Category Archives for Invest & Retire

Microloans Part 1 – What Are Microloans and How Can I Invest in Them?

• Microplace.com – A PayPal Company
• Kiva.org

What kind of return can I expect?

Generally, the returns of these investments of pretty low. Currently, a one year loan on Microplace.com is earning a 3% rate of return.

While this is not stellar, I consider it a very good sign for several reasons.

• First, it is probably a realistic estimate due to the increased risk with this type of investment being counterbalanced by high interest rates charged to the borrowers.
• Second, and maybe most importantly, it is currently double what I am earning on my online money market savings account (1.4%). So, it is not all that bad when you think about it!

How is the payback reliability of microloans?

As I was investigating this topic today, I was shocked to find out that microloans actually have a 97% successful payback rate.

This is truly an awesome find! I think it is also proof that people are more motivated to do well if they are treated with respect.

By giving poverty stricken individuals a loan (instead of a donation), they are being instilled with responsibility. It is a pretty cool thing!

My experience with microloans

• $20
• Repayment in less than one year (Jan 2011)
• 3% annual interest

Comparison of Blockbuster Online vs. Netflix DVD Rental Programs

• Enjoy going out to a brick-and-mortar movie rental store and being able to physically look at all of the selections.
• For me personally, I have very found memories of going to the movie store as a kid. It’s a fun activity, after all! But, that was before online movie rental became big!
• Demand on viewing Blue-Ray versions of movies (since this is offerred at no extra charge with Blockbuster).
• Click on the following link to check out Blockbuster’s website – Blockbuster Video

• Enjoy watching a good variety of quality, new and vintage movies in regular DVD format.
• Enjoy having a wide access to even more movies and TV episodes that you can stream instantly online.
• This was the biggest selling point for me in my decision to go to Netflix. It is the same price as Blockbuster, but I am able to stream many shows and movies online. In fact, at home right now, I am watching Karate Kid II instantly!
• Click on the Netflix image below to view a full listing of pricing and features (free trial also available).

How about you all? Do you use Netflix or Blockbuster? Which do you find is better suited to your needs?

My Personal Finance Journey
Learning for Life

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Podcast #2 – Building Your Cash Emergency Fund

How about you all? How much of an emergency fund do you keep on hand? What type of an account do you save the money in?

My Personal Finance Journey
Learning for Life

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My Current Asset Allocation and Net Worth Growth – July 2010

For me, July is a big month! It is my last month in the working world before going back to graduate school this coming fall. As such, I thought it would be fitting to include the cute school bus graphic above! Enjoy!

Let’s get started with the monthly review…

Net Worth Growth

From June 3rd (when the last portfolio update was published – see link below for more information) to July 12, the S&P 500 index went down 2%.

My Personal Finance Journey – June 2010 Portfolio and Net Worth

During that time period, my net worth increased 2.35%. While this is not stellar, it is beating the market!

Update on Financial Goals for 2010

I have now achieved the following financial goals in 2010:

• Achieved my short term target net worth for this year.
• Contributed the maximum contribution level of $5000 allowed for my Roth IRA for the year 2010 (and 2009 as well).
• Eliminated all significant holdings in individual stocks from my portfolios.
• Eliminated the actively managed Vanguard Short-Term Investment-Grade Fund (MUTF: VFSTX) and replaced it with the following short-term bond index fund – Vanguard Short-Term Bond Index Fund (MUTF: VBISX).
• Have accumulated 100% of my cash target to go towards my down payment for a condo purchase at the end of this month.
• Downpayment funds have been transferred from my online high yield savings account to my checking account.
• Am under contract for a condo to purchase this fall and am on track to close end of July, 2010.
• Have obtained title and condo insurance for my condo purchase.
• Found an attorney to assist with my condo settlement and title insurance processing.

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

• Overall Fixed Income / Equity Allocation
• Currently, 32% of my net worth is invested in fixed income instruments (cash or bond funds), and 68% is invested in equity.
• This is undoubtedly off of my targets of 25% and 75%, respectively, for these categories.
• The cash portion of my net worth has increased significantly since I am building up funds for a down payment for the condo I am purchasing at the end of this month.

• Equity Allocation
• In the equity portion of my portfolio, 71% is invested in US Domestic Equities with the remaining 29% being held in international equities. This is exactly in line with my equity breakdown targets of 71% and 29%, respectively, for US Domestic and international holdings.

