According to Google, Yahoo, and Morningstar, it’s yield was a little over 3%.

Wait a minute… Over 3% for a tax-exempt bond fund? In the current interest rate environment? Really? Yes, really. Well, sort of. Not all yield estimates are created equally.

Upon further investigation, Vanguard was listing the yield as 1.57%. The difference? Both Google and Morningstar were reporting the so-called “distribution yield” whereas Vanguard was reporting the SEC yield.

Looking back with the distribution yield

The distribution yield is calculated as the total amount distributed over the past 30 days divided by the current net asset value (NAV) and then annualized.

In other words…

Divide the distribution amount by the NAV, multiply by 12, and then multiply by 100 to turn it into a percentage. Simple enough.

Note that it’s also possible to estimate the distribution yield over the past 12 months (sometimes referred to as the 12 month yield) in a similar fashion. In this case…

Divide the sum of the distributions from the past 12 months by the NAV and then multiply by 100 to turn it into a percentage. Again, pretty simple.

So, in both cases, the calculation is looking backward and focusing solely on the amounts that have been distributed relative to the current price. Not surprisingly, this isn’t a particularly good predictor of future returns.

Looking ahead with the SEC yield

The SEC yield is a bit more complicated, but the end result is a value that’s analogous to the yield-to-maturity (YTM) of an individual bond. In other words, the SEC yield gives you a more realistic estimate of total returns going forward.

Instances where the distribution yield is higher than the SEC yield are generally due to a fund holding bonds that are trading above par due to their higher-than-current yield. So yes, they’re currently paying out nicely, but that will be partially offset by a price decrease as they approach maturity.

In other words… If you’re looking to invest in a bond mutual fund and want to make an apples-to-apples comparison, you should focus primarily on the SEC yield when evaluating your options and setting your expectations.

The post Dividends: Distribution Yield vs. SEC Yield appeared first on Financial Ramblings.

And when I do, I can’t help but roll my eyes.

If you’re interested in picking stocks, there are plenty of things to consider, but the dividend payment date shouldn’t be one of them. Seriously. Ignore it.

If you’re disciplined enough to build a portfolio capable of supporting your income needs in retirement, then you’re disciplined enough to manage your cash flow.

Think of it this way…

Dividends are (typically) paid quarterly. That means that, at worst, you’ll be receiving dividend payments every three months. Consider the hypothetical case of a $1M portfolio with a 3.6% yield — or $36k/year in dividend outcome.

That works out to an average of $3k/month.

At best, if things work out just right, you’ll get exactly $3k/month. At worst, you’ll get $9k every three months. In the latter case, simply deposit the dividend payments in a dedicated savings account and pay yourself $3k/month.

There. Problem solved, and you didn’t have to let something as inconsequential as the dividend payment date influence your stock selection.

Sorry, but deferring to the calendar when selecting your investments is just dumb.

And no, I’m not advocating dividend investing as a preferred strategy, nor I am suggesting that you start picking individual stocks.

Note: If you must know, it was an article from Kiplinger.

The post Dividend Investing: Payment Dates Don’t Matter appeared first on Financial Ramblings.

But how do you decide when to rebalance? While it’s good to keep things in check, there’s no sense in going overboard.

While some re-balance at set time points (e.g., annually), we’ve decided to use tolerance bands. Thus, as long as things remain mostly in line, we just leave well enough alone.

Portfolio drift: how much is too much?

Mostly in line. What exactly does that mean? Well… As long as things stay within 5% of our targets, we don’t make any changes. We do direct new money to whatever happens to be underweight, but we don’t actively rebalance within that range.

There’s nothing particularly scientific about these boundaries, 5% is just a nice, round number. If you prefer to use 3% (or whatever), that’s okay. The point of these rules is to enforce consistency and to take the emotion out of your decisions.

So, given our current targets of 60% stocks and 40% bonds, we tolerate anything in the range of 55-65% stocks — and, conversely, 35-45% bonds.

But we don’t stop there…

Since we subdivide our equity holdings into domestic vs. international and our bonds into “regular” vs. inflation-indexed, I also look within classes. It’s possible for these ratios to get out of whack even if the overarching 60/40 remains within bounds.

