All posts by Jacob A Irwin
Was The “Lost Decade” Really Lost For Investors? – Guest Post at Yakezie.com Today!
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Click here to enter my free giveaway for 3 sets of 500 business cards from AllBusinessCards.com.
Good day all! Just a quick post today to recommend stopping by Yakezie.com whenever you have a chance to read my guest post that went live this morning (at the link below).
Was The “Lost Decade” Really Lost For Investors – Yakezie.com
In this post, I take a look at the performance of the stock market over the past 10 years, a time period often labeled as “The Lost Decade” for investors because the market basically ended up in 2011 at the level at which it started in 2001.
What I found was that by using dollar cost averaging, the returns delivered by the market over the past 10 years weren’t quite as bad as the financial media would have us believe!
How about you all? How did your investments fair the past 10 years? Was it actually a “lost decade” for you?
Share your experiences by commenting below!
***Photo courtesy of http://cdn.yakezie.com/badges/300-yakezie-01.png
Yakezie Carnival – Tour de France Financial Factoids – June 26th, 2011 Edition
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Click here to enter my free giveaway for 3 sets of 500 business cards from AllBusinessCards.com.
Welcome everyone to the June 26th, 2011 edition of the Yakezie Carnival!
For those of you unfamiliar with the Yakezie Personal Finance Blog Network, it is the web’s largest, most involved, and most organized group of personal finance and lifestyle bloggers. Participants in the network collaborate multiple times throughout each day on the Yakezie forums and through other mediums. You can view all of the details at the “About Yakezie” page by clicking here.
Each week, the members and challengers of the Yakezie Network submit their best articles to be featured in the Yakezie Carnival. And, today, it is My Personal Finance Journey’s honor to be the host!
The theme for today’s carnival is random Tour de France (the biggest cycling race in the world) financial facts. With this carnival being only 4 days away from the start of July and the Tour de France cycling race, I figured this would be a fitting theme!
In addition, it fits in nicely with the spirit of my site starting the Tour de Personal Finance this year. Each July from 2011 onward, I’ll be running/hosting the Tour de Personal Finance (sort of a Tour de France for PF blogging competition) on MyPersonalFinanceJourney.com. You can view all of the details and guidelines at the announcement below.
- Name and URL of blog.
- URL and title of your best article from last 12 months.
- A concise 2-5 sentence description of the post (this will be posted on each stage’s announcement, so really SELL why post should win!).
- The month and year in which you started blogging (will be used to determine White Jersey winner).
OK, enough with the introduction! I’m getting carried away. Let’s get to this week’s Yakezie Carnival articles.
The best thing about hosting a Yakezie Carnival is that the posts are all top notch, and not from spam sites talking about online dating of Ukranian brides! (haha – I’m not even joking. I have received carnival submissions like that in the past).
Top 3 Editor’s Picks
1. Frugal Confessions brings us We Were Scammed on Craigslist: How to Protect Yourself from Fraud, saying, “After snagging an interested buyer, Mary Hudson, for our $500 item we listed on Craigslist, we became increasingly alarmed at the strange requests and secondhand-English email correspondence. See how this scam played itself out.”
It really ticks me off how sophisticated of schemes the scam artists are coming up with these days. Just take a look at the one Amanda shares in this article!
When I got screwed over by a fake eBay supplier, the payment was also requested to be issued via Western Union. Maybe Western Union should change it’s slogan to, “Preferred by fraud artists worldwide!”
2. KNS Financial brings us Need To See A Doctor? Go Rob A Bank!, saying, “James Richard Verone robbed a bank in order to get medical care. Find out the details behind this strange story, and then weigh-in with your opinion!”
In this article, a man goes to some extreme measures to get medical care! Or, were they extreme…..
3. The Amateur Financier brings us What I Want to Pass on to My Children.
Passing along your life lessons to your children is what every parents wants. Personally, I think the biggest gift that my parents passed on to me is the gift of wanting – wanting to succeed, wanting to do my best, and wanting to learn more. What do you hope to pass on to your children?
And, listed below are the rest of this week’s submissions!
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Tour de France Financial Factoid # 1 (brought to us by Wikipedia.org)
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Outlaw Finance brings us The Difference Between a Roth IRA and Traditional IRA, saying, “This article looks at the Roth and the traditional IRA individually and then compares the two. ”
Squirrelers brings us Memorable Examples of Witnessing Generosity.
The Ultimate Juggle
brings us Happy Hour Isn’t for Drinks, saying, “Happy hour is known for its price break on drinks, but it’s also a great way to save money on food – especially if you have to eat out early anyways with a toddler!”
Money Reasons brings us The Benefits of a High Credit Score, saying, “I describe how to take advantage of a high credit score if you have one. Also I explain why having a high score is beneficial.”
Money Health Central brings us Did The Debit Card Revolution Kill The Balanced Checkbook?, saying, “We use debit cards for convenience. In return, the transactions fly fast and furious. Balancing your checkbook is nearly impossible, which can lead to other problems.”
In fall 2006, Lance Armstrong and several other institutional investors were considering buying the Tour de France in an effort to reform cycling for the better. It was estimated that it would have cost about $1.5 billion at the time to buy the Tour. Quite a hefty price tag! I don’t believe it ever went through though. The current family that owns the Tour didn’t want to sell.