While the overall percentages for these categories may not be ideal, 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%) 17%
% non-inflat Bond Funds (target 15%) 15%
% TIPS Bonds (target 5%) 0%
% International Equity (Target 11%) 12%
% International Emerging Markets (Target 11%) 8%
% Domestic Large Cap (Target 8%) 16%
% Domestic Small Cap (Target 8%) 14%
% Domestic Small Cap Value (Target 14%) 7%
% Domestic Large Cap Value (Target 13%) 6%
% REIT (target 10%) 5%

• Cash –
• As I have mentioned several times, I expected that this would be high due to accumulating funds for a down payment.
• No action can be taken.
• TIPS Bonds –
• Since I have no extra cash right now (due to cash accumulation above), I cannot purchase this mutual fund due to Vanguard’s $3000 minimum purchase requirement.
• It is not available as an ETF with Vanguard either (I wish it was).
• Domestic Large Cap –
• Unfortunately, this is being held in my 401k account, and therefore, has a greatly reduced selection of index funds from which to choose.
• Because of this, the only options available to me are to exchange funds from this mutual fund to 1) an international equity fund, 2) a small cap index fund, or 3) a bond fund.
• Because I have 32% of my net worth currently held in fixed income instruments (and the stock market currently is going down anyways), I want to work towards decreasing my exposure to bond funds slightly.
• In order to improve my situation, I exchanged all of my 401k’s domestic large cap funds in to an international index mutual fund. While this is not ideal, I would prefer to have additional funds invested more aggressively internationally than in an S&P500 fund.
• Domestic Small Cap, REIT, & Domestic Small Cap Value –
• No action can be taken at this time due to tax consequences and insufficient funds stemming from my impending condo purchase.
• Domestic Large Cap Value –
• Since this is held in a taxable account, I cannot sell my holdings to exchange money to this mutual fund. I will have to wait until new funds can be added to increase the allocation %. However, I did add a large cap value ETF to my taxable Vanguard account that I can begin funding whenever I get additional money coming in. This is good news.

My next moves for the July/August 2010 time frame will be to do the following:

• Sign up for a biweekly home loan payment plan.
• Set up accounts for making home ownership automatic – automatic deductions for loan repayments, real estate taxes, maintenance reserve funds, insurance, etc.
• Open up a Traditional IRA / Rollover IRA to convert from my current employer’s 401k.

Wish List

Note: since most of my extra cash this month is being used to save for down payment, I will not have as much extra to play around with as normal – so these may or may not happen.

• Purchase an inflation adjusted bond mutual fund (TIPS)
• Begin contributing to the large-cap value funds in my taxable Vanguard mutual fund account.
• 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.

How about you all? How did you fare in the month of June/July in the stock market?

How often do you all create financial goals and track them? Monthly? 2X per year? 1X per year?

My Personal Finance Journey
Learning for Life

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Podcast #1 – Account Hierarchy and the Correct Way to Prioritize the Use of Your Funds

Recently, I was reading the book titled Blogging For Dummies by Susannah Gardner and came across the idea of using Podcasts as a way for blog readers to have access to important content in an audio or video fashion.

• They are FREE for readers to listen to.
• They can be downloaded in mp3 format and played on any iPod or mp3 player.
• They can be listened to when readers do not have access to a computer (i.e. while riding in a train or car).

Learning for Life 

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Why Following Hot Mutual Fund Managers Doesn’t Work

My Personal Finance Journey Homepage

During the winter of 2007, Jim Cramer, in his television show and his book, Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer), was highly recommending 1) to follow his technique for picking your own stocks and 2) if an individual could not devote the time to picking his/her own stocks, to put your money in the care of a fantastic money manager at a mutual fund.

Since I knew that I didn’t have enough time or desire to devote to picking my own stocks, I decided to go with option 2 above.

The most highly recommended fund manager by Jim was the CGM Focus Fund’s manager, Kenneth Heebner. Jim’s advice was something along the lines of “buy this fund and stick with it as long as Ken Heebner is running the show.”

Since this was in my learning, naive days, I followed Jim Cramer’s advice and bought this mutual fund in a Roth IRA account.


This was probably one of the stupidest things I have done financially to date. Let’s analyze why.

Why was this such a mistake? It was recommended by Jim Cramer, after all.

This was a mistake because it basically violates every rule of set forth in My Personal Finance Journey.

