The World of Wealth

True Investors Don't Buy Mutual Funds

theworldofwealth@gmail.com (MEG) — Thu, 05 Nov 2009 20:29:00 +0000

The value of diversification in a portfolio is heralded constantly in the investment world; nobody really ever argues against it. Along those lines, mutual funds (particularly index funds and ETFs) have been championed for their ability to offer easy diversification to smaller investors.

I learned in a finance class in college that experts generally agree it takes a minimum of 50 stocks to create a diversified portfolio. Without mutual funds you might need at least $50,000 to build that diversified portfolio (assuming that it doesn't make sense to invest less than $1K per stock in order to minimize transaction costs).

But by investing in a mutual fund you get to purchase tiny slivers of hundreds or even thousands of stocks without incurring hundreds or thousands of trading fees. You get the benefits of diversification for a fraction of the cost!

For this reason most investors use these funds as the basis of their portfolio, including myself. I have a Scottrade account with which I trade individual stocks "for fun" and only with a small percentage of my overall portfolio. The majority of my "real" investments - including my retirement savings - are in Vanguard funds.

But consider this excerpt from Investopedia article "Think Like Warren Buffett:"

While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies.

Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due diligence process is completed, an investor should feel comfortable enough to dedicate a sizable portion of assets to that stock. They should also feel comfortable in winnowing down their overall investment portfolio to a handful of good companies with excellent growth prospects.

Buffett's stance on taking time to properly allocate your funds is furthered with his comment that it's not just about the best company, but how you feel about the company. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

I think this is a very significant point that should be considered by all investors. If you really have no knowledge or interest in finance and investing then a simple index fund may be the best thing for you. It also might be the best place to start for most people, especially if you have limited capital to invest.

But if you've got significant money to invest and you are educated in matters of investing (and an argument can be made that all of us should be), then could you be better off by condensing your holdings to a collection of fewer stocks - and bonds - that you have personally evaluated and selected?

In reality, you aren't an "investor" in the true sense of the word if all you do is dump your money blindly into mutual funds. A true investor can and does evaluate businesses on a fundamental level. They make informed decisions about where to invest their limited resources. They evaluate performance based on expectations and the earning potential of that business or industry.

In short, a true investor knows what she owns and why. Do you?

Saving Money This Holiday Season

theworldofwealth@gmail.com (MEG) — Wed, 04 Nov 2009 20:24:00 +0000

I've come up with several ways to save some serious bucks this holiday season. They may not all work for you, but here are some ideas:

I'm returning the $200 formal gown I bought to wear to a ball that my employer is requiring me to attend. I'm wearing an old prom dress instead (I also get to return the $80 spanx I needed to pull off the slinky new gown).

I am driving 8 hours to see my grandparents in Louisiana this Thanksgiving, even though I have flown every year since I graduated from college. It will only cost me about $80 in gas compared to a $300 flight.

I'm also driving home to Alabama for Christmas for around $300 savings.

I'm also spending extra days at home this holiday season, which will save me money on food and entertainment this season.

I'm saying "no" to at least 2 charity parties that I have gone to in each of the last few years. Savings is roughly $200 (sorry kids).

Due in large part to the previous point, I will not be needing quite so many manicures/pedicures as I usually get this time of year. Savings = $150

I'm not buying any extra or holiday-themed (and therefore overpriced) foods, decorations, flatware, scented goods, gifts/ornaments or anything else this year.

As I'm not dating anybody in particular (I don't think...) I will save significantly on Christmas gifts this year. Also, I'm going to scrimp on my family and not feel bad since I've been relatively lavish in years past. Savings = $250

The reality is that most of this savings revolves aroung the Giving portion of my budget. I have noticed my giving has declined by about 50% year-to-date compared to 2008 (charitable giving, gifts for others, political donations, and donations to my alma maters).

Expensive Day and Night

theworldofwealth@gmail.com (MEG) — Fri, 30 Oct 2009 19:14:00 +0000

Tonight will not be a cheap evening for me.

I'm meeting a friend from out of town for sushi at this hip new place where I will probably spend $50 for two drinks, my half of an appetizer, and one specialty roll. My friend lives in south Texas where they don't have trendy sushi restaurants, so this is her guilty pleasure when she visits.

I will then be paying $15 for a cab to take me to a charity party for which I just paid $50 for a ticket online.

Luckily drinks will be free at this event, so my only costs for the remainder of the evening will probably be $15 for a cab ride home (unless I can catch a ride with a friend...).

Dinner/Drinks - $50
Charity Event - $50
Cabs - $30

This in addition to the fact that I just spent roughly $300 over my lunch break when I made the mistake of going to the mall (via Nordstrom) to get a sandwich at this place I like in the food court.

$75 - this Spanx thing I need to wear with my clingy formal dress at a ball in November
$130 - this really classy and unique work blouse that will go with most any skirt or pair of pants
$75 - two versatile DKNY tanks (one black, one dark pink) that will be perfect under a suit jacket or sweater - and even by themselves around the house.
$7.95 - the sandwich, plus a bottle of water

Everything I bought was 40% off except for the spanx. And I didn't buy the fantastic Burberry jacket that I tried on (which would beautifully fill a seriously gaping coat hole in my wardrobe). She told me it might go on sale next week though. In which case I might just have to find my way back to the store...

Tis the season.

Shield Your Assets - Protection from Creditors, Lawsuits, Taxes, Heirs

theworldofwealth@gmail.com (MEG) — Wed, 28 Oct 2009 21:28:00 +0000

Protecting ones assets isn't discussed as often as accumulating them, investing them, and even distributing them to charities or heirs. But it's one of the most important aspects of financial planning.

