Category Archives for Invest & Retire
Which Platform Should You Choose for Online Stock Trading?
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The following is a guest post from Jason Laurents. Enjoy!
Choosing a Platform for Online Trading
Investing in the stock market is by no means an easy task. Even more experienced traders have a difficult time calling the right investments, but that doesn’t mean a novice investor can’t do well for themselves. Even during this economic downturn, choosing to invest in the stock market can still provide excellent return on investments. Making the right investments is all about analysis, timing, and emotionless decision making. You also need a great broker.
Unfortunately, choosing to hire a broker can be expensive – especially if you choose one from a more distinguished firm. While these individuals have incredible knowledge about the stock market, they also charge high commission fees which can greatly reduce your return on investment, and quite honestly, not many people have the additional funds to hire such a broker.
Online Brokerage Options
However, for those wishing to avoid the high brokerage fees, there are numerous online trading platforms that can help with trading. These online trading platforms allow users to purchase stocks at relatively inexpensive prices and provide users with the most up-to-date analysis available so that they may make educated investing decisions. A few of the most popular platforms for online investing include:
• E-Trade
• Scottrade
• Fidelity
While each of these platforms has their own unique advantages and disadvantages, they are all industry leaders and generally good choices. Prior to choosing a firm, investors should read reviews including the E-Trade, Fidelity, and Scottrade review at different sites around the Web to ensure they are choosing the company that will best suit their needs and budget.
What to Look for in an Online Broker
Investors using online trading platforms also don’t have to worry about going at trading alone. Most of the online companies have brokers on staff who are willing and able to assist users and help them make good investing decisions. However, before signing up with an online trading platform, investors should always make sure that they are choosing a company with minimal account fees and low margin rates.
Conclusions
Trading stocks online can be a great way to invest additional savings, but investors should not let online trading become their only investments. The stock market is highly volatile, and those who don’t give their investments the time and dedication they need, risk losing their hard earned money. Diversification is, and always will be, the best way to manage your investments, and although only investing can produce worthwhile ROIs, no investor should ever rely on them solely for their savings.
How about you all? What is your favorite online stock and/or mutual fund trading brokerage?
What features do you specifically look for in an online broker?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- @ Investing Strategy of Buying/Selling Individual Stocks –
- If you’ve been reading my blog for a while, you probably know that I am not the biggest fan of individual stock trading.
- Instead, I employ what’s called a passive investing strategy/approach.
- However, I’m not totally against people investing in individual stocks. In fact, I think it’s healthy to invest a little play money in stocks to test your hand at fundamental and technical analysis. However, I would not recommend that any one base their retirement funds on money invested in individual stocks.
- @ 3 Online Brokers Listed Above –
- Of the 3 online brokers listed above, I’ve only bought and sold mutual funds with Fidelity and Scottrade. I have never used E-Trade.
- Between the pair of Scottrade and Fidelity, Fidelity is definitely better for investing in mutual funds, mostly because they offer low-cost index mutual funds which trade free of commission within a Fidelity account.
- For individual stock trading online, I would not recommend Scottrade, Fidelity, or E-Trade. Instead, I would go with a discount broker such as Zecco.com or Sogotrade.com. Both of these offer trades for around $3-$4.
- @ Diversification –
- Diversification is extremely important in saving for retirement. If you must invest in individual stocks, be sure to own at least 5 stocks in different industries to obtain sufficient diversification.
- In addition, before investing in stocks, ensure that you have 1) health insurance and 2) an adequate emergency fund consisting of 6-9 months of expenses in a liquid, cash account.
***Photo courtesy of http://www.flickr.com/photos/ivanwalsh/3914312938/sizes/o/in/photostream/
Tips on Saving Money for the Future
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The following is a guest post by Check ‘n Go.
Saving money is hard, plain and simple. It’s tough to save when bills pile up and you feel like the future is far away, especially when you need to solve problems right now.
But, saving money is also one of the most essential parts of your finances. If you’ve resolved to start saving money, it’s a valuable and important goal. Consider these money-saving tips to help secure your future.
1. Look realistically at your finances
It’s important to understand your needs. They vary family to family, depending on your specific responsibilities. People who have children are going to have very different responsibilities than people who have hamsters or just dogs.
Figure out all of your expenses so that you know where your money is going, and where you can cut costs. Also, try keeping a list of all you’re spending in one month: it will help you realize where you need to cut back, and where your essential expenses lie.