Given our 2:1 target of domestic-to-international stocks, we tolerate anything between 62-72% for domestic (and 28-38% international). The same goes for bonds, where we target a 2:1 ratio of regular-to-inflation-indexed bonds.

Putting our plan into practice

That’s all well and good, but with multiple accounts and a desire to keep things relatively simple, how do we keep track of everything? While we could use a tool like Vanguard’s Portfolio Watch or Personal Capital, I use a simple spreadsheet.

I use Google Docs, though Excel or Open Office would work. On Sheet 1 (Overview), I have the high level overview with multiple sections — one for the overall stock:bond breakdown, one for the domestic:international breakdown, and one for the regular:inflation-indexed breakdown.

On Sheet 2 (Data), I have the raw data. This is again broken into sections, and there is a row for each type of holding in each of our accounts. And Sheet 3 (Allocation) holds our targeted allocations — 60/40 overall, and 67/33 within each division.

Note: I’ve kept the allocation information as separate variables instead of hard-coding it into the various equations. Thus, I’ll be able to easily change these values. if/when we change our target allocation.

So it works something like this… Roughly once a month, I update the the Data sheet. I grab the numbers from Moneydance, where they’re nicely summarized on a per-account basis, so this step only takes about a minute to complete.

Our balances are then summed in the appropriate sections on the Overview sheet, which calculates the proportional breakdown across asset classes as well as our targeted dollar amounts. These latter values are based on our total holdings and the percentages from the Allocation sheet.

The Overview sheet also includes a column that compares our actual holdings to our targets and, using conditional formatting, flags things that need attention. In short, this involves telling it to color cells with a deviation in the -4.999% to +4.999% range green. Beyond that, it colors them red.

While this took about half an hour to set up the first time through, everything now auto-calculates so all I have to do is punch in a few numbers on the Data sheet, and then flip back to the Overview to see if anything is coming up red. If there is, it’s time to rebalance. If not, I continue on my merry way.

Update: You can now access a generic version of our asset allocation spreadsheet. It’s available in both Excel and OpenOffice format.

I know this was a somewhat convoluted explanation, so… If you’re interested in seeing the actual spreadsheet (minus our actual numbers, of course), I can try to make a generic version available click the link immediately above.

The post Deciding When to Rebalance Your Investment Portfolio appeared first on Financial Ramblings.

Sure, the season technically kicked off Wednesday when the Cowboys beat the Giants, but today is when it really gets rolling.

For starters, an article on AdWeek argued that fantasy football is a $5 billion business, with the majority of the benefit going to advertising and media companies.

When all is said and done, I suspect that the true impact is considerably larger, as the fantasy football craze has helped drive the huge popularity (and profitability) of the NFL itself. Unfortunately, these indirect impacts are hard to measure, and it’s also difficult to separate cause from effect.

But it’s not all good news, as an estimated 22.3 million employed fantasy football “owners” spend at least an hour a week managing their rosters. Given an average pay rate of $19.33/hour (according to BLS statistics) that works out to just short of $431 million in lost productivity per week.

Looking across a typical 15 week season* that adds up to somewhere in the neighborhood of $6.5 billion in lost productivity. Here again, the impact is probably greater given that the numbers above were based only on average pay rates and didn’t include the costs associated with other benefits.

Then again… It’s been argued that things like fantasy football are a positive influence in the workplace, as they increase camaraderie amongst employees, create opportunities for making business contacts, etc.

What do you think? Do things like fantasy football, March Madness pools, etc. have a net positive or negative impact from an economic perspective?

*Note: Yes, the NFL regular season runs 17 weeks, but fantasy leagues tend to wind down early so as not to be impacted by things like teams resting their starters after clinching their playoff spot.

The post The Economic Impact of Fantasy Football appeared first on Financial Ramblings.

I had driven to the airport and all seemed well when I parked and headed to my flight. But, upon my return, my tire was dead flat.

Upon closer inspection, I discovered it had been punctured by a screwdriver and it wouldn’t hold air. I thus had no choice but to put on the mini-donut spare tire and limp my way home. The next day, I took it to the tire shop and learned that it was beyond repair.

Since this is a relatively new car, it still had the original tires on it. Thus, no road hazard protection from the tire dealer. The good news was that since the tires were so new, I could get away with replacing just the one.