My Multiple Incomes brings us
What To Consider Before Starting a Website, saying, “A few key points to know before you take the plunge of starting a website!”
***Photo courtesy of http://www.flickr.com/photos/dripps/2304151835/sizes/l/in/photostream/
Carnival of Value Investing # 9 – June 25th, 2011 Edition
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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Click here to enter my free giveaway for 2 copies of H&R Block At Home Premium Edition
Welcome to the June 25th edition of The Carnival of Value Investing!
For those of you unfamiliar with The Carnival of Value Investing, the purpose is to showcase the best posts throughout the personal finance blogosphere each month related to undervalued stocks and value investing strategies in general.
Investopedia.com defines “value investing” in the following way:
The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.
Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.
I think that all of us can benefit from knowing more about value investing. Even for a passive investor like myself, I incorporate small-cap and large-cap value index mutual funds in to my investing strategy.
As such, let’s get to this month’s value investing posts! There were quite a few posts submitted to the carnival this month. However, only the 3 selected below were specifically related to value investing.
Echo presents How To Add Gold To Your Portfolio posted at Boomer & Echo.
In this post, Boomer and Echo discuss different ways that gold can be added to an investor’s portfolio. However, they advise that caution should be taken before buying, given that gold is currently priced above it’s 52-week high. Personally, I have also been contemplating whether or not to add gold to my investing portfolio. However, as a passive investor, I haven’t yet decided the best way to go about this, or that it is even totally necessary. This post will serve as a good resource whenever the time comes for me to take action.
No Debt MBA presents Buy stocks that leave the S&P 500 posted at No Debt MBA.
No Debt MBA shares their thoughts about an interesting value investing strategy in this post. Given the fact that so many mutual funds track/buy shares of stocks that are in the S&P 500 index, they broach the question of whether an investor could make a good deal of money by investing in stocks that have recently left the index (and are intrinsically undervalued as a result).
My guess to this would be that the market would self-correct to account for this. However, I am by no means an expert when it comes to individual stock selection. What’s everyone else’s take on this? Will this strategy work?
Investor Junkie presents What I’m Investing In Now posted at Investor Junkie.
In this post, Investor Junkie shares his thoughts about the strength, value, and direction of the current stock market and also the recent performance of his actively managed investments. Overall, he feels that the market is overpriced by historical standards. I would tend to agree with this assessment. One good practice that he does is to carry 15% of his asset allocation in cash. He uses the cash to invest in the market when corrections (significant dips) occur, buying undervalued shares. Nice idea!
Thanks to everyone for participating and for reading! Hope you enjoyed the posts.
You can submit your posts for the 10th (July) edition of the Carnival of Value Investing using the submission form either at Blog Carnival or at the Canadian Finance Blog Carnival Workaround.
***Photo courtesy of http://www.flickr.com/photos/thewalkingirony/3051500551/sizes/z/in/photostream/
Introducing The Tour de Personal Finance Competition – Submit Your Best Posts Today!
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Click here to enter my free giveaway for 2 copies of H&R Block At Home Premium Edition
I simply love the Tour de France.
There is truly something magical about watching this particular 3 week cycling race unfold in July each summer. In the race, the riders cover nearly 2,000 miles, including stages through the majestic Alpine Mountain range and the sunflower and vineyard fields of Southern France. As an avid cycling fan and past Category 2 road cycling racer (I raced once-upon-a-time from 2001-2005), July is a truly a glorious time of year.
And, now that I’ve been blogging for a little over a year and a half, I’ve decided that I want to bring the spirit of healthy (minus the occasional doping scandal) competition embodied by the Tour de France to the personal finance blogosphere in the form of the Tour de Personal Finance!
What is the Goal of the Tour de Personal Finance?
How The Tour de Personal Finance Will Work
- Personal finance bloggers will submit their best, highest quality post from the past year (only one post) to me via email (see below for details of how to submit a post) before July 1st.
- The posts will then be paired off using a random number generator.
- The paired posts will “compete” against each other each day in a stage (what they call each day of racing in the Tour de France), which will be posted on My Personal Finance Journey.
- Readers will comment on the post to vote for which post they think is better. The post with the most votes each day will be declared the STAGE WINNER.
- The stage winners will move on to the next round, where they will square off against other stage winners. Again, the best post each day will be voted for by the readers.
- The blog author will be allowed to vote for him/herself. Others will most likely do it, so you should too! But, no gaming of the system will be allowed. Entrants will, however, be allowed to ask their friends to vote for them, promote the contest on their site, etc.
- At the end of the month, the final winner of the competition will be crowned the Maillot Jaune (or the yellow jersey, which is given to the overall winner of the Tour de France each year). Ties will be broken by me.
Winners’ Jerseys
- Yellow Jersey – Winner of overall competition. Article voted “best” by readers.
- White Jersey – Goes to highest placing, new blog (judged by how far they get in the competition and how long they have been blogging).
- Green Jersey – Goes to the blog whose article wins a single stage “the fastest.” In other words, the Green Jersey goes to the blog who wins a single stage by the biggest margin against their competitor.
