Archive for Aug, 2012
Around the financial blogosphere there were several noteworthy articles that I thought were worth reading:
- Free Money Finance is one of the premier financial blogs had a good listing of Best Cash Back Credit Cards, great help for those who use cards judicially, and want to earn more bucks back
- Five Cent Nickel has the Money-Saving Tailgating Tips, great help for those of you celebrating the beginning of the football season this weekend
- My Money Blog has Lowes 10% Coupon code, nice tip for those with big home improvement projects this weekend
- Moolanomy compiled a nice list of 20 Important Financial Tasks to Complete Each Year, great list to help us stay on track
- Dougroller’s 7 Apps to Make Free Phone Calls describes the various apps to reduce your phone bills
In the back of our minds, it seems as if a lot of us have a desire to be rich. This thought reminds me of Tevye. The central charachter in the Tony (10) Award Winning Play, and Oscar (3) Winning Movie, Fiddler on the Roof, Tevye shows us his interesting story about poverty and wealth.
This Broadway musical started in 1964 and was one of the longest running shows. It was the first to surpass 3,000 performances for almost 10 years. The movie version released in 1971 remains a timeless classic; it’s on my top-ten list of best movies and plays of all time. These productions made many people wealthy, yet the story’s focus was on a poor dairyman in early 20th century Russia.
Tevye is a likable character, yet he has complaints about his situation: suffering from poor transportation (lame horse), family discord (daughters not following tradition and a disagreeable wife), oppression (Jewish and political), and modest lifestyle (laborious job and humble belongings). Throughout the film Tevye is constantly conversing with God. It is in this discourse and transparency that we see his internal struggles.
In a couple of scenes he is complaining to God about his suffering and poverty, and he looks up and says:
- “It may sound like I’m complaining, but I’m not. After all, with Your help, I’m starving to death. Oh, dear Lord. You made many many poor people. I realize, of course, it’s no shame to be poor… but it’s no great honor either. So what would be so terrible… if I had a small fortune.
- “Money is the world’s curse. May the Lord smite me with it. And may I never recover.”
We all think at different times that financial wealth is a solution to our problems, or society’s ills; we are no different from Teyve it seems; I guess that is why I think of him.
What are riches?
If we count the things we have, most of us are really quite rich, especially compared to most other humans on the planet. Tevye had many things to feel bad about, but he had good things to appreciate too.
- Family: he had beautiful, intelligent daughters full of promise who loved their father, and a devoted wife who was good to him, a loving partner in the struggles of life
- Job: he had a job that provided income, even though it was not glamorous or easy, but it was important, filling a vital role for his community
- Friends: he had friends and family surrounding him, providing connection, solace, humor and companionship
- Community: he had the community of faith and neighbors, who helped each other generously through life’s ups and downs
- Shelter: Tevye had a house that he owned, a place to lay his head down at night and to sup with family and friends
- Country: this Tevye didn’t have; his people faced upheaval, something most of us will never face–the forced immigration with only the belongings on our backs, a situation some in Africa and middle-eastern countries face today
- Faith: knowing a God that cared for him, provided guidance in scripture and at temple, promised a great eternity and peace and joy in his heart
- Transportation and pets: he had a cart, a horse and a milk cow to help him get along and to provide for his needs
We could list many more things for Tevye, and for ourselves, with an inestimable total price tag. Most people, even those with less, after adding things up, are indeed rich, again especially by entire world comparatives.
Having a higher income has its benefits, don’t get me wrong, such as better health-care, safer neighborhoods, better schools, and overall healthier environment. Going from higher income to riches has its benefits too, such as better homes, cars and vacations, but there are disadvantages too. There is the worry of keeping the money, living with some fear of having to return to living as those with less means do. Wealthy people often have spoiled children to deal with, and they find that facing financial adversity often upsets marriages and friendships. Living modestly has benefits too–the opportunity to be happy and content with what is really important: character not based on wealth, appreciation for what one has, and the joy of being generous to those around us who are in financial need.
In conclusion, striving to be better, to succeed, to have a business that grows is a good thing, but sometimes the measuring stick is financial. Striving for integrity, strong character, strong community and justice are higher goals, and ones our country’s Founding Fathers held high, something that I am reminded of by mentors of mine.
Investing in physical fitness is smart, being in better health not only means feeling better, and having less stress, it saves money on doctors bills. Healthier people not only get fewer colds and flu, they have less disease and falling accidents. They spend less on prescriptions, and save time going to the doctor and pharmacy.
