What's In Your Wallet

There is a meme going around where bloggers reveal the contents of their wallets. Thought i'd post just for kicks. My wallet (not mine, but what it looks like):

1. American express True Earnings
2. Citibank Dividend Rewards MasterCard
3. Chase Cash Plus Rewards MasterCard
4. Premier Practice $20 Golf Driving range card (last used during Thanksgiving)
5. San Diego County Library Card
6. REI membership card
7. San Diego Blood Bank Donor ID card
8. Student ID card (for discounted movies)
9. Bank of America ATM Card
10. California Drivers license
11. Organ donor card
12. Triple A Ohio card
13. Blue Cross health insurance card
14. Epocrates debit visa card
15. In case of emergencies contact information card
16. Check from Ameritrade..... for 12 cents (capital gains anyone?)
17. $33 cash

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Cisco @ 73: An Expensive Lesson Learned

During the late 1990s, I was living in the Bay Area during the dot.com boom and was saturated with news about how much money people were making on the stock market. I knew nothing about markets/investing.... I was in school with no income other than my student loans. But I didn't want to miss out. So despite not having much money, I couldn't pass on the opportunity for "easy money". So I bought $1000 worth of Cisco @ 73/share March 2000 (just before the bottom-dropped out of the market) . Did I even know what products Cisco made? No, something about routers or switches or some high-tech-type product... I just knew they had cool commercials ("Are you ready?"), were "tech" and thus as good as gold. When people start buying stocks without doing sufficient research, and prices continue to go up despite poor financials on that company, you are then investing in a speculative market or as Alan Greenspan called Irrational Exuberance.

I subsequently watched the price go down... and down... and down... and bought a few more shares to try to recoup some losses... but watched it go down to it's nadir of $8.00/share in October 2003.

In the interim, I reeducated myself, got into mutual funds, and haven't looked back.

I finally sold all my shares at around $20 last month because I was tired of
owning a single stock that was going nowhere despite the bull market of 2003-2006.

6 years later, after having "reeducated" myself about personal finance and investing, I must say that buying Cisco was one of the best things I could have done early in my investing experience. Although I lost ~70% of my initial investment, it forced me to read and learn more about investing. Now, I tend to agree with the opinions of William Bernstein, John Bogle, David Swensen to name a few.

Lessons learned:
1)never buy a single stock
2)don't overestimate your stock-picking ability
3)diversify
4)know when to sell
5)learn from your mistakes
6)buy low, sell high (easiest to do by dollar-cost-averaging and rebalancing appropriately)
7)research before you commit money to something

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California: Quick to cash, slow to respond

My wife recently had to apply for licensure as part of her profession in California. She submitted her appropriate documents to Sacramento in October... She followed-up within 6 weeks to check on her status. Total run-around, no resolution. Needless to say, she finally did NOT get appropriate licensure until earlier this month (approximately 6 mos after initial application).

Now.. I owed the state of California money for 2005 income taxes. In addition, I submitted an estimated tax payment for 2006. Payment submitted via snail mail on April 17 to prolong the pain of paying taxes as much as possible. The checks were deposited by the state of California within 1.5 weeks! Why does it take the state 6 months when you need them to approve something as a condition of your employment; but when it comes to accepting payment, they deposit your money as quickly as they receive it?

How convenient.

Don't you hate it when this happens with other "services"...i.e. cable companies, DSL service, phone bills, etc. They expect payment promptly but when you call customer service, it takes ungodly amounts of time to just speak to a human sometimes. How lame.

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Why Mr. Johnson (Fidelity) is no John Bogle

It seems that Fidelity has been trying to change their business strategy as of late and... hmmm, it smells a lot like what Vanguard has already been doing since the company was founded by Mr. Bogle many years ago. Let's briefly review: Fidelity was the shizznit back in the 80s and 90s when Peter Lynch racked up impressive returns with his Magellan Fund. This vaulted Fidelity into the largest mutual fund company and Magellan as the largest mutual fund. As usual, most investors joined the party too late missing out on those stellar returns, but the fund continued to have severe asset bloat, thus returning less than the S&P 500 for most of the late 1990s and early 2000s. Fidelity is notorious for closing their funds too late as exemplified by Contrafund scheduled to close later this month (current assets ~70 billion!).

