March 2012

Friday, March 30, 2012

Carnival of Financial Planning - Edition #230 - March 30, 2012

Welcome to the March 30, 2012 Edition #230 of the Carnival of Financial Planning!

The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. The focus is on efficient and sustainable personal financial planning practices that can lead to lifetime financial security.

This edition is arranged by subject heading, so that you can browse efficiently.

Enjoy!

Budgeting and Economics

Justin presents What Should You Try Before You Take Out a Loan? posted at Budget Snob, saying, There are some situations in which taking out a loan is appropriate, such as buying a house or a car. However, in other situations, loans may not be the best choice. Before you take out a loan, its important to look at your options.

Chris presents The Recession Generation posted at Experiglot, saying, We really are the recession generation.

Tim presents 5 Business Lessons Learned from Monopoly posted at Faith and Finance, saying, Monopoly is good family fun and all, but its also a crash course in business. Here are 5 business takeaways you can learn from the old game Monopoly.

Janet presents Living expense tracking methods posted at Independent Financial Planner , saying, " Many people do not track their living expenses and do not understand the magnitude of their consumption. Failure to monitor your consumption expenditures means that they are flying blindly regarding their future finances. "

Darwin presents The REAL Inflation Rate posted at Darwin's Money , saying, Most Americans feel the government inflation numbers aren't representative of the real inflation they see year to year. Here's your solution.

Financial Planning

Craig Ford presents The Unpopular Truth About the Dangers of a Dave Ramsey Only Approach to Christian Finances posted at Money Help For Christians, saying, "Christians should consider paying attention to other financial authors as well."

Jeffrey presents Can We Stop Gushing Over Our Self-Affirming Financial Bull? posted at Money Spruce, saying, Did the title make you uncomfortable or defensive? Good, it's probably not new news to you that everything likes to read things that simply back up what they already think and do. Finances are no different. We like to have all the answers, and we like to be on the right track. Sure, there are little tweaks here and there but not too much to rock the boat.

Dave presents Passive Investing – Active Investing – Alpha Returns posted at Wall Street Nerds , saying, " The Old Testament of indexing is Burton Malkiel’s classic A Random Walk Down Wall Street, first published in 1973 by W.W. Norton and now in its ninth edition. For typical individual investors, without special access to information, it offers what is likely the best financial advice they will ever get: It is hard to consistently beat the market, especially after fees. A passive strategy will do better in the long run. "

Philip Taylor presents We Finally Completed Our Last Will and Testament, Living Will, and Durable Power of Attorney posted at PT Money Personal Finance, saying, Discusses our personal estate planning, as well as our choice to pay a lawyer versus using a website such as Legal Zoom.

Jen presents Make Money While Drinking Beer? posted at Master the Art of Saving, saying, I started thinking about it - can you really make money while drinking beer? Yep, I've decided that it is quite possible for somebody to make money while drinking beer-- though most of these things can also been done by sober people.

Shaun presents What to Do If You are in a Car Accident posted at Smart Family Finance, saying, While being a party to a car accident might be outside your control, knowing what to do after a car accident will help keep you safe and potentially avoid you legal headaches down the road.

TSI presents Where’s Waldo? – The illusion of superior professional mutual fund manager performance. posted at Skilled Investor Blog , saying, " If investment mutual fund managers were truly skilled at beating the market, then you would expect mutual fund manager performance prowess to persist over time. Unfortunately, the evidence indicates that superior past professional performance among mutual fund managers tends not to persist. Past superior mutual fund performance is simply not a predictor of future superior mutual fund performance. "

Everything Finance presents 7 Fun Ways to Teach Children to Save posted at Everything Finance, saying, Creativity is a child's bread and butter, so why not use that to your advantage to teach them about saving money? These clever tips are ideal for teaching your child how to make smart money decisions.

Kevin presents Would You Destroy An Entire Industry? posted at Thousandaire, saying, If you invented something that would benefit consumers immensely but would destroy an entire industry at the same time, would you release your product?

Eddie presents How Do We Measure Success? posted at Finance Fox, saying, Here's my two cents. Singularly education, money, cars and the circle of friends do not measure ones success. Success is measured with a combo of all the above four.

Income

Corey presents How To Make A Killing As A Bar Server posted at Bar Whiz Blog, saying, Although a tight fitting tank top and a pair of orange short-shorts won't hurt, showing skin is not the only way to make a killing as a server. Following these "tips", anyone can make a surprising long-term income from serving.

John presents Wage Slavery and Money Myths posted at Married with Debt, saying, Wage slavery, for some, is an everyday reality. For others, there's no such thing and work is a pleasure.

MR presents Can A Side Blogging Business Help You At Your Primary Job posted at Money Reasons, saying, Can working at a blogging side business help you at your employed day job? I think so and here is my story.

Daniel presents Salary vs Commission: Which Do You Prefer? posted at Sweating the Big Stuff, saying, Do you like working for commission? Do you prefer a salary? There are several compensation options and each has it's own advantages and disadvantages.

Insurance and Risk

Paul Vachon presents Saving Money on Home Insurance posted at The Frugal Toad, saying, There really are no secrets to saving money on home insurance. The trick is to include evaluating your insurance needs as a part of your yearly financial review. Most individuals don't do this and are losing out on potential savings. Here are some of the best ways to save money on home insurance:

Investing

Kanwal presents The Biggest Investment Mistakes Canadians Are Making posted at Simply Investing, saying, I was recently interviewed for this article by Cindy Waxer she writes for publications including Technology Review, The Economist, TIME, Fortune Small Business, and CNNMoney.com. Have a look. ManyCanadians are falling short of their investing goals.

