Reasons to shop at Walmart

I found the following good news article relating to this topic at the link below.
http://walmartstores.com/FactsNews/NewsRoom/8594.aspx

At this website, you can go to another link where you can find a pdf document with the details of a complex study done by the Global Insight Group showing that shoppers can save $700 per year by shopping at Wal-Mart. Wow!

So, let’s look at what that has meant for me in the past several years since I have been shopping at Wal-Mart (2005-2009). Multiplying $700 per year times the 5 years would yield a total savings of $3,500.

Assuming that I placed this money in my Roth IRA account and invested it until retirement at the age of 65 years old (and assuming the 80 year historical average return of 12.4% in the stock market), this would result in a nest egg of $600,854 at the end of the 41 year period. Applying the effects of inflation to this sum (assume 3.2%), this would yield $165,159.

This is quite amazing if you ask me!

Student

Presentation on benefits of starting to invest at a senior in high school!

Hi everyone! I’ve been wanting to post a presentation/powerpoint slide deck on my blog that I put together that I am going to present to high school seniors in the area on the benefits of starting to invest early to take advantage of compound interest over the long term.

However, the settings on the site won’t allow me to upload an entire presentation.

If you are interested in seeing the presentation (or even better, dessiminating the information to teenagers), please email a request at jazzdog059@aol.com!

Talk to you soon!
Student

One of my favorite topics: Is it worth it to go to an expensive college?

Why do I not sign up for a gym membership and not sign up for cable?

If you are interested in seeing what Netflix has to offer (which I would highly recommend because they offer instant movie watching on your computer as well as rental DVDs), click on the link below to start your free trail!

Should I sign up for my employer’s Flexible Healthcare Spending Account (FSA)?

I believe the answer to this question should be “yes.” However, it should only be a small enough amount that you know you can spend it each year. Why is this? Because the contributions to your flexible spending accounts (FSA) are made on a “use it or lose it basis,” so they don’t carry over from year to year.

I really enjoy contributing a small amount to my FSA each year, of $150-$200. It is great because the amount is deducted pre-tax from your income, and therefore, decreases your taxable income. Also, my employer provides me with a VISA debit card that I can use to make purchases on eligible items directly from my account, without having to submit reimbursement forms.

What are the various types of FSA eligible expenses? Lots of things! Several of the items I use the account for are listed below. Usually, you can obtain an eligle items list from your employer of things you can buy. It’s surprising how many everyday items qualify!

•  Prescription medications
• Contact Lens Solutions
• Co-pays at doctor visits
• Contact lenses/eyeglasses
• Tylenol
• Certain Over-the-Counter medications

Keep on learning!

Jacob

How do I decide if a Roth IRA (Individual Retirement Account) or Traditional IRA is right for me?

The decision of whether to open a Roth IRA or Traditional IRA is a very important one. In doing an investigation online, I came across the website at the link below that gives a good comparison on the features of both types of accounts.

About.com – Roth IRA vs. Traditional IRA

But, in my mind, the decision can basically be narrowed down by answering two questions:

1) Do you meet the qualifications needed to open a Roth IRA? 

In order to open a Roth IRA, you must have earned income of less than $95,000 (single) and $150,000 (married couples filing together).

2) When is it more beneficial for you to pay the taxes on the proceeds from your account?

In the case of a Roth IRA, you contribute after-tax income to your account. However, when you withdraw it at retirement, it is tax free! This is incredibly generous that the government gives us this tool to invest with.

In the case of a traditional IRA, you contribute pre-tax income to your account, and then pay taxes on the earnings when you withdraw the money (much like a 401k account).

So, if you are young like I am (24 years old) making a middle-class salary (under $95,000 limit), but you are investing money prudently and hoping that the miracle of Time Value of Money will cause your nest egg to grow, you will most likely be in a lower tax bracket now than you will be when you retire and withdraw the money (lower tax bracket = lower taxes). Therefore, it is more beneficial for me to use a Roth IRA and pay the taxes now vs. later.

General Rule of Thumb – from David Bach’s book, Fight For Your Money

• If you’re under 35 years of age, a Roth IRA is the way to go.
• If you’re 50 or over, a Traditional IRA is the way to go.

See! Not too difficult right? Let me know if you have any questions.

Keep on learning!

Jacob

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Remember to save your coins/change and cash them in!

Just recently, I took all of the change that I have saved up during November and December of last year and cashed it in at a Coinstar machine at a local grocery store. I really enjoyed the experience. I cashed it all in for $7.80 and saved on the commission fee by converting that money to Amazon online store credit. Very nice! Visit the Coinstar website below for more information.

http://coinstar.com/us/html/a-home

Does Phil Town’s Rule Number 1 – 15 min a Week Stock Trading System Work?

After trying Phil’s Rule #1 system for 6 months and not seeing the results of my efforts, I am leaning towards saying “no.” However, by doing this system, I probably learned more about investing in individual stocks that I ever thought that I would. So, for that reason, I am not sorry one bit for taking on the activity.