- Polka-Dot Jersey – Goes to the best blog article entered which details information on “climbing” out of the debt “mountain”.
How To Enter
- Name and URL of blog.
- URL and title of your best article from last 12 months.
- A concise 2-5 sentence description of the post (this will be posted on each stage’s announcement, so really SELL why post should win!).
- The month and year in which you started blogging (will be used to determine White Jersey winner).
Please let me know if you have any questions! Let the cycling (and blogging) begin!!!
***Photo courtesy of http://www.flickr.com/photos/joeshlabotnik/350582000/
How To Save Your Family $1000 On Your Next Vacation – Pay For The Rental Car With Your Credit Card
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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Click here to enter my free giveaway for 2 copies of H&R Block At Home Premium Edition
Recently, I took a trip down to Raleigh, North Carolina to celebrate my grandfather’s 90th birthday.
After arriving at the party location, our gathered family began to eat dinner and share interesting and funny stories about my grandfather over the past half century or so.
During the dinner, a fairly fierce wind started to blow outside. However, our family didn’t think much of it because little to no rain was coming down.
Needless to say, we were very shocked when we strolled outside after dinner to find the tree in the picture below laying on top of my Dad’s Enterprise rental car. Apparently, the tree had been loosened by a semi-tornado that came through Raleigh a week or so before, and the wind was all that it needed to fall down nearly 30 feet on to my Dad’s car. Yikes!!!
After having a little laugh about how strange the situation was (what are the odds of having a tree fall on your car in a parking lot after all?!), I began to think about how the situation would be handled from a financial/insurance perspective because I know that my Dad is smart and never gets the rental car insurance coverage.
What Happens If Your Car Gets Damaged And You Did Not Buy The Rental Car Insurance Coverage?
Rental car companies almost annoyingly push the sale of insurance policies covering any damage incurred to rental cars while under your care. In fact, they try to push the sale of the coverage so hard that they make you feel almost reckless if you decline the coverage. Talk about tricky!
However, is this coverage really necessary?
The question to this is a resounding, “NO,” (with one exception) for two primary reasons.
Reason # 1 Why Rental Car Insurance Is Not Needed – Your Existing Car Insurance Already Covers You
That’s right folks, if you already have a comprehensive car insurance plan for your normal car, you are most likely already covered under that policy for any damage that gets inflicted to the car while under your watch-full care.
However, it is important to remember that you will still be responsible for paying your deductible on your car insurance before your full policy takes effect. This is just another important reason why you should have an adequate emergency fund.
Reason # 2 Why Rental Car Insurance Is Not Needed – Your Credit Card Covers You (if you paid for your rental car with the credit card)
A very powerful, useful, but somewhat unknown perk of many credit cards is either providing primary or secondary insurance for rental cars rented using the credit card.
If the card has primary coverage, it will pay the full cost of repair or replacement of the car, without even having to access your regular car insurance policy. If the credit card offers secondary coverage, it will pay your deductible and any replacement or repair costs not covered by your normal car insurance, but will require you to file a claim with your main car insurance.
Regardless of whether your credit card carries primary or secondary rental car insurance coverage, this is a very cool perk that is offered, and definitely one that I would recommend you follow up on.
In my Dad’s case, he called up his credit card company and found out that he has primary coverage. Because he had used his credit card to pay for the rental car, he avoided having to spend $1000 to pay for his deductible on his regular car insurance policy.
Follow up Action Item – I would recommend calling your different credit card companies and finding out which one(s) offer rental car coverage. After you find out, you can make sure to bring that card(s) with you on your next trip and pay for the rental car with it. Just make sure you smile for me when you decline the rental car insurance coverage!
The One Exception For When Rental Car Insurance Is Recommended
How about you all? Do you buy the rental car insurance coverage offered by many companies? Why or why not? Do you think it’s worth the money? Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/jefield/37133848/lightbox/
My Current Asset Allocation and Net Worth Growth – May-June, 2011
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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Click here to enter my free giveaway for 2 copies of H&R Block At Home Premium Edition
Overall, the 1st half of 2011 went very well.
I was able (surprisingly) to successfully complete the required classes in my chemical engineering PhD program, and this summer, I have been getting a nice start to my research in preventing the protein aggregation that is believed to be a cause of Alzheimer’s disease.
As far as the stock market goes, this was a nice upwards trend during the first 5 months of the year, and investors were enjoying ~6% gains in their portfolios. However, recently, the market has dropped off, and we are back to only about a 2% overall gain in 2011. Not bad, but still, not the best returns in the world. Let’s hope that things improve as we get in to the Fall.
With all of the up and down that has occurred, let’s take a look and see how it affected my net worth progress…shall we?
Net Worth Growth (not including condo)
From
29-April-2011 (when the last portfolio update was published – see link below for more information) to 18-June-2011, the S&P 500 index went down 6.54%. Yikes! Pretty nasty little run for a month and a half, eh?! Let’s hope it doesn’t stay this way!My Personal Finance Journey – April, 2011 Portfolio and Net Worth
During that time period, my net worth (excluding condo ownership) decreased by 0.60%.
Condo Equity Growth
Currently, I have 11.4% home ownership in my condo (up from 9% at the end of December, 2010), with this accounting for 27% of my real net worth (so net worth subtracting the condo loan – this is different from the net worth above).