2. Put money away every month
Once you’ve taken a clear-eyed look at your finances, start saving. Don’t give yourself the chance to back out; set up an automatic withdrawal that deducts money from your account, either every month, or whenever you get paid.
3. Contribute to a 401K or Roth IRA
If your job offers a 401K, start contributing as much as they will match. It might not feel great for your paycheck, but it’s an investment in your future. Unless you have nowhere else to turn, never borrow against your 401K. If you do, consult with a financial advisor beforehand.
If your job doesn’t offer a 401K, look into a nondeductible IRA or a Roth IRA, so you can start contributing to your retirement.
4. Put away money for your children’s future
If you have children, then you’re probably considering their future education. Based on your current responsibilities, you could have a realistic projection of your future finances. As much as you might want to pay for their education, you do have to consider your own finances. If supporting your children now means they need to support you later, you need to weigh your options. If you do decide that you can afford to pay for your child’s college, then it’s worthwhile to look into a 529 plan that can help you save for your child’s college. There are prepaid tuition programs that allow you to purchase a year’s worth of college tuition at the current rate, as opposed to the future, exponentially increasing rate.
5. Look into tax cuts
Even if you weren’t looking into tuition savings, it’s worthwhile to see if you’re eligible for tax cuts or government-supported programs. Houses, tuition, and even certain bills are deductible, and these deductions could save you quite a bit of money in the long run.
6. Flexibility
Even people with the best kept finances find themselves in trouble sometimes. An emergency can drain your finances quickly. Having a cushion of savings to soften the fall means you won’t be driven into debt, or have to borrow money from friends or relatives. Having a backup plan will help you feel safe and secure, even in a bad situation.
Saving money, even if it’s just a little bit every month, is extraordinarily important. It provides you with a valuable way to cement your personal security, and take care of your family down the road.
How about you all? What techniques do you use to make sure you are saving enough for your future and/or emergencies? Do you use any on this list?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- @ Developing a frame of mind that facilitates saving – It’s very true that saving is quite hard for many people. I think this is especially true when people are not raised with the saving “mindset.” It takes a good bit of mental resolve to force yourself to forgo current pleasure (spending) for enhanced living later in life.
- However, the easiest way that I have found to make saving more of a part of my life is to think of it as a challenge/hobby. This makes it fun and more motivating all at the same time!
- @ Tracking your spending to determine your financial needs – This is a practice that I personally employ in my personal finances at least every time I move to a new location or my financial situation changes. By tracking your spending, you can figure out what categories you need to devote money to and how much you can pay yourself first with in order to save for your future.
- @ Automatic deductions for savings – Once you have tracked your spending and know how much money will be left over to save/invest at the end of the month, it’s important that the money be transferred over to your savings account without you having to think about it at the beginning of the month (before your wallet has the chance to spend it!).
- This comes in very handy for me with my dream and life values savings accounts. If ~3% of my after tax income each month was not automatically transferred over to my savings account, I probably wouldn’t consistently save the money.
- @ Saving money for your children – I am in agreement with the advice above that saving money for your child’s college education should not come at the detriment of your personal finances.
- I read a book once that said that the best financial gift parents can give their children is for the children to not have to financially support them once the parents retire.
- Going along with this advice, I would encourage parents to first make sure they are saving as much as they can for retirement before looking at an educational savings plan for their children.
- Another option for keeping educational costs low is to encourage your children to attend a state school instead of an expensive private institution for the higher-educational endeavors.
***Photo courtesy of http://www.flickr.com/photos/o5com/5126344583/
What Would I Do If I Inherited One Million Dollars?
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About a week ago, Sandy from Yes, I am Cheap proposed an interesting idea to the Yakezie Blog Network: she proposed that all blogs that were interested write a post on the common topic of “if you suddenly inherited a million dollars from your long lost cousin Bertha that you haven’t seen since you were a baby, what would you do with the money?”
Since I absolutely love these initiatives where several different blogs write about a common topic (such as the Yakezie Blog Swap, which I always try to take part in), I was very eager to have the chance to reflect on what action steps I would personally take with $1 Million, if I were to be lucky enough to receive it. It also reminded me a great deal of a topic in the 2nd Yakezie Writing Scholarship Contest (which I helped judge several months ago) where essay applicants were asked to write about what they would do if they won the lottery.
