indexfundfan @ indextown

Reverting back to using checks instead of ACH

indexfundfan — Mon, 16 Nov 2009 19:14:47 +0000

ACH transfers (or better know as electronic funds transfer) is supposed to be the new method of money transfer in the 21-st century. But strangely enough, I find that I am reverting back to using checks for some of my transactions instead of using ACH. The following are some examples.

Depositing money at brokerages

TD Ameritrade offers a very fast ACH system for funds transfers. Recently, after setting up two new links to my bank accounts, I used the system to move some money from one account to another. That however seemed to trip them up and their compliance department sent me a secure message telling me not to use their ACH system to transfer money. In addition, they pointed out that, at their discretion, money pulled in using their ACH system can be held for up to 60 days before I can withdraw it.

Funds deposited electronically may be withdrawn three (3) business days after settlement date. However, all electronic deposits are subject to review and may be restricted for 60 days.

If I sent them a check, the funds can be withdrawn in six business days; there are no further restrictions after six business days. If I use ACH, there could be restrictions for up to 60 days.

Transferring money

My current paycheck goes into the Fidelity mySmartCash account. I had setup the mySmartCash account a few years ago for its very good BillPay system and availability of market rate money market funds. But now that the market rate for money market funds is very low compared to online savings accounts, I have been pulling out any excess money and moving them to the savings account (I am using Alliant Credit Union’s savings account) whenever my paycheck is credited. (I know I know, I should update my direct deposit instructions…).

To transfer the money, I do not use Fidelity’s ACH system. Instead, I write a check against the mySmartCash account and deposit into one of Alliant CU’s network of ATMs. The result: I start earning interest on the day of deposit (say Thursday). The mySmartCash account is debited only on the following Monday.

Similarly, when I have money to transfer out from TD Ameritrade, I write a check against that account and deposit it into the Alliant’s network of ATMs. I no longer use TD Ameritrade’s ACH system.

Paying for taxes

To pay for state and federal taxes, I used checks instead of ACH. This gives me additional float of the funds before the debit.

Conclusion

On surface the ACH system is a very efficient means of money transfer, however because of its relatively lack of security for the bank “pulling” the money, many financial institutions have chosen to impose limits on these transactions. Some of the liability issues are discussed in the following post on BankDeals:

If a bank initiates an ACH credit to another bank, that ACH credit cannot be recalled. So if a bad guy somehow got into a Provident account and transferred all the money out, Provident would be liable to the account holder (assuming it was a consumer — not a business — account) and it would have no easy way to get the money back from the bank to which it was sent.

On the other hand, if another bank initiates an ACH debit from a Provident account, then NACHA rules allow Provident to reverse the transaction — no questions asked — for 60 days if they can produce a Written Statement Under Penalty of Perjury (WSUPP) from the account holder. They are under no obligation to investigate the legitimacy of the WSUPP.

Portfolio Return for October 2009

indexfundfan — Fri, 06 Nov 2009 15:22:21 +0000

Comments: Portfolio was on track to gain for the fourth month in a row until the last week of October. In the end, the portfolio had a small loss of 1.66%. Took the opportunity to rebalance out of US LargeCaps and PME into US SmallCaps, US Timber/REITS and International EAFE equities.

Refinance Still In Progress

indexfundfan — Thu, 05 Nov 2009 18:58:06 +0000

This is a short update about my refinance, which was started about one month ago. It is still in progress. The appraisal has been done, value came up to be OK but the credit union is swamped with applications.

According to the loan officer, they are currently processing applications submitted in the second week of September. They will reach my case some time near the end of this month. I asked about the rate lock expiry (60 days). The loan officer told me that they will honor the rate if they could not process the loan by the lock expiry date.

I sure hope she is correct.

Portfolio Return for September 2009

indexfundfan — Thu, 05 Nov 2009 18:38:24 +0000

Comments: Sold off some PME to buy US LargeCaps.