• First, it is an actively managed fund. And, as we have found in many financial books (A Random Walk Down Wall Street, for example), 70% of actively managed mutual funds fail to beat the market index averages.
• Second, the expenses ratio/fee for owning the CGM Focus fund is 1.23%.
• This is much higher than the Vanguard Total Stock Market Index, whose expense ratio is 0.18%.
• The CGM Focus Fund cannot keep all of it’s money invested in equity at all times due to the fact that it has to maintain reserves to redeem shares when investors buy and sell shares. This decreases returns for investors.
• For example, CGM keeps >1% of it’s assets in cash vs. Vanguard’s Total Stock Market Index which maintains 0.31% in cash.

How has the CGM Focus Fund performed relative to the S&P500 Index?

• Over the past 10 years…
• CGM Focus Fund has increased 120% vs. the S&P500 which has decreased 30% overall.
• Over the past 5 years…
• CGM Focus Fund has decreased 30% vs. the S&P500 which has decreased 15% overall.
• Over the past year…
• CGM Focus Fund has decreased 2% vs. the S&P500 which has increased 15% overall.
• Since I bought the CGM Focus Fund
• My holdings have decreased 22% overall. Wonderful!
• During this same time period, the S&P500 indexed decreased 19%, beating the CGM Focus Fund. Remember, this is even before considering the expense ratio of the CGM Focus fund further diminishing returns.

The topic of whether or not superior past performance will indicate superior future performance is continuously being debated.

Moolanomy.com recently put out a good piece discussing several reasons why past performance will not be the same going forward. See the link below for more information.

Moolanomy.com – How Important Is Mutual Fund Historic Performance?

Recently, while reading the book by Jerry Tweddell titled, Winning With Index Mutual Funds, I came across a brilliant and very complete section about the reasons why “hot” mutual funds do not perform well in the future. The key findings are listed below.

• The top 20 best performing mutual funds from 1982-1992 fell to an average rank of 142 out of 309 funds in the period 1992-2002. This is basically reverting to average performance.
• When a fund becomes successful, publicity increases, causing more funds to pour in to the fund.
• All too often, this creates the situation of the mutual fund manager having more money than good ideas. This can even put pressure on the manager to purchase additional stocks that he or she is not as enthusiastic about.
• An increase in funds also means that the fund will need to bring in more personnel to handle additional workload. This can create additional people-management problems that the mutual fund manager must handle, distracting him or her from investment analysis.
• Success also increases the chances that a fund manager will be hired away to another firm or start their own business all-together. This increases the chance of turnover in the mutual fund.

In my opinion, these are definitely interesting findings. However, I wonder how this increase in popularity, funding, and success affected our all-star, Kenneth Heebner. Let’s investigate that scenario.

First, we need to know when Heebner’s CGM Focus Fund was made popular by Jim Cramer’s book, Jim Cramer’s Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer). Looking at Amazon, it appears that the book was published December 4th, 2007. Great! We have our beginning date.

• Since the published date, the CGM Focus Fund has decreased 54%, compared to the S&P500 index which has decreased 26%.

What’s even more interesting to note is the price changes that can be seen on the Google Finance screen shot at the link below.

Google Docs – Performance of CGM Focus Fund Since 2007

As you can see, Jim Cramer recommended the CGM Focus Fund when it was FAR outperforming the S&P500 index (in 3Q-4Q 2007). However, almost immediately after his book was published, the price decreased dramatically.

While there may have been other factors involved in this price decrease, it is interesting how it looks like a classic case of being doomed by your own success, as discussed by Tweddell in his book.

Should I sell out of my and rollover to a Roth IRA With Vanguard?

Given all of the evidence against owning actively managed funds, the question that remains in my mind is, “Do I sell my actively managed CGM Focus Fund and rollover my Roth IRA with CGM to a Vanguard IRA?”

This will be the topic of future post. So, keep your eyes out for it! On the way soon!

How about you all? Do you all own actively managed funds? How have they performed compared to the market indices? Are you thinking of selling out of them?

My Personal Finance Journey
Learning For Life

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Should I Invest in Bank IRA’s?

In a previous post (shown at the link below), I discussed the different points to consider when choosing whether to choose a Traditional or Roth IRA for your Individual Retirement Account (IRA) needs/investing.

My Money Blog – Deciding Between a Roth and Traditional IRA

However, one thing I did not cover in this previous post on where to invest is analyze the different locations/institutions where an individual can open up one of these IRA’s (once you decided upon which IRA is right for you). This analysis will be the topic of today’s posting.

Note: In this analysis, we will go through several examples of products offered by different banking institutions. For simplicity, we will assume that you have chosen to go with a Roth IRA.

So, let’s get started with a little background of my own experiences.

