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Category: Personal finance

  • Curious Cat Investing, Economics and Personal Finance Carnival #17

    We collect useful recent personal finance, investing and economics blog posts to help you find useful information.

    • How to Create a Million-Dollar Business This Weekend (Examples: AppSumo, Mint, Chihuahuas) by Tim Ferriss – “Don’t get me wrong–I’m not opposed to you trying to build a world-changing product that requires months of fine-tuning. All I’m going to suggest is that you start with a much simpler essence of your product over the course of a weekend, rather than wasting time building something for weeks… only to discover no one wants it.”
      • photo of Penang, Malaysia
      Penang, Malyasia by John Hunter
    • The True Cost of Commuting – “In other words, a logical person should be willing to pay about $15,900 more for a house that is one mile closer to work, and $477,000 more for a house that is 30 miles closer to work. For a double-commuting couple, these numbers are $31,800 and $954,000.”
    • Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment by John Hunter – “A huge advantage of dividends stocks is they often increase the dividend over time. And this is one of the keys to evaluate when selected these stock investments. So you can buy a stock that pays a 4% yield today and 5 years down the road you might be getting 5.5% yield (based on increased dividend payouts and your original purchase price).”
    • I Stand With the Protesters by Lee Adler – “Stop the fraud, return to the rule of law, prosecute the bankers, punish the guilty, figure out what our assets are really worth and pay us a fair return, and most importantly, return basic standards of fairness and ethical behavior, something that many in society must relearn.”
    • The Depression: If Only Things Were That Good by David Leonhardt – “In the short term, finance, health care and housing provide jobs, as their lobbyists are quick to point out. But it is hard to see how the jobs of the future will spring from unnecessary back surgery and garden-variety arbitrage. They differ from the growth engines of the past, which delivered fundamental value — faster transportation or new knowledge — and let other industries then build off those advances.”
    • Banks Have a Right to Make a Profit; Customers Have the Right of Choice by Ryan Guina – “I encourage you to explore your options and find the bank which meets your needs, and won’t nickel or dime you with fees. I use USAA, which is an incredible bank. And there are a variety of fee free online savings accounts, free checking accounts, and hundreds of credit unions which don’t charge as many fees as some of the larger banks.”
    • Remember when rare earth stocks were hotter than magma? Well, they’re 50% cheaper now by Jim Jubak – “The growing demand for rare earths from new technologies plus China’s moves had two immediate effects. First, prices for rare earth minerals, especially the rarer heavy rare earth elements soared with prices for some rare earth elements climbing ten times from 2009 into 2011. Second, the scramble was on for alternative sources of supply. Suddenly there was plenty of capital available to restart mines that had closed because of low prices and stricter environmental regulation outside of China.”
    • Fighting Civil Forfeiture Abuse – “The net effect of these three factors [profit motive, standard of proof, innocent owner burden] is to increase the use of forfeiture by law enforcement agencies by incentivizing forfeiture through making it profitable for the agencies that engage in it, by making it easier to keep seized property (by lowering the standard of proof) and by making it more expensive and difficult for owners to challenge the action (by shifting the burden of proof to the innocent owner).”

  • Investing Return Guesses While Planning for Retirement

    In my opinion is has never been more difficult to plan for retirement. It is extremely difficult to guess what rates of return should be expected in the next 10-30 years. It might have actually been as difficult 10 years ago, but it seemed that it wasn’t. Estimating a 7-8% return for your portfolio seemed a pretty reasonable thing to do, and evening considering 10% wasn’t unthinkable, if you wanted to be optimistic and took more risk.

    Today it is very hard to guess, going forward, what is reasonable. It is also hard to find any very safe decent yields. Is 4% a good estimate for your portfolio? 6%? 8%? What about inflation? I know inflation isn’t a huge concern of people right now, but I still think it is a very real risk. I think trying to project is helpful (even with all the uncertainty). But it is more important than ever to look at various scenarios and consider the risks if things don’t go as well as you hope. The best way to deal with that is to save more.

    In the USA save at least 10% of your income for retirement in your own savings (in addition to social security) and it would be better to save 12% and you might even need to be saving 15%. And if you waited beyond 30 to start doing this you have to save substantially more, to have a comfortable retirement plan (obviously if you are willing to live at a much lower standard of living in retirement than before, you can save less).

    Other factors matter too. If you don’t own your house with no more mortgage payments you will need to save more. Ideally you will have not debts at retirement, if you do, again you need to save more.