Reduce your California tax withholding to avoid an IOU next April

indexfundfan — Mon, 02 Nov 2009 19:49:40 +0000

As far as I know, California state has raised the tax withholding rates twice this year. The first was for payrolls starting from May 2009 and the second is for payrolls starting from November 2009. The latest increase is reported in this LINK.

If I remember correctly, the increase in May 2009 was due to the increase in the tax bracket from 9.3% to 9.55%. This led to the corresponding increase in withholding from 9.3% to 9.55%. This is a reasonable change (I am just saying that the change in withholding is logical; NOT that the increase in tax rate is in any way logical in a recession).

Above: Tax withholding rates (before 11/1/09)

Above: Tax withholding rates (from 11/1/09)

In the most recent increase, the withholding rate was increased by 10%. For most people, this increases the withholding from 9.55% to 10.505%. There is no logical reason behind this; the only reason for this was that the state government wants an interest free loan from the tax payers.

Below are some comments reported in the LA times regarding this change:

“Many families are sitting at their kitchen table wondering how they’re going to make ends meet,” said state Sen. Tony Strickland (R-Thousand Oaks). “At the same time, the state of California is taking a no-interest loan.”

Such temporary measures as the withholding tax increase don’t really fix the budget gap, “they just more or less hid it,” said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. “I call it a fraud.”

But there is a way out of this:

Savvy taxpayers can get around the state’s maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state’s Franchise Tax Board.

“People can get out of this,” she said, noting that most people would have to change their allowances through their employers. California’s budget leaders are banking on the hope that most won’t.

This is exactly what I did. I submitted the DE-4 form to slash my additional state tax withholding to zero and added the corresponding allowances as provided by the withholding guidelines. This will bring me very close to the 90%-mark for the amount of taxes to be withheld without paying an under-withholding penalty come April 15, 2010.

If you are in a situation to already receive a refund next year, take some time to update your withholding by completing the DE-4 form

http://www.edd.ca.gov/pdf_pub_ctr/de4.pdf

For all you know, as it already happened this year, when it is time to get your refund, the state might not even have the money to pay you and you will get an IOU instead. I would rather owe the state money than the other way round.

Additional links

[1] http://www.bogleheads.org/forum/viewtopic.php?t=45134&mrr=1257174149

[2] http://online.wsj.com/article/SB10001424052748703932904574511923279377100.html

[3] Sign the petition to repeal this additional withholding — No to Sacramento!

Refinance Started

indexfundfan — Wed, 30 Sep 2009 02:09:06 +0000

I have been watching the mortgage interest rates diligently for the past two to three weeks. Yesterday, I kicked off the refinance process.

I had already obtained quotes directly from the big banks (Bank of America, Wells Fargo & Chase) but most of their rates included an one point fee (which I do not want). And even with that, their rates were not very competitive.

I also obtained several quotes from brokers using Zillow’s online mortgage quote system. One of the quotes actually looked promising and I got to talk to the broker who called back quite promptly. His quote (for 9/28/09) was:

30-yr fixed, “conforming” loan (<$625.5k) @4.875% with zero point. Fees $2800 ~ $3000 out-the-door.

By “out-the-door”, he meant that it included lender fees plus title charges and recording fees (but excludes prepaid items like home insurance or interest). This broker had a handful of reviews, most of which were good. But one negative was that the loan required impounding for property taxes and insurance. To waive this, an additional fee of $780 was required, bringing the total closing costs to $3600 ~ $3800 (note: my LTV or loan-to-value, is below 70% so a high LTV was not the reason for the impound).

I then looked at the credit unions in my area (San Francisco bay area). The most promising rates were from Star One credit union. Their rates yesterday were:

30-yr fixed “conforming” loan (<$625.5k) @5.00% with zero point.
20-yr fixed, “conforming” loan (<$625.5k) @4.75% with zero point.
15-yr fixed, “conforming” loan (<$625.5k) @4.375% with zero point.

Their estimated “out-the-door” closing cost is around $2000. This closing cost number is quite accurate according to a friend who closed a mortgage with them last year.