A little background on what I’ve experienced
Back in around 2004 when I was just starting college, I had read several personal finance books and decided that a Roth IRA was best suited for my needs. So, I knew that I wanted to open up a Roth IRA, but I did not receive any guidance on where to open one.

Because of the lack of guidance, I turned to the closest banking institution to my circumstances, Bank of America, since that is the bank in which I currently held my checking account.

I proceeded through the online Roth IRA application steps on the Bank of America website, opened up the Roth IRA, and figured I was set until retirement!

However, I later realized that the Bank of America IRA was structured in such a way that I could only invest in low-yielding money market, savings, and Certificate of Deposit instruments. Even though all of these products are FDIC insured, I soon became aware that I would need to change to another IRA provider in order to invest in more risky (and therefore higher yielding) investment instruments.

Looking back on my actions now, I realize that I was rather ignorant. However, I believe this is a fairly common occurrence among beginning investors.

So, what do bank IRA’s offer?
At the link below, you can find the different types of investments offered for Roth IRA accounts at both Bank of America and CitiBank.

Bank of America Roth IRA Investment Options
CitiBank Roth IRA’s

As you can see on the website, you have the following options for how your Roth IRA funds are invested with Bank of America.

• Lock your money in an FDIC insured Certificate of Deposit earning a 1.06% return for 1-3 years.
• This is not appealing at all for young investors needing to earn a good return.
• Place your money in an FDIC insured money market account earning < 1% per year.
• Same comment as above.
• Invest your money in mutual funds or individual stocks offered through Bank of America in partnership with Merrill Lynch.
• As discussed before, it is a rule of My Money Blog followers that we do not invest in individual stocks, unless it is play money.
• The mutual funds that Merrill Lynch offers are inferior to the mutual funds by Fidelity and Vanguard because 1) many are actively managed vs. index (increases fees) and 2) involve a sales charge / load (increases fees)

As you can see from the points above, to be perfectly blunt, Bank IRA’s are inferior and should not be bought.

Then where should I open up an IRA?
In my mind, there are really only two options for opening up an IRA account – Vanguard and Fidelity.

Both companies offer extremely low fees and a broad range of international, fixed income, US domestic, and index mutual funds.

And, if you demand to have FDIC insured protection of your investments (not recommended unless you are already in retirement), Vanguard and Fidelity both offer Certificate of Deposit options as well.

Key Takeaway
Bank IRA’s are by far, inferior to IRA’s offered by Vanguard and Fidelity because Bank IRA’s offer lower returns and a reduced amount of investment options.

Keep on learning!

Jacob

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Should I Invest In Annuities?

• Annuity involves two phases of ownership
• Accumulation phase – Can add new funds to annuity at any time you work, after opening with a minimum $5000 investment.
• Income phase – Begins when you convert your annuity assets in to a stream of payments. You also designate how long the stream of income will last. Conversion can occur any time after age 59.5 and before age 95.
• Average cost for Vanguard Variable Annuity is 0.61%, 1/4 of industry average.
• No sales or surrender charges.
• Tax-free and commission-free exchanges between different mutual funds within the annuity.
• $25 account maintance fee per year for accounts under $25,000 value.
• A good selection of index mutual fund investment options, including money market, short-term bond, total stock market, international, and REIT index funds.

What type of investing strategy (and quantity) will I use with this annuity?

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Should I Buy Life Insurance Even Though I Don’t Need It?

• Are you married?
• Me: No.
• Do you have children?
• Me: No.
• Would your parents and/or siblings have trouble paying for your funeral if you were to die?
• Me: Probably not.

Since I answered “no” to all of these questions, it is quite easy to see that I do not necessarily need life insurance.

However, would it be a wise investment decision to lock in a life insurance term rate now (at age 24 when I do not need it) than to wait until I do need life insurance? This will be the subject of today’s posting.

To do this analysis, we’ll need to compare the total cost of two scenarios – #1) the total cost of obtaining life insurance now, at age ~25 or #2) the total cost of obtaining life insurance at age 31, an age when I will be closer to having a wife/children. Both scenarios will involve obtaining a $1MM, 30 year level term policy quote from LifeQuotes, Inc.

Scenario 1
Annual premium = $688

Scenario 2
Annual premium =$891, ($738 current quote increased with inflation for 6 years from to simulate buying at age 31)

As you might have guessed, because I am younger in Scenario 1, the annual premium cost is less than in Scenario 2. However, we need to understand the magnitude of this difference in order to make a final decision.

