Investing Curiouscatblog

Tag: Saving

  • 401(k) Options – Seek Low Expenses

    401(k), IRAs and 403(b) retirement accounts are a very smart way to invest in your future. The tax deferral is a huge benefit. And with Roth IRAs and Roth 401(k)s you can even get tax exempt distributions when you retire – which is a huge benefit. Especially if you don’t retire before the bill for all the delayed taxes of the last 20 years starts to be paid. The supposed “tax cuts” that merely shifted taxes from those spending money the last 10 years to those that have to pay for all the stuff the government spent on them has to be paid for. And that will likely happen with higher tax rates courtesy of the last 10 years of not paying the taxes to pay for what the government was spending.

    When looking at your 401(k) and 403(b) investment options be sure to pay close attention to expenses for the funds. Some fund families try to get people to investing in high expense funds, that are nearly identical to low expense funds. The investor losses big and the fund companies take big profits. Those people serving on the boards of those funds should be fired. They obviously are not managing with the investors interests at heart (as they are obligated to do – they are suppose to represent the investors in the funds not the friends they have making money off the investors).

    Here is an example (that I ran across last week) expense differences for funds that have essentially identical investment objectives and plans in the same retirement plan options: .39% (a respectable rate, though more than it really should be) for [seeks a favorable long-term rate of return from a diversified portfolio selected to track the overall market for common stocks publicly traded in the U.S., as represented by a broad stock market index.], .86% [for “The account seeks a favorable long-term total return, mainly from capital appreciation, by investing primarily in a portfolio of equity securities selected to track the overall U.S. equity markets based on a market index.”]. Do not rely on your fund provider to have your interests at heart (and unfortunately many companies don’t seek the best investment options for their employees either).

    The .47% added expense isn’t much to miss for 1 year. However, over the life of your retirement account, this is tens of thousands of dollars you will lose just with this one mistake. Personal financial literacy is an easy way to make yourself large amounts of money over the long term. It isn’t very sexy to get .47% extra every year but it is extremely rewarding.

    $200,000 at 6% for 25 years grows to $858,000
    $200,000 at 6.47% for 25 years grows to $958,000

    So in this case, $100,000 for you, instead of just paying the fund company a bit extra every year to let them add to their McMansions. In reality it will be much more than a $100,000 mistake for you if you save enough for retirement. But if you save far too little (as most people do) one advantage is the mistake will be less costly because your low retirement account value reduces the loss you will take.

    Related: 401(k)s are a Great Way to Save for Retirement – Retirement Savings Allocation for 2010 – Many Retirees Face Prospect of Outliving Savings
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  • Consumers Continue to Slowly Reduce Their Debt Level

    Consumer debt decreased at an annual rate of 3.25% in the second quarter. Revolving credit (credit card debt) decreased at an annual rate of 9.5%, and nonrevolving credit (car loans…) was about unchanged.

    Revolving consumer debt now stands at $827 billion down $39 billion this year. That is on top of a $92 decline in 2009. Hopefully we can continue this success.

    Through June of 2010 total outstanding consumer debt was $2,419 billion, a decline of $30 billion ($21 billion of the decline was in the 2nd quarter). This still leaves over $8,000 in consumer debt for every person in the USA and $20,000 per family.

    Consumer debt grew by about $100 billion each year from 2004 through 2007. In 2009 consumer debt declined over $100 billion so far: from $2,561 billion to $2,449 billion.

    The huge amount of outstanding consumer and government debt remains a burden for the economy. At least some progress is being made to decrease consumer debt.

    Those living in USA have consumed far more than they have produced for decades. That is not sustainable. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing.

    Thankfully over the last year at least consumer debt has been declining, but it needs to decline more. I disagree with those that want to see short term improvement in the economy powered by consumer debt. It would be nice to see improvement to the current economy. But we can’t afford to achieve that with more debt. Government debt has been exploding so unfortunately that problem has continued to get worse.

    Data from the federal reserve.