I crunched some numbers to compare the three options. This is illustrated in the figure below:

The 20-yr mortgage requires 20% more monthly payment than the 30-yr mortgage but gets paid off 10 years earlier. The 15-yr mortgage requires 41% more monthly payment compared to the 30-yr mortgage but gets paid off in half the time. Given the relatively high discount (25 basis points) in going from 30-yr to 20-yr yesterday, I decided to apply for the 20-yr fixed mortgage.

As I already had an account with Star One, it was a relatively painless process to apply for the mortgage. Everything was done online, and I was charged $12 for the credit reports (paid by credit card). I was approved instantly by the online system and I locked in the rate on the spot.

According to the warning in the online application, mortgage applications with Star One are taking an average of four to six weeks to close. We will see how it goes.

Addendum

By the way, the rates for Star One today are

30-yr fixed, conforming jumbo loan (<$625.5k) @4.875% with zero point.
20-yr fixed, conforming jumbo loan (<$625.5k) @4.75% with zero point.
15-yr fixed, conforming jumbo loan (<$625.5k) @4.375% with zero point.

On hindsight, there is a 50% chance that I might have picked the 30-year fixed mortgage if I were to lock today.

Portfolio Return for August 2009

indexfundfan — Fri, 04 Sep 2009 14:56:20 +0000

Comments

Portfolio continues to recover. Sold off some US REITs to rebalance after their huge run up over the past few months.

Moved my web hosting out of 1&1

indexfundfan — Fri, 21 Aug 2009 16:26:54 +0000

1and1 (1&1) webhost is increasing the hosting fees by 40% from $4.99 per month to $6.99 per month. I made good on my promise to transfer my website out. I have moved the website to Arvixe Personal’s Class hosting which offers “unlimited storage and bandwidth” and includes one domain name registration. I made a one-time payment of $72 for two years, which averages out to be $3 per month. The new price is less than half of 1&1’s new fee.

The following is a review of the process in moving this website (www.indextown.com) together with another of my domain away from 1&1’s webhost.

1&1 : Unlocked the domain from the 1&1 domains control panel (select the domain and click on Transfers -> Lock/Unlock).
1&1 : Take note of the Authorization Code (select the domain and click on “Info”).
1&1 : Made sure the email address under Contact -> Show Contact Details is reachable by test sending an email to this address. As long as this email address is reachable, there is NO need to disable private registration on 1&1 if you don’t want to. Note: some other registrars’ whois protection does not forward emails to the listed contact; in which case the only option is to disable the whois protection.
Arvixe : Signed up for the Personal Class hosting at Arvixe.com and specified that I am transferring a domain over. Provide the transfer authorization code obtained in Step 2 to Arvixe.
Arvixe : An authorization for transfer email will be initiated by Arvixe (eNom, Inc). This is sent to the contact information listed in Step 3, so a reachable email address in Step 3 is essential. Approved the transfer by following the instructions in the email.
1&1 and Arvixe : I installed the latest version of Wordpress and created an empty MySQL database on Arvixe. I then exported the Wordpress MySQL database from 1&1 and imported into Arvixe. I then transferred the site-specific files (images, theme files etc) over.
1&1 (this step is optional) : I changed the DNS away from 1&1 (e.g. ns57.1and1.com) and pointed it to those provided by Arvixe (e.g. ns1.bee.arvixe.com) (select the domain and click on DNS -> Edit DNS Settings). What this does is that while 1&1 still has my domain name, any request to the website would now go to the new Arvixe servers). It takes about 24 hours for this change to be propagated throughout the internet.
Five days later, the domain name was transferred successfully.
1&1 : Finally, go to cancel.1and1.com to cancel the 1and1 hosting. If you don’t do this, 1and1 will continue charging you, and if your credit card doesn’t go through, they will send your account to collection.

Keywords: review of domain transfer, 1&1, 1and1, Arvixe.