I have now achieved the following financial goals in 2011. I have done quite well I think – thanks to everyone’s help for keeping me motivated and accountable!
- Have contributed the maximum allowed by law for 2011 to my Vanguard Roth IRA ($5000). I am very proud to have achieved this!
- Am maintaining slightly over my target of 6-9 months of expenses in a cash reserve fund in my Dollar Savings Direct high yield online savings account. This is due to being paid my entire summer salary (through August) at the end of May. However, this should correct itself as we get towards the end of the summer.
- Have rebalanced my mutual fund portfolio to meet my asset allocation target %’s (75% equity, 25% fixed income overall)
- Have donated $1,300 to Multiple Sclerosis Foundation in 2011 (5% of income) and passed my target fundraising amount of $5000 for my MS 150 ride that took place June 11-12, 2011. I will most likely be shooting for raising $7500 for 2012. Rock n’ Roll!
For a detailed list of my short term, mid term, and long term financial goals, click on the link below:
My Personal Finance Journey – Financial Goals
Review of Current Asset Allocation (excludes condo)
- Overall Fixed Income / Equity Allocation
- Currently, 29% of my net worth is invested in fixed income instruments (cash or bond funds), and 71% is invested in equity.
- This is 4% off from my targets for these categories of 25% (fixed income) and 75% (equity), but still within my +/- 5% allowable band limits.
- Equity Allocation
- In the equity portion of my portfolio, 73% is invested in US Domestic Equities with the remaining 27% being held in international equities.
- This is almost perfectly aligned with my equity breakdown targets of 71% and 29%, respectively, for US Domestic and international holdings.
While the overall percentages for these categories looks fairly good, a detailed look (table below) at the allocation breakdown reveals the real story and provides for better analysis of the current state.
Remember: a red flag goes off if your current % allocation in a category is greater than +/- 5% off of the target allocation. This is my trigger that I need to rebalance that aspect of my portfolio.
% Cash (money market target 5%) 10%
% non-inflat Bond Funds (target 15%) 15%
% TIPS Bonds (target 5%) 3%
% International Equity (Target 11%) 10%
% International Emerging Markets (Target 11%) 10%
% Domestic Large Cap (Target 8%) 7%
% Domestic Small Cap (Target 8%) 9%
% Domestic Small Cap Value (Target 14%) 14%
% Domestic Large Cap Value (Target 13%) 13%
% REIT (target 10%) 9%
Analyzing my current asset allocation percentages, it appears that my current asset allocation is aligned with my target levels with the exception of the cash portion of my portfolio. This is once again due to the fact that I have more cash than normal on hand in my money market portfolio from being paid in advance for the entire summer period at the end of May.
Because of this, no action needs to be taken at this time, as this will correct itself as we move forward in the summer and I naturally spend more money.
My next moves for the June-July, 2011 time frame will be to do the following:
- Now that I have fully funded my Roth IRA, any extra money I have will most likely go towards paying off my condo loan and obtaining even more equity in that investment. The only other option I would have is to invest in my individual mutual fund (taxable) account. But, I feel that it would be a more efficient use of my time to build up more equity in my condo. What do you all think?
- Continue investing $41.67 each month in microloans to help the working poor in Peru and/or Nicaragua This is part of my 2011 goal of having $500 in microloans. I am currently more than half way there!
- Save 30% of any income from blogging for 2011 tax payments next year at tax time.
Wish List
- At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund. This gives better, broader diversification to the US stock market.
- Install a stacked washer/dryer combination unit in to my condominium. This one will be a long shot, but it just may be possible! More than likely, this will be something that I will do in 2012-2013.
How about you all? How did you progress with your net worth in May-June 2011? What are your thoughts about the strength of the market right now? Do you think it will rebound?
Share your experiences by commenting below!
***Photo courtesy of http://farm4.static.flickr.com/3154/2625861427_0a6b6f48c2.jpg
Dollar Cost Averaging vs. Dollar Value Averaging – Which Is Better?
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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Click here to enter my free giveaway for 2 copies of H&R Block At Home Premium Edition
This post was selected as the No. 2 pick in the 109th Best of Money Carnival over at Couple Money and the No. 1 pick in the 9th Carnival of Passive Investing at Wealth Informatics. Stop by the Carnival pages and read all of the great posts!
Recently, I received a comment on the post, Valuation-Informed Indexing vs. Passive Investing – Which Is Better?, asking whether I had used dollar cost averaging or dollar value averaging in my analysis.
In that case, the answer was “neither” because the analysis merely looked at the performance/growth of a $10,000 initial investment using both Valuation-Informed Indexing and passive investing in an attempt to determine which strategy was more effective.
However, the question definitely got me thinking about my own personal finances, whether dollar cost or dollar value averaging is better, and which I should recommend that people utilize.
To begin addressing these questions, we first need to have an understanding of what each method involves.
Dollar Cost Averaging
In Dollar Cost Averaging, the idea is that a constant amount of money is invested each month in to your account. Therefore, you will naturally buy MORE shares when the market is down and LESS shares when the market is up. Sounds like a good, simple method, right?