I called around town and finally found a place that could get the right tire in relatively short order. But at a cost. The replacement would cost around $170 with another $30 or so for mounting, balancing, etc.

So… A total cost of roughly $200. Not terrible, but I’d obviously rather not have to pay it. With that in mind, I decided to call our insurance agent and find out about the possibility of them covering the cost.

Tire damage and insurance coverage

I called our insurance agent’s office for details and the woman that I spoke to said she’d need to call an adjuster to find out for sure. She took down the details and promised to get back to me later in the day.

When she eventually called back, I was pleased to learn that they would be willing to cover the damage as a comprehensive claim.

“The reason we’ll do that,” she explained, “is that we can’t tell for sure how the damage happened.”

Like I said above, it was driving fine as I pulled into the parking lot. But when I got back? Flat. So either I ran over a screwdriver just before parking or someone shanked my tire while I was away. I’m not sure which, and neither are they.

“Since it seemed to be okay when you left it, we’re assuming that it was an act of vandalism,” she continued. “And vandalism is covered as a comprehensive claim.”

That’s great!

Our policy has a $0 deductible for comprehensive claims so there should be no out-of-pocket cost. Moreover, because comprehensive claims aren’t considered to be your fault, they (typically) have no effect on your premiums or insurability.

But what if it I had hit a pothole or it had obviously been due to road debris? I didn’t get that info at first, so I wound up calling back to check. I’ve gotta get the whole scoop for you guys, after all.

Potholes, missiles, and road debris

When I got him on the phone, our agent explained that something like hitting a pothole would be considered a “roadbed collision” and would be covered as a collision claim. In that case, we’d have to meet the deductible before insurance would kick in, and it would also show up as a black mark on our claims record.

If, on the other hand, something had flown off a truck and damaged our car — let’s say a ladder flew back and punctured our radiator — that would be a comprehensive claim. When something’s in the air, it’s considered a “missile” and you’re not at fault if you hit it (or it hits you).

But if that same ladder had come to rest on the ground and I tore up a tire or our undercarriage running it over, it would move back over to collision. Thus, I’d be on the hook for our collision deductible and we’d be at risk of a premium increase.

Summary (the TLDR version)

So… To make a long story short: if it’s vandalism, your comprehensive coverage kicks in. If it’s damage from a flying object, it’s likewise a comprehensive claim. But if you run something over, you’ll have to claim it against your collision coverage.

In our case, since it’s a comprehensive claim, and since we have a $0 deductible for such claims, I’ll report it. If it was a collision claim, I wouldn’t even consider filing unless the cost of the damage far outstripped our deductible.

The post Does Car Insurance Cover Tire Damage? appeared first on Financial Ramblings.

Overall, I was struck by how complex they made an otherwise simple concept sound. I thus thought I’d share some thoughts on the matter.

For background, dollar-cost averaging (DCA) refers to investing a chunk of money in equal dollar amounts over time as opposed to doing a lump sum, all-at-once investment.

Dollar-cost averaging has been billed both as a way to get more for your money (you automatically buy more shares at lower prices and fewer shares at higher prices) and as a strategy for reducing risk.

But those who think that DCA is a magical strategy that will improve their returns are mistaken. It won’t. In fact, on average, it does just the opposite.

The effects of averaging

Consider the following questions:

Q: Which has higher expected returns, stocks or cash?
A: Stocks.

Q: Which has higher volatility, stocks or cash?
A: Stocks.

Q: What effect will having less money in the market (and more in cash) have on your (expected) returns?
A: It will reduce your (expected) returns.

Q: What effect will having less money in the market (and more in cash) have on the volatility of your portfolio?
A: It will reduce portfolio volatility.

Q: And what effect does DCA have on your portfolio?
A: It reduces the amount of money you have in the market during the averaging-in period.

So, during the averaging-in period, DCA will reduce your expected returns, though it will also reduce risk. This is the classic risk-return tradeoff. Your portfolio will be (temporarily) more conservative than if you gone straight to your preferred allocation, so it should come as no surprise that you’ll get lower (expected) returns.