As Fidelity started to lose their market share (see American Funds and Vanguard), they started to change their business model to mimic what companies like Vanguard had already been doing, namely lower costs. Their Spartan index funds have expense ratios of 0.10 (less than Vanguard), they recently announced closure of two more of its successful mutual funds (Mid Cap and Growth Company)..... and now, they've provisionally won a contract to manage California's 529 college savings plan. They beat out Vanguard and TIAA-CREF by promising lower fees, more investment choices, and marketing efforts.

But Fidelity does not hold the interests of its shareholders as a priority. In fact, Fidelity has objected to an SEC requirement that fund boards have independent chairs. Looking out for the individual shareholder? I don't think so. For Californians, it's kind of a moot point because there is no state tax benefit for residents to hold a california 529 plan so residents can shop around for any state's plan and still get the federal tax benefit.

After saying all that, would I own any Fidelity funds? I already do.... in fact, all of my 401K is tied up to Fidelity funds. It still offers solid choices... but just like the wolf in sheep's clothing, the interests of (most) fund companies do not lie with those that own its mutual funds.

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I-Bond Yield at 6.73%: Not the Whole Story

One of the safest places to invest money is to invest in US Government bonds. These low-risk investments come at a price that is a general rule to apply to all investments; the lower the risk, the lower the expected return. Wait a minute... what about the current 6.73% yield on I-bonds? This surely blows away any bond yield that is available at this low risk level. But let's look at it closer as this yield is set to expire at the end of this month.

The yield on I-bonds is comprised of two rates: a fixed rate that is good for the life of the bond (30 years) and a variable semiannual inflation rate based on the consumer price index (CPI). Knowing the fixed rate is key because this is the true yield of the bond. For example, the prior 6 months had a relatively high CPI of 2.85%. Multiply by 2 to make it the annual yield (i.e. 12 months) and that results in 5.7%. Finally, add the fixed yield of 1% with some minor adjustments and you arrive at the current yield of 6.73%.

Now, a new yield for I-bonds will occur May 2006 and while we can't predict what that rate is; we can make an educated guess. The CPI for the last 6 months has been ~0.5%; annualize this brings you to 1%. Add this to the fixed rate and your new I-bond yield will be around 2%...still a positive return but definitely not the 6% that you may have expected upon first signing up for the bond.

Of course, I-bonds still definitely have a role in everyone's portfolio as they are a nice hedge against inflation. I allot 25% of my bond portfolio to TIPS (Treasury Inflation Protected Securities) which for my current allocation (90% stock/10% bonds) is 2.5% of my overall portfolio. But it's important to understand how the yield for I-bonds is calculated so that you don't expect the nice return of 6.7% for the life of the bond.

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Gold and Silver: Pass the Pepto-Bismol

The commodities market has been on a tear as of late. In fact, Vanguard's Precious Metals and Mining Fund (VGPMX) has returned > 60% in 1 year! It has been so successful that the fund closed in early February 2006 to limit asset bloat. Gold prices were in the headlines earlier this week as the price went over $600 per ounce. Is it time to invest in these precious metals?

Commodities are known for their volatility and this was demonstrated a few days ago when Gold dropped 2% in one day, sliver dropped 14% in one day! Many experts feel that gold still has plenty of room to go higher as downward trend for the dollar is anticipated over the long-term. Some may ask themselves, how can you just sit this out while people invested in the sector are getting red-hot returns? Personally, I cannot tolerate such volatility. Most investors are irrational investors to what are perceived to be rational markets and tend to invest when prices are high and sell when prices are low. So as gold continues to push higher, there will undoubtedly be a greater influx of investor money into it. Returns may continue to be strong but it may be another case of joining the party too late. Once again, appropriate diversification and dollar-cost-averaging is an easy way to protect against our own irrational behavior when it comes to investing.

