothing consistent in either direction. Until this week.  The day on which I do my quarterly rebalance was built towards with six consecutive down days in the market.  Lucky me!  I'm not sure there would have been much activity in my portfolio this quarter without it.  Hence the reason experts have said rebalancing annually, like on your birthday, is sufficient.

But if you're one of the obsessive types who writes a financial blog to track your movements, then this may have been how your allocation chart could have looked this quarter:


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 - 10% / 0% / 10%

Fortunately, there were some rounding percentages that allowed me to move small portions around, but the final amount moved was less than 1% of the portfolio so it does not show up on the chart.  But if you have a 401(k) plan to which you are no longer contributing, then rebalancing once a year or twice a year is sufficient.  Corresponding research has shown that rebalancing more frequently (e.g. daily, monthly, or even my quarterly) had no significant effect on lifetime returns over 40-50 years.  An annual rebalance is standard reference in the financial field, which is why I was surprised Vanguard released the following video:

There was a simple question, followed by a somewhat simple answer, but notice that the answer does not ever truly address the question.  It's aggravating because it feels like it is another case of the industry professionals complicating their field to keep others from being able to manage it themselves.  The further I get away from finance, the more I appreciate the aggravations of laypeople to whom the entire concept is a mystery.

Fortunately, I experienced the field from the inside for 10 years so I learned most of the finer points directly.

Understanding Taxes

It occurred to me last week that I had not filed my taxes (or even started) yet, and it was already April.  Luckily, I realized that I was somehow a full week ahead, and at that point, it was only the last week of March (which is when I usually file) but among homework assignments, shifts at work, and self-imposed obligations to friends, I couldn't find any time to take care of them.  Luckily, I had a later shift at one point this week and there is an H&R Block in the same shopping center as where I work, so I popped in with my tax information to see what would happen.

"I am coming in to start my taxes," I explained to the secretary when she asked me how they could help.  She asked me if I had an appointment, "nope."  To which she disappointingly said, "It's APRIL ... and you're coming in ... to START your taxes ... WITHOUT an appointment?"  "Yea, basically."  I already knew where this was headed, and it was the opposite of where it should be going.  "Well... *exasperated sigh* it just so happens that we had a cancellation."

This is why I often call myself "Mr. Lucky."

On one hand, it amazes me how much people don't know about the tax laws in our country.  On the other hand, it amazes me how complex the tax laws in our country are.  For both reasons, I have always gone to a tax professional to file my taxes.  It allows me to be lazy and laissez faire.  Also, I was once told very early in my career "H&R Block pays for itself."  It's true.  A few years ago, I owed some taxes (several hundred dollars were due) so we ran the numbers, and I could get a couple dollars back if I maxed out pre-tax contributions into my IRA.  I could have paid the government money and never seen it again, or I could have paid a little bit more to myself and keep it in my possession.  Of course, I did the latter.  But I never would have known it without H&R Block.

More importantly, I was employed for half of this past year and then under-/unemployed for the rest of the year, so I knew my 2011 tax situation would be unique.  Also, I was a student this year but I did not even consider that there would be significant tax breaks.  As it turned out, the tax deductions that I had in mind (and one that the average taxpayer would have used) would have reduced my taxes.  Conversely, there were some tax credits available for full-time students such as myself (I don't think of myself as a "full-time student," but I qualify as one) from which I could get a large refund.

If you don't know the difference between a tax credit and a tax deduction, then you probably need assistance from a professional.  You could pay taxes on your own and save the $100 fee from H&R Block, but you will risk missing out on potential "loopholes" to reduce those taxes.  For example, my taxes were 15% this year but what I paid (owed) was 1%.  I proudly felt like Bobby The Brain Heenan when I heard that fact.

Another sign you may need a tax professional is if you don't know that when I say "my taxes were 15%" that I mean, my last dollar earned was taxed at 15%.  The Internal Revenue Code uses a marginal tax rate, which means everyone is taxed the same way.  The first $9,000 we earn annually is not taxed ... at all ... for everyone.  The next $8,500 is taxed at 10%.  The next $8,500 is taxed at 15%.  Above that, it is taxed at 25% until you've earned $85,000 over that original amount (which I believe it $9,000, but I could be wrong), and then you reach the 28% tax bracket.