Risk vs. regret

This brings us to another point. Consider the following scenarios:

1. You receive a large cash windfall and your preferred allocation is 60/40 stocks-to-bonds. What do you do? Put it straight into the 60/40 allocation? Or dollar-cost average into the market over time?
2. You receive a large windfall that happens to already be in your preferred 60/40 allocation. What do you do? Leave well enough alone, or sell it (ignore tax implications, please) and then average back in over time?

For many people, their answers will differ. But why?

A: Psychology. I would argue that many people are more regret-averse then they are risk-averse.

So, when handed a pile of cash, many people will opt to dribble the money into the market to avoid the possible regret associated with making a big move just before the market dives.

And when handed an already-allocated portfolio, many of these same people will leave well enough alone. If you don’t act (or don’t take big actions) you’re less likely to do something that you’ll regret.

Note: I’m ignoring the possibility that the windfall will change you need (or desire) to take risk, and thus change your preferred allocation. That’s certainly possible, but it’s another topic entirely.

In my experience, people don’t view inaction as an action even though it really is — i.e., they’re choosing not to act. So if inaction (or slow action) ends up being a mistake, there’s not the same level of regret attached.

Similarly, I suspect that many people feel the pain of losses more acutely than the joy of gains. So avoiding a potentially large loss at the expense of likely gains is perhaps a reasonable tradeoff for many.

The way forward

So what should you do? Mathematically, you should invest in your preferred allocation from the start. If you’re not comfortable doing so, then perhaps you don’t really prefer your “preferred” allocation. It may be too aggressive.

But more than anything, you should do in the short-term whatever prevents you from doing something stupid in the long-term. If going all-in might cause you to panic and do something stupid if the market turns against you, then perhaps you should DCA.

In other words, at the end of the day, you should do what works for you.

The post Thoughts on Dollar-Cost Averaging appeared first on Financial Ramblings.

As I’m sure you’re aware, there’s pressure in a number of states to reduce or abolish personal income taxes.

In general, the argument in favor of doing this has been that states without such taxes outperform the rest of the country, and that this out performance is due to the lack of income taxes.

But is that actually true? Well… A careful look at the data suggests otherwise.

As it turns out, states with the highest income taxes have seen more per capita economic growth and less decline in (real) median income levels over the past ten years than states that lack an income tax.

As for the job market, unemployment rates don’t appear to vary across states as a function of their income tax status.

The study concludes that:

“Residents of the states that levy income taxes – including residents of those states with the highest top tax rates – are experiencing economic conditions at least as good, if not better, than those living in [other] states.”

They further state that earlier arguments to the contrary are fundamentally flawed because they were based on cherry-picked, aggregate data.

So does this mean that state income taxes spur economic growth? Perhaps. An argument could certainly be made that by investing in public education and infrastructure, states are positioning themselves for success.

Then again, as we all know, correlation doesn’t necessarily imply causation.

In this light, one could argue that the observed patterns are indicative of something else entirely. For example, maybe those states that employ an income tax (or have higher rates) enjoy other advantages that allows them to succeed despite the added tax burden. Seems plausible, right?

Well, the opposite may be true. States without income taxes have often chosen that course because they possess unusual advantages – abundant natural resources, federal military spending, or even favorable climates that spur tourism – that allow them to raise revenue and grow their economies in ways that other states can’t.

Anyway, I thought this was an interesting bit of contrarian data given that so many people take it as gospel that tax cuts necessarily spur economic growth.

Source: ITEP.org

The post The Economic Impact of Income Taxes appeared first on Financial Ramblings.

Pretty slick. If you know any tax evaders and want to doing something similar, read on…

Note: Yes, I realize that it’s extremely unlikely that any of you will have this sort of knowledge but… It still makes for interesting reading (at least to me).

So who qualifies and how does this work?

For starters, the IRS “may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the non-compliant taxpayer.” They go on to state that they’re looking for solid info, not educated guesses or speculation.

There are two types of awards. In general terms, if the amount recovered exceeds $2 million and the taxpayer (non-payer?) has an annual gross income of at least $200k, the tipster is eligible for 15-30% of the money collected as a result of their information. These submissions are processed under IRC 7623(b).

In cases where less than $2 million is in question and/or the taxpayer has an annual gross income of less than $200k, IRC 7263(a) applies. This regulation allows for a maximum award of 15% (capped at $10 million), at the discretion of the IRS.