The Google Docs spreadsheet, which can be accessed at the link below, provides a comparison between these two scenarios.

Google Docs – Should I Buy Life Insurance Even Though I Don’t Need It Now?

As you can see on the comparison, the difference, in today’s Dollars, is approximately a $6000 total savings by obtaining life insurance now vs. waiting until I am in my 30’s.

While this is a significant amount of money, it is not enough to influence me to buy life insurance now. Furthermore, the advantage of locking in coverage now diminishes further when you look at the opportunity cost of having your funds tied up in life insurance premiums.

For example, if I took the $688 annual premium for life insurance that I would pay between the ages of 25-31, invest it in the stock market, and assume an average return of 10%, it would result in an invested balance of $5300.

So, I would encourage each of you all to examine your own situation (and the benefits and negatives involved) and determine when is the most appropriate time for you to obtain life insurance.

Keep on learning!

Jacob

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Roth 401k Plans – What Are They and Should You Invest In Them?

Recently, while reading David Bach’s book, Fight For Your Money, I read a passage describing a new type of investment instrument that is being offerred by some employers for their employee’s retirement savings.

It is called a Roth 401k. First, let’s take a look at exactly what a Roth 401k is.

What is a Roth 401k?
In a previous post (see link below), I sorted through the decision making process of whether a Roth IRA or Traditional IRA is better suited for your needs.

My Money Blog – Roth IRA vs. Traditional IRA

A Roth 401k has many of the same characteristics as a Roth IRA. The attributes of Roth 401k’s are listed below:

• Offered through your employer’s benefits department.
• Employees contribute funds to the Roth 401k on a post-tax elective deferral basis, in addition to, or instead of, pre-tax elective deferrals under their traditional 401k plan.
• Combined pre-tax and post-tax contributions to a 401k is still limited to the regular $16,500 maximum contribution required by the government.
• Key Feature
• Withdrawals/earnings from the Roth 401k account will be tax free, provided that the Roth 401k account has been open/active for > 5 years and you are 59.5 years of age or older.

For more information on Roth 401k accounts, click on the link below:
Wikipedia.org – Roth 401k

Is a Roth 401k Right For Me?
A general rule of thumb that can be used is that if you determined (from decision process in previous post at link above) that a Roth IRA is best for you, then a Roth 401k is a good investment decision for you as well.

As we discussed in the previous post, the decision to elect a Roth 401k over a Traditional 401k hinges on what tax bracket you currently are in and what bracket you will be in upon retirement (when you want to choose to pay the taxes on your investments).

• If you think you will be in a higher tax bracket when you retire, a Roth IRA/401k is best for you.
• In general, this situation applies to most young (18-30 year old) investors who start saving money early and expect to have accumulated a good nest egg when they retire.
• If you think you will be in a lower tax when you retire, a Traditional IRA/401k is best for you.

The article shown at the link below from Wikipedia.org provides a good matrix comparison of the benefits of both types of 401k programs.

401k – Roth vs. Traditional Matrix

Another tool that I found in doing some research on this topic is shown below. It is a calculator that allows you to enter several details about your financial situation, and then it projects 1) the effect on your current income and 2) the effect on your income during retirement, as a result of electing to use either a Roth or Traditional 401k plan.
Schwab.com – Roth 401k vs. Traditional 401k Calculator

At age 24, my results were as follows:

• Using a Roth 401k will decrease my current take-home pay by 7%, over a Traditional 401k.
• Using a Roth 401k will increase my annual income during retirement by 41%, assuming that my tax bracket stays the same as it is now.
• If my tax bracket increases from 29% (now) to 35% at retirement, using a Roth 401k will increase my annual income during retirement by 54%. Wow!

How Accessible Are Roth 401k’s?
So, in my case, it would clearly be beneficial for me to use a Roth 401k account. However, the program is that these types of accounts are not readily being adopted by employers. I just called the benefits center at my work, and they said that they do not offer a Roth 401k option.

In fact, it is estimated that only 1 in 4 employers currently is offering a Roth 401k as an account option.

So, don’t be too dissappointed if this option, while good, is not yet available to you.

Key Takeaway
Roth 401k’s, like Roth IRA, are a relatively new form of investment tool/account that is slowly being adopted in to our society.

Everyone should analyze their own situation carefully to determine if a Roth plan is right for you. If it is determined that paying tax now with a Roth account is better than waiting until retirement, it is beneficial to 1) open up a Roth IRA and 2) call your current employer to ask if they offer a Roth 401k as well.

Keep on learning!

Jacob

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