My Personal Finance Journey

Category Archives for Invest & Retire

Carnival of Passive Investing # 6 – May 2011 Edition With Author Rick Ferri Now Live!

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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

“Better late than never” is my favorite phrase this afternoon! I apologize for being a week late reporting this, but the latest (May 2011) edition of the Carnival of Passive Investing is now live over at The College Investor at the link below.

Carnival of Passive Investing # 6 – Passive Investing Do’s and Don’ts May 2011 Edition with Passive Investing Author Rick Ferri

Congrats to Wealth Informatics, Boomer and Echo, and Little House in the Valley for being selected as the top 3 articles this month by Rick and Robert @ The College Investor.

We were honored this past month to have Rick Ferri, author of numerous passive investing books helping to judge/rank the top 5 passive investing articles. Great job Rick!

This month (June), another one of my favorite passive investing authors, Larry Swedroe, will be helping to rank the final selection, with the help of our host, Jon Elder @ Free Money Wisdom.

Be sure to get your best passive investing articles submitted this month for Larry to review. You can submit your articles by clicking here.

How about you all? Have you written any good passive investing posts lately?


Who is your favorite financial author? 


Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/vegaseddie/3309218023/sizes/z/in/photostream/

    Are You Worried About Online Security?

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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

    The following is a guest post. Enjoy!



    Are You Worried About Online Security?
    These days, we rely on the Internet more and more for shopping. It is available 24 hours a day, and we can shop for anything on the web, from the weekly groceries, to home ware and clothing. It is also the place we use to research and shop around for insurance, credit cards deals, savings accounts, investments, and bonds.

    So, with all that we are using the Internet, the question of how can we be sure that our details are secure is of great importance to all of us.

    Types of Scams

    Some of the scams and fraudulent sites are getting more sophisticated and convincing, so it is important to know what you are looking for and stay observant whilst you are browsing. Installing your computer with anti-virus software and firewalls will help to protect against viruses and sites that access your personal information. You do need to be aware that some of these can slow down your computer, so be careful not to install more software than you need.

    How To Protect Yourself Online

    If you are browsing for financial services, credit cards, or bonds, the site you are reading is likely to be a comparison site, and you should not be asked to provide any card or bank details before you are actually signing up for a product.

    Try not to be tempted by unbelievably cheap prices that seem too good to be true – they probably are. Stick to reputable retailers, as these will have reviews and customers comments and the more reviews the site has, the better. Any website that claims to be part of an accreditation scheme or professional body will display the logos for these organizations. Always click through the links to ensure it is a current and valid accreditation and not a less than ethical website pasting a picture of the logo that does not have a link.
    One of the hazards of Internet shopping is that the web page address does not give you any indication of where the retailer is based. A genuine retailer will have their physical address listed within the website, as well as contact information and telephone numbers. If you are at all suspicious about a site, you always have the option to telephone or email to make contact with them before you make a purchase. Their response to a simple query in this way may allay your concerns, or indeed confirm your suspicions.
    Once you are satisfied that you are dealing with a genuine retailer, you are likely to make a purchase. Always check your summary to ensure that unexpected charges have not been added to your total. Often, prices are quoted without tax or delivery charges to tempt shoppers, but a shock is in store when the total amount payable is displayed.
    As you continue with your purchase to the payment page, a genuine and secure connection is indicated by the closed padlock symbol in the browser bar at the top of your page. Before you enter any bank or card details, it is important that you check this. If you do a lot of Internet shopping, you may also want to use a middleman service such as Pay Pal that will ensure the retailer does not have access to any of your personal information.
    Using the Internet is so convenient and saves us time and money. By following these simple checks, we can also make sure it is completely secure.

    How about you all? How do you protect your identity and personal information online? How cautious are you about sharing personal information? How much do you worry about it being stolen? 


    Share your experiences by commenting below!

    Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

    • This article is on a topic that is becoming increasingly important to all of us these days, as it really is a brave new world out there! 
    • It seems like I get about 2-3 fraudulent emails per day from people pretending to be Amazon or eBay (eBay posers are especially prevalent!). Typically, these emails are wanting you to think they are from the real company so that you go to their fake website and enter your login information, which can then be stolen. It can be very tempting to fall for these scams because the fake recreations of the real websites are generally very good.
      • However, there are several methods that I use to avoid falling in to these traps, as discussed below:
      • 1) I never use links given in emails to log in to the company being referenced. Instead, I simply type in the normal (reliable) address in to the URL field of my browser (example – www.ebay.com). This ensures that you are going to the authentic website.
      • 2) You can generally also spot a fake website by the hyper link format in the email. If the email was from the actual company, it would be in the format www.ebay.com/payments (or something along those lines). On the other hand, scammers are forced to adopt a slightly different hyperlink format. An example of this would be something along the lines of www.v23r.ebay.info/wrer/payments. The scammers typically try to hide this slightly different address by using anchor text (the text that shows up as a link in the email) that is seemingly normal, such as “Login to your eBay Account.”
    • I wrote a good reference post back in June of 2010 on this site (How To Protect Yourself Against Identity Theft) detailing several easy steps one can take to protect his/her personal information online and in general life. Two of the most important steps (in my mind) that you can do are 1) use Opt Out Pre-Screen to reduce the amount of junk mail you receive and 2) place a fraud alert on your credit report. Both of these steps are simple, effective, and FREE!

    ***Photo courtesy of http://farm3.static.flickr.com/2381/2580085025_7f1cc8d205.jpg

    Valuation-Informed Indexing vs. Passive Investing – Which is Better?

    Well folks, it’s been on my research topics list since January of this year, but during the past several days, I’ve finally been able to perform the detailed comparative analysis the topic deserves.