Dollar Value Averaging
In Dollar Value Averaging, the idea is to meet portfolio value goals that you pre-define at regular intervals throughout the year.
For example, say you bought the S&P 500 index mutual fund with Vanguard in your Roth IRA for $3000 in 2010. In 2011, you plan to contribute $200 per month to the fund for all 12 months. Therefore, you would then lay out value targets throughout the year as follows.
End of Month Portfolio Values
Jan $3200
Feb $3400
Mar $3600
Apr $3800
May $4000
etc
At the end of the month, you assess the current value of the portfolio and compare it to the targets above. For example, if at the end of January, the fund is worth $2900, you would then contribute $300 instead of $200 in order to force yourself to buy more shares when the market goes down. Then, at the end of Feb, the market has gone up a lot and we find that the value of fund is currently $3500. Since it is over our target, we would then invest nothing in the stock fund, and instead place the investment money in a cash or fixed income security. Make sense?
Why Do Most People Use Dollar Cost Averaging?
In my reading over the years, most experts seem to agree that dollar value averaging is more effective in the long term than dollar cost averaging.
However, dollar cost averaging seems to be more aligned with how most investors save money/contribute money to their retirement plans. It is also a simpler approach/strategy to roll out.
So, why do most people use dollar cost averaging, despite the consensus among experts about the superiority of dollar value averaging? Well, the majority of investors (me included) invest money for retirement in one of three ways, as described below.
- They specify to contribute a set percentage (dollar cost) of their monthly income to their 401k retirement account.
- They specify a percentage (dollar cost) of their monthly income to contribute to their Roth or Traditional IRA.
- They spend money throughout the month according to their routine. Then, at the end of the month, they invest the money they have left over in their Roth or Traditional IRA.
Potential Problems with Dollar Value Averaging
However, due to the importance the decision of using dollar cost vs. dollar value averaging can potentially have on long-term returns, I wanted to perform a fairly in-depth analysis to determine what trends result.
Analysis – Dollar Cost Averaging vs. Dollar Value Averaging – Which Is Better?
In order to determine whether dollar cost or dollar value averaging demonstrated out-performance over a long-term period, I examined the portfolio value growth of two hypothetical portfolios over the past 10 years (June, 2001 to June, 2011) employing dollar cost and dollar value averaging.
Both portfolios assume a monthly target contribution of $500. The only difference is that for the dollar cost averaging strategy, this is the exact amount invested on a monthly basis, while for dollar value averaging, we will be targeting to increase the portfolio’s value by $500 each month.
Portfolio 1 – Assumes that the portfolio is made up of a single equity mutual fund. In the analysis, I used the Vanguard Total Stock Market Index Fund.
Portfolio 2 – Assumes that the portfolio is made up of the same equity and fixed income index mutual fund mix that I currently employ (see table below for detailed allocation splits). Overall, this portfolio has 25% of the assets in fixed income securities, 75% in equities, and employs monthly rebalancing.
Analysis Results
The complete results of my analysis can be found at the Google Docs Spreadsheet link below.
Google Docs Spreadsheet – Dollar Cost vs. Dollar Value Averaging – Which is Better?
Because of 1) the results found in my analysis and 2) the previous books I have read agreeing that dollar value averaging is the “way to go,” I think it’s time that I begin thinking about implementing this strategy to new money I invest in my finances.
However, to do this, it will not be 100% easy. Therefore, I will need a solid plan to ensure that the implementation goes successfully!
Implementation Plan for Changing from Dollar Cost to Dollar Value Averaging
If you look at the pink highlighted Column P of the “Multiple MF Portfolio” tab on the shared spreadsheet, you’ll see what I mean when I said that dollar value averaging is not the easiest thing to do!
Why is this you might be asking? It stems from the fact that with dollar value averaging, the amount you need to invest VARIES greatly in order to keep your portfolio value steadily increasing.
For example, in February 2009, dollar value averaging dictates that I needed to invest $4,833 that month. However, from March, 2009 to present, the system dictates investing $0. While investing $4,833 in one month sounds like a wildly large amount of money, overall, dollar value averaging only causes you to invest more accumulated money than dollar cost averaging 26% of the time (so, not that often).
Even though dollar value averaging recommended keeping money out of the fixed income and/or equity market from March 2009 to the present, I definitely would not want to miss out on contributing money each year to my tax-privileged 401k or Roth IRA accounts.
Because of this concern and the fact that I have already contributed the maximum allowed to my Roth IRA for 2011 (so I am too late to do it this year), the way I plan to implement dollar value averaging in 2012 is shown below:
- Using the spreadsheet above as a template, I will create a spreadsheet with the goal of increasing my overall portfolio (excluding condo ownership) by $420 each month.
- The $420 per month increase is calculated by dividing the maximum allowable 2012 Roth IRA contribution of $5000 by 12.
- On the 1st or 2nd of each month, I will automatically transfer $420 to my Roth IRA Vanguard account and direct it to be invested in the Vanguard money market mutual fund. We’ll call this my “money parking lot.”
- Also, at this time, I will examine my current portfolio’s asset allocation percentages and determine if I need to move around any money within the tax-deferred accounts (but will not touch money in the “parking lot.”
- On the last day of each month, I will compare my total portfolio value to the target value (old value + $420).