If you think your being in the 28% tax bracket meant every dollar you earned was taxed at 28%, then you're wrong (but you're in good company).

Another common misunderstanding is if you receive a bonus at work and the taxes are withheld at a higher percentage than on your ordinary income.  Many people are mistakenly under the impression that bonuses are TAXED at a higher rate.  This is untrue!  The increased withholding is to protect you from yourself.  You were not expecting the bonus (ideally) so withholding more of it means more of your taxes are paid by the end of the year than the remainder of your earned income.  Unfortunately, correcting people on either point is usually a fruitless endeavor, because (for whatever reasons) taxes are just misunderstood by the American public at large.

If you hear politicians push for "flat tax," this is the reason why.  Unfortunately, I think it's a bad idea.  Very bad idea.  I like the marginal (tiered) tax rates in this country myself.  Part of the reason it is a bad idea is that it would need an entire re-write of the entire Internal Revenue Code, and as confusing as it is now, at least enough people understand it.  If the entire book were rewritten, then it would be a crap-shoot whether it was written for better or worse.

Albeit, it would make filing taxes a lot easier.

Cash For Gold

Natural beauty in investing may happen very rarely.  Despite all I have learned, there is a lot more in investing that I do not know.  However, I know what my expectations are and I know what my limits are, so when it comes to managing my money, those are the most important things to know.  Beyond that, my opinion has very little influence in the overall marketplace.  Regardless, it is beautiful when I learn people I respect share my same opinions.

My favorite television show is "South Park," and tonight was the second episode of their sixteenth season.  It was entitled "Cash 4 Gold," and as soon as I learned that much about it, I was immediately excited to see it.  I knew they would have fun poking fun at the Cash For Gold places, but as the episode played out, it brought to life my personal opinion on investing in gold, which made my heart smile.

My former-roommate (who's currently a highly successful investment banker) told me a couple years ago that the biggest use of gold today is for making jewelry in India.  If that's the source "demand" of gold, then the rest of the marketplace's "demand" is bunk!  It does not surprise me that the American investors have gone from high-tech stocks (which was a natural bubble) to the rest estate market (which was a bubble that got inflated by a lot of hot air), and now Pat Boone's "Gold IRAs" have taken the advertising time and space previously held to hock REITs.  For the record, there is no Gold IRA anymore than there is a Green IRA or a Red IRA.  The marketing ploy of that commercial alone is absurd.

In no uncertain terms, the "South Park" episode drew correlation between the elderly population buying items on Home Shopping Network and the excessive supply of "jewelers" who are ready and able to purchase gold.  Although the episode pinpointed how unbalanced the supply and demand for gold are in this country, it opted against targeting those individuals who are encouraging people to invest their IRA and other retirement accounts with gold.  Perhaps the average person is not exposed to those ads as often as I am, or (unfortunately) they aren't smart enough to understand that a spoof is not a good method for investing, and that episode may insire another several thousand wannabe-Cartmans to move their money to gold.

I sold a gold ring for my best friend a couple weeks ago, which I absolutely HATED to do, but I went to a jeweler who had been buying gold for as long as I have been living in my current location (over 13 years now), so I felt as though she got a good deal.  Immediately after the sale, I started kicking myself because I wish I had thought to "shop" it around to a few of these nefarious "Cash For Gold" places, and see how their offers stood up against this place.  According to "South Park," we would likely have been offered a high of $8.75 or a low of a seven-layer Taco Bell burrito.

In reality, gold is at a pretty big high right now, so it's a SELLERS market.  I am so weary of the metals market right now that I told my friend to NOT sell gold at first, and then I realized that this was the best time to SELL gold since she was interested, so I convinced her to sell and she got $50 for an otherwise worthless piece of jewelry.

Although, I hate to think how much her mother paid to give it as a gift however many years ago.

Financial IQ Score

There is one important (critical, even) element of your financial lifestyle that I have neglected to mention previously in this blog, and that is your Credit Score.  Not only have I failed to mention it in this blog, but honestly, and I should be ashamed to admit it, I have neglected my own credit score for the past 10 years, which was the age by which my mother required us to be financially self-sufficient.