I therefore began to search around for evidence of anyone’s success through a Google search. I pretty much hit a dead end, and could not find anyone that really tried the system and found success.

So, what exactly does Phil’s Rule 1 system involve and what made me intrigued enough to give it a try?

The thing that made me try Phil’s system was that it is the only individual stock picking strategy that is actually 1) systematic, 2) repeatable, 3) formulaic, and 4) most importantly, has a way to block emotions from coming in to investing. In a way, it is the most similar approach to dollar value averaging and index mutual fund asset allocation I could find.

Description of Rule 1 System:

1) Search for and identify stocks to invest in – These should only be companies that you would be proud to own, trade for > $1 per share, and have > 500,000 average daily trading volume. Ok – good. I agree with this approach. The type of companies you should invest in should be at the intersection of what you love to do, what you are good at doing, and what you can earn money doing.

2) Next, identify if the company has a “moat” – What he explains we are looking for here is >10% growth rate  over 10 years for the following things: Return on investment capital, sales revenue, EPS growth, Equity per share, and free cash flow growth. He does a very nice job explaining exactly how to calculate these numbers, and Phil also offers a very good free calculator on his website (www.ruleoneinvestor.com) that I have used and would highly recommend. We also make sure that the company has enough current free cash flow to be able to pay back it’s long term debt in 3 years or less. OK – I agree with this as well.

3) Research the management and make sure the CEO is good and that no insider selling is happening – OK I agree with this.

4) Calculate the appropriate sticker price, or what the stock should be selling at given it’s current EPS and EPS growth rate. We then calculate the Margin of Safety price (MOS) to make sure that we buy the stock a significant enough discount to shield ourselves from mistakes and be able to achieve higher returns.

5) Once you ID a company that fulfills all of these fundamental requirements, it is then time to use technical analysis tools to make sure you are either buying or selling at the right time. Phil recommends using three technical tools to make sure of this – 1) MACD indicator, 2) Stochostics, and 3) 10 day moving average. Without going in to all of the details of these (Phil does in his book), Phil recommends that you only buy when all 3 of the tech. indicators say “buy” and that you only sell when all 3 indicators say, “sell.” I felt like this was really good because it eliminates the emotionally urges investors have to sell off at the wrong time and buy when prices are too high. Remember, you only buy the stock if 1) all technical indicators say to, and 2) it is trading below the MOS price. If a stock doesn’t fit these requirements, we put it on our watch list and review the current price each week to see if it has been discounted enough by the market to be under our MOS price.

So, that’s Phil’s system at a high level! How did I fare using it?

Since I wasn’t ready to commit my own real money to using his system before trying it out, I did 6 months of simulated trading/investing with this system using an Excel spreadsheet and my Google Finance watch list.

The companies listed below were ones that I found that fit the fundamental criteria above and were placed on my watch list. However, there were only two stocks during the 6 month period that came in below my MOS price that I calculated, Apollo and Research in Motion. I took this as a good sign because I didn’t want to be investing in just any company.

During the period that I tested out this system (August 2009 – January 2010), the S&P500 index return was 11.2%.

The returns for my trading activity for Apollo and Research in Motion were as follows (not included trading commissions or taxes):

• Apollo – 2% gain, 1.4% gain, 6% gain, 0.3% loss
• Research in Motion – 12.4% gain, 3% loss, 6.25% loss

If you sum up the returns, you get a total return of 12.85%. However, if you subtract 1% from each return for commissions, it is easy to see how the total return dips below the return of the market (and you haven’t considered taxes yet).

Netflix

eBay

Alcon

Apollo Group

Walgreen’s

ITT Educational Services

Capella’s Education

JCOM

Garmin

Varian Medical

Vasco Data Security

American Ecology

Research In Motion

Hittite Microwave

Aeropostale

Petsmed express

Quality Systems

Factset Research Systems

Priceline

meridian bioscience

fluor

Decker’s Outdoor

Apple

Stryker

Amazon

Jacob’s Engineering

Panera

Hansen Natural

Mobile Telesystems MBT

America movil amx

Amphenol

Western Digital Corp WDC

Turkcell TKC

Flir FLIR

EOG resources EOG

Immuncor BLUD

China Mobile CHL

murphy oil MUR

Gildan Activwear GIL

Endo pharma ENDP

Compania de bebidas ABV

Pharm Product Development PPDI

American Oriental Bioengineering AOB

Lincare LNCR

China Automotive Systems CAAS

Gamestop GME

Ross Stores ROST

Best Buy BBY

Amedisys AMED

Devry DV

Netease.com NTES

Synaptics SYNA

Google GOOG

So, to summarize, Phil’s system is very interesting, and I feel that I learned a lot from it. However, I still do not believe that it beats portfolio theory, asset allocation, and investing in index mutual funds.

Is it better to invest a lump sum you have just received all at once or spread it out over time?

This is a fairly complicated question, because it depends on your investing horizons and your ability to handle risk.

In the book, he basically states that if you have a long-term investment plan and can tolerance a certain degree of risk, it is better to invest the lump sum all at once for several reasons.