Although $600 seems very high, if adjusted for inflation, gold will have to be >$2000 to reach the highs it had in the 1980s. Invest in precious metals in 2006 and enjoy the wild ride? No thanks, I'll pass on the pepto-bismol and the darkened bowel movements that result from it.

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Our savings rate is less than 0%: The whole truth?

Recently, there have been dire headlines in the newspapers regarding our consumerist tendencies in this country. According to these articles, we are a country addicted to debt, our savings rate is negative for the first time since the depression; i.e. as a nation... we're in some deep s!@# and our children will have to pay the consequences via higher taxes, more sacrifices.

Much of these dire predictions do give us a snapshot of where we stand in this country as a whole; however, this isn't the entire truth. For example, my savings rate is >10% (and many of you that read finance blogs likely save more than you spend); I don't think I'm necessarily unique in this aspect. In fact, many Gen X and Gen Yers are not relying on social security for their retirement and are making preparations now in the form of contributing to 401ks or IRAs. Is there a subset of super-savers that has reacted against the current perception of our generation being a generation of materialism and indebtedness?

There is an interesting article in the NY Times that discusses this. It seems that within our generation (age 20-40), there is a growing disparity in savings rate between those with high incomes and those with lower incomes. High income people are contributing more to retirement than ever before whereas those with lower incomes continue to struggle and will necessarily depend on social security and/or pension plans during their golden years. The larger questions are (1) how will this problem be fixed? and (2) is it fair to burden those that have done a good job at saving in the form of higher taxes to compensate those that need assistance? What then is the motivation to save if you get "penalized" for doing so? Where do you fit in? Super-saver, saver, breaking-even, or so far in debt it doesn't even matter anymore?

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Got Refund? Now What?

Unfortunately, I didn't have the fortune of getting a little somethin' from the IRS this year. In fact, I owed the IRS quite a bit of money this year. You can almost say that the IRS loaned me money and this came due on April 15.

For those that do have a little refund or have some extra cash to save... don't just blow it on that plasma TV your neighbor just bought or a down payment for the new set of wheels. The following is a checklist in the order of how you should utilize that money:

1. Emergency fund
2. Maximize the match from your 401K
3. Pay credit card debt
4. Max out Roth IRA
5. Max out 401K
6. Invest wisely in non-retirement accounts...

Notes to above:
1. Have an emergency fund that covers about 6 months of all of your expenses. This is so you don't lose that new house you recently bought or have to start bumming rides from your friends if you have an unexpected lay-off, or medical bill, or (fill in the blank). This should be invested in short-term vehicles, preferably, high yield savings, money markets, or short-term CDs for easy accessibility. Next...

2. Contribute enough to your employer-sponsored retirement plan to get any matching contributions from your employer. This is free money! Don't pass this up! Matching equals 100% returns... you will never get any better return than this. The matching rate can vary anywhere from 1% to 6% of your contributions (if you get any higher, don't lose that job)

3. Pay off credit card debt. The higher the interest, the earlier that debt should be paid off. Credit card interest generally tends to be higher than 15% and higher if your credit score is worse. If you can, transfer it to a new card with a promotional 0% balance transfer

4. Contribute to a Roth IRA (most folks, especially younger ones, benefit from a Roth over a traditional IRA) and max this out. 2006 limits are $4000 for age < 50.

NEXT (if you've gotten this far, you're doing better than the average person)

5. Return to that 401K and max this out. $15000 limit for 2006.

6. Invest to your heart's content. Diversify broadly and be tax-savvy. This usually means no load mutual funds, index funds, low-turnover (<20%), domestic and international equities, tax-exempt municipals. My favorite is Vanguard but there are several other good companies including Fidelity, TRowe Price, Dodge and Cox, Dimensional Fund Advisers, TIAA-CREF... if you insist on paying a load, then American Funds are managed well. Each have their own positives/negatives.