Boomer presents Pros and Cons of Holding Your Mortgage in Your RRSP posted at Boomer & Echo, saying, One investment that is eligible to be held in your RRSP is your mortgage. You need to have enough cash, or assets that can be converted to cash, and hold your mortgage in a self-directed RRSP. You then make your mortgage payments to the RRSP instead of a financial institution.

Bobby Boughton presents Is it Better to Invest or Pay off Debt? posted at ReadyForZero Blog, saying, Ah the age old question: Is it better to invest or pay off debt? This article goes through a few scenarios and helps you decide which is the better route to go.

Dividend Growth Investor presents Does entry price matter to dividend investors? posted at Dividend Growth Investor, saying, "The reason for the lost decade in stocks is that many otherwise quality companies were overvalued in the early 2000s. For example Johnson & Johnson (JNJ) was trading at 29.30 times earnings in early 2000, whereas McDonald’s (MCD) traded at 26.90 times earnings. Even some of the best dividend stocks are not worth paying more than 20 times forward earnings."

Teacher Man presents ETF Investing Low Maintenance and Stellar Returns posted at My University Money, saying, So the big day is finally here and we are ready to unveil our eBook the world. A huge thanks goes out to all of the great help Ive had building and marketing the eBook! Without further ado.

Mike presents What You Need To Know About ETF Investing posted at The Dividend Guy Blog, saying, Everything you need to know on the topic.

Managing Debt

Steve presents 10 Things You Can Do to Get Out of Debt Starting Today posted at Money Infant, saying, Are you always wondering why you can't get off the debt treadmill and live a satisfying life without constant money worries? 10 things to help get out of debt

Martin presents Do You Know Who Has Your Credit Card Number? posted at Studenomics, saying, The scary possibility of credit card fraud.

Real Estate

A Blinkin presents Should Homeownership Still Be The American Dream? posted at Funancials, saying, This was initially a guest post I wrote for Sam at Financial Samurai. Let me know what you think. There have been numerous studies performed over the years which clearly outline the social benefits of homeownership. In the mid-2000's it was nearly impossible to argue against the advantages of owning a home.

Little House presents Are Homeowners Really More Credit Worthy than Renters? posted at Little House in the Valley, saying, Aren't I, the renter, the more stable consumer than the homeowner who couldn't afford a home to begin with?! Don't my years of rental payments count for something! Why is it that rental payments aren't factored into credit worthiness and therefore counted towards my score?

Glen Craig presents What is Mortgage Amortization and How Does it Work? posted at Free From Broke, saying, People get confused when they hear the term Mortgage Amortization. Don't be. It's not that confusing. See what mortgage amortization is and how it works.

Retirement

FMF presents Determine Your Retirement Number posted at Free Money Finance, saying, The first step in determining how much money you will need to save for retirement is to answer a few basic questions about your future. If you can answer these six questions accurately then your retirement savings number will also be accurate.

Madison presents Unveiling The Retirement Myth: Book Review posted at My Dollar Plan, saying, There are so many books about saving, investing, and building your portfolio, that it is rare to find a good book about spending down your portfolio, or the distribution stage. The book Unveiling The Retirement Myth by Jim Otar does a great job on explaining the distribution stage, in detail, with actual numbers.

Savings

N.W. Journey presents Start Planning and Saving for the Holidays Now posted at Networth Journey, saying, "Discover why now is the best time to save for the holidays."

Ashley presents Saving For College; How to do it and why you shouldn't feel guilty for not posted at Money Talks Coaching, saying, Saving for college is a huge task. Not only does the cost rise faster than inflation you have a very short time frame in which to save.

Kyle presents How to Save 10 Percent on Your Grocery Bill Without Cutting a Single Coupon posted at The Penny Hoarder, saying, If you're someone who won't use coupons or you're somebody who uses coupons, but wants to save even more, I've got an unconventional way to cut the grocery bill.

Taxes

Cash Flow Mantra presents Update on Income Tax Situation posted at Cash Flow Mantra, saying, For those of you who might be unfamiliar with this part of my financial life, I owe some money to the IRS, and it is not just a little bit. I had to come up with another plan which involved borrowing money from individuals so I could avoid paying more taxes plus a nasty penalty on funds withdrawn from a retirement account. Yes, I am a little like Greece and kicking the can down the road, but I think that things will be getting better.

Money Cone presents Handling Royalty Trusts in Turbo Tax posted at Money Cone, saying, If you own Royalty Trusts in a tax-deferred account, you can skip the tax preparation step and unlike MLPs, owning Royalty Trusts in your 401K or IRAs wont trigger the dreaded UBTI. But if you happen to own them in a taxable account, be prepared to spend some time doing the tax math for each Royalty Trust you own.

Super Saver presents Where's My Refund? posted at My Wealth Builder, saying, "Despite getting a refund this year, I have not filed and therefore know why I haven't received a refund. However, for many that have filed, their refunds have been delayed."

That concludes this edition. Submit your blog article to the next edition of Carnival of Financial Planning using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Sunday, March 18, 2012

$64.51 Giveaway - Community and Charity 10% Monthly Blog Income Give Back # 6 - March 2012 Edition

The 10% give back giveaway fun rolls on for the month of March!