    Related: Consumer Debt Declined a Record $21.5 Billion in July – The USA Economy Needs to Reduce Personal and Government Debt

  • Google’s Own Trading Floor to Manage the Cash of the Company

    Google has generated a large amount of cash due to the profitability of their business. It currently has $26.5 billion 3rd only to Microsoft and Intel of short term holdings of technology companies (though Apple likely should be considered as having higher cash holdings). Google’s Latest Launch: Its Own Trading Floor:

    Google’s trading room opened in January. The plan is to keep the war chest growing safely and ready to be deployed should the right mergers-and-acquisitions opportunities arise. The investment team has grown to more than 30 people, up from six three years ago. Many of the new arrivals are former Wall Streeters who left lucrative careers at Goldman Sachs, JPMorgan Chase, and other banks. The man in charge is Brent Callinicos, Google’s 44-year-old treasurer, who joined from Microsoft in 2007, back when Google had $11 billion in cash. “This isn’t fast money, this is patient money,” he says. His crew works in a recently remodeled finance building on the company’s corporate campus in Mountain View, Calif., complete with a rock climbing wall, massage chairs, murals of tropical sunsets, and bamboo wall panels.
    …
    After a couple years of cautious cash management at Google, Callinicos says he’s beginning to build a higher-risk, higher-return portfolio. Since last year he has pulled away from U.S. government notes and moved into corporate debt securities ($4.9 billion as of Mar. 31, up from $695 million the year before), agency residential mortgage-backed securities ($3.3 billion, up from $60 million), and foreign government bonds ($332 million, up from zero).

    The largest Google holdings are: cash 35%, corporate debt 18%, US agency debt 13%, residential mortgage backed US agency securities 13%, municipal securities 8%, US government notes 8%. For all the debt problems with government, consumers and corporations that followed advice of mortgage bankers to overly leverage themselves there are many companies that have much larger cash holding than every before. Google is one but many other companies have built up large cash positions as well.

    I have been a long term investor in Google and think it is a great buy now. I don’t see myself selling it anytime soon (maybe anytime at all). I do worry a bit about Google wasting the cash on buyouts they are tempted into due to huge amounts of cash on hand. Hopefully they will avoid such mistakes. I think they may well be better off paying a dividend but they seem apposed to that idea.

    Related: Google Posts Good Earning But Not Good Enough for Many – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 (Nov 2008) – Too Much Leverage Killed Mervyns

  • Retiring Overseas is an Appealing Option for Some Retirees

    Retiring overseas has been growing in popularity over the recent decades. A lower cost of living and health care systems that work are two of the big draws. Americans Who Seek Out Retirement Homes Overseas

    With life expectancies growing — and some pension plans diminishing — baby boomers are doing the numbers and concluding that moving overseas makes more sense than aging in place.
    …
    She said a minimum amount for a comfortable retirement in a number of appealing places — Cuenca, Ecuador, and La Barra, Uruguay, being two examples — would be about $1,200 a month.

    Mr. Holman said that if you purchased a home in Medellin, you could live quite comfortably on less than $2,000 a month. As time goes on, retirement hot spots change along with countries’ economic and political situations.

    Ms. Peddicord said she used to recommend Ireland, Thailand and Costa Rica, but no longer does. She cited the high cost of living in Ireland, the anti-foreign sentiments in Thailand, and the growing crime rates both within and outside of San Jose, the Costa Rican capital.
    …
    “In Panama, for example, your rent could be $1,500 a month for a two-bedroom apartment in a nice building in Panama City with a doorman and a pool,” Ms. Peddicord said, “or it could be $200 a month if you choose instead to settle in a little house near the beach in Las Tablas, a beautiful, welcoming region.”

    Lee Harrison, an American who retired to Ecuador several years ago and then moved in 2006 to Uruguay, said there were a wide range of financial issues to consider before making the leap to retire abroad.

    For example, he recommends that retirees maintain a bank account and credit cards in their country of origin as well as in their new country, to facilitate money transfer. He also said that retirees should investigate their home country’s system of sending pension money to retirees abroad, as well as their new destination’s ability to accept electronic bank transfers.

    Retirees also should request help from a tax adviser and make certain their move doesn’t trigger the need for a new will.
    …
    Financial considerations aside, advisers say that when making the decision to retire abroad, most retirees find that the journey itself is the reward.

    “I know lots of people who retired to one country and then decided to move again somewhere else but never back” to their home, Ms. Peddicord said. “I don’t know of anyone who has decided to move back full-time after having had a taste of living abroad.”

    Living overseas is something a significant portion of people in the USA have no interest in at all. But for those that like the idea there are appealing options with some strong benefits. At the same time you need to understand the significant change this bring to your life and plan for it I suggest visiting the location several times over the years – before you retire.