One of the toughest questions is where does real-estate fall into this mix of things. My bias is you shouldn't be considering real-estate if you still have credit card debt although this is a bit controversial. I just wouldn't be comfortable adding a huge mortgage if I knew I still had a lot of consumer debt. Oh... and if you are somewhere around step 5 or 6 and STILL want that TV... you probably deserve it; just make sure it doesn't send you back to step 3.

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Publish or perish: #2 on the list of 10 best jobs!?

CNN/money recently posted the 10 best jobs list in America. Pretty surprising to see some of the professions they listed. The idea of college professor is really cool but when I think of professor, I think of someone that has to "publish or perish". That does not sound like a mantra under which I would want my livelihood to be dependent on. Job insecurity would make me age rapidly as in the way Bill Clinton's appearance transformed from pre-Lewinsky to post-Lewinsky impeachment.

Teaching at community colleges, technical schools is different and likely just as rewarding... but the term professor to me implies research... thus grant applications... thus constant deadlines and the possibility of not being funded. Not cool.

In addition, this list does not have longevity, it's more of what is HOT right now...I doubt "real estate appraiser" will be anywhere near the top 10 next year.

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When 6% is Too High

San Diego is one of those cities that is constantly near the top of cities with the largest increases in real-estate prices over the last 5 years. Unfortunately, I moved here likely near the top of the peak and as luck would have it, am looking to purchase our first piece of real-estate sometime in the near future. While as a buyer, I do not directly have to pay commission on the purchase of home; it indirectly effects the price of the home I am paying as the seller necessarily takes the commission into consideration when pricing his home. This is usually 6%.

Although we have a full-service realtor, my wife and I have been doing most of the legwork in looking for our house (by choice of course as I am not comfortable relying on someone else telling us what we may or may not like). Our realtor does drive us to look at homes, but usually, we generate the list of homes that are interesting to us. Since we do most of the work, why should our realtor get up to 3% of that 6% commission? An innovative company has come up with a solution that seems to be extremely beneficial for the consumer; namely, returning some of their commission to the buyer.

Not sure if I'll try it (yet) but definitely an interesting development in the world of real estate. Like Chuck D said in Black Steel in the Hour of Chaos... (BASS)How low can you go?!

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Read My Lips... No New Taxes

Some of you may remember that statement said by George I during his run for presidency in 1988. While his defeat in 1992 was multifactorial, much of his credibility was lost when in fact he did raise taxes during his presidency. George II, most Republicans and Democrats agree on this, is likely not the most intelligent president this country has seen... but he does learn from his father's mistakes. One of his political successes was to push through substantial (but temporary) tax breaks with some expiring in 2010. Currently, there is debate regarding whether to make these breaks permanent.

Politicians are a savvy group; that is why they are politicians. Increasing taxes requires action that politicians cannot necessarily sneak under the noses of their constituents; most are opposed to having to pay more taxes and will vote accordingly (see George I again). But allowing tax breaks to expire has the same effect as raising taxes... it's just that doing so is passive and most will not realize they will owe more taxes until the tax bill comes due. In 2006, the Alternative Minimum Tax (AMT) Patch expired and "one in four families with children, up from one in 22 last year, will owe up to $3,640 in additional federal income tax come next April" (NY Times). Now while I don't fall into the AMT and this doesn't effect me, it seems disingenuous for officials to state that they do not raise taxes but in fact, allow tax breaks to expire without mention.

While permanently lowering the taxes on dividends and long-term capital gains is great...I would prefer that Congress act to fix the AMT as it effects many millions more. 2008 will be an interesting election...depending on which party gets elected, the approach to balancing the current budget mess will be very different. Will the gap between the haves and the have-mores continue to widen? Probably, but who to elect in 2008 to fix this mess will be crapshoot...most do not practice what they preach during the campaign trail. Smoke and mirrors man... like the last scene in Enter the Dragon.