Inheritance/Estate Tax
Like it or not, the first 30-40% of the $1 Million would most likely have to be set aside to pay Uncle Sam for any estate, or inheritance, taxes that I would owe on the money. However, according to Kiplinger’s, Congress’ lack of action lately on renewing the estate tax in 2010 may allow up to $5 Million to be exempt from taxes. This would be quite a blessing!
Since I’m not quite sure what the verdict will be on this or if a final decision has been reached by lawmakers, I will, for now, operate under the assumption that 40% of the $1 Million be paid in taxes.
Amount remaining = $600,000
Play Money
Of the remaining $600,000, I would take 5% ($30,000) and set it aside for what I call “play money.” This amount of money would be small enough that I would be all right with losing, but would still enable me to “live it up” and enjoy the $1 Million.
Several possible things I would use the play money for are shown below:
- A trip to Spain/France.
- Buying new hiking or cycling gear.
- A trip to the Grand Canyon.
- Visit Yellowstone National Park.
- Backpack on the Inca Trail.
Donate Money to Charity
Currently, I donate 5% of my income to a number of charitable organizations. However, the main one is the National Multiple Sclerosis Society, for which I participate in a bike ride each year in order to raise funds to support and find a cure for this disease.
With the $600,000 remaining after taxes of the $1 million inheritance, I would take 10% ($60,000) and donate it to the Multiple Sclerosis Society. I sure would be their top fundraiser then!!! 🙂
Amount Remaining After Play Money and Donating = $510,000
Achieve My Purpose Focused Financial Plan
With the remaining ~$500,000, I would invest it in achieving my Purpose Focused Financial Plan.
.Essentially, what the strategy is all about is that people/couples should plan for their specific values and life dreams, as opposed to planning what material possessions are needed for life (can be easily influenced by contemporary culture).
- Define the 1) importance and 2) purpose of money in your life.
- 1) Involves ranking the importance of money in your life on a scale from 1-10.
- 2) Involves a qualitative description of how you view the role of money in your life.
- Determine and take action on your life values.
- Your life values action plan is based around goals that you specifically want (and one could almost say need) to do in your life in order to be fulfilled.
- Determine and take action on your life dreams.
- Your dream action plan is based around “fun” things that you want to accomplish in life that will enable you to live an extraordinary life, based upon your standards.
- Place your dream and life values savings on autopilot.
- This involves setting up savings vehicles to ensure that your values and dreams are met.
In particular, the things that I would use the inheritance for (relating to my Purpose Focused Plan) are listed below:
- Ensure that I continue to contribute 5% of my income each year to charity.
- Pay for traveling and participating in running and cycling races in various locations.
- Max out my Roth IRA and/or 401k each year.
- Maintain an emergency cash fund with 6-9 months of expenses.
- Pay off my condo mortgage of ~$90,000.
- Achieve my life dream of owning a cabin in the mountains.
Looking at this list, it’s impossible to think that all of these actions can be taken at once. Therefore, it will be important that the inheritance funds are invested in financial instruments whose liquidity, risk horizon, and maturity match the time frame in which the funds will be needed. A description of this time frame investment matching process/concept can be found here.
How about you all? If you won or inherited $1 Million, what would you do with the money? Would you save it, spend it all, or a mix?! Share your experiences by commenting below!
***Photo courtesy of http://search.creativecommons.org/?q=million%20dollars
Emergency Funds – Are They Essential?
The following is a guest post. Enjoy!
When it comes to emergency funds, most people have strong opinions one way or the other about the value of this type of account. While some believe that this is the secret to peace of mind and stability, others believe it to be an unnecessary precaution. There are several different factors to take into consideration when it comes to deciding whether or not this is the right option for you.
What is the Purpose of an Emergency Fund?
When you have an emergency fund, the idea is to have money available in the case of the unexpected happening. This means that when an unexpected bill arrives, something happens and your car is totaled, or you get in a wreck and need surgery, you have the money necessary to take care of the problem. There is no reason to make a charge on a credit card, and there is no reason to borrow money from friends and family members. It gives you a sense of independence when problems arise.
Benefits of an Emergency Fund
When you already have the money that you need on hand, you don’t worry so much about what you will do when the unexpected happens. You know that you have the emergency fund, and you can take care of most of the problems that will come your way.
For some people, sleep will come a little easier at night when they can worry less. If you have your emergency fund in a general savings account, your money may be earning interest. While it probably isn’t going to be much, there is going to be some type of return on your “investment.”
Where to Invest Your Emergency Fund
Shop around to find the best place to set up this account. Read the terms and conditions carefully to find out if there are penalties for withdrawals and what the minimum balance needs to be.