There are various people and entities from whom you might want to shield your assets: creditors, lawsuits, any taxing authority, even your spouse (or future ex-spouse). Whatever your purpose, there are many strategies to help you protect your assets.

Note: We are talking about legal and ethical methods of asset protection here. Other methods will not be discussed and are not endorsed, such as setting up offshore accounts for purposes of tax evasion; giving away assets in order to qualify for medicaid or other government assistance; or hiding assets from your spouse for purposes of leaving him/her in the cold after a divorce.

Insurance Policies
Insurance policies are a relatively simple and common way to protect a person's biggest asset - his or her earning potential. You can purchase disability insurance or long term care insurance to protect yourself in case you lose your ability to work. Or you can purchase a variety of life insurance products which will protect your loved ones by providing them a lump sum or annual annuity upon your death.

Tax Sheltered Accounts
Individual Retirement Accounts, 401ks, pension plans, 529 plans and many other types of accounts enable investors to legally shield certain investments from the tax collector. These can be powerful tools, especially when utilized over a long period of time. Plus they are often legally protected from creditors even in the event of bankruptcy.

Similarly, homesteads provide large income tax deductions and in many states are protected from creditors in case of bankruptcy.

Trusts
Trusts can also be used to shield assets from taxes, creditors, and lawsuits, but in addition they can protect your assets from your own family members.

Often the head of a family will set up a trust or trusts for the benefit of the children (and/or for his future widow) with very specific rules about when and how that money can be accessed. This can help protect the estate from the financial ignorance or apathy of the heirs, from any addictions they might have, from their creditors and lawsuits, and it also may have the added bonus of keeping that money in the family in case of a divorce on the part of a beneficiary.

On a personal note I have decided to quit taking distributions from a trust that was set up for my benefit by my grandfather in order to keep those assets sheltered. I used to take out enough each year to max a Roth IRA and for other purposes, but now I've realized that while that strategy might be a good tax strategy, once I take money out I can never put it back in - and it becomes accessible by my creditors, by my tenants if they ever sue me and win, and by any future spouse I may acquire and subsequently divorce.

Contracts
Any number of contracts can protect both parties in legal arrangements. A Pre-nuptial agreement, for instance, can protect assets you accumulated prior to marriage in case of divorce. It can also ensure any inheritances you receive during the marriage are yours alone.

Business Entities
Corporations, LLC's, Partnerships, and other business entities can function like trusts to get assets out of your estate and, therefore, protect them from estate taxes, spendthrift family members, creditors, litigious rivals, and even from personal bankruptcy.

My New Conservative Asset Allocation

theworldofwealth@gmail.com (MEG) — Mon, 26 Oct 2009 18:42:00 +0000

My asset allocation has changed dramatically over the last month, due to certain decisions made on my behalf by the trustee of my largest investment account. I was consulted in advance about the potential changes, and I said that I was fine with whatever they decided.

So my portfolio just got a lot more conservative.

I have about $175K left in a trust which was originally set up solely for my educational benefit; I won't control those funds until I turn 35. Throughout my entire life they've been invested 100% in Vanguard stock index funds, but recently my grandfather had a change of heart that he decided should trickle down to those accounts (most of which are still being tapped for college by my cousins and siblings).

But in addition to that I have nearly $50K in retirement funds I've saved on my own, in addition to $15K of other investments and $15K in cash. Not to mention $130K in real estate equity.

My previous total portfolio allocation if you add up all those investments was:

Stocks - 58%

Bonds - 2%

Cash - 5%

Real Estate Equity/REITs - 35%

Now that they've moved 50% of the trust into cash, it looks like this:

Stocks - 35%

Bonds - 2%

Cash - 28%

Real Estate Equity/REITs - 35%

Honestly I'm fine with this new allocation. Not only is it pretty balanced with a third in RE, stocks, and cash, I may end up tapping the trust to pay for a wedding and/or a car and/or a new rental property within the next 5 years, so part of it may as well be in cash.

Besides I'm focusing on my retirement accounts as my primary long term investments, and the allocation in those is 15% bonds and 85% stocks (about a third of which are international). That's all I can really control at this time (RE is what it is, and the trust isn't officially mine), so that's all I worry about. In a few short years as I continue to add to retirement accounts, that allocation will take over.

Deducting Charitable Gifts - More Complicated Than You Think

theworldofwealth@gmail.com (MEG) — Thu, 22 Oct 2009 19:28:00 +0000

For a charitable gift to be deducted from your income for tax purposes, many rules must be taken into account.

First of all the Donee must be a qualified Public Charity, Private Operating Foundation or a certain kind of Other Private Nonoperating Foundation. Any gifts to other people or organizations, however charitable in nature, do not qualify for a tax deduction.

Second, the Donor must have "donative intent," meaning they knowingly chose to donate and knew what they were doing and the value of the gift; the Donee must accept the gift; and there must be a lack of consideration from the Donee (i.e. the Donor doesn't benefit from the gift).

You can deduct travel costs associated with charitable work ($0.14 per mile for auto), but you cannot deduct the cost of your time or any services you provide.

Now that we've got the definitions settled, let's consider the tax implications of charitable giving.

Qualified gifts may consist of:

Cash,

Ordinary income property (property that would give rise to ordinary income if sold),

Short-term capital gain property (such as inventory), and

Long term capital gain property, which is further divided into the following categories: Intangibles, Tangible Property (related use to the charitable organization), Tangible Property (unrelated use to the charitable organization), and Real Property.

The type of property donated affects the deduction that you can take.

Gifts to Public Charities & Private Operating Foundations
The general rule is that a Donor can deduct the lesser of the adjusted basis or the Fair Market Value of any charitable gifts given - but only up to 50% of his or her Adjusted Gross Income in any given year. Any amount given in excess of that ceiling can be carried forward for 5 additional years and deducted against future income.