    That Retirement Calculator May Be Lying to You

    According to Ibbotson data, the long-term annualized gain for the Standard & Poor’s 500-stock index dating back to 1926 is 9.9 percent. For bonds, it’s 5.4 percent. (From 1970 to 2010, the Barclays Capital Aggregate Bond index average was 8.3 percent.) Plug those numbers into a portfolio of 60 percent stocks and 40 percent bonds and the return is about 8 percent, which is precisely the number most financial planners — and retirement calculators — were using up until recently.
    …
    Vanguard founder Jack Bogle has a slightly more upbeat assessment. He expects stock returns of 7 percent to 7.5 percent over the next decade. He assumes no expansion in the market’s price-earnings ratio, dividend yields of 2.2 percent, and earnings growth of at least 5 percent. Bogle expects bond returns to be about 3 percent. For a balanced portfolio, that produces a net nominal return of slightly more than 6 percent. A higher forecast is T. Rowe Price’s estimate of 7 percent; until this year it had used 8 percent.

    I also suggest using high quality high yield dividend stocks for more of the bond portfolio. I wouldn’t hold bonds with maturities over 5 years at these yields (or if I did, they would be an extremely small portion of the portfolio). I would also have a fair amount of the bond portfolio in inflation protected bonds.

    I also invest in emerging economies like China, Brazil, India, Malaysia, Indonesia, Thailand, the continent of Africa… To some extent you get that with large companies like Google, Intel, Tesco, Toyota, Apple… that are making lots of money in emerging economies and continuing to invest more in emerging markets. VWO (.22% expense ratio) is a good exchange traded fund (ETF) for emerging markets. I also believe investing in real estate is wise as part of a retirement portfolio.

    Related: 401(k) Options, Select Low Expenses – How Much Will I Need to Save for Retirement? – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation

  • Mortgage Rates Fall Under 4%

    For the first time ever average 30 year fixed mortgage rates have fallen under 4%. My guess about interests rates have not been very good the last decade or so. I can’t believe people actually want to lend at these rates but obviously I have been wrong. The risks of lending at these rates over the long term just seem way too high to take a paltry 4%. But obviously I have been wrong.

    So if you didn’t refinance when I suggested it (and refinance, myself), previously, you may want to look at doing so now. Or you may believe that listen to me about interest rates doesn’t seem very wise.

    I have even read that banks are reducing fees in order to encourage refinancing. Seems crazy to me, but what do I know.

    You do need to have a decent loan to value ratio (certainly no more than 90%, and probably 80% would be better). That can be difficult for those that have had large decreases in their homes value. Also you need a great credit rating and a stable job situation. But if you qualify refinancing at these rates should be a great financial move for many. I’m perfectly happen to have done so earlier, I didn’t quite pick the bottom but I still think over 30 years these rates (the current rates and earlier rates of 4 1/4% or 4 3/8%) will seem like a dream.

    Related: Fixed Mortgage Rates Reach New Low (August 2010) – Lowest 30 Year Fixed Mortgage Rates in 37 Years (Dec 2008) – The Impact of Credit Scores and Jumbo Size on Mortgage Rates (Jan 2009)

  • Don’t Pay Debit Card Fees

    In the first place debit cards are a bad idea. They don’t have the same protection as credit cards. Banks pushed them in the USA because of the huge fees they charged (hidden from users). Now those banks are not allowed to charge the hugely excessive fees (compared to any other country) they had been charging retailers. And the banks are now trying to push huge fees onto those using the cards. Just dump any debit card you have.

    Secondly, you should have long ago severed any ties with the large banks (that not surprisingly are the ones announcing the huge fees, so far). They provide lousy service and extract exorbitant fees whenever they can sneak them by you. Choosing to do business with companies that you must remain hyper vigilante to abuse from is just not sensible. Small banks unfortunately get bought out by the large banks to prevent competition. So while using small banks is ok, you keep having to go to a new one as the large ones buy out your bank to prevent the competition.

    So it is more sensible to just pick a credit union. Credit unions are decent overall. Some can still be bad choices but it is almost impossible to do worse than any of the large banks. If you use ATMs a good deal make sure you minimize ATM fees when selecting a credit union (their policies in that area – waived fees, network ATM access… are significantly different between your options).

    The free checking we have grown accustom to may well be on the way out. That seems fine to me. Essentially the government’s subsidy to the large banks and financial institutions in repressing short term interest rates (at the expense of course of savers and retirees) has greatly reduced the value of checking and savings balances at banks. I am sure the large banks will be the most customer unfriendly as fees are added to accounts, based on their track record.

