Investing Curiouscatblog

Author: John Hunter

  • Lazy Portfolio Results

    Lazy Portfolios update by Paul Farrell provides some examples of how to use index funds to manage your investments:

    These portfolios are virtually “zero maintenance!” Set them and forget them. Plus you can ignore Wall Street’s relentless, misleading chatter about markets and the economy. Seriously. After customizing your own Lazy Portfolio you can ignore the news and focus on what’s really important: your family, loved ones, friends, your career, hobbies, travel — you name it — anything but wasting time tracking and playing the market.

    I think the article is a bit misleading in showing the out-performance of the S&P 500 index (during periods where the S&P 500 index does very well these portfolios will under-perform it). The out-performance shown in the article is largely due to the great performance of international markets recently. Still the strategy is well worth reading about. The strategy is based on using index funds from Vanguard (very well run mutual funds with very low fees). But don’t get tied into Vanguard, if they start to focus on lining their pockets by increasing your fees look for alternatives.

    Overall, I give this concept high marks. Dollar cost average appropriate levels of money into such a strategy and you will give yourself a good chance at positive results.

    My preference would be to include significant levels of international and developing stocks. For aggressive long term investing I like something like:

    40% USA total stock market
    15% Real Estate
    25% international developed stock market index
    20% developing stock market index

    When aiming for more security and preserving capital (over growth) I favor something like:

    30% USA total stock market
    10% Real Estate
    25% international developed stock market index
    10% developing stock market index
    10% short term bond index
    15% money market

    Of course all sorts of personal financial factors need to be considered for any specific person’s allocations.

    Related: Allocating Retirement Account Assets – Why Investing is Safer Overseas – Saving for Retirement – 12 stocks for 10 years – what is a mutual fund?

  • What Should You Do With Your Government “Stimulus” Check?

    What Should You Do With a Check Out of the Blue?

    The USA government is sending out checks to taxpayers in an effort to encourage spending which in turn will provide stimulus to the economy in the very short term. First, this is bad policy in my opinion. Second, if you support this policy the precondition is you run surpluses in order to pay for it when you want to carry out such a policy. They have not, instead they have run huge deficits. What they have chosen to do is spend huge amounts and have the taxes paid by the children and grandchildren of those the politicians are spending the money on today. I would support Keynesian government spending in a serious recession or depression – just not for a country already with enormous debts and in a very mild recession.

    But ok, so the government chooses to spend your children’s taxes foolishly, what should you do now? This is very easy. Whatever is the wisest move for your personal financial situation for any windfall you receive, regardless of the source of that windfall. If all your savings needs are met there is nothing wrong with buying some toy. But most people need to pay off debt, build an emergency fund, save for retirement or something similar not get another toy. Of course would be nothing wrong with donating it Kiva, Trickle Up, the Concord Coalition or your favorite charity.

    The politicians are acting like a 5 year old that wants a new toy. I can too get the new toy now :-O, Mommy you can use your credit card. So what if you already bought me so many toys you couldn’t afford by using your other credit cards and they won’t lend you any more money. Just get another one. Similar to how congress recently yet again increased the allowable federal debt limit to over $9,000,000,000,000.

    The stimulus effect of spending is that if you actually purchase a new toy (say a TV), then the store needs to replace that TV so the factory makes another TV… The store, shipper, factory, supplier to the factory all pay staff to carry this out, those staff can buy new books, dishwasher… and the business may buy a new forklift or computer to keep up…
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  • $2,540,000,000,000 in USA Consumer Debt

    U.S. Consumer Borrowing Rose $5.2 Billion in February

    Consumer credit increased $5.2 billion for the month to $2.54 trillion, the Fed said today in Washington. In January, credit gained $10.3 billion, more than a previously reported increase of $6.9 billion. The Fed’s report doesn’t cover borrowing secured by real estate, such as home-equity loans.

    $2.54 Trillion seems like a great deal to me. Based on a population of 300 million people that would mean $8,467 for every person in just personal debt. USA GDP = $13 trillion. USA federal debt = $9.4 trillion (based on the USA government accounting – so way understating the true debt). USA federal budget $3 trillion.