    What topic is this, you’re probably asking? The topic is Valuation-Informed Indexing (or Valuation-Informed Index Fund Investing – however you want to call it). This topic/investing strategy was first introduced to me by Rob Bennett when he guest posted on the subject over at Free From Broke and has been the topic of numerous online and offline discussions in the personal finance world.

    Reading Rob’s post really got me interested in this form of investing, because it is sort of an attempt to put a more actively managed role on my current investing strategy of passive investing, but without all of the emotion that normally causes the performance of active investors to suffer. More specifically, I wanted to find out two things after first hearing about Valuation-Informed Indexing. These are described below:

    • Determine the exact method it uses to find out how unbiased and repeatable it is.
    • Perform a long term (approximately 20 years) performance comparison between Valuation-Informed Indexing and passive investing to determine which makes you more money.
      • In this analysis, I would also want to compare risk levels (standard deviations) and attempt to optimize the Valuation-Informed Indexing method. 

    So, armed with nothing but a Toshiba laptop, a “why-not” attitude, and a smile, I set off in trying to find some answers to the aforementioned goals.

    Note from Jacob: I really get a lot of enjoyment out of these types of post that require putting together a spreadsheet, inputting some interest rate formulas, and analyzing large amounts of historical data. Maybe it is the scientist in me that enjoys this!

     

    What is Valuation-Informed Indexing (VII) and How is it Different from Passive Investing?

    Truthfully, it was fairly difficult to figure out the exact method that defines Valuation-Informed Index Investing and makes it different from passive investing. This is most likely due to the fact that it doesn’t yet have a wide following, as opposed to passive investing where there are shelves full of books written on the subject!

    However, through study of 1) Rob Bennett’s website about Valuation-Informed Indexing (in particular, his “How To” guide) and 2) Professor Wade Pfau’s preliminary research, I was able to piece together enough information to define the VII method and construct a study.

    In a general sense, Valuation-Informed Indexing involves changing your asset allocation targets in response to fluctuations in market prices. What does this mean exactly? It means that you should have a higher equity asset allocation when the market is lower and a lower equity asset allocation when the market is high.

    Now, this all sounds well and good. But, the real question is “How do we actually go about doing this in a way that doesn’t introduce investor sentiment and ineffective market timing tactics?” VII has an answer to this too!

    A summary of the Valuation-Informed Indexing methodology is summarized below:

    • First, decide on your base asset allocation. For example, in my study, I used 60% equity / 40% fixed income securities.
    • Second, use PE10 data (Current price of S&P500 divided by average inflation-adjusted earnings over the past 10 years) published by Professor Robert Shiller at Yale to change your asset allocation targets based on market fluctuations.
      • When the PE10 goes above 20, switch to 30% equity / 70% fixed income.
      • When the PE10 goes below 12, switch to 90% equity / 10% fixed income.
      • When PE10 is between 12 and 20, use your base asset allocation (60% equity / 40% fixed income, for example).

    Application of this strategy is supposed to deliver superior returns at much less risk (standard deviation of returns) than a fixed asset allocation with regular rebalancing (in other words, passive investing).

    Existing Findings

    The only other numerical studies comparing passive investing to Valuation-Informed Indexing were conducted by Professor Wade Pfau. His preliminary findings can be found here, and the definitive, complete report, can be found at this link.

    Wade’s findings reveal that VII provides more wealth for 102 of the 110 rolling 30-year periods from 1870 to 1980. However, in recent years, it appears that the out performance of VII over passive investing is becoming less and less.

    As someone in my mid-20’s, the time period I was most curious about was the most recent twenty year period. Additionally, I wanted to test this period because in order for me to be convinced to give up passive investing in favor of Valuation-Informed Investing, I would need to see demonstration of its superiority in a time frame that is more relevant to me.

    Lastly, over any 20 year period, it would reason to believe that random, short term fluctuations in the market should be hidden by the correct, overall, long term behavior.

     

    Study Methodology

    So, now that I’ve explained a little bit about what Valuation-Informed Indexing is in general and what existing research has been done on the subject, we can now get in to the specific investigation that I conducted.

    The details of how I set up my analysis are summarized below:

    ·      Investment Total – For simplicity, we will assume that our investment only consists of a one-time initial purchase of $10,000. Transaction fees, fund expense ratios, and taxes will not be considered in the scope of this analysis.

    • Time Period – January, 1990 to May, 2011.
    • Portfolios – There will be two competing types of portfolios – 1) a Valuation-Informed Indexing portfolio, and 2) a passive investing portfolio. Various parameters within each of the models will be changed in order to analyze performance.
    • Rebalancing – Rebalancing for the passive investing and VII portfolios will be done monthly (the same as what I do currently). This is different than Pfau’s analysis, which assumed annual rebalancing.
    • Asset allocation changes – The passive investing portfolio will remain at the same asset allocation targets for the duration of the study. However, the asset allocation targets for the Valuation-Informed Indexing portfolio will be adjusted based on the PE10 trigger levels discussed previously.

     

    Study Results

    The complete results/details of my comparison between VII and passive investing can be found at the following Google Docs Spreadsheet – Valuation-Informed Investing vs. Passive Investing. Rows 1696 and 1697 contain the total return and standard deviation (risk level) for each portfolio.

    The table below shows a summary of the portfolio returns and standard deviations of the analysis. Three passive investing portfolios were compared to three different Valuation-Informed Indexing portfolios/strategies. It’s interesting to note that from 1990-2011, the PE10 never fell to the lower trigger point level of 12.