- If the current value is less than the target, I’ll take the money that is in my “money parking lot” and invest it in such a way that maintains my asset allocation targets.
- If the current value is more than the target, I won’t touch the money in the parking lot.
- It will be important for me to include the parking lot cash/funds in my overall net worth calculations, but to exclude them when looking at my portfolio asset allocation percentages. This is due to the fact that the added cash could skew the “invested” asset allocation levels.
- This process will then be repeated each month.
Conclusions
For quite some time now, I have read about the benefits of using dollar value averaging. However, for one reason or another, I always talked myself out of implementing the strategy for my investments.
But, after seeing the 13% out-performance of dollar value averaging over dollar cost averaging over the past 10 years in this analysis, I am now convinced enough to try it. I am hopeful that it will be an effective strategy, and also one that becomes easier to execute each month as I become accustomed to doing it. Wish me luck!
How about you all? Do you currently use dollar cost or dollar value averaging for your investing? Which do you think is superior/provides superior returns?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/calistan/3610859184/sizes/l/in/photostream/
June 2011 Financial Goals Update – Short Term, Mid-term, and Long Term
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Back in January of this year, I laid out my short term, mid-term, and long term goals for the 2011 year. I do this once every year as part of my goal to create what author David Bach calls a Purpose Focused Financial Plan. The goal of this system is to employ money in your life in a way that matches your life values and dreams.
You can read more about my journey to create this system at the following links – Creating a Purposed Focused Financial Plan & My Personal Finance Journey’s Investment Strategy.
As part of making this system work, I wanted to give an update on how I’m doing so far this year with the goals I established. Overall, I feel that I am doing a satisfactory job. I got semi-behind on these updates (had to give a bulk one for the months of January-April, but these past few months, I am much more on top of things! 🙂 Let’s keep our fingers crossed to keep this up!
Short Term (< 1 year) Goals:
- Contribute $5000 (or $420 per month) to my Roth IRA with Vanguard this year (maximum allowed) – Complete. Have now contributed $5,000 so far this year. Because my graduate school employment doesn’t include the perk of a 401k, my tax-deferred investing options for 2011 are now exhausted. Because of this, I will now begin pouring any extra money at the end of each month towards my condo home loan. Nice!
- Reach net worth target for this year (not displayed here) – Ongoing – getting closer and closer! Requires 20% increase in net worth. May not be possible to obtain, but will attempt.
- Maintain target 6-9 months of expenses in cash reserve fund in Dollar Savings Direct account – Currently, I have slightly too much cash on hand in my money market savings account due to being paid for the entire summer at the end of May. But, this should correct itself as we get towards the end of the summer.
- Rebalance mutual fund portfolio to meet asset allocation target %’s (75% equity, 25% fixed income overall) – Correct for now, but ongoing.
- Obtain 15% ownership / equity in condominium – Ongoing – currently have 11.4% ownership, so getting closer.
- Put together a will and have it reviewed by a lawyer – Will completed. Not yet reviewed by lawyer.
- Continue to save money for trip to Grand Canyon – Ongoing – need to figure out when to take this.
- Upgrade condominium with investment in stacked washer/dryer combo – $1000 for unit, $1000 for labor/installation – Currently saving $87.50 per month for home maintenance and upgrades – Ongoing, but on track. By September of this year, I will have accumulated 1% of my home value in my home maintenance savings account. After that, I will be able to begin accumulating the $2000 that it will cost to get the washer/dryer in my condo. I’ll probably just keep the auto-transfer of $87.50 from checking to savings to accumulate this money.
- Invest $500 in Microloans for Latin America in 2011 ($41.67 per month) –Ongoing – Have invested a total of $291.69 this year so far to working poor fund in Peru and Nicaragua. This comes with a pretty nice 3-3.5% interest rate. Note: I use Microplace.com to invest this money. It seems to work well and be dependable. I just logged in to my account, and it says that my money has been used to help 40 people down there! Pretty cool stuff if you ask me!
- Donate $1,300 to Multiple Sclerosis Foundation in 2011 (5% of income) – Done. So far, I have raised approximately $5575 to support finding a cure for this disease (with the help of company matches). My bike ride happened on June 11-12, but there is still time to get in additional donations. If you’re interested in making just a $10 donation to my ride, click here.
- Save 3% of take home pay each month (after taxes) for Dream Account.On target – Have an automatic transfer each month from my Bank of America checking account to my ING Direct high yield savings account.
- Save ~30% of blogging income (if any) in a high yield online savings account in preparation for 2010 taxes. I have been very bad at doing this so far. I have a pretty large cash reserve built up, but it is all earmarked as emergency fund money. Thus, I need to get started doing this so I am not surprised come tax time in April of 2011.
- Implement dollar value averaging for my 2012 Roth IRA contributions.
Mid-Term (3-5 years out) Goals:
- Continue contributing $5000 to Roth IRA each year and using dollar value averaging.
- Reach intermediate net worth target (not displayed here, but is 2X my current net worth)
- Own a rental property by 2016.
Long-Term (>5 years out) Goals:
- Obtain a net worth of $1,000,000
- Own a home free of mortgage payments
- Own a vacation home in the mountains somewhere remote
- Accumulate enough funds not have to work, but will probably anyways because I would get bored.