Consumers of physical fitness products are ripe for rip-offs, because people want the most efficient way to achieve their fitness and weight loss goals. However, I have found most of the pills and equipment marketed on TV are junk and a waste of money. Marketers are after quick bucks, and make millions selling products to people that have little knowledge of fitness.
Have you ever gone to neighborhood yard sales and not seen exercise equipment, videos (most of the time unused). Consumers should especially avoid equipment that is purported to help you loose weight on a particular body part such as the butt and stomach. It is a fact that any cardiovascular exercise will burn calories and fat all over the body. Doing isolated exercise will create more muscle in a particular area, something that the user may not want. This is all common knowledge in the exercise world and could be learned by anyone reading a decent book on fitness.
A few days ago the Federal Trade Commission recently settled for false marketing claims with the Ab Circle Pro for $25 million, and Skechers last May for $50 million for toning shoes. This reminds me of the vibrating exercise belts of yesteryear which pulled a canvas belt back and forth across one’s hips. Gymnasiums had these for decades, I remember seeing a few still in the 1970′s. It seems even with fitness equipment nothing is new under the sun.
I recall seeing various “….Of Steel” videos in boxes at our yard sale as well as an Ab Roller. It is a good rule of thumb to remember that 90% of highly marketed devices DVDs and pills aimed at consumers wanting to get in shape and loose weight are junk.
The better investments I have made on exercise equipment are good bicycles. Also membership to a fitness facility can be a good buy (when I actually go) – Just be sure not to sign a long-term contract. I know people that really use their treadmills, so they can be a good investment, but they are not cheap, look for a good used one. Investing in a modestly priced personal trainer might be a really good idea too, to help you stay on track. The best buy in exercise equipment for me has been a good pair of running shoes, I get hundreds of hours of running and walking for a small investment. To get a really good pair that will be kind to your feet and ankles, initially spend $75 to $115. Then when you need a new pair buy last-year’s model online for a big discount. These days the new model offers few enhancements- the changes are mostly cosmetic, only the very avid runner will notice the upgrade.
The presidential race tax debate faces Romney’s lowering them 20% for all, versus Obama’s increasing them for those in middle to higher incomes. For quite a while the tax burden has continued to shift to higher income people, and those on the opposite end pay less and less taxes, per the Wall Street Journal. If you want taxes lowered for all bracket, it seems as if your candidate is Romney lowering them and if lowered just for the upper income earners, then you may favor Obama, per Bank Rate.
According to the Wall Street Journal, the following chart outlines the tax policy for Obama and Romney.
Nike announced they will soon be releasing $315 dollar basketball shoes, named after the famous, or if you are from Cleveland infamous, all-star, Olympic Gold-Medal winning, national championship, basketball player.
The shoes are great! They are endorsed by one of the top players in the game, LeBron James; they have a unique design; and they will be rare, since only a limited supply will be made. Not only will they have an awesome gold Nike swoop, they will have electronics to measure how high the wearer can jump and other metrics. They are better, of course, than the $250 LeBron 9 PS Elite. Now if you can’t afford the 9 or X, you will be able to buy a cheaper version for less, you just won’t get the electronics.
Now look, I value well made shoes, having a wardrobe of various types of casual and dress types in brown and black, but paying much more than $100 for sneakers is insane. I’ve paid more than $100 for some I have, but I have been known to own and wear a pair for more than 20 years, after several resolings. I usually have one pair of athletic shoes for various exercising and running, but I have owned golf and other varieties of sports shoes in the past.
Some people have been known to kill each other over the latest and greatest Nike shoes, and it seems shameful to come out with an out-of-sight priced shoe for greed and envy aimed squarely at the youth market. Because of silly things like this that Nike does, I usually avoid them when looking for new running shoes, although I wish I had the blue and orange pair I owned as a kid in the 1970′s since they are now a collectors’ item.
Roth IRAs which I wrote about a few days ago are good for supplementing one’s retirement and growing tax-deferred until retirement. This article doesn’t cover the rules regarding IRAs that were converted into Roths.
The rules are quite a bit different, than they are for traditional IRAs withdrawals. The differences compel many to seriously consider Roth IRAs, since they have many tax advantages over them at retirement, however their are rules. Careful planning is important, so if someone wants to use the money for retirement or other needs they want to avoid tax penalties. Let me say at the outset that since planning for IRA distributions can be tricky, obtaining advice from a qualified financial expert would be a good idea.