    As can be seen in the table, passive investing with monthly rebalancing resulted in total returns over the ~20 year time period of 239%, 267%, and 220%, for 60/40, 75/25, and 50/50, asset allocation splits, respectively.

    For comparison, three different Valuation-Informed Indexing strategies/portfolios were employed, as described below:

    Valuation-Informed Indexing Portfolio 1

    • When the PE10 goes above 20, switch to 30% equity / 70% fixed income.
    • When the PE10 goes below 12, switch to 90% equity / 10% fixed income.
    • When PE10 is between 12 and 20, use your base asset allocation (60% equity / 40% fixed income, for example).

    Using this strategy, a total return over the time period analyzed was 185% (much less than the 60/40 asset allocation passive investing portfolio).

    Valuation-Informed Indexing Portfolio 2

    Because the total return obtained from Portfolio 1 failed to outperform the passive investing portfolios, I decided to attempt to refine the strategy (because I really do feel that there is potential for this form of investing! We just have to find it!).

    Next, I proceeded to take the average PE10 from 1990-May 2011, and saw that the average PE10 was a whopping 25.68. Since this PE10 seems to be higher than we’ve seen historically, I figured that maybe by increasing the upper trigger to 25, a higher return would be seen.

    Making this change, the strategy for Portfolio 2 becomes as follows:

    • When the PE10 goes above 25, switch to 30% equity / 70% fixed income.
    • When the PE10 goes below 12, switch to 90% equity / 10% fixed income.
    • When PE10 is between 12 and 20, use your base asset allocation (60% equity / 40% fixed income, for example).

    Using this strategy resulted in a total return over the time period of 195% – higher than Portfolio 1, but still much lower than the passive portfolios.

    Valuation-Informed Indexing Portfolio 3  

    In a final effort to increase my returns using VII, I next tried to increase my equity exposure during “high PE10” times to 50% equity/50% fixed income (instead of 30/70 in Portfolio 1 and 2).

    Making this adaptation, the strategy for Portfolio 3 becomes as follows:

    • When the PE10 goes above 20, switch to 50% equity / 50% fixed income.
    • When the PE10 goes below 12, switch to 90% equity / 10% fixed income.
    • When PE10 is between 12 and 20, use your base asset allocation (60% equity / 40% fixed income, for example).

    Using this strategy resulted in a total return over the time period of 221% – higher than Portfolio 1 and 2, but still much lower than the passive portfolios, with the exception of the 50/50 asset allocation one.

    Conclusion – Passive investing outperforms Valuation-Informed Indexing in the past 20 years, but VII displays much less risk. This is consistent with the normal risk/return correlation.   

    So, what can we conclude from all of these results and confusing numbers? In my opinion, we can take away several key things.

    1)     While Valuation-Informed Index Investing may have outperformed passive investing in most previous historical periods, evidence of it not performing as well in recent years is enough to keep me as a passive investor, at least until VII is refined.

    a.      It’s interesting to note that by using the VII methodology, an investor would have been 30% equity / 70% fixed income from January 1995 until September 2008. The investor would have taken on less risk (in the subsequent market crash of 2008-2009) by owning fewer equity shares during this “high price” time. However, he or she also almost totally missed out on the 163% total return during the ~13 year time period.

    2)     Valuation-Informed Index Investing has great potential because it greatly reduces the risk to investor returns.

    a.      Even though VII failed to outperform passive investing in my analysis, it also provided much less risk, as evidenced by the sharp decrease in standard deviation of the portfolio value over time.

    b.     For example, VII Portfolio 1 provides a slightly lower return of 185% over the time period analyzed (compared to the passive investing portfolios). However, the portfolio also has 34%, 55%, and 21% less risk (standard deviation of portfolio value) compared to the 60/40, 75/25, and 50/50 passive portfolios, respectively.

    This ability of VII to deliver sufficient (but slightly lower) returns at less risk is what I think is the real power of Valuation-Informed Indexing. I feel that with some refinements, VII can become an effective investing strategy. However, I’m not quite ready to switch over just yet…Thanks for reading!

    How about you all? Have you ever tried or heard of Valuation-Informed Index Investing? What are your thoughts about its efficacy? What improvements do you think need to be made? 

    Share your experiences by commenting below!

    ***Photo courtesy of

    50,000 Total Visitors = Just Awesome!

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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

    Happy Memorial Day to everyone! In the spirit of celebrating success and taking a break on this holiday, I wanted to share something very special that happened to My Personal Finance Journey this past Saturday, May 27th, 2011.

    We passed the 50,000 total visitors threshold!

    This is very exciting news for all of us here at My Personal Finance Journey, even to Cheapskate Jake, who, to my surprise, hasn’t scared too many people away! Go figure!

    It’s been an incredibly fun journey (pardon reference to the site name) to get to where we are today. This site started on January 15th of 2010 (almost a year and a half ago) as a way for me to share what I’ve learned about personal finance and investing and learn from other like-minded folks. I definitely had no idea when I started this site that it would be such a large part of my life and identity.

    If I had to venture a guess, I’d say that I’ve spent about 1500 total hours on this blog. Big hint here: if you’re looking for a get rich quick venture, blogging probably isn’t the best for you! During this 1500 total hours, there have been 378 posts written by both myself and various guest posters (we’re not quite to the 500 post mark yet!).