    Related: Americans are Drowning in Debt – Too Much Personal Debt (UK, £1.3 trillion in 2006 – even more than the USA) – Incredibly Bad Customer Service from Discover Card

  • Teaching Children About Money Matters

    In response to: What do you think? Should you discuss finances with your children?

    My wife and I both grew up in households where our parents talked about their money situation and taught us the basics of finance, but didn’t disclose any information about how much they made, their savings, their debt, or their overall expenses.
    …
    We both waffle back and forth on these two perspectives and right now we’ve settled somewhere in between. Our children know we have debt, but don’t know the amount. They know I make pretty decent money, but don’t know how much. Our older boys pretty much know the details of our monthly expenses, such as the cable bill, phone bill, utility bills, etc. We’ve shared this with them to help them appreciate things a little more.

    I definitely think talking about finances with children is important. I don’t have kids, but I was one 🙂 I don’t think you need to get into exactly what the figures are to have valuable conversations. Far too many people become adults with far too poor an understanding of personal finance. Given how important managing money is today I think it is like hunter-gathers not teaching a kid how to hunt.

    Books: Money Sense for Kids – Growing Money: A Complete Investing Guide for Kids – The Motley Fool Investment Guide for Teens – Raising Financially Fit Kids – A Smart Girl’s Guide to Money: How to Make It, Save It, And Spend It

    A few blog posts on teaching children about money: Personal Finance for Children and Pre-Teens – 5 Tips for Savvy Parents – Teach your teen the basics of money management

    Related: Questions You Should Ask About Your Investments – Why Americans Are Going Broke – How Not to Convert Home Equity

  • Stimulus Options Should be Tested

    I think a country that is more than $500,000 in debt per household should not send out checks to taxpayers to try pretend they are doing something to help the economy. Just as I wouldn’t think some family with $20,000 in credit card debt should fix the problem by taking the family on a new credit card financed vacation. But if you are going to do so, then take Dan Ariely’s advice: Stimulus options should be tested first. His blog post on the topic, Do we know enough to give stimulus packages?

    In the domain of the stimulus packages, these results suggest that the method of delivering them (individual tax relief in the form of tax rebates, money toward retirement saving, gift certificates, pre-paid debit cards, etc.) could have large consequences on its effectiveness.

    The next question, of course, is which delivery method to select. Here behavioral economics has been instructive as well. In particular, years of research have demonstrated over and over that our intuitions about the relative effectiveness of different approaches are often wrong. Given that the method of delivery could make a large difference, and given that our intuitions about their relative effectiveness could be wrong, what should we do?

    One answer is to conduct an experiment, as this is the only method we have for testing what really works and what is likely to fail. In the same way that we force drug companies to test the efficacy of their drugs before rolling them onto the market, shouldn’t we ask the government to first test their ideas before they invest billions of dollars of our tax money on some stimulus packages?

    Related: Politicians Again Raising Taxes On Your Children – Charge It to My Kids – Google: Experiment Quickly and Often

  • Angie’s List

    I heard of Angie’s List several years ago. I looked at it a couple times but thought the price was a bit much so I never joined (it is around $10/month). But I joined a few weeks ago and I am impressed. What they offer is information. And there is lots of information for free on the internet. But they do a good job of organizing what the information and provide a valuable service in my experience.

    From their site: “Angie’s List is where you’ll find thousands of unbiased reports and reviews about service companies in your area. Our members share their experiences with each other so that you can choose the service company that’s right for your job the first time around.”

    The usefulness boils down to their ability to get accurate and useful information and present it well. And they do. The reviews, provided by other users, are detailed and helpful. I found two companies to do some work for me based on the site and both were very good. So far so good. I hope the track record continues.