How about you all? How have the months of May and June been for achieving your goals? What are your next milestones?
Share your experiences by commenting below!
***Photo courtesy of http://farm4.static.flickr.com/3023/3059374021_09b08f2a40.jpg
American Growth Fund of America – An Example of Things That UPSET Me!
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Click here to enter my free giveaway for 2 copies of H&R Block At Home Premium Edition
An interesting section included in each edition of Kiplinger’s is a listing of the 20 largest stock mutual funds, ranked by size (net asset value). The top 5 funds on the list are shown below:
Kiplinger’s List of Top 5 Mutual Funds by Asset Size
1. American Growth Fund of America – Symbol AGTHX = $165.2 billion
2. Vanguard Total Stock Market Index Fund – Symbol VTSMX = $164.0 billion
3. American Europacific Growth Fund – Symbol AEPGX = $113.3 billion
4. Vanguard 500 Index Fund – Symbol VFINX = $109.4 billion
5. American Capital World Growth and Income Fund – Symbol CWGIX = $82.2 billion.
In reading down the list, one thing that shocked me was how many American brand mutual funds had high rankings. In fact, as you can see, they have 3 out of the top 5 spots! Wow!
This surprised me because I would have thought that Vanguard and Fidelity would take the highest places. However, Fidelity didn’t rank on the list until the number 6 spot, with the Fidelity Contrafund, Symbol FCNTX = $79.4 billion.
After inspecting the entire list, I began to feel slightly embarrassed that I wasn’t at all familiar with American brand mutual funds. So naturally, I began to do some research on the company in general and specifically, on the highest net asset value mutual fund in the world, the American Growth Fund of America. In addition, I wanted to find out how it compares to a very logical (in my biased opinion) highly ranking pick on the list, the Vanguard Total Stock Market Index Fund.
In searching around the Internet and Google Finance, I was able to find the following information on the two top-ranked mutual funds by assets.
American Growth Fund of America
- Is an actively managed mutual fund (a big no-no in my book of passive investing).
- Has an expense ratio of 0.69% (not all that bad for an actively managed fund).
- Charges a front-end sales load of 5.75%. Wow!!! This is ridiculously high!
- This means that 5.75% of all money invested in this fund gets paid to brokers and/or American Mutual Funds. What a rip off! This upsets me.
- Just to give you all an idea of how much money this translates to, 5.75% of the fund’s asset value of $165.2 billion would be a whopping $9.5 billion! Wow!
- More information can be found at Google Finance – AGTHX or at American Funds.
Vanguard Total Stock Market Index Fund
- Is a passively managed mutual fund, that seeks to mimic the return/performance of the MSCI US Broad Market Index, so no individual stock selection is involved.
- Has an expense ratio of only 0.18%
- Charges no sales loads.
- More information can be found at Google Finance – VTSMX.
Why Do So Many People Invest in the American Growth Fund of America?
After examining the characteristics of each of the top two highest ranking funds, I began to wonder, “What makes SOOOO many people/investors place their money in to the American Growth Fund, knowing that it charges a 5.75% fee before they earn you any money at all?!”
The only two reasons I could come up with are shown below:
- American Mutual Funds earn investors more money over the long-term.
- This is sort of my optimistic side talking. I just hope that this is truly the case!
- A more likely explanation in this day and age is that American Mutual Funds simply spend more money/effort advertising their funds’ popularity to 401k providers and individual investors.
- This explanation seems to be supported by one article I found on the Internet at ToolsForMoney.com.
- Another related issue here is something I was reading in an investing book 4 years ago when I was just learning/beginning to save money. Essentially, the belief of the authors was that a sadly large amount of investors invest in a mutual fund solely because the name “sounds” good.
- It would be reasonable to think that a lot of Americans would choose American brand mutual funds because they identify with the name.
Performance Comparison – American Growth Fund of America vs. Vanguard Total Stock Market Index Fund
Overall, there’s not much to be studied or analyzed about too many people investing in the American Growth Fund because of the name or because of proactive advertising. However, I was very interested in the first bulleted reason above – do people invest in the American Growth Mutual Fund because it provides superior performance?
To find an answer to this question, let’s take a look at the fund price information/performance over the past ~15 years….
Analysis Set-Up/Goal
As mentioned above, the goal of this analysis is to determine (on a after-fees basis) whether or not the American Growth Fund of America or the Vanguard Total Stock Market Index Fund performed better since 1996. In the analysis, we’ll examine the performance/growth of a $10,000 initial investment and $500 monthly follow-up investments in each fund.
Note: 1996 was chosen because that was the date of inception of the Vanguard Total Stock Market Index Fund. Historical price information was taken from Yahoo Finance.
Remember, 5.75% of all money contributed to the American Growth Fund will be taken out of the investor’s portfolio to pay the sales load. Nice right?!
Results
The complete results of my 15 year performance analysis can be found at the shared spreadsheet at the link below. Just download a copy to play around with the numbers if you want!
A quick summary of the results can be seen on the table below.
In examining the table above, it quickly becomes apparent that the more “popular” and “sexy” actively managed, American Growth Fund of America underperforms the Vanguard index fund by 8% over the time period analyzed.