In case you missed the first five editions of the 10% Blog Income Give Back, after doing some thinking at the beginning of October 2011 about what direction I want this blog to grow and evolve towards in the future, I decided that any income made from this blog would have more significance to me at a personal life values level if I knew that a portion were being given back to the following places:

1) The readers - Obviously, without you here to read my articles and interact with my ideas, there would be no blog in the first place (let alone blog income). As such, it is only fitting that you receive a portion of any blog income.
2) Charitable organizations - If you've read my blog before, you know that I'm a big believer in donating a portion of my money to charity. Each year, I donate between 5-10% of my income to the National Multiple Sclerosis Society as part of the Bike for MS fundraiser that I do. Beyond the good that is done by donating your money, getting used to contributing to charity is also a good practice to emulate the actions of affluent individuals (T. Harv Eker discusses this in his book, Secrets of the Millionaire Mind, which I would definitely recommend reading if you have a few hours).

Because of these considerations, I've decided that each month going forward, I'm going to give away 10% of my net (after-tax) blogging income/profit to My Personal Finance Journey readers (5%) and to charity (5%). Listed below is how the process will work:

After each calendar month passes, I'll tally up my net blog income and determine what Dollar value correlates to 10%.
I'll post the giveaway (similar to this post you're reading now), and you'll have approximately 2-3 weeks to enter (I apologize for the late start this month!).
Once the giveaway is over, a grand prize winner will be announced, and then I'll donate another 5% of my blog income to a charity. Once the giveaway entry window ends, I'll send out the money to the blog reader winner(s) and personally drop off the charity donation.
So far, I've been very happy with the success of the first 5 editions of the 10% income give back.

In October, $205 total was given away, with $100 being donated to the charity, GreenPeace.
In November, $201.40 total was given away, with $100 being donated to the charity, The Blue Ridge Area Food Bank. If you're interested, you can view the details of me going to drop off the check at the Food Bank by clicking here.
In December, $74.52 total was given away, with $38 given to Big Brothers Big Sisters of Central Blue Ridge. You can view the details of the donation drop by clicking here.
In January, $196 total was given away, with $96 given to the Sexual Assault Resource Agency. You can view the details of the donation drop by clicking here.
In February, $141.20 total was given away, with $70 given to the Blue Ridge Chapter of the National Multiple Sclerosis Society.

So, that's the overall flow of things and a brief recap of what's happened so far with the give back initiative. Now, let's get in to the specific details for this month's (March 2012) giveaway.

Details of March 2012 10% Blog Income Giveaway

$64.51 total blog income to give away - $34.51 to a My Personal Finance Journey reader and $30 to the National Multiple Sclerosis Society - Blue Ridge Chapter.

$34.51 in the form of one prize available to one reader as follows -

1) Grand Prize = $34.51 Amazon Gift Card or $34.51 cash via PayPal.

It's been very fulfilling developing a relationship with the local chapter of the National Multiple Sclerosis Society through the MS150 fundraising bike ride I do each year. Click here to see the details for the 2012 edition of the ride I'll be doing! I look forward to continuing to raise money for their efforts.

How to Enter the Giveaway - Deadline to Enter is Midnight, March 31st, 2012

Like last month, I've decided to use the RaffleCopter giveaway management tool to handle sign-up facilitation for the March giveaway, so simply go through the steps listed in the widget below to enter the running for the prize and accumulate entry points.

There is no limit to the amount of points you can earn. If you refer 10 subscribers – your name will have accumulated 170 entry points! Or, if you link to the giveaway more than once, you can accumulate those 7 entry points multiple times. You can also retweet the giveaway and/or share other My Personal Finance Journey articles via social media sites once per day. In the event of a tie, I will be using a random number generator to select the winner.

Important instructions: After you complete an entry method, make sure to click and fill out the "I Did This" or "Enter" button in the widget so that I have a record of your points.

a Rafflecopter giveaway

Remember, the deadline for entries will end at midnight on March 31st, 2012 (about 2 weeks from today - the start of the give back). Good luck to you all! Please contact me if you have any questions. After the deadline for entries passes, the winner (one with the most points accumulated) will be contacted via email to receive their prize.

Saturday, March 17, 2012

The Best Financial Calculators Government and Academia Provide

The following is a guest post from Amanda Green. Enjoy!

The Best Financial Calculators Government and Academia Provide

Love it or hate it, the United States government is a source of unprecedented human capital and resources. While we can't say that Uncle Sam's wealth trickles down to only the most necessary of places, it's a guaranteed fact that the overwhelming majority of federal funds go to useful things, such as services to the public and grants to universities. The existence of online financial calculators stemming from both government agencies and state schools is an example of the capability and reliability of public service and funding.

While they won't replace the expert advice of a financial advisor, the following six calculators available through various federal agencies and public universities are free to the web-connected public and above all, are trustworthy:

University of Maryland Medical System Cost-of-Smoking Calculator

For those of you who dealing with a cigarette addiction, this cost-of-smoking calculator puts the price of your daily pack on an annual scale. While not the main reason to quit, the financial benefits are a definite perk.

Department of Energy Fuel Economy Comparison Calculator

Analysts say to prepare for $5.00 gallons of gas by the end summer. Those thinking about trading their gas guzzler for a more fuel efficient ride can't afford not to stop by the DOE's fuel economy comparison calculator to see their options side-by-side.

