Credit Where Credit's Due

This morning, CNN Money posted an article regarding this year's most popular credit card.  For the past seven years, American Express earned that distinction, but now it has to share the honor with Discover (my family has been a loyal to Discover since its first national roll-out campaign in the mid-80s). Not surprisingly, the CNN trolls (the commenters with more opinions than knowledge) chimed in on the subject of credit cards, but they were immediately shut down at every post. Two trolls in particular stuck out. One compared credit cards to a layaway plan, insisting that people who can pay off their monthly amount were better off using cash, and the other said credit cards were the shovel you use to dig your own financial grave.

I will discuss the first commentary in a moment as it was more relevant, but the second comment stuck with me because it was the perfect test for a hypothesis I had a few weeks ago. Imagine how much more agreeable we would be if we used first person in place of second person in our comments. For example, if that CNN troll had instead stated “credit cards were the shove I used to dig my own financial grave,” it would inspire more empathy instead of the barrage of defensive outrage (though, for all I know, outraged replies may be the gold that trolls treasure in the first place).

A lot of media outrage has been generated over the years about credit cards. Some of it is warranted, especially the predatory methods some companies used targeting fresh-faced college students who were falsely assured all their efforts today would be rewarded later, so they decided to spend a blue streak today, driving themselves into those aforementioned financial graves later.  There was also a slew of good, old-fashioned stupidity involved in consumer credit abuse, as the first comment mentioned, such as using credit cards to buy things now to pay off slowly.  Aside from the extraordinary fees charged for that irresponsible behavior, I still believe the resulting sensation of depression it can cause is more costly.

Personally, I got my first credit card as soon as I moved out to Arizona. It was through MBNA, which was a highly rated credit company until it was bought out by a highly disparaged credit company several years later. My credit card limit started at $3,000, and within a few years, it became a platinum card with an exponentially higher limit (as you may expect, that change occurred with the change in companies). I was offended by the increase, fearing that I would be more of a target for credit fraud, so I stopped using the card. In reality, the more unused credit you have in your name, the better it is reflected in your credit score. Canceling the card was a mistake, which may adversely affect me in the future.

Regardless, I was excited to apply for a Discover card to replace my Platinum card. Truthfully, Discover popularized the rewards gimmick that is an unspoken obligatory offer in every credit card today. The CNN troll who incorrectly stated that credit cards are mostly used for layaway purchases further defended her point by saying that the consumer is charged for those rewards vis-a-vis the monthly interest rate (finance) charges. Once again, her information was warped by the media-hyped fear mongering, and clearly not by personal experience.

In keeping with my previously mentioned “first person” theory, by paying off my credit card balance each month, I am not assessed a finance charge. I will still benefit from all the rewards though (and the credit card company still comes out ahead in the game) because those rewards are generated by the fees that credit companies charge the merchants. Truthfully, we are a society so grounded in credit that it is difficult for small businesses to survive without accepting credit. There are a few restaurants that I do not frequent simply because they do not accept Discover (and a few others that I never visit because they do not accept any credit).

Credit has gotten a bad wrap (for some good reasons) over the past few years, but the simple truth is that there is a way to use credit cards properly and responsibly, and the totality of those benefits is better than strictly hailing to the King (BTW, “cash is king”).

The Full Motley -- 3Q, 2014

I had reallocated my assets on Monday as I do each quarter, moving only a small fraction of my account (two-thirds of 1%, to be exact), and then at lunch on Tuesday, I happened to hear a discussion on Money Radio 1510, discussing the allegedly over-inflated research in favor of reallocating periodically, specifically noting that re-allocating monthly or quarterly was pointless. While I support some of that argument more than my actions would suggest (I honestly do not believe moving 0.67% of an account is critically important for long-term financial success), there are a lot of additional benefits to reallocating that the hosts of this talk radio program grossly (or, conveniently) overlooked.