    Related: In the USA 43% Have Less Than $10,000 in Retirement Savings – Many Retirees Face Prospect of Outliving Savings – Saving for Retirement

  • Avoiding the Vicious Cycle of Credit Problems

    Credit problems create a vicious cycle. Credit card interest rates are increased, fees are onerous and even applying for jobs is negatively affected (many employers look at credit reports as one factor in the hiring process), insurance companies look at them too and can offer higher rates. Employers and insurers have the belief that bad credit is an indication of other risks they don’t want to take on. Once into the cycle there are challenges to deal with. I must admit I think it is silly to look at credit for most jobs. But a significant number of organizations do so that is an issue someone that gets themselves in this trouble has to deal with.

    I think the best way to deal with this problem is to build a virtuous cycle of savings instead. We tend to focus on how to cope with a bad situation instead of how to take sensible actions to avoid getting in the bad situation. In general we spend far too much money and take on too much debt – we live beyond our means and fail to save. Then we have a perfectly predictable temporary hit to our financial situation and a vicious cycle begins.

    If we just acted more responsibly when times were good we would have plenty of room to absorb a temporary financial hit without the negative cycle starting. The time to best manage this cycle is before you find yourself in it. Avoiding it is far better than trying to get out of it.

    Build up an emergency fund. Don’t borrow using credit cards – or any form of consumer debt (borrowing for education, a car or a house, I think, are ok). Save up your money until you can afford what you want to purchase. Don’t buy stuff just to buy stuff.

    Re: The Vicious Circle of Poor Credit

    Related: Real Free Credit Report – In the USA 43% Have Less Than $10,000 in Retirement Savings – Financial Planning Made Easy

  • Will The Savings Rate Fall Back Again

    Welcome to the False Recovery by Eric Janszen

    Because of the way the government measures household savings, the increase doesn’t signify more money in people’s wallets; instead, it suggests that consumers are paying off their mounting debt during a period of reduced borrowing. That’s no harbinger of growth.

    Companies planning for sudden and relatively near-term growth should reshape their strategies to make the best of economic flatness.

    He makes a decent point for companies, but the he flips back and forth between the need to save more (because we are buried in debt) and the need to spend more (because we need to grow the economy right now). And while I wouldn’t stake my life on it I wouldn’t be surprised that we have a strong economic rebound (it is also perfectly conceivable we have a next to no growth or even fall into a recession). But it seems to me the return to bubble thinking and spending beyond our means is making a strong comeback.

    The money is not going under mattresses or into bank accounts, from where it will emerge one day to jump-start the economy. It’s actually subsidizing the previous boom, which was built on debt and the presumption that assets would always cover that debt.

    Another ok, point but we have hardly paying off anything of the previous living beyond our means. It would take decades at this rate.

    Banks can loosen lending policies to allow people to borrow and spend again—but for that to solve anything, consumers must be extremely judicious in how they take on and use their debt. It’s more likely that consumer debt levels will rise again as individuals stretch themselves to afford what they want. Alas, this will drive the reported savings rate back down. By the end of 2010, I expect it to dip below 3%. Then, any drop in asset values will set off the debt trap. We’ll again see a rising savings rate and tightened lending, followed by loosened lending and a declining savings rate. The recovery will become a series of starts and stops: promising progress, periods of retreat.

    So the problem is the saving are not actually resulting in increased ability to spend (first point above) – which is bad he says, because it means their won’t be more spending (because people won’t have the ability to spend). Then he says when banks lend the consumers money they will spend and the saving rate will go down (which is bad – though he doesn’t seem to really want more savings (because that means business won’t get increased sales).

    The conventional wisdom likes to point out the long term problem of low savings rate but then quickly point out we need more spending or the economy will slow. Yes, when you have an economy that is living beyond its means if you want to address the long term consequences of that it means you have to live within your means. It isn’t tricky. We need to save more. If that means the economy is slower compared to when we lived beyond our means that is what it takes. The alternative is just to live beyond your means for longer and dig yourself deeper into debt.
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  • Bill Gross Warns Bond Investors

    Bill Gross Warning May Catch Bond Investors Off-Guard

    Pacific Investment Management Co.’s Gross, manager of the world’s biggest bond fund, said yesterday in an interview with Tom Keene on Bloomberg Radio that “bonds have seen their best days.” Pimco, which announced in December that it would offer stock funds, is advising investors to buy the debt of countries such as Germany and Canada that have low deficits and higher- yielding corporate securities.