However if the gift consists of Intangibles, Tangible related-use property, or real property, then the rule is different. In those cases you can deduct the FMV of the gift up to only 30% of AGI. Or the Donor can make a "Basis Election" in which case he or she can deduct their basis in the gift (as opposed to the FMV) up to 50% of AGI.

Gifts to Other Private Nonoperating Foundations
The AGI ceiling in this case is 30% for cash and Ordinary Income and Short Term Capital Gain property. The AGI limit is 20% for gifts of all types of Long Term Capital Gain Property whether or not the Basis Election is made.

And there you have it.

Income Not Subject to Tax - It Does Exist!

theworldofwealth@gmail.com (MEG) — Thu, 22 Oct 2009 19:01:00 +0000

Did you know that there are some forms of income that even the IRS doesn't count for tax purposes? It's true. The IRS allows exclusion of the following types of income:

Gifts and Bequests - When you are given or inherit money it is 100% income tax free.

Child Support - Child support is not taxable income, though alimony is.

Scholarships for Tuition, Fees, and Books - but not for housing or other expenses.

Workers Compensation, Life Insurance Proceeds, and Damages awarded by the courts for bodily injury

Return of Capital - i.e. the basis component of proceeds from a sale, or the amount you invested

Fringe Benefits from your Employer, such as meals and lodging under certain circumstances, workout facility access, group term premiums for up to $50K of life insurance, employee discounts on merchandise up to a point, education expenses up to $5,252, dependent care up to $5,000, adoption expenses up to $12,150, and "no additional cost services" such as a flight attendent flying standby for free.

Roth 401(k) vs Roth IRA

theworldofwealth@gmail.com (MEG) — Wed, 21 Oct 2009 15:32:00 +0000

Individual Retirement plans such as the 401(k) and IRA offer significant tax incentives to individuals to save for retirement. Not only do your investments grow tax deferred, but you either get to deduct your contribution in the year it is made (Traditional plans) or you get to withdraw investment proceeds income tax free when you retire (Roth plans).

Which route you take depends on whether you think your income tax bracket will be higher when you retire. Since income tax rates are near historical lows and the national deficit is at record highs, the smart bet for many folks is a Roth plan, because tax rates are likely to go up for all of us.

Assuming you have decided that a Roth is right for you, which is better - a Roth IRA or a Roth 401k? Consider these differences.

Who Can Contribute?
You can only contribute to a Roth 401k if your employer offers one, and many still do not. If you have access to one at work though, there are no income limits to be able to contribute.

Anybody can open a Roth IRA, but you can only make a full contribution to it if your AGI in 2009 is less than $105,000 (single) or less than $166,000 (married filing jointly). These income limits change every year.

You CAN max out a Roth IRA and a Roth 401(k) each year, assuming you qualify under the parameters above. This is of course the best option if you can afford it! If you must choose however, read on.

How Much Can I Contribute?
In a Roth 401(k) the 2009 contribution limit is $16,500. If you are 50 or older you can make an additional $5,500 "catch up" contribution as well.

The 2009 Roth IRA contribution limit is much lower at $5,000. If you are 50 or older you can put in an extra $1,000.

When Can I Get Money Out?
In both Roth plans, you must be 59.5 or older and you must also have waited at least 5 years from January 1st of your first contribution year to avoid paying income taxes on your earnings.

To avoid a 10% penalty on distributions from a Roth 401k you must be over 59.5, have died, have become disabled, or have opted for substantially equal annual distributions under rule 72(t) where you must liquidate the entire account. In addition, you can make penalty free distributions to the extent of your deduction for qualified medical expenses.

You can avoid a 10% penalty on Roth IRA distributions under any of those same parameters, plus a few extras: you can make penalty free distributions for higher education expenses, to purchase your first home, or to pay for health insurance if you are unemployed.

With a Roth IRA you can take out your contributions at any time tax and penalty free, but once you've put them in a 401k you can only access them via a loan (unless you leave your job).

Am I Required to Make Distributions?
In a Roth 401(k), minimum distributions are required by the April after you turn 70.5 years of age. Otherwise you face a 50% penalty of what you should have taken out. The amount required depends on the IRS life expectancy tables. If you are still working the RMD's do not apply, unless you are at least a 5% owner in the business.

It's important to note that these RMD requirements also apply to beneficiaries of Roth 401ks once the account owner passes away. Beneficiaries must take out all the funds within 5 years or begin substantially equal annual distributions based on their life expectancies.

These RMD's do NOT apply to Roth IRAs, which can be a huge advantage to consider if the funds are not likely to be needed in retirement and will be passed down to heirs.

Other Differences to Consider:

One advantage with a Roth is that you can make 2009 contributions all the way until April 14th of 2010.

Account fees and fund expenses are likely to be much higher in an employer-sponsored Roth 401k plan than in a Roth IRA you set up on your own, and investment options will be limited to a handfull of funds selected by your employer. With a Roth IRA you can choose your investment company and invest in any securities you choose.

On the other hand, you won't face account minimums in a Roth 401k, so it may be easier to get started investing there if you can only afford to save a little bit each month.

Your employer may offer to match your contributions to a Roth 401k, which is a huge advantage that can outweigh increased fees and poor investment options. Where else can you get a guaranteed 50% or higher return on your money?

CFP Exam Study Guide - It's Go Time!

theworldofwealth@gmail.com (MEG) — Tue, 20 Oct 2009 18:46:00 +0000

The CFP Exam begins exactly one month from today: November 20-21, 2009. We are officially down to the wire!