Department of Agriculture Cost of Raising a Child Calculator

Before you and your loved one decide to start a family, make sure it's the right time financially by using this cost of raising a child calculator. It's also useful for existing families looking to see the bigger picture regarding the expenses of parenthood.

Federal Reserve Credit Card Repayment Calculator

While minimum payments give you more spending money today, they'll result in massive amounts of interest paid over time. To get a glimpse at the long-term state of your credit card debt at the rate your going, use this repayment calculator.

Penn State Living Wage Calculator

Many cost-of-living calculators exist online. But, none get as specific as this living wage calculator created through economics research conducted at Penn State. While it focuses primarily on the necessary wages needed for low income living, it provides an accurate portrait of living conditions in cities across the United States.

Lawrence Berkley National Laboratory Home Energy Savings Calculator

By plugging in information about your geographical area, home, utility bills, energy habits, and existing efficiency efforts, this handy calculator will tell you the ways in which you can further increase sustainability and eliminate waste. It's ideal for families as well as college roommates.

Uncle Sam has never had much of a glossy reputation, but our tax dollars do go to more useful things than we tend to think about. The aforementioned online calculators, and the inevitable financial information you'll gain from using them, are proof of the benefits of public funds and service.

How about you all? Do you use any financial calculators online? Have the ones you've had more success with been provided by the non-profit (academia/government) or for-profit sector?

Share your experiences by commenting below!

***Photo courtesy of http://opencage.info/pics/files/800_4543.jpg

Thursday, March 15, 2012

Welcome Budgets are Sexy Readers!

Welcome Budgets are Sexy readers! Thanks so much for stopping by my site by way of the my guest post today over at J. Money's blog listed below. I'm very happy to have you here! :)

How to Save Even MORE on Hotel Rooms Using Both Priceline and Hotwire

And, thanks to J. Money, I actually found out that the post was lucky enough to be mentioned at the following places as well. I'm glad that everyone seems to be benefiting from sharing this simple money saving strategy.

LifeHacker.com - Get Better Hotel Deals
College Candy - Cheap Candy

If you're stopping by my site for the first time, I just wanted to give a little guide towards what I offer here, since information overload can occur quickly and time is our most valuable asset.

To introduce myself, my name is Jacob. I started this site back in January of 2010, and since then, have poured my heart and soul in to the site to produce a product I am proud of and I think adds value to the world. You can read a little more on my background and even see a picture of me on the "About" or "First-Time Visitor" pages to find out more about us.

WHAT I WRITE ABOUT HERE AT MY PERSONAL FINANCE JOURNEY

In short, I like to offer actionable personal finance advice with the goal of achieving long-term success.

Specifically, I really enjoy writing about the following areas (I've also listed several posts related to each topic in case you're interested in reading more):

Long term investing and asset allocation strategy analysis

Deciding how to prioritize new funds as they come in to various spending requirement areas

How to develop a lifestyle of frugality and live according to your life dreams and life values

Balancing Frugality with Fun

ARTICLES SIMILAR TO MY GUEST POST TODAY AT budgets are sexy

Additionally, if you liked the theme (how to save money / frugal living) of the guest post I wrote for Budgets are Sexy today and are interested in similar posts I've written in the past, you might want to check out the ones below:

WAYS TO STAY IN TOUCH WITH NEW CONTENT

If after sampling some of the content above you think that my posts will add value to your life, there are many easy ways to stay in touch with new material when it goes up! See below for details:

If you would like to receive free updates on articles by email, then sign up here.
Or, you can subscribe to the RSS feed.
Also, follow/like our pages on Twitter or Facebook.

10% MONTHLY BLOG INCOME GIVEAWAY

Also, each month, I give away 10% of any income I make from this site, with 5% going to blog readers and the other 5% going to a charity selected by the grand prize winner. You can read about all of the details by clicking here.

So far, we've given away:

Current total given to charity = $334
Current total given to blog readers = $345

If you want to enter in to the March 2012 giveaway, it will be on the way in a few days. Stay tuned!

Thanks for visiting! Keep on learning!

***Photo courtesy of http://s0.geograph.org.uk/geophotos/01/29/34/1293468_818276a6.jpg

Saturday, March 10, 2012

Professional Indemnity Insurance Explained

The following is a guest post. Enjoy!

Professional Indemnity Insurance Explained

Business owners purchase Professional Indemnity Insurance (PI) in order to protect themselves from losses due to claims from third parties. There are several types of policy and they can be tailor made for the type of business they will be protecting. There are three main types; errors and omissions, malpractice and professional indemnity itself, and although they offer similar coverage and protection, they are geared toward different industries. For example, malpractice insurance is tailored for the medical profession and will protect against damages claims filed by clients and patients whereas errors and omissions (E&O) will cover mistakes (omissions) and errors that may lead to financial losses for clients. This is commonly purchased by professionals like lawyers, architects and web designers. Professional indemnity is the most broadly purchased policy and will cover damages and financial losses by a third party.

Insurance companies will take over the responsibility for paying settlements both in and out of court, up to the policy limit - and any legal fees will also be paid.

Premium amounts will differ from business to business depending on the risk assessment. Applicants considered to be higher risk will pay higher premium prices and these can also be affected by the coverage amount selected by the applicant.

"Run-off" coverage can be added to the policy plan so that the professional is still covered when the business closes, or they decide to retire. This is due to third parties being able to sue years after the incident occurs, or even when the business has been closed for years. Run-off will provide protection in these circumstances.