On the downside, if you don’t invest the money, you aren’t really getting anything back. In an interest bearing account, the money will actually be working for you. You will see that the money you deposit is earning something and not just sitting somewhere waiting to be used in case of an emergency.
Cons of Having an Emergency Fund
If you use the cash from your emergency fund to pay for unexpected expenses, you are partly missing out on a chance to build your credit. A prepaid debit card or an actual credit card can also make it easy to take care of these emergencies, and on the upside, they are also helping your build positive credit when you make payments on time and pay off the balance.
Balancing the Pros and Cons of an Emergency Fund
Having an emergency fund is a personal decision that only you can make. There are several different options that you can choose from that will help you balance out the positive and negative aspects of an emergency fund.
Here are two options to consider:
- Keep half of your money in cash and the other half in a higher interest-earning account. This way, you have the money that you need and you are earning interest.
- As you continue to save, add the extra money to the interest bearing account.
- When a major expense arises, use your credit card to pay off the amount that you owe. Then, use your emergency fund cash to pay off the card. This way, you still have the cash so there is no need to worry and you are able to add to your personal credit score.
How about you all? Do you have an emergency fund? How many months worth of expenses do you target to have in the account? Do you feel an emergency fund is necessary?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- @ Purpose of an emergency fund – First, I have to disclose that I am a big supporter and promoter of people having an emergency fund. I carry an emergency fund myself in which I target holding 6-9 months worth of my normal expenses. In fact, I place so much importance on having an emergency fund that in my account hierarchy, saving money for this type of fund is at the top of the list, right alongside having health insurance and paying off your credit card debt monthly minimums.
- Having gotten this disclosure out of the way, I’ve found that a lot of people get confused about the actual purpose of an emergency fund.
- An emergency fund, as the name suggests, is for unexpected serious expenses that are necessary for your normal income creation to occur.
- Examples of what would fall in to this category are unexpected car expenses, health care deductible bills, paying the $2,500 deductible on my condo insurance policy if my apartment burned down, buying a plane ticket to your relative’s funeral half way across the country, living expenses if you are downsized/fired from your company, etc.
- Examples of what would NOT fall in to the realm of what an emergency fund should be used for are $10,000 wedding rings, a new couch that you desperately need, a $5,000 surgery for your dog (unless you already have this savings factored in to your emergency fund amount), or a vacation to the Bahamas.
- How much money to place in your emergency fund – It seems like there are several opinions on how much money one should place in to your emergency fund. The general consensus seems to be to place anywhere from 3-9 months worth of expenses in this account. The logic behind these numbers is that this is generally the period of time needed for someone to find a new job, in the case that they are let go from their past job.
- Personally, as a fairly cautious person by nature, I tend to prefer staying on the high-end of this rule-of-thumb time frame (6-9 months of expenses).
- @ Where to place your emergency fund – In this day and age, there are of course a plethora of options for where you can place your emergency fund. I’ve discussed these different options at the following link – Bank Savings Options – My Personal Finance Journey. The options are listed briefly below:
- Bank savings account
- CD
- Money market mutual fund
- Money market saving account
- Of these 4 options, the one that I personally feel is the best to use (even though interest rates in the US are INCREDIBLY LOW!) is a money market savings account.
- By using a money market savings account, which generally has high interest, stability for your money, and good history in not defaulting, you don’t need to invest half your money in cash and half in a “high-interest-earning account” (as suggested above in the post) because your money will already be in a dependable, high-interest earning account.
- My favorite options for a money market savings account at this point in time are either ING Direct or DollarSavingsDirect.com.
- @ Cons of an emergency fund – Personally, I don’t really feel that there are any cons of having an emergency fund.
- The one con mentioned above about using an emergency fund to pay for unexpected expenses slowing a person’s credit accumulation down doesn’t, at least in my opinion, apply to today’s society since we are already making most of our purchases on a credit card anyway.
- @ Paying for the emergency expense via credit card and then reimbursing yourself with money from your emergency fund –
- This is a great idea! By paying for the emergency expense with a credit card (if possible), your purchase is protected against fraud, and you will also accumulate cash-back or other reward points, if offered by your credit card.
***Photo courtesy of http://farm4.static.flickr.com/3112/2346575422_7054222273.jpg
Carnival of Value Investing # 9 – June 25th, 2011 Edition
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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/
My Current Asset Allocation and Net Worth Growth – May-June, 2011
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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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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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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