I can begin to see light at the end of the tunnel, and it's tempting to daydream about how great it's going to feel when this is all over, but I have to stay focused. And I have to be part of the 50-60% who will pass it. Because I'm not sure I have it in me to try again if I fail.

SO that means I need a study guide. I kicked it off this past month with a $1,000, 4 day long, 9 hour a day, intense review course. In four days we reviewed everything I've (allegedly) learned in classes over the last year.

The real benefit of that course for me was that it condensed the multitude of information that's been thrown at me in 7 courses and 15 books over 1 year into one handy "most important stuff to know" binder. The instructors were great, too and had a lot of insight as to which specific topics are tested, what percentage of the questions are on which category, and also how certain topics are most often tested.

Here are the main components of my preparation plan for the next month:

Do 3 case studies each Sunday from now until the exam (12 total).

Do the online Diagnostic Exam (100 questions) this Saturday to see where I should focus my study efforts. Then on each Saturday afterward do a Mock Exam section (4 hours).

During this week and next, thoroughly review each section of the Review Binder and do all practice questions. Learn any remaining new concepts. Review online videos and books for any topics I struggle with.

During the following 2 weeks, focus on memorization. Make flash cards for any formulas / lists / charts I struggle with and carry them everywhere.

When exam site is released do a test drive and find parking, the exact room, etc. Get new calculator batteries, pencils, and a good eraser. Clear my work calendar for the day before and day of testing.

I can't wait for this to be over so I can have my life back! I literally have no idea what I used to do with all the time I've been spending on CFP stuff over the last year. I guess blogging, reading, sleeping, going out, working out...oh, and travel! I've had to turn down 2 trips this fall because of this exam. :(

Property Taxes Are Due

theworldofwealth@gmail.com (MEG) — Mon, 19 Oct 2009 18:27:00 +0000

Property tax invoices go out in early October in Texas. Property taxes are due and payable as of October 1, but they aren't late until January 31 of the following year.

I have a big fat stack of these invoices piling up on my dining room table. I own my own residence plus two duplexes, and each unit of the duplexes is taxed separately. In addition the two rentals are in different cities in Dallas county and so I get separate invoices from the city and from the county that I have to keep track of. In total I end up with about 10 separate invoices to track and pay.

I owe $5,450 on my most expensive rental property, which I purchased for $220K last year. I escrow taxes on my other rental, so I don't have to worry about those (around $3,000).

In addition I have to pay just over $3,000 on my own personal residence.

So in sum I'll be paying out over $11,000 in property taxes by the end of the year. Fun, fun. If all goes according to plan (i.e. no tenant defaults or moves between now and the end of the year), then I'll be able to pay all my taxes without dipping into reserves. We shall see.

Oh, and in other exciting news I found out you can pay your property taxes online with a Mastercard or Visa, and it doesn't look like Dallas county charges any additional fee or service charge for that privilege. So I can put all those taxes on my credit card and get points!

Here's the link in case any of you want to check it out. It's also kind of unsettling that you can search any name or address and find out what properties are owned, their values, the tax levy, and who paid the taxes and how much going back years and years.

So Close to Retirement Savings Milestone

theworldofwealth@gmail.com (MEG) — Wed, 14 Oct 2009 21:13:00 +0000

By the end of this year I just might have closed in on a major milestone - $50,000 in retirement savings!

Not only is this a great round number, it also happens to be just over my average annual expenditures (the average is actually $47K, which doesn't include savings).

Right now I have $25,550 in my Roth IRA and $20,500 in my Roth 401k at work for a total current balance of $46,075.

I contribute $500 a month to the 401k, and my employer puts in another $150 a month, so that's another $2,000 to be added by year end. With a little help from the markets I might just tip right over the $50K line in time for New Years!

If not, I'll probably hit it in January when I make my annual $5,000 Roth IRA contribution (unless the markets really tumble again).

A Great Texas Traffic Court Experience

theworldofwealth@gmail.com (MEG) — Wed, 14 Oct 2009 19:23:00 +0000

Last week I had to drag myself to traffic court. I got a ticket in February of this year and - very uncharacteristically - failed to do anything about it until the court date on the ticket had passed.

It had been years since I'd gotten a ticket, and apparently now (in Dallas at least) the court date / deadline to act is only about 2 weeks from the date of the citation. By the time I looked at the ticket again it was literally 1 day past my court date.

I panicked, called the court, did research online, and even called an attorney friend for advice. I knew a warrant could be issued for my arrest for failing to appear in court. But the lady at the court didn't seem worried and told me to chill out and that they'd just assign me another court date. My attorney said the same thing, trying to assure me by telling me they had literally thousands of issued warrants piled up in Dallas county that nobody was much concerned about.

So my new court date was set for last week. I had to wait 8 months to take care of this, and I'd lost the option to just pay it online or request drivers ed from the court clerk - because I'd missed my initial court date, I had to be present at this hearing and talk to the judge himself.

It was pouring rain and the courthouse was 15 miles away for some reason, which I realized as I Googled it on my way out the door, so I was 10 minutes late and this was shaping up to be a horrible experience. But it wasn't. The judge was a humorous, grandfatherly Black man with a booming voice who came out and immediately told all of us to quit frowning and relax because there was nothing to be afraid of and to save our game faces for trial, if in fact we intended to come back another day and fight.

He explained in detail our 4 options:

Plead Not Guilty and come back next June for trail to fight the ticket with or without an attorney.

Plead No Contest and ask for Defensive Driving (which you can take in TX once a year and subsequently get your traffic ticket dismissed).

Plead No Contest and ask for Deferred Disposition.

Plead Guilty and pay the ticket.