If a professional decides against taking out an indemnity insurance policy, they will be responsible for paying any settlement fees out of pocket, as well as their own legal fees and perhaps that of the offended third party. This can run to thousands of pounds and in some cases, could affect the future of the business.

How about you all? If you are a business owner, do you have business insurance and/or professional indemnity insurance? Why or why not?

Share your experiences by commenting below!

Jacob's Thoughts - Listed below are my random thoughts as I was reading this article.

Personally, I have zero experience dealing with business insurance, so I cannot comment too much on the points in this article.
Overall, I think that having business insurance is a very good idea for most business owners.
However, before blindly deciding to take on this added insurance, you should make sure that the nature of your business warrants the need for this added protection and expense item.
For example, for my sole proprietorship that I have set up for my blog, I don't believe there is very great of a need for business insurance since 1) I don't have a separate physical office away from my home that needs to be protected, 2) have no employees to look after, and 3) I do not provide physical goods or services to customers/clients that I could be sued over if something went wrong.
Sure - there still exists the minute risk of me being sued for something like slander or using intellectual property without authorization, but there are many steps that can be easily taken to avoid/control these things. So, overall, I don't feel that I need business insurance just yet.
However, if I had a business such as a doctor's office or bakery, I would be much more apt to have a business insurance policy.

***Photo courtesy of http://www.public-domain-image.com/cache/people-public-domain-images-pictures/male-men-public-domain-images-pictures/employees-discuss-in-office_w725_h483.jpg

Tuesday, March 6, 2012

The Case Against Passive Investing

The following is a guest post by Rick from Invest In 2012. Enjoy!

The Case Against Passive Investing

I'm not much of a passive investor myself, as I like to get in and out of markets within just a few weeks. But with all due respect, I do know some people who are wealthy and are also passive investors. So, taking their opinions into consideration, here's my case against passive investing.

As a trader, passive investing is unappealing to me in two ways.

1) Your portfolio rises and falls with the markets. Naturally, I want every single one of my trades to be profitable, so I can't stand following the market's ebbs and flows.

2) Patience has never been a big virtue of mine. I might be able to wait up to a year for the right opportunity to come along, but no more than that. I can't just watch my portfolio sink 30% in one year. I feel like I have to do something about it.

But a lot of people are passive investors because they simply don't have the time to invest actively. Fine. But still, I don't think passive investing is very effective. Here are it's flaws.

Advocates of passive investing often cite the "over 40 years, the stock market moves up". That sounds great, but if you think about it, who can hold on to an asset for 40 years? Even 30 years seems like a stretch. Most passive investors and mom and pop investors don't hold for 50 years; they hold for 10 at most. The reason why markets fall and rise in extreme volatility is because it's very painful to hold onto a stock for 10 years and not realize any gains, so passive investors are lulled into selling at market lows!

And even if passive investors do intend on holding a stock for 40 years, many of them simply can't! While some people have the capacity to ride out an economic storm and buy on the dips, the majority of Americans can't. The next time the recession hits, or the next time they're out of a job: they have to make ends meet at home. Considering that the American savings rate is so low, the only way to rustle up some instant cash is to sell their equities portfolio! And as chance has it, you're most likely to be out a job at the bottom of a recession, when (non-coincidentally), stocks are also at market lows. Talk about bad timing. Passive investing asks you to buy when the market dips. And when the market dips badly, unfortunately, most passive investors (who work at a job during the day) don't have any cash to buy!

Also, stocks (just like everything else in this world) have cycles, usually lasting 15 years. Fifteen years of good times, and 15 years of bad times. So what happens if you get out of college, land a job, plan to start investing, but the beginning of a 15 year recession hits? You'd have to have the stomach to hang on during those 15 years and not see any profits! There's going to be a lot of really scary market crashes, which is why the end of a market crash is usually signalled by the panicked selling by a lot of buy-and-holders (no offense to the buy-and-holders out there).

So let's assume that you are a passive investor, and you've actually had the guts and the capability to sit back and hold on to your portfolio for 30 years. Now, you're 57 years old, and close to retiring. All of a sudden, the country plunges into a recession, and BOOM, 50% of your retirement fund is wiped out in a flash. At your previous annual growth rate of 7%, how long would it take for your portfolio to climb back above pre-crisis levels (adjusted for inflation)? A long time. Hence, it is not surprising that soon-to-retire passive investors were among the hardest hit in the 2008/2009 financial crash. While the young guy still has 20 or 30 years to grow his retirement fund, the soon-to-retire guy doesn't!

For every market winner, there's a market loser. For every dollar made, there's a dollar lost. Warren Buffett once said "If you don't know who the fool in the game is, it's probably you." If a laid back, passive investor is making money, who's the one that's losing?

And above all, as a passive investor, your fate is in the hands of the market. You'll be completely exposed to the ups and downs of the market.

How about you all? Do you follow a passive or active management style in your investing strategy? Why do you choose one method or the other?

Share your experiences by commenting below!

Jacob's Thoughts - Listed below are my random thoughts as I was reading this article.

Thanks for this insightful guest post, Rick! Even though I'm pretty devoted/convinced passive investor myself, I always like to hear different perspectives.
My thoughts on the various arguments mentioned in the post are listed below:

Since I realize that I have a fairly biased perspective on this topic, I welcome any and all feedback in the comments section below!