Definitely, a large factor in the underperformance of the American Growth Fund stems from the 1) higher expense ratio (which is already factored in to the daily price of the fund) and 2) the high front-end sales charge! In fact, over the ~15 year period, you end up almost paying $6000 in fees to American Funds and other brokers.
Conclusions
From this analysis, we were able to conclude several valuable things. These are summarized below:
- Just because a fund is “popular,” doesn’t mean that it is necessarily going to provide superior performance/returns.
- Following the crowd isn’t always the smartest course of action.
- Shared Google Spreadsheets are the best invention ever!
- Expense ratios and especially sales loads can significantly eat in to investor returns.
And finally, at least in my mind, this once again reminds us why passive investing offers superior returns to active management!
How about you all? Are you familiar with American brand mutual funds? Why do you think they are so popular/widely invested in? Do they offer a superior product?
Have you ever invested in a mutual fund or stock just because you thought the name was “catchy?”
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/zachklein/54389823/sizes/o/in/photostream/
What’s Your Biggest Financial Pet Peeve?
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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post I wrote that was posted at Narrow Bridge Finance back in March of this year. The post was written as part of a “Yakezie blog swap” where members of the Yakezie Personal Finance Blogging Network pair up and exchange guest postings on a common topic. The topic of this blog swap was to discuss our biggest financial pet peeves.
Hello everyone! Thanks for stopping by today! When I started to think about what to write for the topic of this week’s Yakezie Blog Swap, I really came up with three things that are tied for qualifying as my biggest financial pet peeves. They are 1) financing furniture, 2) buying expensive drinks at bars/restaurants, and 3) active investing styles.
Each of these is discussed separately below! Enjoy!
Financial Pet Peeve # 1 – Financing Furniture Someone Cannot Afford
After moving in to my condo in August of last year, I began to receive the typical “new homeowner junk mail” – ads from local businesses, home insurance offers, and most of all furniture advertisements! It really was quite amazing how many I received!
One of the offers I received was a double coupon for 1) a free table lamp and 2) 10% any purchase of $100 or more. I thought to myself, “Wow, a free table lamp! Can’t beat that!” So, I ventured to the store to pick up my freebie. When I got to the store and was checking out, I was amazed at the shear number of staff they had committed to setting people up with furniture that they cannot afford, thanks to easy financing/loans options!
I’ll be the first to admit that yes, I am a pretty frugal person (and proud of it!). And, while I myself would not easily partake in taking out huge amounts of consumer debt on depreciating assets, I do understand why people have to do it in order to buy something essential for non-big-city living, such as an automobile.
However, I simply cannot tolerate the idea of people taking out a loan on a $5000 leather, jaguar/leopard Italian designer couch that they cannot afford. Why is this? Well, it’s because there are a plethora of perfectly acceptable couches on sites like Craigslist.org that people are basically giving you just to take it off their hands. Another good source for furniture is from family members! And, while the piece of furniture may not be the “perfect dream couch” you have wanted since childhood, it will do just fine until you can plan your finances to save for such a purchase. End rant.
Financial Pet Peeve # 2 – Buying a Drink For More Than $10
When you go out to dinner, it is incredibly nice to have a glass of wine or a mixed drink. However, it has always amazed me at the number of people willing to pay as much for one drink as they will for a plate full of food.
I am guessing that this just comes down to personal preference. Personally, a stomach full of delicious food that I could not easily cook for myself at home is well worth the $10-$15 that I usually pay a decent restaurant.
However, I simply do not obtain any pleasure by drinking a $10 glass of wine at a restaurant when I know that I would be just as happy if I had a glass of a $15 bottle of the same Virginia wine 1) before I go to the restaurant and 2) when I get back.
Financial Pet Peeve # 3 – Investing in Individual Stocks or Actively Managed Funds
It is no secret to the readers of My Personal Finance Journey that I am an avid believer in employing a passive investing strategy. What does this mean exactly? I mean that I invest in low-cost mutual funds that simply track established world indices (S&P 500, Wilshire 5000, etc) instead of pouring money in to picking individual stocks.
I employ this type of investing style because numerous studies of investor performance have shown that 70-80% of investment “professionals” fail to outperform the market indices.
Even with this information available readily to investors, the majority of investors are still drawn to investing in individual stocks. I myself was even drawn to investing in individual stocks in the beginning of my investing days. Like many others, I wanted to use my intellect to do my research, select winning stocks, and get rich!!!
However, I found out that the stock market is not small enough to hope to be understood by one person. It’s not like some lab experiment where you control the variables and can obtain the result you want if you work hard enough.
Sure, in twenty years, we will be able to look back and pick out the 5 people that were able to consistently outperform the markets. But, I simply do not think that it is worth people’s time when focusing on an appropriate asset allocation with a passive investment strategy will more likely yield a better result.
How about you all? What financial moves do people make that really get your temperature to rise? Have you ever confronted any one that performs these actions to get them to stop? Did it have an effect on them?
Share your experiences by commenting below!
***Photo courtesy of http://www.sodahead.com/fun/strawberry-milk/question-1432985/?link=ibaf&imgurl=http://daveslife.files.wordpress.com/2009/03/upset-boss.jpg&q=upset