He gave a long winded, entertaining speech about the difference between Defensive Driving and Deferred Disposition, explaining that both would reduce your fine, both would result in the ticket being dismissed, but one required you to spend 6 hours in drivers school.

"Do the math! Which one would you choose? I know which one I would choose, because I went to [X] elementary school right over here, a really great school! Maybe you went to some other school like [Y] over the bridge, so maybe you'd rather spend all that time in drivers school to save only $8. I don't know! It's your decision!"

He then started to say that he couldn't dismiss any ticket for a moving violation (i.e. speeding - which is what I had) unless the arresting officer was present...then paused to answer his ringing phone and proceeded to have a 5 minute long conversation. When he hung up he asked for questions, and then teased us all for not having the guts to ask any. I tentatively raised my hand.

He beamed at me and made me stand, and I asked what he meant by not being able to dismiss a ticket if the officer wasn't present; did that mean I had fewer options than the four he'd outlined since my officer wasn't present? He asked my name and what my fine was. I fumbled around my papers searching for a figure and finally said "I'm not sure...I think $135?"

"GOOD TRY!" He yelled at me, and then burst out laughing. "It's $235." He verified I could still do any of the 4 options he'd outlined - he just couldn't dismiss it outright. Then he did the math for me and told me deferred disposition would decrease my fine to $171 (if I remember correctly). This is all in front of the entire court including all 20 or so people there waiting to take care of their tickets.

A few other people asked questions, and then he began to process us one by one. I guess because my file was on top (or as a reward for asking the first question), he handled me first. I walked up, he asked me what I wanted, I said "deferred..." and he stamped my file and handed it to me and asked me to follow a clerk out the door just to his left.

Within minutes I paid the $171, received documentation that the ticket was dismissed, and walked out the door. The incredible moral of the story is that you don't have to do Defensive Driving to get a ticket dismissed! What an amazing discovery! You just show up and ask for deferred disposition! I guess they don't have to give it to you, but this judge didn't seem to have any inclination to deny it.

Oh, and even though the Internet told me that a $200 fine could have been added for failure to appear in court, that never happened and I was never charged and no warrant ever appeared.

Stocks Are Risky - No Matter How Long You Hold Them

theworldofwealth@gmail.com (MEG) — Tue, 13 Oct 2009 23:04:00 +0000

My grandfather woke up yesterday morning and began calling his children to let them know of a surprising decision he'd made. He'd called his investment advisor and ordered him to sell every equity he currently owns. In addition, he wants everything he has moved into ultra-safe treasury backed securities (TIPS, T-bills, T-notes, T-bonds).

I talked to him later in the day, and he explained his reasoning: he can afford to live the rest of his life with all his investments in treasuries, but he can't afford to lose another chunk of his portfolio in the equity market.

He is in his mid/late 70's, and he (and my grandmother) are living off their investment income. He's been following the markets carefully and attending investment conferences regularly, and many experts seem to think this could be a "double dip" recession (i.e. the market could tank again next year) due to a commercial real estate meltdown, among other possibilities. Some say it could take 10 years for us to really pull out of this.

He underlined his belief that we will ultimately pull out of it even if we are in a double dip or prolonged recession; but he's just not confident it would happen in his lifetime. He seemed to be asking for my opinion, so I told him that frankly I was surprised that he had much in equities at all at his age anyway, and I didn't think it was unreasonable for him to eliminate riskier asset classes if he can afford to live off proceeds from very safe ones.

A WSJ article highlighted on Yahoo Finance today discusses this very issue: Don't Let A Market Crash Hit You At The Finish Line.

As the article points out,

In the past, the longer the measurement period, the less the rate of return on stocks has varied. Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady average annual rate of 9% to 10%. If "risk" is the chance of deviating from that average, then that kind of risk has indeed declined over very long periods.
...
Look at the long-term average annual rate of return on stocks since 1926, when good data begin. From the market peak in 2007 to its trough this March, that long-term annual return fell only a smidgen, from 10.4% to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007, you had only $498,300 left by March 1, 2009. If losing more than 50% of your money in a year-and-a-half isn't risk, what is?

So in other words, another crash might not much impact my grandfather's average annual return over the decades he's been invested. But it could still have a substantial negative impact on the annual income he can safely withdraw from his portfolio.

In related news, he's considering selling all or at least half of the equities in the grandchildren's trusts as well. His only concern is that with our longer time horizons that wouldn't be prudent. However if we are planning to use those funds for school or weddings or real estate in the next decade then maybe they SHOULD be out of the market.

He seemed to welcome my input, and I told him simply that I fully support whatever he thinks is prudent and chooses to invest in those accounts. They've been in Vanguard equity index funds for my whole life, and though I told him that I don't plan to withdraw any more funds from it anytime soon, that I wouldn't lose any sleep if he wanted to shift some or all of the balance to safer securities.

Nothing has been decided for me yet, but he's going to send me a copy of the balance sheet and get my input. Off the top of my head I'm thinking 50% stays in US stocks, 10% is moved to International stocks, 25% put in bonds, and 15% in TIPs...and I can balance around that with my retirement funds and the rest of what I've saved outside that account anyway.

The Cost of Having the Flu?

theworldofwealth@gmail.com (MEG) — Mon, 12 Oct 2009 23:27:00 +0000

I'm sick. Which I wouldn't even admit except for the fact that I've had a fever all day and my throaty cough gives me away. I haven't been sick in years. Basically I feel hungover (mild headache, dizziness when I move quickly, chills/sweats, drowsy) except that I haven't had a thing to drink since Friday night .

Yesterday I felt OK and had a moderately productive day. I was a bit tired though, and last night I started coughing and my chest hurt. I slept for 10 solid hours and woke up tired. My temperature is just over 100 degrees.