1. Markets are efficient and it is impossible to predict consistently where the market will be tomorrow.

2. It takes the emotion out of the timing to invest.

So, invest your lump sum as soon as possible and be done with it!

Index Mutual Funds, Current Asset Allocation, and Investment Strategy

Note: This post will serve as a running list of topics and updates related to mutual funds, asset allocation, dollar value vs. dollar cost averaging, and retirement investing accounts. The advice here should not serve to replace the advice of a financial professional, but rather is to give you some ideas to talk about further with your financial counsel.

Asset Allocation –

As a result of reading the books listed in the Financial Book Review post of my blog, I came up with the following target asset allocation percentages, based on my long-range view of investing and being young/able to tolerate high levels of risk.

% Equity = 75%
% Cash/fixed income securities = 25%
——————————————
Total Portfolio = 100%

For the equity portion of my portfolio, my target split is shown below:

% US Domestic Equity = 71% (71% x 0.75 equity = 53% of total portfolio)
% International Equity = 29% (29% x 0.75 equity = 22% of total portfolio)
——————————————-
Total Equity Portion of Portfolio = 100%

To further break this down in to subcategories so we can select INDEX mutual funds to give us exposure to these areas, the books recommended the following %’s.

Detailed Allocation Calculations
1. % Cash (money market target 5%)
2. % Non-Inflation Protected Short Term and Intermediate Bond Funds (avoid long term bond funds) (target 15%)
3. % TIPS Bonds (Inflation protected bonds -target 5%)
4. % International Equity (Target 11%)
5. % International Emerging Markets (Target 11%)
6. % Domestic Large Cap (Target 8%)
7. % Domestic Small Cap (Target 8%)
8. % Domestic Small Cap Value (Target 14%)
9. % Domestic Large Cap Value (Target 13%)
10.% REIT (Real Estate Investment Trust – target 10%)
———————————————————–
Total Net Worth = 100%

Recommended Vanguard Index Funds for These Categories – All of these have very low fees, and since they are index mutual funds, you will have higher returns than 70% of investing professionals with active management. You can open an account with Vanguard very easily at http://www.vanguard.com/. There are generally no commissions/fees for buying Vanguard funds through your Vanguard account. All funds require $1000-$3000 of initial principal to buy a particular fund.

1. Cash – place in Dollarsavingsdirect.com high yield savings account – see blog post titled, Favorite Online Savings Accounts.
2. Vanguard Total Bond Market Index (MUTF:VBMFX) and Vanguard Short Term Bond Index (MUTF:VBISX)
3. Vanguard Inflation-Protected Secs (MUTF:VIPSX) – Note: this is an actively managed fund.
4. Vanguard Total Intl Stock Index (MUTF:VGTSX)
5. Vanguard Emerging Mkts Stock Idx (MUTF:VEIEX)
6. Vanguard Total Stock Mkt Idx (MUTF:VTSMX)
7. Vanguard Small Cap Index (MUTF:NAESX)
8. Vanguard Small Cap Value Index (MUTF:VISVX)
9. Vanguard Value Index (MUTF:VIVAX)
10.Vanguard REIT Index (MUTF:VGSIX)

Investing New Money when it Comes In –

So, I’ve bought the funds listed above, now what do I when I get my paycheck each month and have new money to invest? There are essentially two ways to do this exercise.  This is where dollar-value averaging and/or rebalancing comes in to play!

Portfolio Rebalancing


Portfolio is the process of maintaining the recommended allocation target %’s listed previous in order to maximize return and minimize risk. The rule I follow for when to rebalance is called the 5% rule. For example, the target allocation % for the REIT part of your portfolio is 10%. Following the 5% rule, you would rebalance the portfolio either by selling shares or contributing more money depending on whether the current % of the total portfolio was 15% or 5%, respectively.

As a general rule, I try to avoid selling shares of mutual funds (even in tax-sheltered accounts) frequently in order to perform rebalancing. Instead, when new money comes in, I buy additional shares in other funds if as needed to maintain my targets.

However, a full rebalancing of your portfolio should be 1X to 2X per year, unless your allocations targets are already aligned from keeping it up throughout the year with monthly investments.

Dollar Value Averaging


Another method of maintaining your portfolio/deciding how much money to invest and when is called dollar value average. This is similar to it’s cousin, Dollar Cost Averaging, but I believe it is slightly more effective.

In Dollar Cost Averaging, the idea is that a constant amount of money is invested each month in to your account, and therefore, will buy MORE shares when the market is down and LESS shares when the market is up.

However, 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 just bought the S&P 500 index mutual fund with Vanguard in your Roth IRA for $3000 in 2009. In 2010, 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
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 Jan, 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. Continuing with this example, so we invested $300 at the end of January. 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?

In my opinion, I believe that Dollar Value Averaging works best with a one mutual fund portfolio. Since I own a lot of mutual funds, I tend to steer clear of using it because it would be hard to apply to my situation.
Keep learning!

Student