    When I think back on this ~1.5 year journey, there have been several accomplishments/actions in particular (other than simply writing posts) that stick out in my mind as being most significant. I’ve listed these below:

    • Joining the Yakezie Personal Finance Network.
      • Joining Yakezie was probably the best thing I ever did as a blogger. Not only have I gotten to meet some amazing friends, but I’ve also been able to learn many things about how to effectively run a website and organize advertising campaigns.
    • Starting the Carnival of Passive Investing.
      • The purpose of the Carnival of Passive Investing is to 1) highlight the various high quality posts written about avoiding investing in individual stocks each month and 2) to create a “go-to” network/community of passive investing knowledge.
      • As an example of this second purpose, one of the most prolific participants in the monthly Carnival of Passive Investing is Mike from The Oblivious Investor. By increasing awareness about Mike’s posts, I want people to know that if they are interested in the passive investing methodology, following Mike’s blog would provide material appropriate to their liking.

    To close, I just want to say “THANK YOU” to all my readers! This milestone (obviously) would not have been possible without you, and your continued interaction and commentary keeps me going as a blogger!

    How about you all? What have been some of your favorite posts from this site in the past year? If you are a site owner, have you hit any important site milestones recently? 


    Share your experiences by commenting below!

      ***Photo courtesy of http://www.flickr.com/photos/squeakymarmot/1019406320/sizes/z/in/photostream/

      Simplify Your Asset Allocation and Remove The Impossible From Your Investing Strategy With Betterment.com

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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

      If you’ve stopped by my site before, you probably know that I am a proud supporter and practitioner of passive investing strategies. In fact, in January of this year, I started The Carnival of Passive Investing just for the purpose of spreading the word about this very effective style of investing.

      Essentially, passive investing involves the use of different types of index ETFs and mutual funds to obtain a target asset allocation based upon your personal tolerance for risk. By applying this simple passive investing approach, we are able to actually outperform 70-80% of investing “professionals.”

      So, needless to say that I am a big supporter of any new products or services that makes it easier for individual investors to get off of the foolish active investing (individual stock investing) track and in to the proven world of passive investing.

      One of these services facilitating passive investing that I was recently exposed to is Betterment.com.

      What Does Betterment.com Offer?

      In a single sentence – Betterment makes investing the smart way as easy as it could possibly be.
      How does it do this you might be asking? Simple! Betterment only asks that you make one decision: deciding what percentage of your money you want in stocks and what percentage you want placed in bonds. After this decision (called your asset allocation) is nailed down, Betterment’s system takes care of the rest for you by investing your money in a mix of bond and stock ETFs.
      Got the gist?! Now that we’ve covered what Betterment offers at a high level, let’s delve in to everyone’s favorite – the details!

      Tools to Help You Decide Your Asset Allocation

      If you already have a feel for what you want your asset allocation to be, great! If not, Betterment has some nifty little tools to help you get started making this important decision.
      Below is a screenshot of the asset allocation decision making tool that Betterment offers. By inputing 1) how many years you have until you want to retire, 2) your current investment, and 3) your risk tolerance in 1 year and 44 years, Betterment is able to generate a suggested asset allocation.
      When I tried using this tool, the recommended asset allocation was 90% stocks/10% bonds. However, I am sort of a worry-prone person, and therefore go with a slightly more conservative asset allocation split of 75% stocks/25% bonds.

      What Does Your Money Get Invested in With Betterment?

      Once you’ve decided your asset allocation, your money will then be invested automatically by the folks at Betterment. Even though you don’t have to personally direct your money, I feel it is a very good to have a general idea as to what funds your money is being placed in to.
       
      The stock/equity portion of the Betterment portfolio is made up of the following index ETFs. Personally, I feel that simply investing in the VTI Vanguard Total Stock Market ETF would have been sufficient. However, the other ETFs are high quality and will still achieve the desired result.
       
      • 20% VTI: Vanguard Total Stock Market
      • 20% IVE: iShares S&P 500 Value Index 
      • 20% IWD: iShares S&P 1000 Value Index
      • 15% IWN: iShares Russell 2000 Value Index 
      • 15% IWS: iShares Russell Midcap Value Index 
      • 10% DIA: DIAMONDS Trust Series 1 
      The bond/fixed income portion of the portfolio is invested in the following index ETFs. I think it’s really good that they thought to include the TIPS (inflation adjusted) bond ETF. Nice work!
       
      • 50% TIP: iShares Barclays TIPS Bond Fund
      • 50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund 

      What Fees Will You Pay? + Other Account Details

      The fee structure at Betterment is in my mind, a very good deal. There are no minimum account balances (I started my account with $10), no transaction fees, and you can withdraw your money at any time. In addition, you can change your asset allocation a maximum of once per day and your portfolio is rebalanced once per quarter back to your asset allocation targets. Not bad right?!

      For all of this, you pay a fixed expense ratio/fee of 0.3-0.9%, based on what amount of money you have invested. Since most actively managed funds charge far more than 1% to under perform the market, this is quite good!

      Currently, Betterment is only offering individual, taxable investment accounts. I would like to see them add Traditional and Roth IRA options at some point, and the VP of Marketing for Betterment just informed me that they will be on the way shortly!

      Another really cool feature of Betterment is that they offer a simulator that will allow you to predict the value of your portfolio a set number of years in the future based on various asset allocation levels. I’ve pasted a screenshot of this tool below.

       

      How Does Betterment Stack Up Against the Competition?