None of this is that big of a deal yet, but just in case I went to the pharmacy and picked up some cough drops, NyQuil, tomato soup, and a box of Kraft macaroni and cheese, plus some granola bars. Total cost: $16.50. I also downed an Immune Booster smoothie with antioxidant boost from Smoothie Factory, which was totally worth the $5.50 I paid.

But leaving the house is when I realized that I was totally out of it - and probably shouldn't have been operating a motor vehicle.

So despite my very ambitious study and workout plans, I've gotten pretty much nothing accomplished today. My head still aches slightly, and I tried to do some CFP reading but just couldn't focus (plus the light hurt my eyes). My back hurts from lying on the couch all day on top of it all. Ugh.

I'll either wake up tomorrow a lot better or a lot worse. I have a feeling either the fever and cough will subside or this will build into a full on flu situation.

I am most annoyed not about the prospect of getting behind at work, but that of getting behind in my fitness/diet routine and CFP study plan.

Total Cost of Obtaining My CFP

theworldofwealth@gmail.com (MEG) — Fri, 09 Oct 2009 16:57:00 +0000

Today I got my final reimbursement check from my company related to the CFP process! I registered for the exam, enrolled for a review course, and submitted my final grades for the last two education courses two weeks ago. The total final costs were $3,000 which I had to put on my credit card (at 0%) until my reimbursement came though. That money went straight to my reserve fund, and thankfully I am now back up over the 6 months of expenses mark!

Here is a breakdown of the total cost I have incurred to obtain my CFP:

Experience Component:
You have to have 3 years of related experience before you can utilize the CFP designation. In my case I don't associate any additional or specific cost with this.

Ethics Component:
You have to have a clean record to obtain a CFP designation. Theoretically you may have to incur legal costs to take care of or avoid a blemish on your record in this capacity, but I associate no additional or specific cost with this component.

Educational Component:
Here's where the real expense begins. Each class was taught for 3 hours a week for 11 weeks at a university nearby by CFP Certified professionals within each field. You can take a variety of courses online and in person to complete the educational requirement, but 30 hours of classtime in a CFP accredited class for each topic is required before you can sit for the exam. Here's what I spent.

Course Application Fee - $50
Fundamentals Class Tuition - $497.50
Fundamentals Books - $166.37
Investments Class Tuition - $497.50
Investments Books - $166.37
Tax Class Tuition - $575.00
Tax Books - $181.61
Retirement Class Tuition - $497.50
Retirement Books - $175.38
Insurance Class Tuition - $497.50
Insurance Books - $215.38
Estate Planning Tuition - $497.50
Estate Planning Books - $162.48
Capstone/Case Study Class - $497.50
Capstone Books - $266.72

You also have to have a college degree, but I don't include that here as a specific CFP expense.

Exam Component:
Exam Registration Fee - $595
Kaplan Review Course - $995.28
(Includes books, online videos and question bank, and 4 days of live instruction with 24/7 access to professors to answer your questions).

In total, I have spent $6,534.59. Unless I have to take the exam again, that should be all I spend.

Of course the cost of my time is an intangible that should be considered as well. I have dedicated over 200 hours of classtime and at least another 150 hours of study time over the last year. Before the exam I'll have put in another 100 hours of studying, not including the 35 hour long Kaplan Live Review.

I have made back around $600 of the cost by selling my used books on Amazon after completing each course. The Kaplan Review comes with an entire set of new books to study, so when the exam is over I'll have 7 more books to sell for (hopefully) around $40 each.

Mortgage Bankers Start to Feel Slowdown

theworldofwealth@gmail.com (MEG) — Tue, 06 Oct 2009 17:12:00 +0000

Long term mortgage rates have dipped below 5% again.

President Obama has offered fat tax credits to anybody who buys their first home.

Prices are down 20%-50% from their highs a couple of years ago.

You pretty much can't ask for a better environment in which to be selling mortgages (except of course for the unemployement rate and dwindling reserves of many potential borrowers). Yet my mortgage banker friends are complaining that things are starting to slow down for them.

Mortgage is the one segment of banking that has been somewhat immune to the Recession in many areas. This is due primarily to the huge volume of refinances when mortgage rates tumbled earlier this year.

But now their business is slowing, despite frantic efforts from politicians to subsidize the market in every capacity. But alas, most of the people who could and wanted to refinance or buy a home have done it already. So the mortgage guys are joining the decidedly less busy ranks of their fellow bankers.

I just sat through a meeting this morning in which the mortgage team (which have literally had a record year through the first half of the year at my company) asked for more referrals and complained of their diminishing pipelines.

Welcome to the Recession! Pull up a chair! Say goodbye to your fat bonus! The rest of us bankers have been here for over a year now.

An Argument For Hefty Overdraft Fees

theworldofwealth@gmail.com (MEG) — Tue, 06 Oct 2009 16:51:00 +0000

Welcome To Overdraftville. Population: You. is a very entertaining article from Newsweek in which the author decries the elimination of overdraft fees for which politicians and consumer advocates are currently pushing.

In their wisdom, lawmakers want to help people by lowering these fees when what they should be doing is raising them much, much higher. Why not charge at least $100 if you overdraft at the ATM? That seems a reasonable fee to pay to get $20 that you don't have from the bank.

I agree, but I also think that the consumer should get a warning that this fee is about to happen if you complete the transaction, just like the ATM warning fee that appears. If they decide they need the money even in the face of big penalties, then they can proceed and receive what is essentially an unsecured loan from their bank.

He goes on to say the following about these "terrible" fees:

They argue that the bank fees disproportionately hurt poor people. Wrong. They disproportionately hurt people who spend money they don't have.