Muni ETFs with in-cash creations

indexfundfan — Fri, 07 Aug 2009 16:12:56 +0000

Indexuniverse has an interesting article on in-cash ETF share creations for muni ETFs as opposed to in-kind creations. The article attempts to explain how in-kind creations can help to eliminate ETFs trading premiums in cases where the underlying securities are relatively illiquid.

The following figure shows the trading premiums of the two types of ETFs.

Clearly allowing cash creations helped to reduce the trading premiums.

It sure looks like there is yet another factor to consider when purchasing ETFs, especially if the underlying assets are illiquid.

Does an asset class allocation of less than 5% make sense?

indexfundfan — Thu, 06 Aug 2009 23:25:48 +0000

In allocating the asset classes in a portfolio, many “experts” recommend that to keep things simple, it does not make sense to sub-divide the portfolio into anything less than 5%. The usual cited reason is that it complicates the portfolio with very little increase in benefit.

For example, if an asset class has an allocation of 2.5%, even if it were to gain 20%, its overall impact on the portfolio is going to be only 0.5%.

Recently, this question came up on the Bogleheads’ forum Why allocate less than 5% to anything? Roy crunched some numbers for illustration:

Since 1972: 100% S&P 500:
CAGR 9.26%
Standard Dev 18.59%

Since 1972: 97.5% S&P 500 and 2.5% CCFs:
CAGR 9.35%
Standard Dev 18.17%

Since 1972: 95% S&P 500 and 2.5% CCFs and 2.5% REITs:
CAGR 9.43%
Standard Dev 17.97%

There appears to have supporters on each sides. Yet, the resident experts both seemed to be OK with the idea of less than 5% allocations:

Larry Swedroe has about 3% in CCFs in his personal portfolio and Rick Ferri suggests only 2% or so in microcap.

For me personally, my current minimum allocation is 4%. Larry sums up this issue with the following statement:

It is not an issue of doing much, if the cost is effectively zero if it adds anything it should be done.

Portfolio Return for July 2009

indexfundfan — Mon, 03 Aug 2009 15:35:50 +0000

Comments: Portfolio continues to recover from last year’s drop. The gain for the month was 7.13%. Current Equity:Bond ratio is 69.4:30.6, with the target being 67:33. If this run continues, I expect to have to rebalance out of equities to fixed income soon.

Squeezing out more tax efficiency from my portfolio

indexfundfan — Thu, 30 Jul 2009 17:28:27 +0000

My portfolio is currently allocated as follows:

US LargeCap 11%
US SmallCap 8%
US REITs 4%
US Timber REITs 4%
US MLP (PIK dividends only) 4%
INT EAFE 20%
INT Emerging Market 11%
PreciousMetal Equity 5%
Fixed Income 33%

The ranking of the asset classes, in terms of tax efficiency (based on historical dividends), are as follows (most tax efficient at the top):

US MLPs EEQ & KMR (with PIK paid-in-kind dividends only) : 0% taxed.
US Timber REITs PCH, PCL & RYN: 0% taxed due to my enormous capital losses accumulated (see related post “Tax-Free Dividends from Timber REIT Investing” HERE).
US SmallCap (IJS) : distribution yield ~2.0% will be taxed.
PreciousMetal Equity (GDX) : distribution yield ~2.0% will be taxed.
US LargeCap (IWB) : distribution yield ~2.8% will be taxed.
INT EAFE (VEA) : distribution yield ~4.0% will be taxed.
INT Emerging Markets (VWO) : distribution yield ~5.0% will be taxed.
Least efficient : US REITs and Fixed Income.

The commonly sprouted ‘wisdom’ of putting International equities and emerging market equity in the taxable account so as to get the foreign tax credit is coming back to bite me now (and probably in future as well) with huge 4% (VEA) and 5% (EEM) distribution yields. This is ironic considering that VEA is simply just another class of Vanguard’s Tax-Managed International stock fund.

On the other hand, US SmallCap Value has a sub-3.0% yield but ‘experts’ usually would recommend putting this asset class into tax-deferred accounts.

Anyway, based on this analysis, I have been re-directing new money in the taxable account to the most tax-efficient assets listed above.