    Obviously you should not carry credit card balances, with high interest rates.

    There really is almost no excuse for dealing with the large banks (other than a mortgage that was sold to them without your permission where you have no option but to put up with their behavior as their customer). Many of the other extremely bad customer service industries (cable TV, internet access providers, airlines) have monopolistic powers than often make it extremely difficult to avoid dealing with them. Of course the large banks make huge anti-competitive moves that shouldn’t allowed in any capitalistic system. But then our system is more about what you can buy with your cash payments to congress than capitalism. And you can’t accept the proponents claims of capitalism as a reason to do what they ask; more often then not those playing the capitalism over government argument are asking for anti-capitalist measures (allowing anti-competitive practices etc.) in support of special interest at the expense of society (markets require regulation to have the benefits of competition provide a dividend to society).

    Related: Credit Card Regulation Has Reduced Abuse By Banks – Credit Card Issuers Still Seeking to Take Your Money – More Outrageous Credit Card Fees

  • Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment

    My preference is for a lower use of bonds than the normal portfolio balancing strategies use. I just find the risks greater than the benefits. This preference increases as yields decline. Given the historically low interest rates we have been experiencing the last few years (and low yields even for close to a decade) I really believe bonds are not a good investment. Now for someone approaching or in retirement I do think some bonds are probably wise to balance the portfolio (or CDs). But I would limit maturities/duration to 2 or 3 years. And really I would pursue high yielding stocks much more than normal.

    In general I like high yielding stocks for retirement portfolios. Many are very good long term investments overall and I prefer to put a portion of the portfolio others would place in bonds in high yielding stocks. Unfortunately 401(k) [and 403(b)] retirement accounts often don’t offer an option to do this. Luckily IRAs give you the options to invest as you chose and by placing your IRA in a brokerage account you can use this strategy. In a limited investing option retirement account [such as a 401(k)] look for short term bond funds, inflation protected bonds and real estate funds – but you have to evaluate if those funds are good – high expenses will destroy the reasons to invest in bond funds.

    There are actually quite a few attractive high yield stocks now. I would strive for a very large amount of diversity in high yield stocks that are meant to take a portion of the bonds place in a balanced portfolio. In the portion of the portfolio aimed at capital appreciation I think too much emphasis is placed on “risk” (more concentration is fine in my opinion – if you believe you have a good risk reward potential). But truthfully most people are better off being more diversified but those that really spend the time (it takes a lot of time and experience to invest well) can take on more risk.

    A huge advantage of dividends stocks is they often increase the dividend over time. And this is one of the keys to evaluate when selected these stock investments. So you can buy a stock that pays a 4% yield today and 5 years down the road you might be getting 5.5% yield (based on increased dividend payouts and your original purchase price). Look for a track record of increasing dividends historically. And the likelihood of continuing to do so (this is obviously the tricky part). One good value to look at is the dividend payout rate (dividend/earnings). A relatively low payout (for the industry – using an industry benchmark is helpful given the different requirement for investing in the business by industry) gives you protection against downturns (as does the past history of increasing payouts). It also provides the potential for outsized increases in the future.

    There are a number of stocks that look good in this category to me now. ONEOK Partners LP pays a dividend of 5.5% an extremely high rate. They historically have increased the dividend. They are a limited partnership which are a strange beast not quite a corporation and you really need to read up and understand the risks with such investments. ONEOK is involved in the transportation and storage of natural gas. I would limit the exposure of the portfolio to limited partnerships (master limited partnerships). They announced today that the are forecasting a 20% increase in 2012 earnings so the stock will likely go up (and the yield go down – it is up 3.4% in after hours trading).

    Another stock I like in this are is Abbott, a very diversified company in the health care field. This stock yields 3.8% and has good potential to grow. That along with a 3.8% yield (much higher than bond yields, is very attractive).

    My 12 stocks for 10 year portfolio holds a couple investments in this category: Intel, Pfizer and PetroChina. Intel yields 3.9% and has good growth prospects though it also has the risk of deteriorating margins. There margins have remains extremely high for a long time. Maybe it can continue but maybe not. Pfizer yeilds 4.6% today which is a very nice yield. At this time, I think I prefer Abbott but given the desire for more diversification in this portion of the portfolio both would be good holdings. Petro China yields 4% today.