      The niche in which Betterment operates is what I call the “single solution index investing asset allocation” space. They are targeting investors that do not want to devote the time to 1) investing in individual ETFs or index mutual funds on their own and 2) rebalance periodically throughout the year.
      So, even though you could easily obtain lower overall expenses/fees by employing an investing strategy with individual ETFs or mutual funds (as I do), this does not qualify as competition for Betterment.
      However, I did some brainstorming to think up products that would qualify as Betterment’s competition, and compared these to Betterment below:
      • Target Retirement Date Mutual Funds
        • These funds are similar to Betterment in that they place an investor’s money in a mix of equity and fixed income mutual funds.
        • An example of this category of funds are the Target Retirement Funds from Vanguard.
        • Vanguard’s expenses are much lower than Betterment’s (0.1-0.2% vs. 0.3-0.9%). However, they do require a $1000 minimum initial account balance, and you don’t have complete control over what asset allocation levels the funds uses (Vanguard decides for you).
        • One good thing though about these Target Date Retirement Funds is that you can invest them in an IRA with Vanguard.
        • So, in this case, Betterment has higher fees, but MUCH more flexibility.
      • Target Retirement Date ETFs
        • An interesting new type of ETF that has come out is the ETF version of the target retirement funds discussed above.
        • The only provider of these that I could find was iShares. You can view an example of one of these target date ETFs by clicking here.
        • These ETFs offer lower expenses than Betterment (around 0.3%) and slightly more flexibility in withdrawing your money. However, the asset allocation level is still dictated to you by the folks at iShares and you will most likely pay commissions on each trade you make.

      What’s the Bottom Line?

      “So, what’s the bottom line, Jacob? After reading this Betterment review, how do I decide if Betterment is right for me?”

      As you might have guessed, this comes down to your personal preference of how involved you want to be in your investing strategy of any money outside of your retirement accounts (because remember, Betterment doesn’t yet have IRAs).

      Betterment is not right for you if you enjoy selecting which ETFs or index mutual funds to invest in and rebalancing back to your asset allocation targets throughout the year.

      Betterment is right for you if you want a very simple, low-cost way to invest the correct way by making one asset allocation decision and then just watching your money grow.

      How about you all? Have you used Betterment? Are you a fan of these single solution asset allocation investments? 


      Share your experiences by commenting below!

      My Current Asset Allocation and Net Worth Growth – April 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 continues to go very well.

      The market continues to trend upwards, and investors are enjoying some nice gains in their portfolios. Here in Virginia, it feels that summer is almost upon us (inspired picture at right). You can smell the barbecues cooking on your way home, and neighborhood pools are beginning to open. For me, summer means a couple things – trail running, hiking, camping, and road biking!


      However, I’m getting off track here. You all stopped by for the net worth growth update! 

      Let’s take a look at the pertinent details….

      Net Worth Growth (not including condo)

      From April 1st, 2011 (when the last portfolio update was published – see link below for more information) to 29-April-2011, the S&P 500 index went up by 2.85%. Pretty nice little run for a month, eh?! Let’s hope it keeps up!

      My Personal Finance Journey – January-March, 2011 Portfolio and Net Worth

      During that time period, my net worth (excluding condo ownership) increased by 2.55%. 


      I think that the reason that the market outperformed my net worth growth this past month was due to the fact that I had to pay my 1st half 2011 condo property taxes ($500). However, I’m pretty satisfied overall with the month.

      Condo Equity Growth

      Currently, I have 10.7% home ownership in my condo (up from 9% at the end of December, 2010), with this accounting for 26% of my real net worth (so net worth subtracting the condo loan – this is different from the net worth above).

      Update on Financial Goals for 2011

      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!


      • Am maintaining a my target of 6-9 months of expenses in a cash reserve fund in my Dollar Savings Direct high yield online savings account.
      • 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).


        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, 24% of my net worth is invested in fixed income instruments (cash or bond funds), and 76% is invested in equity.
          • This is almost perfectly aligned with my targets for these categories of 25% (fixed income) and 75% (equity).
        • 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 pretty 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%) 7%
        % non-inflat Bond Funds (target 15%) 14%
        % TIPS Bonds (target 5%) 3%
        % International Equity (Target 11%) 11%
        % International Emerging Markets (Target 11%) 10%
        % Domestic Large Cap (Target 8%) 8%
        % Domestic Small Cap (Target 8%) 9%
        % Domestic Small Cap Value (Target 14%) 15%
        % Domestic Large Cap Value (Target 13%) 14%
        % REIT (target 10%) 9%

        Analyzing my current asset allocation percentages, it appears that I am lucky enough to be exactly on target with all of my asset classes (within +/- 5% banding) .Therefore, no rebalancing is required. Always a good thing!

        My next moves for the May-June, 2011 time frame will be to do the following:

        • Continue contributing to my Roth IRA for the 2011 year. I only need to contribute $1450 more to fully fund it for 2011. 
        • After fully funding 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. This is part of my 2011 goal of having $500 in microloans.
        • Try to reach and pass my $5000 fundraising goal for the Multiple Sclerosis bike ride I am doing in June of this year. Currently, we have reached $5,000 (including company matches), but let’s keep it going! If you are interested in making just a $10 donation, click here. 


        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.

        How about you all? How did you progress with your net worth in April 2011? What are your thoughts about the strength of the market? 


        Share your experiences by commenting below!

          ***Photo courtesy of http://farm3.static.flickr.com/2225/2038075453_65b965fb97.jpg

          Would You Have Locked In a 13.5% Fixed Rate Investment in the 1980’s?

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          My my my. I think we all have and will always have a special place in our hearts for the 1980’s. Any decade that produced Back To The Future, one of the best movie series ever made, has got to be awesome! Not only that, 1980’s/Back To The Future gave us 2 minutes of the best Biff insults of all time. If you don’t believe me, just take a look at the video clip below!

          But, before the 1980’s made like a tree and got outta’ here (excuse the Biff line), it also gave us one of the most CRAZY and random music videos I have ever seen in Bonnie Tyler’s “Total Eclipse of the Heart.” Just take a look at the video below. This video has slow motion doves, football players, ninjas, fencers, and preppy guys making a wine toast!