1and1 web hosting hiking fees by 40%

indexfundfan — Fri, 24 Jul 2009 15:46:11 +0000

The current web hosting service that this blog is hosted on (1and1.com) has given me notice that they intend to hike the fee by 40%, from $4.99 per month to $6.99 per month. They were even pleased to announce this to me:

We are pleased to unveil the new 1&1 Home Package with more web space and unlimited traffic coming in September 2009. As a result, starting September 2009 your Home package will cost $6.99 per month*.

By listening to our customers, weâ€™ve made this important change to allow us to offer the worry-free hosting environment that your site needs. Regardless of the amount of traffic your site generates you won’t have unexpected charges at the end of the month beyond your monthly fees. And with more web space, you can take your site even further.

As of September 1, 2009 you will be able to enjoy unlimited traffic and more web space. The new price for the Home package will be applied at the start of your packageâ€™s next billing cycle after September 1, 2009.

If you have any questions regarding the changes to the Home package, our support representatives will be happy to assist you.

I don’t need the additional bandwidth nor the storage space. Besides, the prices of hosting services are going DOWN, instead of UP. So I sent them a request politely to let me stay on my old plan, hoping they would listen to me and assist me in this matter. Here’s their reply:

Unfortunately, this is applicable to all Home packages that we had. There is no option to stay to the old $4.99 per month.

Looks like I am off shopping for a new web hosting service!

Keywords: 1&1 webhoster, 1and1.com web hosting, increasing fees, raising fees, monthly fees, problems, issues.

Portfolio Return for June 2009

indexfundfan — Fri, 24 Jul 2009 06:51:34 +0000

Comment: Completed my 4% allocation into MLPs with PIK dividends in the taxable account.

Portfolio Return for May 2009

indexfundfan — Fri, 24 Jul 2009 06:48:46 +0000

Change: Added MLPs which distribute dividends as PIK (payment-in-kind) : KMR & EEQ. This whole business with mega-bailouts and deficits from an administration that clearly will hike taxes in the near future caused me to re-examine my portfolio to try to squeeze out more tax efficiency.

Portfolio Return for April 2009

indexfundfan — Fri, 24 Jul 2009 06:40:19 +0000

Portfolio Return for March 2009

indexfundfan — Fri, 24 Jul 2009 06:38:08 +0000

Portfolio Return for February 2009

indexfundfan — Fri, 24 Jul 2009 06:35:52 +0000

Change: Added my own pseudo-index US Timber REITs : PCH, PCH & RYN in taxable account. These are in 50:50 ratio with regular US REITs.

Don’t be too quick to fleece the wealthy

indexfundfan — Wed, 27 May 2009 22:18:28 +0000

Here’s an interesting article of the unexpected consequence of raising taxes on the rich. Maryland finds that it couldn’t balance its budget last year, so the state decides to increase taxes on the wealthy to close the shortfall. Here’s what happened one year later.

One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.

No doubt the majority of that loss in millionaire filings results from the recession. … And the Maryland state revenue office says it’s “way too early” to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It’s easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: “Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it’s easy for them to change their residency.”

Taxable investment-grade bond ETFs

indexfundfan — Thu, 21 May 2009 18:41:55 +0000

I am looking for an investment-grade bond ETF to round up my portfolio. The criteria I used include the following:

Low expenses : the lower the expense ratio, the better.
Diversification : for investment grade bond funds, generally the more holdings, the better.
Amount of assets & trading volume : generally the larger the better (improves liquidity, smaller trading spreads).
Duration : duration is a measure of the sensitivity of the fund price to interest rate changes. At this juncture in the economy, I would prefer not to go too long on duration.
Credit quality : no junk bond fund for me.

The ETFs that I narrowed down to include BSV, CSJ, AGG, BIV, CIU and LQD. These are listed in the table below:

From the look of it, I would probably go with CSJ, Â the iShares Barclays 1-3 year credit bond ETF.

indexfundfan @ indextown

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