    The prospect of a strengthening U.S. economy and rising interest rates makes an “argument to not own as many” bonds, Gross said in the interview.
    …
    Treasuries have rallied for almost three decades, pushing the yield on the 10-year Treasury note from a high of 15.8 percent in September 1981 to 3.89 percent as of yesterday. The yield reached a record low of 2.03 percent in December 2008 during the height of the credit crunch.
    Excess borrowing in nations including the U.S., U.K. and Japan will eventually lead to inflation as governments sell record amounts of debt to finance surging deficits, Gross said.

    “People have been making money on fixed income for so long, people assume it’s going to continue when mathematically, it cannot,” said Eigen, whose fund is the third-best selling bond fund this year, according to Morningstar. “When people finally start to lose money in fixed-income, they won’t hesitate to pull money out very soon,” he said.

    John Hancock Funds President and Chief Executive Officer Keith Hartstein said retail investors are already late in reversing their rush into bond funds, repeating the perennial mistake of looking to past performance to make current allocation decisions.

    I agree bonds don’t look to be an appealing investment. They still may be a smart way to diversify your portfolio. I am investing some of my retirement plan in inflation adjusted bonds and continue to purchase them. My portfolio is already significantly under-weighted in bonds. I would not be buying them if it were not just to provide a small increasing of my bond holdings.

    Related: Municipal Bonds, After Tax Return – 10 Stocks for Income Investors – Bond Yields Show Dramatic Increase in Investor Confidence – Investors Sell TIPS as They Foresee Tame Inflation

  • Building an Emergency Fund

    Many people find personal financial planing boring. Building a cash safety net is an important part of your personal finances even though it isn’t exciting. I have written previously the very simple idea that you can just not buy what you can’t pay for. If you can’t pay for it this month, don’t buy it.

    But that leaves out one thing. Even if you do have the cash you should be building up a cash reserve before buying luxuries. The typical advice is to build up 6 months of expenses in cash (rent or mortgage, food bills, utilities, health care, etc.). Now actually building up to that level can take awhile and forgoing all non-mandatory expenses until you have that saved is not usually reasonable. But as part of your personal finances building up an cash reserve is important (even if it is boring). And I believe you really should aim at a higher level – say building to 1 year.

    A significant portion of downward spirals in personal finances are started when people have emergency expenses and have to borrow that money (since they don’t have cash reserves). And even worse when they start racking up huge fees for late payments, increased interest rates on outstanding debt, health care expenses if they fail to keep health care insurance…

    If you are over say 26 and don’t have a cash reserve yet saving for it should be part of your monthly budget. How quickly you build that up is a personal decision but I would say a 2% of the target amount (so if you are aiming for a cash reserve of $20,000 then $400/month). If you have next to nothing saved now start aiming at 6 months. As you get 3 months saved up start aiming at 9 months. As you get 6 months saved up start aiming at 1 year. And you have to also be saving for other needs – you shouldn’t raid your emergency fund savings for other things (a new car, a vacation…). This takes real discipline but it is much easier than the challenges our ancestors had to face of billions of people face financially today. So yes it is not easy, but really those that feel sorry for themselves need to realize they shouldn’t expect that they are so special the world owns them financial riches with little effort.

    Doing something is better than nothing so do what you can (even if it is less than 2% of you target). But realize that is one of the weaknesses in your personal finances and try to fix that as soon as possible.

    Very important personal financial allocations for you to put first include: current needs (food, car payment, rent/mortgage, utilities…), insurance, creating a cash reserve, retirement savings, saving for future purchases. Then there are luxuries and treats, such as: eating out, vacations, cable TV… Many people put current needs, luxuries and treats fist and then say they don’t have the ability to do what is responsible (check how rich you are – before making such claims yourself).

    Related: How to Protect Your Financial Health – Save Some of Each Raise – Buying Stuff to Feel Powerful – Consumer Debt Down Over $100 Billion So Far in 2009 – posts on basic personal finance matters

  • Retirement Savings Allocation for 2010

    I adjusted my future retirement account 401(k) allocations today. I do not have as favorable an opinion of investing in the stock market today as I did a year ago. I would likely have allocated 20% to a money market fund except my 401(k) actually has two options – 1 paying 0.0% and the other paying -.02%.