    When invested in a retirement portfolio prior to retirement I would probably just set up automatic reinvesting of the dividends. Once in retirement as income is needed then you can start talking the dividends as cash, to provide income to pay living expenses. I would certainly suggest more than 10 stocks for this portion of a portfolio and an investor needs to to educate themselves evaluate the risks and value of their investments or hire someone who they trust to do so.

    Related: Retirement Savings Allocation for 2010 – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 – 10 Stocks for Income Investors

  • Curious Cat Investing, Economics and Personal Finance Carnival #16

    Welcome to the Curious Cat Investing and Economics Carnival: find useful recent personal finance, investing and economics blog posts.

    • A 401k With Employer Matching is More Liquid Than You Think by Kevin McKee – “If your employer offers 401k matching, it’s simple: max it out. The one thing you’ll want to check is when the money is vested. All 401k money is immediately vested at my company, so once the match is in the account, it’s yours.”
    • Potential Euro Collapse & Rapid Redistribution Of Personal Wealth – “When we look at these two situations, what we can plainly see is that there is a massive redistribution of wealth that goes on when we have monetary crises. Millions of innocent people who’ve been playing by the rules and responsibly saving and investing are financially devastated. Other millions of people are enjoying lucrative profits and tax-advantaged surges in their personal net worth.”
    • 3 Dividend Growth Stocks selected by Gordon Model by Norman Tweed – “What this tells you is that constant future dividend growth is additional yield. Gordon speaks about earnings growth also in the paper. However, this is a highly conservative usage, leaving out pure growth stocks and concentrating on yield only. It is most applicable for utilities and slow growth rate stocks.”
    • 6 Online Retirement Planning Tools You Need to Know by Ryan Guina – “if your situation is more complicated, then it may be worth looking into a tool such as Maximize My Social Security, which costs $40 annually. This tool can help you determine the best strategy for maximizing your social security benefit. This tool can be especially helpful when you may need to decide when to collect retiree, spousal, survivor, divorcee, parent, or child benefits.”

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  • Protect Yourself from Credit Card Fraud

    I have written about the importance of protecting yourself against the companies that provide you financial services. There are few (if any) industries that as systemically try to trick and deceive customers out of large amounts of money as the financial services sector does. In addition to watching them, you it also makes sense to watch your credit card charges. For some reason attorneys general let large scale financial fraud go with much less policing than petty theft by juveniles (if some kids come in and take your TV they will be in trouble, if some large bank does the same thing to all of the household goods of many people that never even were their customers criminal charges are ignored for everyone involved – one of many such examples of bad decisions by attorneys general).

    Because financial fraudsters are allowed to continue without much fear of prosecution: thousands, or tens or thousands, or hundreds of thousands and then maybe something will be done, of course that is a lot of people to suffer before action is taken. For that reason we are subject to long standing schemes to take money fraudulently go on for a long time. I wouldn’t even be surprised if most companies found to have taken money that isn’t theirs are left off when they refund money to those people that caught them and that is seen as ok.

    Given this state of affairs, many have discovered just sending bills to people and companies and billing your credit card for things you didn’t order is a good way to steal money. Since law enforcement is extremely lax about stopping this. It is in your interest to protect yourself.

    Bill Guard is one new service to watch your credit card charges and alert you to potentially fraudulent charges. It seems like a pretty good idea. Like Google flagging spam email for you. I really would think credit card companies should do this (they do but I guess not nearly well enough – no surprise there). I don’t so much love the idea of sharing credit card info with these people. And I don’t charge much so I can review my bill easily, myself. I can imagine lots of others though have difficulty remember every charge. If so, this may well be wise.
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  • The Return of the Multi-Generational Family Household

    There are many good economic reasons to have multi-generational (at least 3 generations) households. There are some good social reasons too. There can be interpersonal benefits but also annoyances (which I think is why they decreased – plus we could afford it, the USA was living extremely richly).

    The Return of the Multi-Generational Family Household

    As of 2008, a record 49 million Americans, or 16.1% of the total U.S. population, lived in a family household that contained at least two adult generations
    …
    This represents a significant trend reversal. Starting right after World War II, the extended family household fell out of favor with the American public. In 1940, about a quarter of the population lived in one; by 1980, just 12% did. A range of demographic factors likely contributed to this decline, among them the rapid growth of the nuclear-family-centered suburbs; the decline in the share of immigrants in the population; and the sharp rise in the health and economic well-being of adults ages 65 and older.
    …
    Another factor has been the big wave of immigration, dominated by Latin Americans and Asians, that began around 1970. Like their European counterparts from earlier centuries, these modern immigrants are far more inclined than native-born Americans to live in multi-generational family households.