In terms of finance, your credit score is a far better measure of intelligence than your IQ.  Sadly, I didn't even know what mine was.  All I knew is that it had to be decent because, when I bought my convertible in 2007, the salesman confided that, after his bosses saw my credit score, he wasn't allowed to let me leave without a sale.

Fortunately, this week I took that sizable step of getting my credit report from all three bureaus.  Honestly, I was planning to approach each of the three bureaus independently and find out the score myself instead of paying someone else to do it, but that's usually because the expense is $100+/yr from most of the companies offering the service.

However, the last time I was at my bank (Wells Fargo), I saw a whiteboard offering to provide your credit report for $1.  I didn't think much about it since the purpose of my visit was only to withdraw money to pay my mortgage at the bank across the street.  But a couple months passed since then, and as I went to the bank, I was ready to inquire about it.  Unfortunately, their whiteboard was now reading another advertisement, so when the teller asked if there was anything else they could do, I proactively inquired if the offer was still valid.  He said it was, and shortly thereafter, sat me down with a personal banker.

He printed the scores for me, which were very, very good thankfully, and then segued into offering a separate credit card through the bank.  He prefaced the fact that the card would have 0% interest for nine months, and unbeknownst to him, I am about six months away from starting a new career in law, so (ideally) I could use this card for the next six months and then start paying it down over the last three.  The card was ideal for my current situation (especially since I am having trouble paying off my current credit card each month).  I agreed, and we scheduled a follow-up meeting, and then I went across the street to the next bank to pay my mortgage.

At that bank, I was approached by a Personal Banker upon entering the door.  He asked why I was there (politely) and then offered to help me.  I don't know whether he knew the paperwork in my hands were my stellar credit report or not, but we paid my mortgage and then he went on a high pressure push for moving my assets over to the bank.

Now, the reason I pulled my accounts from this bank (where I had banked for over 13 years) last year was when I was quitting my job and going back to school, their checking account would have come with a monthly fee of $25.  Initially I opened up a new bank account with them where the balance to avoid the fee was significantly lower, but then Wells Fargo blew them out of the water with their checking account, so I closed that new bank account at a different branch through the same bank.  As it turned out, there was a $25 fee to close the new account and they had signed me up for the credit card that I declined when presented with the offer.

Cut back to current day, and their new sales pitch is that if I bring over one of my retirement accounts, then I would qualify for free banking across the board, and also (and this was the huge no-no of any aspiring salesmen) their retirement plans were superior to mine.  As we know through this blog, my account is self-managed.  While the comment was supposed to be directed at Vanguard, it was more of a personal attack on my own ability to manage my account.  Albeit, it was a blind attack since the blabbermouth clearly didn't know what he was saying would be interpreted so differently, but nonetheless, I left slightly insulted and very disgusted.

The entire conversation with Wells Fargo rep had nothing to do with my retirement accounts, even though my balances there are way higher and the interest rates at Wells Fargo are way higher.  Therefore, I have decided to move a larger amount of my savings account to Wells Fargo this month.  Not my investment accounts, mind you, but my savings account.  As we know from Vanguard's Investment Philosophy, saving is for the short-term, and investing is for the long-term.

Regardless, it was an eye-opening morning to see how competitive the financial corporations, especially for high balance account holders with high credit scores.

The Full Motley: 1Q, 2012 (supplement)

I have never done an entry like this one before, but I wanted to do it because I noticed today that my 401(k) balance has tripled since February 2009, and I haven't even contributed to it since last April.

Last week I made my first quarterly rebalance of 2012, and I noted that the benefit of anchoring your portfolio around your asset allocation and rebalacing to your target allocation at predetermined intervals is that it takes the guess work out of investing, and then, (A) you don't have to hire a professional, and (B) you won't react emotionally, and you'll make wiser moves in the long-run by focusing on the long term.

Therefore, you never want to reassess your moves after one week since it just increases the temptation of reacting emotionally, but if you have the self-discipline to check your portfolio's performance frequently while holding true to your allocation & intervals, then there isn't much harm in checking in more often.

That was the case today when I heard that the markets were up, but I was curious how the recent string of increases had affected my portfolio.  Out of curiosity, I checked the price per share from last week when my reallocation took affect to the most recent price per share in the market.