First, periodic re-balancing keeps you thinking. Specifically, thinking about your future and your investments. Two things that, while I may not have any problem finding time to do so in the middle of the day, many others fail to consider. Granted, to the point of the show's hosts, over-thinking is a common pitfall for novice (and even expert) investors, but, to my point, neglecting it is on the opposite end of the spectrum and more detrimental in the long run.

Secondly, contrary to that program's apparent belief, not every piece of financial advice should be made in order to maximize profits. There are many things that are recommended solely to reinforce good habits and establish discipline.  That discipline in particular will prevail with cooler heads whenever the markets get particularly emotional (e.g., market corrections).  Periodic re-allocations can be one of those habits.

Furthermore, the downside of their argument against reallocating was that the initial allocation is completely arbitrary.  The hosts are professionals in the industry, so maybe they have clients often come to them devoted to a strict allocation, only to learn later that this allocation was generated by a computer program or an even more impersonal method.  Regardless, dismissing re-allocations based on the validity of the target allocation is where I mostly took a defensive stand.

The largest purpose of reallocating small amounts, such as monthly or weekly or daily reallocating will do, is to achieve rule #1 in investing: buy low, sell high. Until your target allocation changes significantly, generally due to the natural process of aging, there is no better method to move money out of inflated assets or move money into deflated assets than reallocation.  Because the amounts being moved are small and because these re-allocations are predesignated periodically, there should be no decisions to second-guess or no bad news to cause an adverse reaction in a temporary panic.

Another good habit for long-term financial success is diversification.  This year, I started adopting many more markets and sectors in my Roth IRA, including the gold (metals) market, healthcare sector, and 3D technology sector. Diversification can get you far, but there is a limit to its fruitfulness. Most people know that there is such a thing as over-diversification, but few would say that issue negates the benefit of diversification altogether. Same goes for re-allocations. Dismissing either strictly for its limitations is throwing the baby out with the bath water.

New Dimensions

"If you choose not to decide, you still have made a choice." -Rush

Recently, I wanted to invest in 3D Printing.  As soon as I heard about the concept, I knew the potential was limitless (for the next several years) and I would have jumped on investing into it at that time, except there were two major dissenting factors.  First, I had quit my job and my risk tolerance was minimal.  Secondly, the research I did on the subject unveiled three companies competing for supremacy in the industry.

Granted, the landscape was wide open enough for all three, but the memories of Beta and HD-DVD made the probability of it seem increasingly less likely.  Even if I picked the correct industry for a boom (3D Printing), I could have picked the wrong company and my investment would have ended up as a bust. Individual stock selection is high risk by its very nature, and I have never been involved in it.

Once I got hired back at my prior income level, my interest in 3D Printing rejuvenated.  Shortly thereafter I read a news article that the first 3D Printing Fund would be opened in February 2014.  I thought it was my lucky day!  By that point, I figured I would have restored my budgeting practices and I would be ready to invest again.

Unfortunately, the first article I read about the fund panned the investment because the fund manager had no experience in managing mutual funds, so I dismissed the investment idea altogether.  Besides, the Dow was slipping and I figured the losses would continue for the next several months.

Instead, things turned 180°.

After a strong finish to March and a stronger April, I saw an intriguing link to an article in late May suggesting that the end of cable television was near.  The presentation at hand would direct invested investors in where to put money to benefit for the new wave of television.  It turned out to be a link by Motley Fool (no relation) and the 3D Printing industry was their answer, which I found out for a small investment of $50 for a 12-month subscription price.

Now that I had invested money in the idea of investing in individual stocks, I figured it was the best time to invest in individual stocks.  Additionally, shares in $WWE (of whose programming, I have been a loyal viewer since 1988) crashed that month, so I thought for sure that I would invest in them and in one of the 3D Printing companies.  Once again, I hit the dilemma: which one of the three?  All three were recommended in the Motley Fool article.