    However, the trend reversal has also played out among native-born Americans. And for all groups, the move into multi-generational family households has accelerated during the Great Recession that began at the end of 2007.

    The percentage of the population in such households now is 16%, still significantly below the high of 24.7% in 1940.

    Related: Mortgage Rates Falling on Fed Housing Focus – Personal Finance Basics: Long-term Care Insurance – Bankruptcies Among Seniors Soaring (2008)

  • Curious Cat Investing and Economic Carnival #15

    The global economy continue to be fragile and chaotic. At the same time companies continue to make large, and often increasing, profit. Here are some good blog posts on investing, personal finance and the economy.

    • The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects by John Hunter – “the prospects in emerging markets look incredibly good to me. Yes they will slow their growth a bit if the large economies stall, but I think it is foolish to avoid investments in China, Singapore, Brazil, Korea, India, Ghana, Malaysia, Indonesia. In fact that is where companies like Google, Tesco, Apple, Toyota and Amazon are going to be making lots of money. Emerging markets are volatile and the companies in them are too. This will continue.”
    • Extreme Early Retirement in Practice: How Two People Did It by Robert Brokamp – “We recently spent three months in Guatemala nestled between three volcanoes, on the shores of beautiful Lake Atitlan, and our average spending was $40 per day for the two of us, which equates to $14,600 per year. Our hotel price included daily cleaning, wi-fi, room service, cable TV, and a view.”
    • Are stocks cheap yet? Not if the economy is slowing, these numbers say by James Jubak – “A 20% drop in forecast earnings—the rough equivalent of an economic slowdown instead of a recession—would put the price-to-earnings ratio of the S&P 500 at 13. That’s below the average of 15 but not really very cheap given the degree of economic risk that an investor is taking on right now.”
    • Private Pensions: Another Gradual Catastrophe by Evan Tarte – “Despite the arguably noble intent of defined benefit plans and the PBGC, these plans demand crippling contributions from employers and inevitably the taxpayer, and make little sense in today’s market environment. PBGC’s current deficit stands at $22 billion”
    • Emergency Savings: is 6 Months Still Enough? by GE Miller – “with the average unemployment duration at 40.4 weeks, 6 months (or 26 weeks) is no longer enough, particularly when you take into account the possibility of medical emergency, pet operations, or other unforeseen circumstances. What is a good length these days? 1 year, at a minimum.”

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  • Good News: Credit Card Delinquencies at 17 Year Low

    The national credit card delinquency rate (the rate of borrowers 90 or more days past due) decreased for the sixth consecutive quarter, dropping to 0.6% at the end of the second quarter in 2011. This is the lowest mark observed in 17 years. Credit card debt per borrower increased $20 in the quarter to $4,699, though it remains near record-low levels (and yet still at a level that is far too high).

    Although credit card delinquencies were expected to drop, the data released today shows credit card delinquency rates improving by more than at any other time since the recovery began in 2009, both on a quarter-over-quarter basis (-18.9%) and on a year-over-year basis (-34.8%).

    “National credit card delinquency rates have fallen to levels not seen since 1994 as consumers continue to tighten their spending,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “TransUnion believes that the recovering economy is only indirectly impacting delinquency rates. More important and impactful to the decline in bank card delinquency are that consumers are using credit cards more responsibly; a large number of delinquent accounts have moved to charge-off status; and lenders remain conservative in their underwriting.”

    The record low-level of credit card debt that has continued post recession is supported by a separate TransUnion credit card deleveraging analysis released in July. The analysis found that consumers made an estimated $72 billion more in payments on their credit cards than purchases between the first quarters of 2009 and 2010.

    This is good news. We still need to reduce pay off much more of the excessive debt we took on living beyond our means the last few decades, but at least this is a small positive step. Overall consumer debt increased in the 2nd quarter, according to the Federal Reserve, and stands at over $2.45 Trillion. Revolving debt (credit cards) decreased slightly but non-revolving debt increased more. Consumer debt peaked near $2.55 Trillion in 2009 and recently bottomed just below around $2.4 in 2010. Consumer debt totals still need a great deal of improvement.

    Related: Consumer and Real Estate Loan Delinquency Rates 2000-2010 – Consumer Debt Down, but Still Over $2.4 Tillion in the USA –