          Interest and Inflation Rates During the 1980’s

          Aside from these unforgettable media contributions, the 1980’s was also a time of incredibly high interest rates (and indeed inflation as well).

          According to Money Cafe’s Prime Rate History page, the prime interest rate (the rate at which banks borrow money from the Federal Reserve) during the 1980’s was well above 10%. In fact, during the early portion of the 80’s, prime interest rates as high as 20% were seen. Now, it’s important to realize that as an investor, you wouldn’t be able to invest money at the prime interest rate (since the banks have to have a spread of around 3% less on investment products in order to make money). However, opening up a fixed income investment at 10% annual interest doesn’t sound too bad at all, right?!

          Enter the concept of a 30 year Treasury Bond or fixed interest rate Certificate of Deposit (CD)…According to the Federal Reserve’s data website and Mortgage-X.com, the interest rate being paid on these fixed income investment instrument exceeded 10% for 5 years from 1980-1985 (see table below for 30 year T-Bond returns).

          During this same time (according to Jeremy Siegel’s book, Stocks for the Long Run), the annualized inflation rate was 4-5%. While this is still higher than the average annualized inflation seen from 1888-2001 of 2.68%, it is much lower than I expected it to be. Before beginning to write this post, I was suspecting that inflation was above 10% in the 1980’s.

          Applying this knowledge along with the fact that the average nominal return of the stock market since 1888 has been 9.72%, it begs the following question….

          Did People Take Advantage of this Situation By Locking in This High Interest Rate for a Long Period of Time? And If Not, What The Heck Were They Thinking?!


          In a search for an answer to this question, I reached out to my Dad for some insight.

          According to him, during the early 1980’s, inflation rates were so high that it made the effective return on shorter term CDs fairly low. Because of this, he did not lock in this fixed rate. “At that time, we did not know that the inflation rate would go down and stay down below 4% for the 25 years since then.  Even money market rates were around 7%,” mentioned my Dad. Another factor that turned him away from purchasing a CD was that he would have to pay tax on the interest (around 40%) so you were losing money after taxes and after inflation.

          However, he further went on to explain that what he did do with any of his extra money was to pay off his 14.5% interest rate mortgage taken out in the early 80’s. This definitely was a wise decision, and I do believe that for people that opened up mortgage accounts in the 1980’s, it would have been a better use of your money to pay off your loan, due to high interest rates.


          On the other hand, for people that didn’t have a mortgage, it would reason that it would have been a great idea to lock in a 30 year T-bond at a cushy 13.45%, knowing the historical trends.

          What Can We Learn From This?


          In my opinion, there are some powerful takeaways that we can learn from this analysis. I’ve tried to concisely summarize these below:

          • Keep history in mind and don’t doubt it.
            • Since 1888, the average inflation rate has only been 2.68% and the average nominal (before inflation) has been 9.72%. Period. End of story. 
          • Compare current fixed income interest rates to the interest rates on your debt accounts.
            • For example, let’s say that I am a 30 year old that has locked in a 30 year fixed rate mortgage at the current national average of 4.62%. 
            • However, in the year 2015, the world economy goes haywire and inflation goes up to 10%, but the rate on 30 year T-bonds goes up to 13%. 
            • Since you have locked in a lower rate mortgage, I feel that it would be beneficial for you to invest a substantial amount of money in a fixed rate bond. 
          • Remember to invest using tax-deferred/favored accounts.
            • My Dad’s concerns about the effect of paying taxes on CD investments in the 1980’s is very prudent. However, according to eHow.com, fixed rate investments (CDs and T-bonds) can be housed in IRA accounts. This takes care of the tax worry! Hurray!

          How about you all? Did you lock in a high fixed rate investment during the 1980’s? If so, what type and what interest rate did you get? If not, what kept you from doing so? 


          Share your experiences by commenting below!

          Does The Market Perform Better When Democrats or Republicans Are President? – An Update On Recent Results

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          Note: This post was selected as the #6 pick in the 103rd edition of the Best of Money Carnival, hosted at My Journey To Millions. Stop by and take a peek at all of the other great articles as well!

          In the 2002 edition of the book, Stocks For The Long Run, Siegel includes a lovely little analysis/study of whether or not the stock market has had higher real returns (so this = after inflation has had its effect) when Republicans vs. Democrats have held the office of the President of the United States.


          What exactly did he find from this study? Let’s take a look!

          Siegel’s Results

          Now, I definitely don’t want to make this a big political battle, because I am not a very “involved” political person.

          However, it is no secret that the stock market in general reacts better to Republicans than Democrats. Republicans pride themselves on being champions for lower capital gains taxes and supporting the businesses that make up the stock market.

          Indeed, Siegel’s findings support the theory that sentimentally (short-term), the markets do favor Republicans being President as compared to Democrats. This was determined based on the study results showing that since 1888, the market has risen 0.7% (on average) on the day following a Republican victory vs. falling an average of 0.5% the day after a Democrat victory.

          This is definitely an interesting finding. However, what is really important is to determine how the market acts during the entire term of having either a Democrat or Republican in Office.

          To do this, Siegel and his research team computed the annualized real return (after inflation) during each Presidential term since Harrison became President in 1888. The results of this portion of the analysis are listed below:

          • From 1888-2001…
            • For Republicans, the annualized nominal return was 8.79%, and the annualized real return was 7.20%.
            • For Democrats, the annualized nominal return was 10.84%, and the annualized real return was 6.48%.
            • Result = Republicans win. Democrats produce higher stock returns, but also higher inflation. Republican have produced higher real returns since 1888 by 0.72% (so not by much).