At retirement, if the owner wishes to withdraw money from their non-tax-deductible, tax-deferred Roth IRA, all of the monies received are tax free. If they pull any funds out of the Roth IRA account before their age of 59½ or within 5 years of the contribution, they will have to pay a 10% tax penalty, there are exceptions and I will cover them in a moment.
Money can be left in the Roth IRA indefinitely until death, and then specific rules apply affecting the distribution, so unlike traditional IRAs (and most other accounts like 403b and 401k) the owner is NOT forced to make Minimum Required Distributions (RMD) by April 1st of the year following the year they reach 70 ½. Also, since ROTHs have no RMDs, there isn’t a 50% penalty for monies left in the account unlike traditional IRAs have.
Withdrawals prior to retirement can be done at any time, however there may be a tax hit. If someone wants to get to their Roth IRA prior to their age of 59 1/2 there is a 10% penalty on the growth only, and no tax on your contribution, since you made it with after tax/non-deductible payments. There are a few ways to avoid the penalty according to the IRS website:
- It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit
- Made because you are disabled
- Made to a beneficiary or to your estate after your death
- One that meets the requirements under first time home under exceptions (up to a $10,000 lifetime limit).
My article entitled The Asset Allocation Style of Investing, highlighted this method of investing made popular from the study by Garry P. Brinson, Brian D. Singer, and Gilbert L. Beebower that found that over 91% of long-term portfolio performance is derived from the decisions made regarding asset allocation, and not market timing or security selection.
In that article I compared 5 fictitious model portfolios to help demonstrate different risk levels: very conservative ‘Volvo portfolio’, conservative ‘Lexus portfolio’, moderate ‘Acura portfolio’, aggressive ‘BMW portfolio’, and lastly the very aggressive ‘Porsche’ model portfolios – each investing in a different mixture of cash, bonds and stock, as well as different allocations of large, mid and small cap stock and foreign stocks.
The mid-year chart below provides historical rates of return for each asset allocation model from the article, based upon the respective indices. Investors should take into consideration expenses and timing and have a healthy historical perspective.
The Expense Factor
The table below compares the GROSS rates of return that you would have earned in any of these portfolios if you invested in index funds that held investments identical to the index. Gross rates of return are before any expenses, such as:
* Mutual fund management fees and expenses
* Transaction costs
* Financial planner’s management fee
In order to have earned these rates of return, you would have had to invest at the same precise time of the time period represented. Fluctuations in the market can make a drastic difference in your actual rate of return, so if you invested a lump sum of money on a day that the market was down or up, or you invested each month (perhaps using dollar-cost-averaging), you may and will experience quite a bit different results than illustrated here.
Historical Perspective of Indexing
Index fund investing (passive) has been popular because people hear in the media frequently that a majority of actively managed mutual funds do not consistently beat their respective index.
Actively managed mutual funds usually have higher expenses, thus making it more challenging for them to out perform their passive brethren. However, investors may want to consider looking for mutual funds that beat the indexes (net of expenses), they might even find some that have a lower risk (volatility) than their index.
The preference to invest in index funds is a fairly recent phenomenon. Now you can even invest in ETFs or exchange traded funds, a hybrid of index investing that has emerged in the last several years. The charts below illustrate returns all the way back to 30 years, however index funds and ETF’s didn’t exist for each of the indexes used to make these calculations back that far.
Past Performance an Indication of Future Performance?
Anyone who as ever glanced at any financial product advertising or literature will see “Past results are not an indication of future performance” pasted all over the place. This sentence is required by the security industry’s regulating authorities and it is very true. However in order to make intelligent decisions, historical information is very useful for comparison purposes, in addition to a lot of other financial information including your own personal financial plan.
The indexes used to compile the historical rates of return are below. Keep in mind there are dozens of different indices. These ones many feel most closely represent the benchmark for each category. There is some differing of opinion in the investment community as to the best indices that should be used for benchmarking.
* Cash – Money Market (3-month CD
* Intermediate Long Bond – Lehman Bros Aggregate Bond
* Large Cap Value — S&P 500
* Mid Cap — Russell Mid-Cap Index
* Small Cap – Russell 2000
* International Equity – MSCI EAFE Equity Index.
|Historical Rates of Return as of 6/30/2012|
|Model Type||Very Conservative||Conservative||Moderate||Aggressive||Very Aggressive|
If you do your own investing – active or passive or hire someone to invest for you, it is prudent to make sure that you are doing as good as the benchmark. The benchmark is a minimum expectation of rate-of-return that you should be achieving. It is a way to hold yourself or your investment advisor accountable. It is important that you know why your investments are either not doing as well or much better than the benchmark. Either could be cause of concern: it could be merely a timing issue or it could be because your advisor made a mistake or is not doing their job. It is important that you are in the know and asking the right questions, and getting the right answers.