That dilemma made me reconsider the 3D Printing Fund.  I figured if I were going to invest in an industry of which I knew nothing about, then my investment selections would likely pale in comparison to the selections of a professional.  The fund manager Alan Meckler was basically a journalist by trade, and his lack of experience as a fund manager was neutralized by the fact that my option was investing myself, and I did not have any experience either.  Therefore, I decided to invest in the 3D Printing Fund ($TDPNX).  Incidentally I canceled my subscription to Motley Fool in the initial grace period, and I got a full refund.

I talked to someone at work whose interest in discussing investments is equal to mine, and he asked why I would invest in a mutual fund for just three of its holdings when I could just invest in the three stocks myself without getting charged fees.  My answer was that I wanted to access to Mr. Meckler's knowledge about the rest of the industry, and my friend (an attorney by trade) immediately ceased questioning. I think he was testing my confidence in the decision, and I greatly appreciate it if so.  I did further research after investing, and I learned that the fund was registered as a global fund, so foreign companies creating advancements in the field would be on the fund's radar (if not in its portfolio holdings) long before residents in the United States would even heard the company's name.

Since I started my investment in the fund, it has increased 11%.  Although completely satisfied with the returns, I started looking at the individual returns of its top 10 holdings today.  The three stocks that I was torn among had returned 2%, 7%, and 15%.  Three of the other stocks in the top 10 that I never would have known about on my own had returned 20%, 25%, and 40%.

While the market is setting new all time highs, only 50 points away from crossing 17,000, I think most stocks are a bad purchase at this point (I expect the market to go through a correction soon, and an increasingly more severe correction the longer it stays afloat).  However, I want to diversify myself while the stock market is high to mitigate the impact and, ideally, find at least one industry that sustains its value while everything else around it crashes.

Maybe if the market fell below 15,000 again, I would reconsider buying individual stocks.  For now, mutual funds offer all the investing prowess I need.

CNNFN: From cancer survivor to millionaire

From cancer survivor to millionaire

By Matt Egan  @mattmegan5 June 21, 2014: 9:27 AM ET
http://money.cnn.com/2014/06/21/investing/cancer-survivor-investor/index.html?iid=HP_River

Tim Eimer defines 2008 in one word: Bleak.

The science teacher and textbook author was fighting off a rare and terminal form of cancer as he watched the Great Recession swallow up 40% of his investment portfolio. Friends in finance warned him to dump his stocks because they feared the Dow would soon plummet from its already depressed 8,000 level to 1,000.

Despite those daunting challenges and ominous warnings, Eimer poured cash into the stock market at the depths of the crisis, a decision that has left him and his wife Gayle on track to become millionaires.

"I didn't jump ship. It was scary buying back into the market at that time," said Eimer, who lives in Horsham, Pa., a suburb of Philadelphia.

Eimer, who in 2005 had been given just two years to live, said he stuck to his belief that you've got to be in the market to make money.

Besides, he said, "If the Dow goes down to 1,000, then all of us have a lot more problems than losses in stocks. You're talking about the collapse of our economy."

'Prepared for the worst' Eimer's courageous investing during the financial crisis was made possible by his family's frugal, debt-free lifestyle.

Unlike most Americans, he didn't lever up during the mid-2000s on luxury cars, over-the-top houses or second mortgages.

Instead, Eimer and his wife saved half of his salary and invested heavily in their retirement and college savings funds. They paid off a mortgage on their two-bedroom condo in 2003 and bought a new Toyota Corolla for just $15,000. Later they "splurged" on a Honda Element for $18,000.

"Frugality was grounded into me from a young age," said Eimer, whose grandfather lost everything in the Great Depression. "If we had not prepared for the worst, we would be faced with financial disaster."

Eimer said he converted his wife from a "spendthrift" when they first met to a frugal manager of the household budget. "Without her, we wouldn't have been able to do any of it," he said, noting the family gets by on just a single prepaid cell phone.

Beating the odds: Disaster struck in 2005 when Eimer was diagnosed with an extremely rare and terminal form of thyroid cancer. That forced him to give up his lucrative side career making up to $200 an hour writing textbooks for McGraw-Hill, Prentice Hall and other publishers.

There was one doctor on the whole planet who was researching this form of cancer, Eimer said, and she developed an experimental chemotherapy drug that helped save his life.