  • Not Understanding Capitalism

    The day the dream of global free- market capitalism died

    The implications of this decision are evident: there will have to be far greater regulation of such institutions. The Fed has provided a valuable form of insurance to the investment banks. Indeed, that is already evident from what has happened in the stock market since the rescue: the other big investment banks have enjoyed sizeable jumps in their share prices (see chart below). This is moral hazard made visible. The Fed decided that a money market “strike” against investment banks is the equivalent of a run on deposits in a commercial bank. It concluded that it must, for this reason, open the monetary spigots in favour of such institutions. Greater regulation must be on the way.

    The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable.

    The intellectually depravity of such claims were obvious well before. Two problems make that truth less important. First, few actually believe in intellectual rigor any longer. Second, huge payments to politicians from those wishing to receive special favors from the government work (not very surprisingly). So given the lack of intellect and the alternative of just rewarding those that pay you huge sums of money it is no surprise politicians turned against capitalism and instead gave favors to a few that paid them well.

    Maybe the latest huge bailout will change how things are done. I doubt it. New rules will be put in place. Plenty of people will pay politicians plenty of money to assure their methods of subverting the intent of those rules are allowed to continue. To change things you would need to vastly improve the intellectual rigor of decision making. That is unlikely, but if it happens it will be plenty obvious from how debate is carried out.
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  • Homeowners Won’t Cut the Price

    It has long been the case that home owners refuse to accept falling prices and choose to demand higher prices than the market demands in a falling market. Therefore when prices should fall (to find buyers) instead the sales decrease as buyers don’t decrease prices to a level buyers are willing to pay. Be It Ever So Illogical: Homeowners Who Won’t Cut the Price

    So the couple, who both have finance jobs in the technology industry, told their real estate agent that they wanted to offer $1.575 million. He told them that the owner wouldn’t even listen to such a low bid. The owner’s attitude was “we’ll just stay here until we sell it for 1.875,” the agent said, “even if it takes years.”

    Three years ago, when the real estate bubble was still inflating, this sort of standoff was the exception. It’s the norm today. Overall home sales have fallen a remarkable 33 percent since the summer of 2005. Home prices, on the other hand, continued to rise until 2006 and are now only 5 to 10 percent below where they were in mid-2005, according to various measures.

  • Real Free Credit Report

    From the official US Federal Trade Commission site:

    A recent amendment to the federal Fair Credit Reporting Act requires each of the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. But there’s only one online source authorized to do so. That’s annualcreditreport.com. Beware of other sites that may look and sound similar.

    Viewing your credit report is an important step to financial security. You should review your credit reports annually (at least) to correct and any errors. Also doing so can be a tool to help you spot identity theft. The credit report site also has a large frequently asked question section with answers to questions like: What is a credit score? How do I request a “fraud alert” be placed on my file? Should I order all my credit reports at one time or space them out over 12 months? (I would suggest spreading the requests out during the year myself).

    Reposting, original is from last January.

  • Bond Yields: 2005-2008

    graph of 10 year bond rates

    From January 2005 to July 2007 the Federal Funds Rate was steadily increased. The rate was held for a year. Since then the rate has been decreasing (dramatically, recently). As you can see from the chart, 10 year bond yields have been much less variable. The chart also shows 10 year corporate bond yields increasing in February when the federal funds rate fell 100 basis points.

    Is the worst over, or just beginning?

    The yield on the benchmark U.S. 10-year Treasury currently stands at about 3.33%, down from nearly 4% about a month ago.
    …
    If rates continue to fall, they could hit not only a new low for the year – the 10-year briefly touched 3.28% in January – but could come close to falling below the 3.07% level they hit in June 2003, which was a 45-year low at the time.

    Treasury bond yields are down but a huge part of the reason is a “flight to quality,” where investors are reluctant to hold other bonds (so they buy treasuries when they sell those bonds). Therefore other bond yields (and mortgage rates) are not decreasing (the data in the chart is a bit old – the yields may well decrease some for both 10 year bonds once the March data is posted, though I would expect the spread between treasuries be larger than it was in January).

    Data from the federal reserve – corporate Aaa – corporate Baa – ten year treasury – fed funds

    Related: 30 Year Fixed Mortgage Rates versus the Fed Funds Rate – After Tax Return on Municipal Bonds