          • From 1948-2001…(the results are quite different)
            • For Republicans, the annualized real return was 6.11%.
            • For Democrats, the annualized real return was 11.25%.
            • Result = Democrats win by a landslide. To give an idea of the magnitude that this difference in returns would make, if you invest $10,000 in 1948 and assume a 6.11% annual return, your money would have been worth $231,785 in 2001. However, if you had realized an 11.25% return, your same $10,000 would be worth $2.8 million. Wow! That is a huge difference! 

          So, from these results, we can conclude that during the time that most people reading this blog have been investing, having a Democrat in office has been favorable.

          However, since I just have the 2002 version of Siegel’s book, I wanted to check up on this and see how our Presidents have performed since then.

          Update on Recent Presidents

          Just as an example, I pulled up the Google Finance chart of the performance of the S&P500 index during the Clinton presidency. During his terms, the stock market went up 203%.

          The same S&P500 chart for G.W Bush’s two terms is shown below. During his time in office, the market decreased 29% overall. However, he did have a nice run in the 2007 time frame!

          Obama is fairly new to the Presidential office compared to the others. However, the performance of the S&P500 index during his term so far has shown a 44.18% increase (see chart below).

          So, it appears that the trend of the markets performing better when Democrats are President vs. when Republicans are in Office has continued.

          Will it continue to be this way? As far as this question goes, I don’t have any answers, as I am not one to ever try to time/predict the market. As a passive investor, I merely adjust my asset allocation to my targets on a monthly basis based on the fluctuations in the market.


          Another thing I don’t have an answer to is why Democrats being President cause the markets to do better (at least in the past 60 years)? Because one would think they would do better with Republicans in Office! I need your help to shed some light on this.


          How about you all? Why do you think the market has performed better when Democrats are in Office the past 60 years? Is it just residual policies being enacted from when Republicans were there? Is it because Republicans control the Senate/House during this time? Or, is it because Democrat policies enable lower and middle class people to have more money/spend more money?


          Share your experiences by commenting below!

            ***Photo courtesy of http://farm4.static.flickr.com/3602/3366720659_b746789dfd.jpg

            Stocks For The Long Run by Jeremy Siegel – Book Review

            It’s hard to believe that it’s been more than 4 years since January of 2007. However, that’s how long it’s been since I first started learning what investing was for real through self-directed reading.

            Sure, I had learned about personal finance topics in my finance classes in my undergraduate degree. However, if I had relied on learning everything about personal finance from those classes, this blog would never have gotten started, and you most likely wouldn’t be reading it right now.
            You heard me right folks. I am willing to bet that you can get a better education about personal finance yourself by reading some of the high-quality books out there then you can from any university professor. This whole debate is an entirely different matter (and one that I feel very strongly about – keep an eye out for a future post), so let’s get back to the subject of today’s post before I go off on too much of a tangent.
            In January of 2007 (during a trip to Macchu Picchu, Peru with my family), I read “Stocks for the Long Run” by Jeremy Siegel for the first time. Since then, it has truly become one of my favorite personal finance/investing books of all time (up there along with A Random Walk Down Wall Street by Malkiel and What Wall Street Doesn’t Want You to Know and Swedroe).
            I consider this my “investing bible.” I may even have a problem because I just realized that I have been sleeping with it no less than 2 feet away from me on the bookshelf for the past couple of years! haha
            In this book, Siegel and his Wharton Business School research team explore pretty much every question you have or could ever wonder about regarding long-term investing in stocks, bonds, and cash-based securities.
            The book is divided into five Parts:
            In Part 1, Siegel examines historical data to determine what trends are present to discriminate how the equity and fixed income markets function. In Part 2, the research team analyzes different techniques to value securities and to predict the future returns investors can hope to obtain. Unfortunately for us, their findings indicate that future returns will be significantly lower due to the bleak outlook of dividends.
            In Part 3, which is in my opinion, one of the most interesting sections of the book, Siegel analyzes how stocks and bonds have performed during specific periods in history. For example, he analyzed performance during the Sept. 11, 2001 disaster, during wars, and how they have performed when Republicans vs. Democrats are President of the United States. Some of the results are counter-intuitive!
            Part 4 of the book explores various short-term periods in history in an attempt to discern whether or not patterns are present which can be exploited to profit when incorporated into one’s investment strategy. Unfortunately, the team pretty much finds that there are no short-term fluctuations that can reliably beat the market averages.
            The final section of the book, Part 5, is my favorite portion because it basically summarizes how all of the evidence he presented in the previous Parts can be used to create an intelligent investment strategy. And guess what, he concludes that low-cost index mutual funds are the best way to go! How about that?! That’s why my investing strategy is based on fixed income and equity mutual funds instead of individual stocks.
            One thing that I think could be improved upon in this book is to add additional detail showing example portfolios of how asset allocation should change throughout one’s life.

            However, for the most part, if you are wondering anything about stocks, bonds, or any security for that matter, this is the book to go to!

            Recommendation for purchasing the book (if you so desire)

            If you’re interested in buying this book, I would recommend purchasing a cheap, used copy from Amazon. There are two editions available for purchase – 1) the 2007 edition and 2) the 2002 edition.

            Personally, I would buy the 2002 edition because it is only $0.48 vs. $23 for the newer edition. I seriously doubt that the added material is worth >$20 more in purchase price, because the 2002 version is already very good!

            How about you all? Have you read Stocks for the Long Run by Siegel? What did you enjoy and what would you change? What are your favorite investment and/or personal finance books?

            Share your experiences by commenting below!

