Queercents

Growing up, we never discussed the stock market. It just wasn’t part of my household, my neighborhood, or (to my recollection) the national zeitgeist.

My parents probably had some money tucked away in a mutual fund or two that were recommended by my Uncle. The Sunday newspaper had a thick section filled with the weekly summary of stock and mutual fund trading values printed in impossibly small print. The subject was a foreign language, full of arcane symbols.

The only investments ever discussed were savings accounts and certificates of deposits. I would take my birthday money to the bank along with my savings passbook. The clerk would fill out the deposit slip and enter the deposit amount in the passbook, initialing the entry.

Growing up with inflation

The bank paid 5% on deposits. We never shopped around for a better rate, because it would have been too inconvenient to travel elsewhere to transact business. During my high school years, inflation grew to 5%, then 7%, then 10%, finally reaching a peak of 13.5% in 1980. As I recall, the bank continued to pay about 5% on my savings. Even with my measly high school math I knew I was losing ground. Inflation was the story of the day. It dominated the nightly news. President Ford encouraged the nation to “Whip Inflation Now,” with his big red WIN buttons.

I don’t mean to bore you with tales from this old geezer’s childhood. I’m telling you this in case you are too young to have lived through inflationary times. Read the rest of this entry »

“The next thing I say to you will be true. The last thing I said was a lie.” — Devo

Two weeks ago, I wrote about my Three-Minute Portfolio based on low-expense-ratio index funds. That’s a great way to put your investments on autopilot. However, an index fund, by definition, will never beat the market.

If you’re willing to put a little time and attention into your investments you can make a portfolio that will (probably) do a bit better than the market.

Didja’ notice some wishy-washy words in that last sentence?

• “Probably”: No one can guarantee you returns that beat the market. Anyone who does is related to Bernie Madoff.
• “A bit better”: This is not a get-rich-quick scheme, it is a way to consider other sensible investments.

That being said, it is reasonable to consider what you would choose if you want to reach a bit beyond index funds.

A sensible place to look is to use Morningstar’s rating system. They rate all mutual funds from one to five stars. The worst 10% of all funds rank one star, 22.5% rank two stars, 35% rank three stars, 22.5% four stars, and the best 10% rank five stars. The funds are grouped by category (e.g. US Large Cap) and adjusted for risk. Read the rest of this entry »

“The perfect is the enemy of the good” — Voltaire

“I’m finally ready to begin investing, but I don’t know where to begin. Stocks. Bonds. Mutual funds. ETF’s. It’s all very confusing. I have some cash in a savings account, but I want my money to work harder. What do I do?”

The premise

Getting started with an investment portfolio doesn’t need to be difficult. The following steps will take you to a solid, low-cost, easy-to-maintain portfolio. You might not end up challenging Warren Buffett for the title of World’s Best Investor, but you’ll sleep well, and you won’t spend every waking hour worrying about your investments.

Well-managed index funds have low expense ratios, since you’re not paying anyone to scout out the world’s best companies. All the manager does is maintain a portfolio of stocks or bonds as indicated by the index, whether it’s the S&P 500 or the MSCI EAFE.* Mutual funds (including index funds) give you a little bit of ownership of hundreds of companies. If one company stumbles, you won’t lose too much money; conversely, your returns are not going to “hit it out of the park.” The idea is to move up and down with the market, with the assumption that in the long run, there will be more up than down. Read the rest of this entry »

Now I know this post will bore the hell out of some of you, but at this time of year it’s important to take stock – no pun intended – of how your investments are doing related to overall market, currency and commodity performances. Since it’s nearly September (in New York known as “get back to work time”), you’ll want to see which of your holdings have gone gangbusters and, perhaps, take a more offensive position, if you like risk, or a more defensive position to protect gains achieved in the last eight months.

Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research, wrote in a recent report that while the United States is showing signs of economic stability, even more positive signs are coming from companies abroad – especially emerging markets.

“As a result, we believe US investors can take advantage of this opportunity by shifting some assets into the more globally exposed sectors. As this story becomes more well-known, the trade can get played out, but we see signs that there is still further to run. Read the rest of this entry »

The other day I did my research on 529 plans and yesterday I spoke with my financial advisor. The first thing I learned was that California doesn’t offer a state income tax deduction for 529 plans so there’s isn’t any advantage to go with our state’s plan. If your state does offer this, then check the fine print. Most states place an annual cap on the amount of the deduction and some impose income limits (so make sure you qualify).

I already knew that an advisor-managed plan would cost us more in ongoing fees and upfront charges. In our case, the upfront (or “front-end”) load is 5 percent. This means that each month with the $400 we invest, $20 immediately goes to fees, which leaves $380 to invest. Obviously, this detracts from our returns over time but the trade off is that she’s actively monitoring the plan’s performance and guiding its allocation of investment options. Hopefully, this means it will perform better than if I managed it. For me personally, I think that’s worth the 5 percent.