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Tax Day

Today is tax day. Don't forget to mail your returns or click that submit button by Monday. Unlike most people, I prefer to adjust my witholding so that I owe money to the government every year... just enough to NOT get penalized for underpaying. Unfortunately, I switched jobs this year and tax circumstances changed a bit.. so now I owe a penalty of $22 for underpaying. Can anyone make sense of those insane worksheets the IRS provides to try to calculate your tax payments or witholding? Typical of something the government would publish... verbose, impractical, and useless.

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New Links

I've added new links to my blog. The financial links are the institutions that I am currently using; not necessarily advertising these companies but companies that I feel CURRENTLY give me the most value for my money. With the exception of Bank of America. I only keep this to have easy ATM cash access and usually keep a minimal balance in here. Otherwise, BofA does not have good rates or deals for checking or savings accounts. Currently, I have a "student" account with monthly fees waived and no minimum balance. For some reason, it has not expired. This is the one time that being a career student has financial benefits.

Who ever heard of a bank charging you money for them to keep your money? Apparently, this is more the norm with the large banks in California. Shoot, they don't even give you those cheesy lunch coolers or duffel bags as an incentive to open an account with them.

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TIVO, DirectTV, and a SIGH of relief

I know, I know... owning a tivo is not necessarily consistent with my "not keeping up with the jonezez" philosophy. But this is one of those relatively big purchases that I feel has been worth every cent. I bought the Tivo after moving to Cleveland about 4 years ago and realizing that my work hours were going to be long and the winter was going to be longer. And believe me... owning a Tivo in Cleveland circa 2002 was definitely not keeping up with the jonezez, in fact, I felt like Mr. Jones himself (clevelanders are not necessarily early adopters). At that time, the total purchase was $600 (400 for the machine + 200 for lifetime service).

I had two questions when weighing the risks for purchasing lifetime service: a)will my Tivo machine last long-enough to justify the lifetime purchase? and b) would Tivo as a company endure as a successful business?

When I heard that DirectTV would no longer market Tivo last summer, I thought the days of my Tivo were numbered and I would have to make the transition to monthly fees for a DVR via my cable company. But with today's announcement that Tivo and DirecTV extended their agreement for 3 more years, I felt a nice sigh of relief (Tivo's stock increased 8% on this news and no, I don't recommend it or own it).

Of course, I am still of the opinion that unless Tivo alters it's business model, it's days are numbered despite the word "Tivo" being in the everyday vernacular just as "googling" someone has become. Cable companies have near regional monopolies that will hinder Tivo from continuing to get new customers. Well.... at least 3 more years (I hope), commercial-free.

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America's Finest City errr Pension Plan

Welcome to San Diego. Surf, Sun, Sand... how about a $1.4 billion dollar pension deficit? Not anything you'll read in tourist brochures for this so-called America's Finest City. So how does this happen? Well, in the late 1990s, local politicians decide to vote themselves an increase in the pension plans for city employees including themselves; problem is, the numbers didn't quite add-up. Now, libraries are cutting their hours short, city services are being cut, police officers are changing municipalities. The feds got involved and brought charges against some of our elected "representatives".

unbelievably, those same officials that put the city in the hole want taxpayers to pay for their defense. Are they kidding?

People tend to think of San Diego as this laid back city and in a lot of ways, most citizens are laid-back, apathetic to local politics. This undoubtedly contributes to the sheer blatant stealing that politicians feel they can get away with.

This sort of cheating relates to how I never think an individual investor is on the same playing field as others in the bizznness (i.e. institutional investors, corporations, insiders). These politicians have inside access; namely the ability to increase their own pensions. Similarly, corporations and institutional investors have access to investment/business information that the rest of us small fries can only dream about. Once again, more reason to diversify broadly, choose low cost funds, and track indexes (i.e. see vanguard).

Let's hope those darn pandas at the SD Zoo can draw enough tourists into the area to help get the city out of this mess.

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1st quarter 2006 Mutual Fund Performance

The first quarter for 2006 just came to a close and overall it's been a good quarter for me and most investors. In reviewing mutual fund performance, it seems that international stocks continue to outperform domestic markets and small cap funds have not given up their gains to large cap funds (as most "experts" have predicted). This again reinforces the notion of appropriate asset allocation and diversification; even the experts cannot predict future market behavior.