Another common argument is that it's unfair for banks to charge you for five or six overdrafts in a row just before your paycheck kicks in, especially if they were small amounts. Wrong again. This is when it's most fair to charge you more. If you know the money is coming in a couple of days, and you can't help yourself from spending, then these fees are your friend.

...Really, do you need to be told by the bank that you're about to overdraw your account? Are we so pathetic that we need Wells Fargo to be our mommy? You're the one who spent money you didn’t have. You're lucky they cover it and only charge you a fee instead of letting you go to jail for kiting checks. In the old days they used to have a thing called debtor's prison, and people did not like to go there.

The author admits that he has overdrafted plenty of times, but he did it knowing the consequences when he needed the money to fix his car or make it through the holidays or something else that he valued more than the $30 fee.

Basically this is all about managing your life. People should realize that coffee is hot and be careful without the government requiring vendors to print warning labels. People should realize that soda is not that great for you and moderate consumption accordingly without the government levying taxes in order to pressure you to buy less of it. And people should balance their checkbook or check their bank balance before writing checks or swiping the debit card at Target.

I agree with the author's final point:

But the politicians who want to lower these fees are teaching us that it's OK to spend what we don't have. (Isn't that what got us into this financial mess in the first place?) Maybe they should put one of those warning labels on your ATM card: "For best results, have money before using.

Ignoring Tenants Feels Good

theworldofwealth@gmail.com (MEG) — Thu, 01 Oct 2009 01:33:00 +0000

I just heard my "tenant phone" ringing and got up to go look to see who was calling. It was one of my tenants.

I thought it might have been my alma mater, whose fundraising call I have missed both of the last two nights, and I was sort of in the mood to answer and explain why I don't plan to donate because there are only about 1000 better and more needy causes to which I choose to give my limited charitable dollars.

But when I saw it was a tenant I put the phone down without answering. It felt really good.

For the last year I have always jumped to answer the tenant phone whenever it rings, even late at night and on weekends. I always address every potential problem or complaint immediately, no matter how small. That over-caring, eager-to-please impulse has faded quickly and predictably though, and I have embraced the realization that I don't have to answer the phone just because it is ringing. I have promised to return all calls within 2 business days - not to answer every call.

So this time I decided not to answer, even though I'm sitting at home not doing anything (unless you consider catching up on all kinds of great new shows on my DVR as "doing something" - which I do).

I know what she was calling for - to apologize for not having the rent to me, even though she's 2 months behind already and my mortgage is due tomorrow. I gave them leniency a month ago because her mother is in the hospital dying and they had to buy a tombstone and she hasn't been working in order to care for her, etc etc.

They've been tenants for a long time and have caught up before from being past due. I'm sure they will again. But I've already transferred money from my personal account to cover the mortgage, and I really don't feel like listening to her blubbering apologies right now.

Maybe it makes me a bad person, but I don't want a status update on her dying mother, nor do I want to be on the phone with her for 20 minutes while she whimpers and whispers her apologies and tells me how many bills they are juggling and promises that I'm on the top of her "list" and assures me they will be caught up by the end of this month. I just want to find a rent check in my PO box, preferably yesterday, without having to have 5 conversations about it beforehand.

So I didn't answer the phone. I just poured another glass of red wine and un-paused my TV.

How "Average Returns" Overstate Gains

theworldofwealth@gmail.com (MEG) — Wed, 30 Sep 2009 21:25:00 +0000

If you read anything about investing, you've heard it 1,000 times: "The stock market averages a 10% return over time!" Sometimes you hear 12%, depending on how far back they are measuring, but financial experts love to talk about the long term double digit average return of investments.

But the unfortunate truth is that "average returns" always overstate an investor's actual monetary gain. You're looking at simple a arithmatic mean of each year's return without seeing the effect of the compounding returns from years past.

Consider this: A man invests $1,000. In the first year his investment gains 50%, and in the second year the investment loses 50%. So the "average return" is 0%. You'd probably assume that investor is back to his original $1,000, right? But you'd be way off. He actually has only $750 left.

His average annual return is 0%, but he lost 25% of his investment.

The first year he gained $500 (50% of $1,000), but in the second year he lost $750 (50% of the $1,500 balance after year one). The average is misleading - it doesn't take into account the compounding gain or loss from prior years.

Is "Health Reform" Just Code for "Income Redistribution?"

theworldofwealth@gmail.com (MEG) — Mon, 28 Sep 2009 19:03:00 +0000

A short, simple and straightforward article in the Opinion section of the Wall Street Journal raises a concerning issue. The writers argue that Health 'Reform' is Income Redistribution and that Congress should be open about that fact and entertain an explicit debate on the subject.

The writers argue that the recent changes proposed by Congress would create a "massively unfair form of income redistribution and create incentives for many not to buy health insurance at all." Rather than income being shifted from the rich to the poor - the argument I expected to read - the article centers around the fact that "younger, healthier, lower-income earners would be forced to subsidize older, sicker, higher-income earners."

This is obviously true, and may not seem like a big deal (after all, we've been doing the same thing via Social Security for decades). I have accepted the fact that individual responsibility for one's own expenses in America is going the way of the dinosaur, and who knows - maybe that's not a terrible thing. But I'm starting to wonder whether, given that reality, my savings and investments will really pay off.

It seems like everything Americans used to have to save for is beginning to be provided by the federal government, courtesy of somebody else's tax dollars. Maybe I should consider the $15,000 or so in taxes that I pay the federal government each year to be my "savings" for retirement, health care, my unborn kids' college tuition, and maybe even that starter home I hope to buy with a husband one day.

Why bother to save at all if everybody is going to ultimately get taken care of by Uncle Sam anyway?