While the drugs extended his life considerably, he still deals with chronic pain, fatigue, abdominal pain and loss of his hair, which has since returned. But Eimer has been able to continue teaching middle school science at Phil-Mont Christian Academy in Springfield, Pa.

Almost a decade after receiving his grim diagnosis, Eimer has beaten the odds and is currently in stable condition. He's also beaten most retail investors by actually participating in the bull market that has left many everyday Americans behind.

"I went through the dotcom bubble, but this seemed worse," Eimer said about the 2008 crash after Lehman Brothers collapsed in September of that year. He said friends who were financial advisers told him to "ditch all stocks and buy silver."

Buying at the bottom: But Eimer did the exact opposite of those dark warnings: He scooped up beaten down stocks and bonds at what turned out to be historically-low prices.

Eimer said he felt confident enough to do this because he had no debt and a ton of fresh powder: 25% of his portfolio had been in cash when the market cratered. At that point, he had bigger problems as he braced for cancer to take his life.

Rather than risk trying to find individual stock winners, Eimer continued a strategy that he's implemented since the 1990s: Buy a diversified variety of index and mutual funds.

Bad luck while investing in individual stocks led Eimer to conclude: "It was only my broker who was getting wealthy."

One mutual fund that's been particularly kind to him is the Vanguard PRIMECAP Fund(VPMAX), which invests mostly in technology and biotech stocks like Google (GOOGL,Tech30) and Amgen (AMGN). The fund has soared 133% since the start of 2009, besting the S&P 500's 123% gain.

"Today, our portfolio is up about 2-1/2 fold from the recession lows. We have zero debt, we're on target to become millionaires in about three years and I'm still alive," Eimer said. "We count ourselves blessed!"

(I share this article for two points: 1) he *risked* his money because at that rate, the collapse of the dollar was the only thing to fear (exact reason I had), and 2) his spin on financial advisers.

The Full Motley -- 2Q, 2014

After a slow start that allowed the "gloomers & doomers" (as Moe Ansari loves to call them) to start crowing that a major market retreat was near, the Dow set new all-time highs earlier this quarter.  Right now, the market has given up those earnings, but it is at 16,575, which is almost exactly where it started the year.  I cannot say that it is showing no signs of slowing down, because the honest truth is that there were no signs that it would increase this year so far, or not decline.  Either is possible, especially in the short run, and a 10% market correct may be the most feasible.

Regardless, my stock-heavy retirement account is doing fine and, most surprisingly, I moved money from my stock index fund, my active stock fund, my international index fund, AND my bond index fund.  The sum taken from all those funds was almost exactly 1% of the account, and most of the funds to be rebalanced (>80%) came from the Vanguard Total Stock Market Index Fund and Vanguard PRIMECAP Fund.  My only fund under-performing its peers over the past three months was my most aggressive active stock fund, which was initially unexpected, but if small- and mid-cap stocks slow down first, then the large-cap funds may just be recognizing the residual benefits from last year's massive increases, and a correction is ahead.

In other news, maintaining this blog has been getting slightly more complex as my employer has started to monitor what I post (hence, the new disclaimer on the main page, which I had always wanted but I never had an incentive to find out how to add it).  Their oversight should not affect the content (as stated in the disclaimer, every moves that I discuss is tailored exclusively to my personal goals and risk tolerance) but it may skew the frequency with which entries are posted.  With a ridiculously low readership, however, I do not anticipate it becoming an inconvenience for anyone.


Move $1144 to Explorer.
Move $25 from Hi-Yield.
Move $545 from Stock Index.
Move $340 from PRIMECAP.
Move $103 from Bond Index.
Move $131 from Int'l Index.

Haunting Words

Very early in my career, I was a financial adviser.  Straight out of college and still working as a cashier at Schlotzsky’s Deli, I was the quintessential financial adviser off the street: A know-nothing mouthpiece who memorized a presentation to recite to as many people as I could find who were willing to listen. See, there are no actual qualifications to call yourself a financial adviser. Conversely, Certified Financial Planners are qualified.