    They seem to believe they should make a significant profit while providing a horrible return (they are still taking over .5% of assets in fees – even though rates do not cover their fees). Those running funds have very little interest in providing value for 401(k) participants – they are mainly interested in raising fees (though supposedly they are suppose to be run by people with a fiduciary responsibility to the investors). Unfortunately most 401(k)s lock you away from the best options for an investor (such as Vanguard Funds).

    My current allocation for future funds is 40% to USA stocks, 40% to Global stocks and 20% to inflation adjusted bonds. My current allocation in this retirement account is 10% real estate, 35% global stocks, 55% USA stocks. For all my retirement savings it is probably about 5% real estate, 35% global stocks, 5% money market, 55% USA stocks (which is a fairly aggressive mix).

    As I have said many times I do not like bonds at this time. I don’t think the interest nearly justifies the risk of capital loss (due to inflation or interest rate risk). Inflation protected bonds are a much more acceptable option for someone that is worried about inflation (like I am over the next 10-20 years).

    A number of the stock fund (even bond fund) options in my 401(k) have expense ratios above 1%. That is unacceptable. The average fees on the options I chose were .5%.

    With my employee match I am adding over 10% of my income to my 401(k), which I think is a good aim for most everyone. Far too many people are unwilling to forgo luxuries to save appropriately for their retirement. This is a sign of financial illiteracy and an unwillingness to accept the responsibilities of modern life.

    Related: Investing – My Thoughts at the End of 2009 – 401(k)s are a Great Way to Save for Retirement – Saving for Retirement – Managing Retirement Investment Risks

  • Investing – My Thoughts at the End of 2009

    In December 2008 I decided to substantially increase my investments in the stock market. This turned out to be quite successful. As I said at the time, the economy continues to struggle and the prospects for 2009 did not look good. And I even guessed the stock market (in the USA) would be lower 12 months from now. But, I also said I was far from certain, in that guess and that I had been increasing my stock investment and would continue to do so.

    At this time my retirement contributions are going 100% to stock investments (if I were close to retirement I would not do this). I am likely going to reduce the contributions going forward (maybe 75% stocks – 25% money market). Unfortunately my retirement fund does not have great alternatives – it has very good real estate options but I am not ready to start putting new funds there (though I likely will during 2010, at some point).

    I did sell reduce my equity exposure in a retirement account that I am not adding to this month. It reduced my overall equity exposure of my portfolio by a couple percentage points, at most. It is still significantly higher than a year ago, due to the incredible gains for 2009 in my stock investments.

    Last year I fully fund my Roth IRA, in January and bought Amazon (AMZN), Templeton Emerging Market Fund (EMF) and PetroChina (PTR). I will fully fund the Roth IRA in January again. I am leaning toward some combination of Templeton Emerging Market Fund (EMF), Vanguard Emerging Markets Stock (VWO), Toyota (TM) and maybe Danaher (DHR). I purchased all of those in my non-retirement account in 2009.

    Investing well is not easy. Saving money is though, sometime people get these confused. You need to save money for retirement – aim for 10% of your income and invest that conservatively if you do not wish to focus on investing. I have no question fully funding your Roth IRA is a wise move for almost everyone. How to invest once you do that is a bit trickier but funding it is not a difficult question to answer. It was not easy to increase investments into stocks last year, when so many others were selling (and the press is full of stories reinforcing the bad news, bad prospects and risks). You can get great opportunities when others are panicking, but things do not always recovery so nicely.

    What the next year holds, again for 2010, if very difficult to see. The economy looks to be in much better shape than a year ago. But it is far from strong. And the recovery in the stock market means the higher prices stocks command today leave more downside risk for stocks, if things do not go well. I am more concentrated in stocks now than I was a year ago, but I am not comfortable with that. I don’t see bonds, even short term bonds, as an acceptable alternative. The risks are not at all justified by the returns in my opinion. I am happy with my real estate investments and may even look to increase that area though I think it may be too early for commercial real estate. I think individual companies may well prosper even if the economy falters – such as Google, Amazon, Danaher, Toyota, Tesco (though Amazon’s price increases may already have more than accounted for this) – all of these are in my 12 stocks for 10 years portfolio.

    Related: Save Some of Each Raise – It is Never to Late to Invest – Does a Declining Stock Market Worry You? – Uncertain Economic Times