However, before we get started, I just wanted to point out that passive investing (at least as I have learned it) does not actually involve buying and holding individual stocks. Instead, this is avoided by purchasing shares of index mutual funds or ETFs that represent the entire market through a target asset allocation.

With this distinction in mind, let's continue.

@ Reason #1 why passive investing is unappealing -"1) Your portfolio rises and falls with the markets. Naturally, I want every single one of my trades to be profitable, so I can't stand following the market's ebbs and flows."

While it's absolutely true that with passive investing, you do have to bear the ups and downs of the market in a controlled way (through a target asset allocation - more on this in a second), this argument is not convincing to me because history has shown time and time again that it's HIGHLY unlikely that an individual person (or even investing professional) will have the foresight to make money 100% of the time on their trades, or even a high enough percentage of the time to make enough to stay ahead of the market returns over long term periods.
I'm not going to say that this never happens (i.e Peter Lynch, Warren Buffet), but it is rare, and it's even harder to predict ahead of time who these investing magicians will be.

@ Advocates of passive investing often cite the "over 40 years, the stock market moves up" -

From what I've seen so far, I do not believe you need 40 years in order to realize the benefits of passive investing over active investing.
Sure - a long period of 20 years may be needed in order to realize the historical average return of the stock market of around 10%, but I simply am not convinced that by using active trading, you can guarantee that you will make that kind of return either.
Thus, the main benefit (in my mind) of passive investing over active investing is that it saves investors from being their own worst enemy because history has shown that people are not able to time the market and/or buy and sell individual stocks in a way that enables them to beat the market return.

@ "Most passive investors and mom and pop investors don't hold for 50 years; they hold for 10 at most. The reason why markets fall and rise in extreme volatility is because it's very painful to hold onto a stock for 10 years and not realize any gains, so passive investors are lulled into selling at market lows!"

I had two general comments that came to mind when reading this portion of the article.
First, I think that my experiences have been fundamentally different than that described above. I know people that do hold on to index mutual funds in their retirement accounts for very long term periods, and so I am convinced that people have the resolve to do so.
Second, while it is true that the markets do rise and fall in a volatile nature, as a passive investor, the risk you expose yourself to is done so in a manageable way (in my opinion).

How is this done?
Easy - through target asset allocation percentages.
By choosing a mix of index investing instruments from different asset classes ranging from volatile (equities) to more secure (fixed income securities), you are able to control how much risk you expose yourself to.
For example, if you are the 57 year old soon-to-be retiree and are using an intelligent life cycle asset allocation plan recommended in any quality passive investing book, you will have no where near 100% stock exposure at that point in your life. Thus, you will not lose 50% of your assets overnight because the majority of your money will be in fixed income assets.

@ "And when the market dips badly, unfortunately, most passive investors (who work at a job during the day) don't have any cash to buy!"

Two arguments for this statement:
First, one could say that this reasoning applies to active stock picking too. If the market is going down and your stocks have dipped as well, you're not going to have excess cash either.
Second, the overall goal of passive investing is to maintain a set/target asset allocation at any one time between various asset classes (fixed income, real estate, equities).
So, in the case of a market dip (a big decrease in equity prices), what would actually happen is that your fixed income and other asset classes would become too large a percentage of your portfolio. So, what you would do is actually sell those shares to buy more equity shares during the dip. In this way, you wouldn't be drawing upon new money in order to buy more equity shares.

@ "Also, stocks (just like everything else in this world) have cycles, usually lasting 15 years. Fifteen years of good times, and 15 years of bad times. So what happens if you get out of college, land a job, plan to start investing, but the beginning of a 15 year recession hits? You'd have to have the stomach to hang on during those 15 years and not see any profits!"

Personally, I have never heard of recessions lasting 15 years.
For example, let's say that you landed your first job and started investing right when the recession started around Summer 2008 (actually, this was when I got my first job out of college).
If you used typical dollar cost averaging in order to invest money in your retirement fund in passive investing instruments each month, it would not have taken too long at all to start seeing a return on the shares that were purchased at very cheap prices during the market bottoms of March 2009, etc.
In other words, I don't think that it takes 15 years to see results from following the periodic investing strategy that most passive investors employ when saving for retirement.

***Photo courtesy of http://www.flickr.com/photos/twobears2/4252297559/sizes/l/in/photostream/

Monday, March 5, 2012

How to Save Money on ATM Fees

ATM fees, ATMs, cash, food and groceries, saving money, frugal living, guest posting

The following is a guest post by Anthony (a fellow Yakezie participant!) from Fiscally Sound. Enjoy!

How to Save Money on ATM Fees

I recently heard the argument for removing the penny from the US currency. It made me wonder if we will ever get to the point where we don’t have currency at all since so many people use plastic. I mean, if you have a (debit) card that represents your money, what else could you need?

Well, the problem comes in when you use that same card to get cash. At least that’s where the fees can come in, and they can add up too. It can turn a $2.00 ice cream fix into a $7.50 crime. Imagine you just want that ice cream fix but you don’t have cash. You are at a little ice cream stand that doesn’t take plastic, so you run to the closest ATM machine. They charge a $3.50 fee, but your bank also charges a $2.00 fee. But, you aren’t thinking about that. You are just thinking that it’s hot and you want some ice cream. When you sit down and do the math, that ice cream just doesn’t taste as good.

So let’s chat about how to keep that from happening. Here are some tips for reducing ATM fees.