• 24 = $79.16 < $81.03 (higher)
• 29 = $5.85 = 5.85 (even)
• 59 = $66.31 < $67.20 (higher)
• 84 = $11.03 > $11.02 (lower)
• 85 = $32.55 < $33.01 (higher)
• 113 = $28.72 < $29.20 (higher)

Four of my six funds have gone higher (including BOTH of the funds that I moved out of) and the total decline in the other two funds was only $.01.

There are two ways to analyze this information.  On the one hand, I could have been better off staying in the two funds highlighted in red for another week (which indicate the funds where I pulled money out yesterday).  On the other hand, the money I took from those funds has already been made back so the higher performing funds are already returning higher and the "profits" taken from there are holding stable or increasing in their own rights.

Obviously, making another change today would be foolish based on the small balance in my portfolio, but if you wanted to invest in an allocation that rebalanced frequently (such as daily), then the best fund for you is a "fund of funds" or a balanced fund which sets an allocation closely matching your preference.

Incidentally, the Target Retirement funds are a perfect example of that philosophy.  They have an allocation, and their investment managers seek to maintain that allocation daily, regardless of market performance.  While they miss out on having a large stake in the funds as asset classes that are rising, they also avoid giving their earnings back when those asset classes retreat.  As I've noted often in this blog, all investments fall much faster than they rise.

In my opinion, it is not worth the investment risk.  And, without question, it isn't worth the time investment to track your investments daily over the 30+ years.  If anyone had that much "spare" time, then I'd strongly recommend volunteering somewhere.  Life is about more than just money (although, understanding investments is invaluable knowledge).

The Full Motley: 1Q, 2012

It has been a long time since I have talked about my personal accounts on here, but the lack of updates does not reflect a lack of knowledge.  After erroneously rebalancing a month ahead of schedule on July 10, 2011, I furthered the "error" by rebalancing again on October 10, 2011 (a month ahead of schedule) since I felt the markets retracted more in September and it would be corrected by November.  That thinking is exactly what asset allocations are created to avoid.  Normally, the schedule should be what you do and speculation should be on what you are not doing.  Unfortunately, for my purposes, I cannot say that my early moves were a bad thing for my portfolio.  But I will say that they did not pay off much either.

This month I intentionally got back on schedule, and I was very pleased with how well my portfolio has performed since October 10th.  The funds that I discuss on these entries are in my 401(k) and in the past, I had been adding money into the funds at all times.  I left my job in April, so no money has gone into that account since then, and the balance is now higher than it was when I left, which is encouraging.  In my last entry, I noted that I expected the 2012 markets to raise higher than 10% as measured by the Dow, so I expect another summer slump, but I have another rebalance on May 10, 2012, which should be before the market retracts.

As for today's moves, here is my chart:

Fund # - Real / Current / Target
Fund 24 - 26% / +1% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 25% / 0% / 25%
Fund 84 - 9% / -1% / 10%
Fund 85 - 25% / 0% / 25%
Fund 113 - 10% / 0% / 10%

In the interest of full disclosure, although this blog should never be used as the primary tool for financial planning on any account except the one listed, there were additional moves made in which money was taken from two stronger-performing funds and placed into four lagging funds to preserve the target allocation, which is the point of rebalancing quarterly.

I only mention this caveat to note how pleased I was to see how well those two funds had performed since October.  The trickiest part about asset allocation is the actions in contrast to urges and expectations.  I mentioned how I failed twice last year by rebalancing a month ahead of schedule, but it is equally important to note that this move takes money out of stronger performing funds and put them in funds that are performing not as well.

Every financial analyst knows the reason for that move would be to "buy low, sell high," but the problem outside of rebalancing is, when you sell, you have to put the money somewhere.  If a fund earns 25% over a quarter, and you want to "sell high," where is it going to go?  If you need it, then that's an option but it does not allow for further growth.  If you sell for the sake of selling high, then you probably know it is going to a stable value fund or a lesser performing fund.  But if you analyze the move, then there is a strong likelihood you will decide to hold the excess where it is.

This quarter reminds me how much rebalancing simplifies this struggle.  It is like cleaning house in a way.  Each fund has its set place, and if one fund gets moved over to one side or another, then you just move it back where it belongs without thinking about it as taking money from a "winning" fund and putting it into one that lags.  When those choices start getting the better of your mind, then reconsider the allocation.  But, as I've noted previously, when you adjust your allocation, then the new allocation should be decided upon about six months before the first action is made on the account.