Honestly, I don’t understand why the annual gross income of the accused comes into play. If I turn in a deadbeat and the IRS recovers $3 million, why does it matter how much the cheater earned in any particular year? I guess they have their reasons.

To file a claim, you need to complete and submit IRS Form 211. Also note that all claims are submitted under penalty for perjury, so don’t go making stuff up in hopes of snagging some cash or getting someone in trouble.

Source: IRS.gov

The post IRS Whistleblower Program: Who Qualifies and How it Works appeared first on Financial Ramblings.

Not only that, but she’s been spending a lot of time volunteering at the school so she might as well get paid for her time. Right?

So… How much do substitute teachers earn? Well, let’s just say that she’s not doing it for the money… In our area, substitute teachers earn $50/day. I have no idea if this is anywhere near the standard, but there’s no shortage of substitute teachers around so no real need to increase the pay rate.

Given that she’s expected at the school by 7:30AM and that the school day ends at 2:30PM, that works out to $7.14/hour — $0.11 less than the current federal minimum wage of $7.25/hour. And that ignores that subs have to see the kids out to the bus at the end of the day, extending the workday by 10-15 minutes.

Honestly, I’m not sure how they get away with this. She’s a W-2 employee, not a 1099 contractor, so I’m guessing that they’re calculating the workday from the opening bell to the closing bell, and ignoring the fact that subs are expected to be there a bit early and stay a bit late.

Assuming that to be the case, the workday technically spans 6.75 hours, resulting in a pay rate of $7.41/hour — slightly more than minimum wage. Regardless, it’s a pretty sad state of affairs when a substitute teacher gets paid so little.

Oh well, she’s been enjoying herself, she likes the flexibility, and we’re not really dependent on the extra income, so it works for us. Plus, it gives her a chance to try out a line of work (teaching) that she might like to pursue as our kids grow up.

The post How Much Do Substitute Teachers Make? appeared first on Financial Ramblings.

With that as my inspiration, I decided to crunch some numbers and chart the data. I started by hitting up the DOL for a listing of the historical minimum wage rates. I then plugged the numbers into the BLS inflation calculator to get inflation adjusted values (in 2012 dollars). Links to the data sources are at the end of this article.

Origin of the minimum wage

For background, the federal minimum wage was enacted during the Roosevelt administration in 1938 under the Fair Labor Standards Act. At the time, employers were required to pay a minimum of $0.25/hour, which works out to $4.06/hour in inflation-adjusted (2012) dollars.

Note that 45 states have minimum wage laws of their own. When the state and federal rates differ, the higher value applies. In 19 states (plus Washington DC), the state rate is higher than the federal rate. In 22 states, the state rate matches the federal rate. And in 4 states (plus Puerto Rico), the state rate is lower than the federal rate (and thus doesn’t apply).

History of the minimum wage

Here’s a chart showing the nominal and inflation-adjusted minimum wage rates from 1938 to 2012:

Some notes:

• Since 1938, we’ve averaged 3.27 years/increase (up to the 2009 increase)
• From 1973-1981 there were seven increases, more than doubling the minimum wage (in nominal terms)
• The two longest periods without an increase were between 1981-1989 (8 years) and 1997-2006 (9 years)
• The minimum wage bottomed out at $3.80/hour (inflation adjusted) in 1948
• The minimum wage topped out at $10.53/hour (inflation adjusted) in 1968
• We’re currently above the (inflation-adjusted) historical average of $7.16/hour

Of particular interest (at least to me) was the period from 1978-1981 when the minimum wage rate increased every year and yet the buying power of an hour of work decreased each year. High inflation sucks.

Here’s something else to consider…

Minimum wage vs. poverty level

The official 2012 poverty threshold was$11,170 for an individual and $19,090 for a family of three (e.g., a single parent raising two kids). Thus, I decided to make a chart depicting the full-time income (in 2012 dollars) of an individual working full time (2080 hours/year) vs. the individual and family-of-three poverty thresholds.

Here it is:

As you can see, a full-time minimum wage job has been enough to keep an individual above the poverty line from 1950 onward, but a family of three with one full-time (minimum wage) worker was only able to stay above the poverty for a smattering of years between 1964-1978.

Sources: DOL.gov, DOL.gov, BLS.gov, HHS.gov

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