Better Planning. If you use an envelope system for your budget, then you will either have the money or you won’t and if you stick to that, you will reduce random ATM runs.
Get Cash Back. If you are using your debit card for a purchase, there is rarely – if ever – a charge for getting cash back from your transaction. Do some pre-planning when you are going shopping and think ahead to see if you will need any cash.
Find a Fee Free ATM. You can do a Google search to find fee free ATM’s in your area, or you can visit AllPoint to find one of their fee free ATM’s. They also feature a mobile app for convenience.
Find a Better Bank. Some banks or credit unions offer fee free ATM’s and reimburse you for any out of network ATM’s. If yours doesn’t, it might be a good opportunity to switch banks.
Micro Emergency Fund. My dad taught me to always keep an extra $5, $10, or $20 bill in my wallet for the unexpected. That can really pay off these days, more so than when he recommended it.

In the end (and thankfully) cash is still king. I have not heard of anyone charging surcharges for using cash, yet.

Hopefully you found this helpful. If you want to put it in perspective, if you save one $3.50 ATM fee every week, that can add $182.00 per year to your savings. And if you compound that savings over 20 years at just 3%, you will have nearly an additional $5,000 in your retirement. Look, you just paid for your retirement cruise. :-)

How about you all? How often do you find yourself paying ATM fees for getting cash? Does it happen often, or only in rare occasions where you are in a bind/emergency? Does your bank charge you a fee to use the ATM?

In the future, do you think a fee will start being charged for using CASH?

Share your experiences by commenting below!

Jacob's Thoughts - Listed below are my random thoughts as I was reading this article.

Great post here, Anthony! Thanks so much for sharing it with us today!
It really breaks my heart when I am in a bar, restaurant, or convenience store and see someone using the "convenience ATM" within the establishment, as you can almost be assured that this person is paying a pretty hefty fee just to withdraw the small amount of money needed to cover their bill.
Personally, I think that in today's competitive banking environment, people should not have to EVER pay an ATM fee, as there is almost always some way to avoid it (except maybe when you are traveling abroad in another country - it's hard to get around it totally in that case!).
@ How I avoid ATM fees -

For the most part, Anthony covered the main ways I save myself from having to pay ATM fees.
First, my bank (Bank of America) does not charge fees in general to use the ATM. In fact, it seems that they prefer you to bank that way to save on cost of labor inside branches.
Second, I try to always carry around about $20-$30 in cash in my wallet at all times. I use this cash only in case of emergencies when credit cards/debit cards are not accepted.

@ Will there ever be a surcharge for paying in cash?

Anthony brings up an interesting idea to think about - will stores start charging a fee in order to pay with cash vs. paying with plastic?
With the funds infrastructure the way it currently is (I don't think it costs anything for a store owner to go to the bank and withdraw cash to use for change, etc), I think we're still a good ways from this happening.
What do you all think about this question?

***Photo courtesy of http://www.flickr.com/photos/z0/5544921651/sizes/l/in/photostream/

Saturday, March 3, 2012

The Permanent Portfolio by Harry Browne - Component Returns Correlation Analysis and My Future Plans

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This past Monday, Flexo from Consumerism Commentary was very gracious to feature a guest post written by me analyzing whether or not investors can/should use the late financial adviser, Harry Browne's, Permanent Portfolio asset allocation strategy as a way to obtain market-beating returns. If you haven't yet read the post, you can stop by and have a look at the link below:

Can Investors Use The Permanent Portfolio to Beat the Market?

In order to improve the ease of reading and keep the focus centered in the guest post, I decided not to include several side analysis portions of the original piece I put together when I was researching the Permanent Portfolio topic. As such, the purpose of this post will be to fill in some of these gaps and give some added information on the following subject areas relating to the Permanent Portfolio that were not included in the guest post:

A correlation coefficient matrix analysis of the returns of the various components of the Permanent Portfolio I defined the the Consumerism Commentary guest post.
An explanation of my future plans for using the Permanent Portfolio, given the conclusions I arrived at in last week's guest post above.

What is the Permanent Portfolio? - A Quick Review

For those of you that are hearing about the Permanent Portfolio for the first time, I just wanted to give a quick review about what it involves/does not involve.

Permanent Portfolio Goal: There are two types of money - money that you can afford to lose and money that you cannot afford to lose. The goal of The Permanent Portfolio is to provide safety and stability to the money you cannot afford to lose in any economic climate.
There are four broad movements to cover pretty much any economic climate - prosperity, inflation, tight money/recession, and deflation.
The Permanent Portfolio is a passively managed asset allocation strategy constructed by components in such a way that at least one component is favored by any of the broad movements mentioned above. The Portfolio components are as follows, each carrying equal weight for as long as you hold the Portfolio:

25% in stocks, which do well in times of prosperity. Harry recommends that an investor select three index mutual funds to make up this portion of the portfolio. However, index mutual funds and ETFs have improved in recent years, and I now believe that an investor could do this quite effectively with a single fund. It's important to note that he only mentions that the components should "represent the entire market." He did not specify whether or not this meant the entire international stock market, or just that of the US. We'll touch on this more below:
25% in gold, which does well in times of inflation, in the form of buying actual bullion coins.
25% in bonds, which increase in price during times of deflation, in the form of actual 30 year year long-term US Treasury Bonds.
25% in cash, which does well in times of tight money/recession when interest rates rise. Harry recommends investing in a money market mutual fund that invests only in short-term US Treasury securities.