We’ve settle on one of the two plans that my advisor recommended: CollegeChoice Advisor. Read the rest of this entry »

My financial advisor scheduled my midyear review for tomorrow. In addition to our general discussion, I told her that I needed advice on 529 plans and saving for Sam’s college education. I figured it would help if I did a little research on my own so I could speak intelligently about the program and ask the right questions. Here’s what I learned:

Definition of a 529 saving plan: A plan that gives me the opportunity to contribute to a tax-deferred account established for our son (known as the named beneficiary) that’s invested in a savings vehicle, such as stock or a mutual fund.

How much do I need to save:

Child’s Current Age: One year old (or younger)
Average Cost Private College: $257,543
Average Cost Public College: $118,312

Click here to see cost estimates if your child is older. Or click here for World’s Simplest College Cost Calculator and finally click here for a more advanced version with columns for multiple children.

How can we save at least $200,000 in the next 18 years? Using this calculator, I put in the following: Read the rest of this entry »

Asset allocation is perhaps the most important consideration when designing an investment portfolio. Selecting an appropriate mix of stocks, bonds, and cash and maintaining the proportions through regular rebalancing, is about as sure-fire a winning strategy as it gets.

And the online financial service firms are there to help, right? If I just follow the directions on the website, it’ll be easy as pie, right? Wait a minute, hombre, not so fast. Let’s compare the offerings of three large online services: Schwab, Fidelity and Morningstar.

What exactly is “aggressive”?

The first step in selecting an appropriate asset mix is to determine what “investing” style matches your investment time horizon and your tolerance to risk.

If you’re nearing retirement, you want to have a more conservative portfolio than if you’re just starting out. Workforce newbies have the most to gain from a high-risk-high-gain allocation, and more time to recoup, should the markets sour. Likewise, if you’re the type who loses sleep when the markets see-saw, you might be more comfortable with a lower volatility portfolio, and accept that you might have to work an extra year — that may be a good trade-off for you. Each website offers a walk-through questionnaire to help you evaluate where you fit on the spectrum of risk tolerance. Read the rest of this entry »

I read the Queercents Weekly Roundup by Elizabeth yesterday and couldn’t resist her pointer to check out Kiplingers list of 20 ways to waste your money. One in particular caught my eye:

8. Pay too much in taxes on investments. Are you investing in a tax-sheltered 401(k) or Roth IRA? If you’re not maxing out those accounts before you invest in a taxable account, you’re spending too much.

Now I’ve seen this suggestion a hundred times before and, in fact, as a financial coach, I’ve probably given this suggestion a few dozen times. For many people this is fine advice. But it presupposes a number of important things.

1. It is actually possible TO max out your 401k AND contribute to a Roth IRA.
2. There are no options for tax efficient investing in a taxable account.
3. You are making so much money that item 1 is possible and you are in a high tax bracket.
4. You won’t be wanting to use that 401k money until you are “retired” at the age of 59 ½ or older.

There was a time when I was working full time with a nice salary, suitable business wardrobe, a new car, a house full of new furniture, 2 weeks vacation, little time to cook and the means to eat out. I did max out my 401k for a few years and I’m glad I did. Of course I was also miserable, exhausted and sick frequently.

My life today is nearly the opposite of this. Read the rest of this entry »

Until I read this book, I believed that individual investors shouldn’t be buying individual stocks. Jumping into the market can be daunting, especially this particular bear market.

So if you’re interested in learning more about buying and selling stocks or still learning like me, then here’s an excellent site that simulates the online trading experience. It’s called WeSeed and it’s designed to help people develop their investing skills without the risk of losing real money.

Everything else about it is real:

WeSeed has real stocks, real prices, and real companies. It’s the money that isn’t real, which means you don’t have to worry about that pesky thing called risk. By creating a safe, risk-free area that has all the other real parts of the stock market, WeSeeders can explore and feel free to make mistakes.

They encourage you to start with something you know and the home page breaks up companies into mini-markets: Read the rest of this entry »

Didja’ ever notice that how you measure something sometimes changes the outcome?

In the 1980’s CEO’s compensation changed from a salary-and-bonus plan to being directly tied to the stock price, and voila, stock prices rose. The companies weren’t necessarily managed any better, but since stock price was suddenly the important metric, it improved.

A similar effect can be seen in Massachusetts schools which are ranked by statewide tests (MCAS). An increase in the scores, doesn’t necessarily mean that the students are any smarter, but they are doing better at passing the exams, leading to much discussion about “teaching-to-the-test.”

Likewise, many financial advisors are paid by a percentage of assets under management. The rate is typically 0.5-2.0% per year, where the low end of that range is for account values north of $1M. If you have $200,000 in an advised account that charges 1.5%, you pay $3,000 per year for that advice.

Not only do I think that’s an awful lot of money, it isn’t judging the right metric. Sure, I want my investments to grow, but what I really want is my net worth to grow. Designing the advisory fee around just one aspect of your net worth focuses their activity around just your investment — typically brokerage — accounts. Read the rest of this entry »