            A Homeless Plan to Guard Against Hopelessness

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            The following is a guest post from Andi B. with Modern Tightwad. It was written as part of a Yakezie blog swap, where different participants in the Yakezie Personal Finance Network partnered up and traded posts on the common topic of “What would you do to improve your situation if you were homeless?”

            You can view my post today over at The Saved Quarter (another great Yakezie blog) by clicking here.

            A Homeless Plan to Guard Against Hopelessness
            A couple years ago, our financial situation was dire, and my husband and I talked about what we would do if we were homeless. One of my friends was kind enough to tell me, “You’ll never be homeless because you have friends,” but I know better than to depend on the unending kindness of friends or family, or to believe that we cannot be crippled by unknowable circumstance. Ben Franklin’s notion of spending a maximum of three days with friends is probably on the short end, but there can still be a limit to how long you can crash.
            Homeless Plan:
            Our working assumption is that my husband and I have lost our jobs, our home, and have no savings. For the sake of argument, we also assumed that we don’t have any friends we can stay with for any duration.
            Step 1: Sell our second car. 
            We have two cars, a 2000 Mitsubishi Mirage and my husband’s 1969 Datusn 510 wagon. We would sell the Mirage because we could get $1000-1500 to put into savings. Although it is our “nicer” car, the seats in the Datsun fold down to accomodate a twin size air mattress, and we could sleep in there if need be.
            Step 2: Sell everything else. 
            If we’re at the point where we may have to stay in our car, a PS3 and a television is unnecessary. I’m pretty sure that we can scrape together another few hundred easily. This should give us up to $2,000 in our savings account, including the money from the car.
            Step 3: Make a sleeping decision.
            With the car, our tent, and the money we’d converted from savings, we could temporarily live in a campground. We could stay in a by-the-week hotel. A priority would be looking for work that included housing. For example, my husband and I both have years of experience in the hotel industry so we would look for a motel or bed & breakfast management position that included an apartment.
            Step 4: Get all the help we can.
            I’m hoping that at this point, we’ve already applied for unemployment. We would also apply for food assistance. If we managed to obtain food assistance, we would utilize local assistance matching programs. 
            The Portland Farmer’s Market, for example, matches up to $5 each week for assistance recipients to obtain fresh local food stuffs. We have a dog and would look to the Pongo Fund for help in taking care of him. Many would advocate giving him up, but since he is my assistance dog, that’s not really an option.
            Step 5: Prioritize food.
            Outside of governmental food assistance, I would also approach local farms and ask if we could help with the harvest or work at their farmer’s market booth in exchange for a share of food, or if we could glean. Gleaning is the process of walking through the fields and picking food that the harvesters miss, food that would go bad if it weren’t for individuals picking through.
            Step 6: Focus on finding work.
            Part A: Gym Membership
            If our sleeping decision doesn’t include bathroom facilities, we decided to get a family gym membership at a local gym. We could get a family membership for $60/month that would provide us with a place to use the bathroom and shower each day. Good hygiene is essential to getting a new job, and a job is needed to get back on our feet. It also may give us something to do for an hour or so each day so we’re not feeling sorry for ourselves.
            Part B: “Borrow” an address.
            A huge stumbling block for people to get work is to have an address and contact number for employers. If we couldn’t borrow an address from a friend, a local church or non-profit may be able to assist.
            Part C: Get a number.
            As stated above, it’s nearly impossible to get a job without a contact number. A prepaid cell phone would be in order. Our last phone would have been surrendered. We’ll worry about paying the cancellation fee when we can.
            A big issue my husband and I discussed would be our attitudes prior to and during our homeless situation. We would guard against complacency or surrendering to what we felt was inevitable. We would be willing to travel anywhere to find work. Unfortunately, if our situation was due to a severe medical problem, or something else, we may have to consider a different plan. However, we are fortunate that if homelessness was an extreme possibility, we both have family in several parts of the country who would be willing to take us in for a month or so to get a job and get on our feet. Not everyone is that lucky. We also have the humility to ask for help, hopefully before our situation becomes desperate. 
            Due to our previous financial circumstances, tragedy is always in the back of my mind. We’ve been house-hunting over the past six months, and currently have an offer in on an house with an accessory dwelling unit – a small 300 sf studio apartment. I was comforted by the fact that if something horrible happened and we lost primary income, we could move into the studio, rent out the main house and more than cover our mortgage. Once we discussed what we could do in a worst case scenario, I no longer struggled with worry. Even if something happens and we become homeless, I’m not hopeless.

            How about you all? What steps would you take to improve your situation if you were homeless? Have you ever known any one that was homeless? 


            Share your experiences by commenting below!

            Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

            • First, thank you so much Andi for writing this article. It was very insightful! I’m so sorry that your situation was so dire several years ago. Was that caused by loss of a job?
            • @ Jobs that include housing – The idea of finding a job that provides housing is a very interesting one that I had not previously considered. I know that resort and cruise ship workers get housing providers, which enables them to save a lot of money. I didn’t know that normal hotel workers could stay in the hotel though for free. Do a lot of hotels do that?
            • @ Unemployment benefits and food sources – In writing my post over at The Saved Quarter, I completely forgot to mention the idea of applying for unemployment assistance and food assistance from the government. The idea of “gleaning” for food is innovative as well!
            • @ Idea of asking for help – I’m really glad that you mentioned the idea of being humble enough to actually ask for help. I think that is something that gets a lot of people in trouble (even with debt problems), because help is available, they are just too stubborn or ashamed to admit to needing it.

            ***Photo courtesy of http://images.cdn.fotopedia.com/flickr-4307313294-hd.jpg

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