Rebalancing - Harry recommended that the portfolio be rebalanced once a year back to the 25% allocation targets, but only if a specific component is greater than +/- 10% off from target.

Before we move on, I think it's important to realize that Browne's goal for creating The Permanent Portfolio was not, in fact, to create a strategy that would beat the market; it was to provide safety and stability to the money you deem that you cannot afford to lose.

"Refined" Permanent Portfolio Component Return Correlation Coefficient Matrix Analysis

In the guest post, after reviewing existing studies that have analyzed the Permanent Portfolio and defining areas where I'd like to improve the analysis to make it more convincing to me personally, I examined the performance of the "Refined" Permanent Portfolio (consisting of the components listed below) compared to a 100% stock and 75% stock/25% bond portfolio.

25% in stocks – Vanguard S&P 500 Index Fund (ticker symbol: VFINX).
25% in gold. Vanguard Precious Metals and Mining Fund (ticker symbol: VGPMX).
25% in bonds. Vanguard Long-Term Treasury Fund (ticker symbol: VUSTX).
25% in cash. Vanguard Short-Term Federal Fund (ticker symbol: VSGBX).

However, aside from overall return performance (shown in the Consumerism Commentary guest post), yet another very fascinating aspect of The Permanent Portfolio from a Modern Portfolio Theory and diversification perspective is that it's one of the most diversified portfolios one could possibly find.

What does the fact that this "Refined" Permanent Portfolio is highly diversified indicate for investor returns? Essentially, this means that the returns of each of the components of the Portfolio (stocks, bonds, precious metals, and cash) move in directions independent of one another. In other words, when one of the assets is going down in price, another one is increasing or staying the same, thus preserving your capital as an investor. Perhaps not by coincidence, this is exactly what Harry Browne was aiming for when he constructed the Portfolio components.

This diversification can be readily observed by examining the table below. Shown in the table are the correlation coefficients of the respective annual returns of the various "Refined" Permanent Portfolio components (measuring the extent to which the annual returns are related) over the past 20 years. Values that are further from 1.00 indicate lower degrees of correlation between the returns of each component.

As can be seen in the table below, the majority of the components have correlation coefficients between each other of less than 0.20, with three of the relationships having negative correlations. The highest correlation coefficient is 0.68 between the two fixed income assets, long-term bonds and short-term bonds, which is somewhat to be expected since they are in basically the same asset class/family.

Permanent Portfolio, Harry Browne, asset allocation, passive investing, Treasury Bonds, individual stocks vs. mutual funds, index funds

My Future Plans With The Permanent Portfolio

After performing the analysis and listing my conclusions in the Consumerism Commentary guest post, I ultimately conclude that I believe few investors (myself included) will have the resolve to stick with the Permanent Portfolio strategy long-term, due to the low correlation that the strategy has with the overall stock market.

As such, I do not plan to fully adopt The Permanent Portfolio in my investing strategy. However, I was intrigued enough by this technique and convinced of its efficacy to adopt it in a smaller manner.

Listed below is how I have adopted this technique to my investing strategy in this limited fashion (test run) using <1% of my overall investing funds.

It's important to note that since I'm adopting this investing strategy using a relatively small amount of funds, I elected to use ETFs instead of mutual funds, since ETFs do not carry the $3000 minimums that many mutual funds do.

Stock Portion - 17.5% of portfolio funds invested in the Vanguard Total Stock Market ETF (ticker symbol: VTI) and 7.5% of portfolio funds invested in the Vanguard Total Int'l Stock Index ETF (ticker symbol: VXUS). These ETFs invest in securities in a manner that tracks the performance of the broad US and all-world ex-US stock indices, respectively, and therefore, represent the entire market, as Browne intended.
Gold Portion - 25% of portfolio funds invested in the iShares Gold Trust ETF (ticker symbol: IAU). This ETF's goal is to match the price movements of physical gold bullion. I had considered using the other gold ETF, GLD, but I found that it's expense ratio was higher than the iShares ETF.
Bond Portion - 25% of portfolio funds invested in the Vanguard Long-Term Gov't Bond Index ETF (ticker symbol: VGLT). This ETF tracks the price movements of an index of long-term (>10 years) US Treasury and US Government agency fixed-income securities
Cash Portion - 25% of portfolio funds invested in the Vanguard Short-Term Gov't Bond Index ETF (ticker symbol: VGSH). This ETF tracks the price movements of an index of short-term US Treasury and US Government agency fixed-income securities.

Since adopting this "test run" of the Permanent Portfolio in mid November 2011, it has returned ~3.5% vs. a ~13% return of the S&P500, but with nearly half of the volatility/standard deviation, as would be expected with the Permanent Portfolio. It will be interested to keep following the progress of this small test run of the Portfolio!

The complete set of calculations of the historical performance of the "Refined" Permanent Portfolio, correlation coefficients matrices, and price history of the proposed ETF Permanent Portfolio analyzed in this post and the Consumerism Commentary guest post can be accessed and downloaded at the Google Docs Spreadsheet link below: Note: All performance data was sourced from Yahoo Finance.

Permanent Portfolio Analysis - Google Docs Spreadsheet

How about you all? What are your thoughts about The Permanent Portfolio strategy and concept? Do you think that it will continue to perform well in the next 20 years?

Do you feel it's something you would implement in to your investing strategy, given the body of evidence available? What do you think about my idea to give it a small test run?

Share your experiences by commenting below!

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