I'm sure future entries will discuss this concept further, even though I am very comfortable with my current target asset allocation.

CNNFN: Dow at 4-year high, Nasdaq hits 11-year high

NEW YORK (CNNMoney) -- U.S. stocks rallied Friday, as investors cheered a much stronger-than-expected jobs report.

The Dow Jones industrial average gained 157 points, or 1.2%, the S&P 500 added 19 points, or 1.5%, and the Nasdaq composite increased 46 points, or 1.6%.

The rally pushed pushed the Dow, up more than 5% in 2012, to its highest level since May 2008. The Nasdaq, up more than 11% for the year, climbed to its highest level since December 2000. The S&P 500 has gained almost 7% this year, and finished at a six-month high.

The rally was sparked by the Labor Department's monthly jobs report, which showed that the U.S. economy added 243,000 jobs in January, far exceeding expectations. The unemployment rate dropped to 8.3%, the lowest since February 2009.

Economists surveyed by CNNMoney had expected the government to report an increase of just 130,000 jobs in January. The unemployment rate was expected to rise to 8.6%.

Economists had expected a slowdown in post-holiday hiring, considering that about 40,000 temporary couriers were hired for the holidays alone.

"The jobs data blew away market expectations," noted Marc Chandler, global head of currency strategy at Brown Brothers Harriman, calling it a "monster" jobs report. "This coupled with other recent reports for January, show the year has begun off on a firm note," he added.

Meanwhile, investors were also on the lookout for an official agreement on a debt-reduction plan and a second bailout for Greece. The deal is expected to be near, but negotiations are likely to continue thorough the weekend.

U.S. stocks ended mixed Thursday as investors digested a cautious economic outlook from the chairman of the Federal Reserve.

The Full Motley: 2012 Preview

On December 31, 2011, the market closed the year at 12,217.56, which was approximately 6% up for the year (opening at 11,577.51).  This news made me happy because all year, I had said that the 2011 markets would be up <10%.  Believe me, there were times when I thought I would be off.  More often than not, I expected that the markets would close higher than 10% but a surprisingly slow fourth quarter dashed those higher expectation.  Interestingly, the second and third quarters had most analysts forecasting a down year but, as often the case when taking current news and projecting it too far into the future, their predictions were short-sighted.  The best success is when projecting far into the future, at least a year.  That said, those expectations will not always prove to be true, but they remove emotion from investing, which is often the most common pitfall to trip up investors.

Case in point, my predictions last year were that the stock market would be up less than 10% (as measured by the Dow) and that bonds and gold would suffer great falls.  Additionally, I added an actively managed fund to my portfolio to hedge against the perceived lag of indexing.  As already noted, I was right about the markets going up between 0-10%, but my other expectations were incorrect.

The 12-month return in the Vanguard Total Stock Market Index (Investor Shares) was 0.96% whereas the returns for the PRIMECAP Fund retreated by -1.84%.  This is a testament to the strength of indexing since PRIMECAP is one of the most highly regarded actively managed funds Vanguard has to offer.  Additionally, the Vanguard Total Bond Market Index (Investor Shares) returned 7.56% in the year that I expected bonds to fall significantly.

The following are the 2011 returns for funds in which I am invested or in which I have been invested in the past five years listed from highest (bonds) to lowest return (international):

• GNMA Fund Inv 7.69%
• Total Bond Mkt Index Inv 7.56% (Adm 7.69%)
• High-Yield Corp Fund Inv 7.13
• 500 Index Fund Inv 1.97
• Total Stock Mkt Idx Inv 0.96% (Adm 1.08%)
• STAR Fund 0.77%
• Prime Money Mkt Fund 0.05%
• PRIMECAP Fund Inv -1.84%
• Explorer Fund Inv -1.89%
• Total Intl Stock Ix Inv -14.56%

At this point in the year is when I like to set my strategy for the coming year.  While the Presidential Election adds a great degree of uncertainty to American investors, I recently read that the market is usually positive during election years.  As a result, I am not going to make any changes to my current allocation and maintain my current investment strategy.

As for the market itself, I expect that the Dow will be up over 10% and close above 13,439.32 in 2012.