This reminds me.. in the summer, my brother asked me to help him out with his non-retirement portfolio as he had most of it in cash. His retirement portfolio, by-the-way, is managed by a financial adviser (who happens to live in Bel Air!... hmmm, makes you wonder how many investors are subsidizing his salary). In order to advise my brother accurately, I wanted to get a sense of how his retirement portfolio was invested (stocks vs. bonds, large cap vs small cap vs. international, etc.). Of course, when I spoke to the adviser, he first asked me what I did for a living (not in the financial industry), then proceeded to drown me in a bunch of jargon stating how he was predicting the market would not do well and so he was maintaining a strong cash position, blah, blah, blah. I point-blank asked him, what is the asset allocation in the retirement portfolio so I can plan my brother's accordingly. He then tried to undermine asset allocation strategies and stated that academics had it all wrong.

Yikes.

Regardless, I advised my brother to invest in Vanguard mutual funds, some index, some actively managed... most with low turnover given it was a taxable account.

Needless to say, it has outperformed his retirement portfolio.

I don't take solace in this because the true measure of performance is how a portfolio does over the long-term (10 years +). But at least he didn't discourage me with all his technical jargon from advising my brother in what I think was the right direction. Unfortunately, I'm not living in any place nearly as nice as Bel Air... I wonder who really gets the last laugh?

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Jack Bogle's Portfolio

Most all of you who read personal finance blogs undoubtedly know Jack Bogle, the founder of Vanguard and champion of index funds. Well, I was very interested to read what HIS portfolio is currently comprised of (see link); mostly to see if he practices what he so eloquently argues for in many of his books. For the most part, he seems to be consistent with his beliefs...he has mostly (but not all) index funds, he has the majority of his portfolio invested in Vanguard funds (at least that's what he discloses), and he practices and assett allocation strategy.... for the most part.

However, there are some aspects of his portfolio that are a result of market-timing or perhaps more accurately, following the momentum of the market that surprised me. For example, the article states that in July 2004, his portfolio was 35% stock/65% bond whereas now, his portfolio is 65% stock/35% bond. Was this intentional? Yes... in that he allowed his portfolio to drift towards this allocation that resulted from the strong performance of equities over the last 3 years. Strictly speaking, if he followed his own advice, he would rebalance his portfolio based on his risk tolerance, time to retirement, etc... rather than allow the market to dicate his assett allocation. And if his assett allocation was 35%/65% in 2004, then the subsequent increase in stock allocation should be a result of a change in his risk tolerance or desire for increased returns at the expense of higher risk, or longer-horizon until retirement rather than a passive result of market performance.

I still respect the man and believe that his book "Common Sense on Mutual Funds" should be read by anyone that has a 401k plan. Overall, I am at least happy to see that he puts his money in Vanguard (I just wish Vanguard funds disclosed how much of the fund is owned by the manager of their funds!)

Link

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Sentinal Post

I've recently moved to San Diego for a new job after having lived in dirt-cheap Cleveland and have come to realize... DAMN! San Diego is friggin' expensive. Much of this is just due to your regular cost-of-living expenses (i.e. housing, food, gas, entertainment), but being southern California, there is a constant black-hole-like pull to try to "keep up with the Joneses". In fact, the default pathway is to try to keep up with your neighbors....whether it is driving a nice car, owning the largest plasma television, taking the nicest vacation; you get the idea. Is this a bi-coastal-blue-state thing? or is it a more universal result of the power of American consumerism? I must say, Cleveland didn't necessarily have the same feeling of materialism... but then again, Cleveland is an economic dead-end..i.e. the mistake by the lake.

So now living in San Diego, my mantra has become to not keep up with the Jonezez.... not only for the money that I will be able to save, but also to stay grounded and maintain self-worth without feeling that I have to purchase something to feel worth. Trying to not keep up with the Jonezez will be the underlying foundation from which I will post on various topics on personal finance, investing, consumerism, etc....

Welcome.

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