Goal For the Week:

theworldofwealth@gmail.com (MEG) — Mon, 28 Sep 2009 18:00:00 +0000

Establish and begin to Execute a formal study plan in order to prepare for the CFP Exam in November.

I put this off all weekend and really should have done it 1.5 weeks ago when my CFP classes ended. I've offically had over a week off and it's time to HIT THE BOOKS.

Hopefully my study will also give me interesting tid-bits for all you wonderful readers. I'll try to post at least one interesting personal finance factoid per day from now until the exam on November 20.

I Saved Money This Weekend...By Going Out

theworldofwealth@gmail.com (MEG) — Mon, 28 Sep 2009 17:52:00 +0000

This past weekend I was planning on not going out and spending money; I was also planning on treating myself to some personal care in the form of a sports massage and a spa pedicure. This was planned for last weekend, but ended up being put off.

Well once again I was talked into attending a work happy hour on Friday afternoon, and once again it turned into a very late night full of spending money on taxi cabs and cocktails and entertainment.

I ended up calling to cancel my sports massage early Saturday morning (knowing it would be a waste of money until I go a good night's sleep and a bit of a detox). I was still excited for my pedicure on Sunday afternoon, but when I got there they informed me the nail technician had the flu and had to cancel.

So all in all I saved about $150 on spa treatments that I'd planned to pay for, all because I went out Friday and spent about $50 net (a friend insisted on giving me $40 in cash since I'd bought her some drinks the weekend before). Sometimes going out does pay!

Short Sale Unlikely to Close

theworldofwealth@gmail.com (MEG) — Mon, 28 Sep 2009 17:39:00 +0000

Last week I posted the question "Just How Long Can a Short Sale Take?" and got some great food for thought and insights from readers.

In the meantime I did a bit more research, and it turns out that the majority of short sale contracts don't end up closing. Some estimates put the figure as low as 10%, and other realtors estimate around a third of them close.

There are two primary things the bank considers when looking at whether to approve a short sale:

The Broker Price Opinion (the market value of the property), and

The seller's hardship package (the financial health of the seller).

If the bank thinks the property is worth (or will shortly be worth) more than the contract price agreed upon by buyer and seller, it may deny the sale. Worst case, they end up having to foreclose and can then sell it for a higher price themselves.

If the bank thinks the seller can keep making payments and/or has enough liquidity to cover the difference between the amount owed and the sales price, they may refuse the short sale on those grounds as well.

Another reader made a comment that since the subject property is a rental and not an owner-occupied home, there's even less of a chance that the deal will be approved - especially considering that the place is fully leased out at a level that should easily cover the mortgage payments (unless the guy took out a loan for 100% of cost with a really terrible interest rate).

So bottom line is I'll probably be getting my $1000 escrow money back in a couple of months, and my mom needs to be looking into other places to invest her cash.

Just How Long Can a Short Sale Take?

theworldofwealth@gmail.com (MEG) — Fri, 25 Sep 2009 15:22:00 +0000

During the first week of June, I submitted an offer on a duplex next to one I own. The seller agreed the next day. But nothing has happenned since then.

The owner of it is attempting a "short sale," meaning that he is trying to sell the property for less than he owes on it. Because of that there are actually three parties which have to agree before the contract is final - the buyer, the seller, and the seller's lender (in this case, Bank of America).

Guess which party has been completely unresponsive so far?

I'm still waiting, because I am allowed to back out of the deal for any reason up to 2 weeks after the contract is formally executed (i.e., up to two weeks after BOA agrees to the deal). So there is no harm in waiting, other than the fact that my $1,000 in escrow money is tied up in the meantime.

I am wondering what the odds are of Bank of America approving the deal.

There have been other foreclosures in the area, which is made up largely of rental properties. So values according to the "comparison approach" have been dragged down. So maybe BOA would agree before the values drop even more.

On the other hand, the property (and neighborhood) is fully leased and cash flowing, making the value according to the "income approach" significantly higher. Plus the property was snatched up (by me) very shortly after he put it on the market - and values may have risen even further over the last four months since then. So maybe BOA would not agree and insist he hold out for a better sales price.

I know BOA is buried in deals like this, but hasn't there got to be some kind of limit as to how long they can drag their heels on an answer?

When Work Expenses Become Personal

theworldofwealth@gmail.com (MEG) — Wed, 23 Sep 2009 16:55:00 +0000

I was "invited" today to attend a black tie ball later this fall, on behalf of my employer. And by "invited" I mean "instructed."

Our company buys tables at a lot of events, and I just got an email that my boss' boss would like me and two other hand-picked bankers to "take ownership" of this event - complete with attending the Underwriters' Party and filling a table for 12.

This could be fun, and I'm glad me and my two closest work friends are the ones chosen to do this. I'll set aside my dread for now about finding a date and/or some clients to attend this with me (my two colleagues have steady girlfriends and only need to invite one other couple each to fill their third of the table).

Instead I'm focused on how this is going to screw up my budget. I'll have to buy a formal dress, you see (not to mention what other expenses may end up being required a la hair, nails, and transportation).

I have a couple of old prom dresses that I occasionally drag out, but most of the time when I go to these events I wear a cocktail dress, not a formal gown. But that's because usually the events are "black tie optional" and I'm going with friends or as somebody else's date - not when it's "black tie" and I'm representing my company as a hostess for a table of clients.

So I need a more formal, less provocative gown than I currently happen to own. And it needs to be nice. *sigh* I love dressing up, but I hate spending a lot of money on a dress that I can only enjoy a couple of times a year.

I guess a $500 Nordstrom purchase wouldn't be an appropriate line item on the expense report...?

:)