Asset allocation investors do not just invest in funds similar to the S&P 500 or the DOW (the most common benchmarks), therefore they should compare their results to aggregated benchmarks that include indices that closely match their allocations.
A few days ago in a question and answer automobile section of the Wall Street Journal, a reader asked if it was okay to buy a SAAB. If you don’t already know, the Swedish automobile manufacturer filed for bankruptcy about a year ago. No one has yet to step up to the plate to buy them and start manufacturing cars and parts again.
I think it is terrible advice that Jonathan Swift gave to recommend that was okay to buy a SAAB. I usually like his car reviews and Q and A columns, but this time I think his advice is erroneous. On one hand I imagine you can get a great deal on them, since some might want to sell them in case parts become hard-to-find. However looking around the internet I found some people who are not able to find parts they need. After market parts manufacturers will continue to make many of the regular serviceable parts for a while, such as alternators and brake parts, but if no one buys and revives the brand it is a gamble, in the long term.
Many people today are struggling through the recession with debt and depleted savings, so purchasing a car that has higher incidents and costs of repairs compared to the average would be better off buying another brand, one they are certain they will be able to find parts for. There are many cars that fit the description of higher incidents and costs of repairs, especially for used ones, and I blogged about it earlier this year- these are the used cars that I would avoid. Cars cost a lot of the average person’s budget, when you consider loan or lease costs, purchase price, gas, oil changes, tires, insurance and regular maintenance. Why compound their expense by getting a really nice envious car, when it might make you go broke.
I know a lot of modest income people buy these really nice cars like Land Rovers and Mercedes, but sometimes the repairs puts them, or keeps them in poverty. Buyer beware.
Does it make sense to buy a new used car that gets great mileage, compared to keeping an old heap, thinking that the gas savings will outweigh the cost of borrowing?
Suppose an old family van isn’t needed anymore since the kids are out on their own. It could be tempting to consider alternatives, for example, there is the opportunity to buy a great used car; a Honda CIVIC from a friend for $5,000. A loan will be necessary since debt reduction has been the goal instead of saving for future needs, so will the gas savings be larger than the loan?
The new car in question is a 2001 2 door CIVIC, 106,000 miles, in excellent condition, and can get nearly 40 miles per gallon, since it has the high-efficiency engine and constant velocity transmission.
The van in question is a 1998 Ford Windstar with 165,000 miles on it, and it averages about 17 miles per gallon with its 3.0 engine.
A $5,000 loan at 7% for 36 months has a monthly payment of $154.39. The van gets driven about 700 miles per month, with a monthly fuel consumption of 41 gallons for $144.11 per month at $3.50 per gallon (700/17×3.50). The Honda’s Fuel cost at 35 miles per gallon would be $70 per month (700/35×3.50).
The net result is that since gas savings would be $74.11 per month and the car payment is $154.39, then to purchase the car by borrowing the buyer would be about $80 in the hole.
I have not calculated the residual values of the vehicles, nor have I considered the maintenance cost. On one hand the Honda should be inexpensive to maintain since it is excellent condition and has new tires. However it requires timing belt replacement every 80,000 miles and other regular service that is unknown. The van is in good shape mechanically, but it could die any day or need a major repair, but either way its useful life is probably less than two years.
The only way it would make sense to make the change is if the van needed major service today, or if gas went to almost $8 per gallon, or a substantial increase in the amount of miles driven.
Since the gas savings doesn’t exceed the car payment, it makes sense to save the difference, buy a car later, and pray for the van to continue hum along without major repairs.
Is the rumor true, is the real estate market rebounding?
There are early indications that after years of depreciating values, prices in some areas are holding and are trickling up a bit. New homes being built are also on the incline. The inventories of houses for sale are the lowest in several years, increasing the sales rates for homes on the market. This and interest rates continuing their low trend have also benefited new home construction.
We are still far away from real estate boom times, especially in areas like Detroit, Florida and Las Vegas, but at least these early trends are something to be positive about. New home building always helps bolster the economy, in new jobs, manufacturing of business components, and resources.
If you want to dig into this more, see last week’s article at the Wall Street Journal.