Meanwhile, I was 23, and this career choice was a lot tougher than I had imagined.  Who knew that no one eating at a fast food restaurant wanted to listen to their friendly cashier for financial advice?  Just like the greener grass in other yards, other people had more success getting people to listen to them, mostly older people (in reference to both my colleagues and to their clients – albeit, I was only 23, so virtually everyone in the work force was older).

It was May 2000, and I was just starting out in finance. I knew nothing. Well, almost nothing! I remember my mentor telling me the story of his clients who were nearing retirement, but they had not saved a large enough nest egg. These bullrageous market conditions were a blessing, and he said that, although those clients were hesitant to put a lot of their money in the market, when they saw how quickly and how high the amounts that they put in had grown, they finally agreed to follow his advice and put a lot more of their money in these fast-rising technology mutual funds. Remember, this was May 2000. As we know now, putting more money in the tech bubble at that stage was the modern equivalence to 1912 contemporaries buying non-refundable tickets on the Titanic’s next voyage.

Unfortunately, I did not know any better then. It is humbling to think how I got from there to here, except that it was a day-by-day process. I got here because I lived each moment in between the two. I remember after the 2009 recovery saying I felt far more confident in my investing knowledge because I had experienced a full cycle for myself. Truly, I had.

My first investment was on March 11, 2003, an insignificant day in history to investors but a truly ideal day to start investing because it was the absolutely lowest point of the stock market that calendar year (the markets were recovering from their 2002 lows, but the incline hit a minor correction in February and March). My investment was the Vanguard 500 Index. I still have that investment in my portfolio, and I have never added another penny of my own money into the fund, but I have let dividends reinvest. It allows me to see how large a little amount can grow in the course of 10 years. Likewise, I can see firsthand how quickly a setback can wipe out numerous years of that growth.

CNNFN: Top Incomes Can Be Fleeting

Top incomes can be fleeting
By Jeanne Sahadi
http://money.cnn.com/2014/03/26/pf/taxes/high-income-taxpayers/index.html

There are few lifetime memberships in the exclusive club of high-income taxpayers.

In fact, there's a lot of turnover in the top 1%, entry into which took at least $389,000 of adjusted gross income in 2011 -- a threshold met by nearly 1.37 million returns that year.

Membership can be fleeting because many people are temporarily catapulted into the top 1% or even top 0.5% of tax filers due to a windfall of some kind.

Two examples: proceeds from the sale of a business or from one-time capital gains.

In fact, nearly 60% of those in the top 1% of taxpayers at the start of any 10-year period between 1987 and 2010 had dropped out by the 10th year. That's from a study by the U.S. Treasury Department.

And the Tax Foundation found this: Of those who reported income of more than $1 million between 1999 and 2007, about half only reported income that high for one year.

Make no mistake: They still may be rich. But their incomes fluctuate greatly.

"There are a lot of people who are [at the top] only once in any given period," said Roberton Williams, a fellow at the Tax Policy Center.

Transience is also a characteristic of those at the very tippy top. Among the top 400 taxpayers between 1992 and 2008, nearly three quarters appeared only once during those 17 years, according to IRS data.

There are many reasons why tax filers drop out of the highest income groups:
--They may start to bring in less taxable income once they retire.
--They may have a bad year on their investments and claim losses, which can offset their capital gains.
--They may change the composition of their income, so that more of it is coming from tax-exempt investments, which don't have to be reported on one's 1040.

Indeed, the federal tax return offers no clue to a person's net worth.

For example, the size of retirement accounts and the value of property that has not been sold are not reported on tax returns. While those assets may throw off some taxable income, such as rent, their underlying value is a better measure of wealth.

That's why there's a lot less fluctuation in the top ranks of the wealthy than there is among the highest income households.

Bill Gates' income in any given year may be topped by that of a hedge fund manager, Williams noted. But his wealth remains vast enough to keep him among the world's richest for a very long time.