Friday, March 29, 2013

Happiness Is....

I read the Daring to Live Fully blog by Marelisa Fabrega on a fairly regular basis. It is sort of a new age living the life you love motivational kind of thing, not my usual fare. However, from time to time it contains some pretty interesting insights that I wouldn’t find in any hard core financial material. Her latest post is titled “How to Calculate Your Net Happiness,” a tall order.

The first problem in our search for happiness is the lizard brain. That is the reactive part of our brain that keeps us alive when facing sudden dangers. Its functions are sometimes called the four Fs, feeding, fleeing, fighting, and….reproduction.

Seth Godin loves to talk about the lizard brain, as it keeps us from reaching our full potential as human beings. He observes, “The lizard brain is hungry, scared, angry, and horny. The lizard brain only wants to eat and be safe. The lizard brain cares what everyone else thinks, because status in the tribe is essential to its survival.”

I would guess the first step in achieving happiness would be keeping the lizard brain under control. I would say satisfying the lizard brain, but I have learned that is impossible. Still, we need a certain amount of food, clothing, and shelter in our quest to achieve happiness. We need stable healthy relationships with others of our species. We need at least a measure of safety and security in our immediate environment. Not all have even the basics that could satisfy the lizard brain, yet some of them have achieved a deep abiding level of happiness.

In a recent article found in Psychology Today, Ryan T. Howell, Ph.D. discusses the results of his extensive studies of happiness. He has found 5 characteristics of happy people; some of them even involve money. People who manage money well tend to be happier than people who do not control their finances. That makes sense. Money is an intrinsic and necessary part of survival in this material world. I expect the lizard brain needs a certain amount of money to feel safe. The next two indicators of happiness kind of hang together. Happy people spend money on experiences rather than things. That too makes sense. A house full of junk does not bring happiness. Believe me it causes stress, especially when contemplating a move. The next indicator for happiness is revisiting memories of those happy experiences. However, our happiest memories were seldom bought with money. The last two aren’t directly related to money. First an ability to read and properly react to the emotions of others, emotional intelligence if you will, is a powerful indicator for happiness. The last is community. I would think that people who know how to read and react properly to others would have a better standing in their community. Such a skill might also help you make more money over the course of your career or lead you to a more powerful position in your community, or not.

There must be something else to this happiness question. Ultimately neither our lizard brain nor that organ’s more evolutionary advanced components are in control. Solomon observed, “Many are the plans in the mind of a man, but it is the purpose of the Lord that will stand.” (Proverbs 19:21) We were also created to relate to a higher power. I am a Christian so you know where I stand on that subject. However, Christians are not the only people who have managed to transcend the limitations of the lizard brain. The Buddhists teach unhappiness arises when we are unable to fulfill our desires. The Apostle James says pretty much the same thing.

James Chapter 4

[1] From whence come wars and fightings among you? come they not hence, even of your lusts that war in your members?
[2] Ye lust, and have not: ye kill, and desire to have, and cannot obtain: ye fight and war, yet ye have not, because ye ask not.
[3] Ye ask, and receive not, because ye ask amiss, that ye may consume it upon your lusts.
[4] Ye adulterers and adulteresses, know ye not that the friendship of the world is enmity with God? whosoever therefore will be a friend of the world is the enemy of God.

Final giving to others also seems to be an important component to finding happiness.

Jesus himself said, “It is more blessed to give than to receive.”

A Hindu proverb observes, “Great rivers shady trees, medicinal plants, and virtuous people are not born for themselves.”

Hazrat Abu Zar Ghaffari reported that one evening he was walking with the Noble Prophet Muhammad (saw) when he said, "Abu Zar, if the mountain of Uhud were turned into gold for me, I would not like three nights to pass and one dinar still be left with me, excepting what I would leave for paying my debts." He would never rest until all the cash in the house was completely finished.

Rabindranath Tagore wrote, "I slept and dreamt that life was joy. I awoke and saw that life was service. I acted and behold, service was joy."

Now go out today with the intention that you will be somebody’s miracle, see how that increases the calculation of your net happiness.

Wednesday, March 27, 2013

One Size Doesn't Fit All At Least Not Forever

No sooner do I learn of the existence of a fail-safe one size fits all portfolio than I learn it no longer works as advertised. Robert Seawright, Chief Investment Officer of Madison Avenue Securities notes in an article entitled “Is the Yale Model Past It” this is really pretty common. Success breeds copycats. As more investors try to buy into the same model portfolio the returns tend to diminish. Also mean reversion, what I have termed “The Las Vegas Line” tends to catch up with even the most successful investors.

Casino Capitalism and The Las Vegas Line

David Swensen runs the endowment of Yale University. For over 20 years he generated an unbelievable average annualized return of 16.3%! His model has been copied by many other universities as well as individual investors. I recently learned about the existence of this genius from the book “I Will Teach You to Be Rich” by Ramit Sethi. By the way, this book is well worth reading. While it is particularly aimed at intelligent, educated, highly motivated singles in their 20s and early 30s, anyone interested in learning to improve their personal finance skills would benefit from considering the author’s ideas.

Here is Swensen’s Model Portfolio:

30% in Domestic Equities (U.S. stocks small, mid, and large cap)
15% in Developed World International Equities (countries such as Canada, England, Japan or Germany)
5% Emerging Market Equities (countries such as Brazil, Russia, India and China)
20% Real Estate Funds commonly called Real Estate Investment Trusts (REIT)
15% Government Bonds (good old boring U.S. Treasuries)
15% Treasury Inflation-Protected Securities (TIPS)

While it still looks like a pretty well diversified portfolio to me, Seawright observes that starting in 2008 things took a turn for the worse. In fiscal 2009 the Yale endowment lost 24.6% of its value, a little better than the S&P 500 but not as good as the average college endowment which lost only 18.6%.

Just how risky is Swensen’s portfolio? His research indicates that the typical Yale Model portfolio runs a 28% likelihood of losing half of its assets over the next 50 years and a 35% risk of a “spending disruption” (whatever that means) over the next five years. I would like to know how this compares to other model portfolios. We might all get a little green around the gills if the results of an academic study of the risks inherent in our portfolios were published in a scholarly journal.

According to Seawright, a portfolio invested 60% in an S&P 500 index fund and 40% in a Barclays Aggregate bond index fund would have gained 12.6% over the last three years and 2.8% over the last five years. Yale returned 11.83% over the last three years and 3.08% over the last five years.

For those of you interested in the more detailed comparison of the results published in this article:

“60/40 Index Portfolio = 42% Russell 3000 Index, 18% MSCI All Country World ex. US Index, 40% Barclays Aggregate Bond Index, rebalanced annually”

“60/40 Asset Class Portfolio = 9% S&P 500 Index, 12% DFA US large value index, 21% DFA US targeted value index, 6% DFA international large value index, 6% DFA international small value index, 6% DFA emerging market value index, 40% Ibbotson 5YR T-Note index, rebalanced annually”

Seawright notes that a variety of studies including Swensen’s own analysis have shown that his excellent returns came from management skill choosing its private equity exposure and an illiquidity risk that hammered a number of other university endowments. These are investments that can not be sold quickly on open markets when their value is headed South.

Sadly the author concludes the Yale Model is past its prime due to overcrowding. Once again it looks like simple is better than complex unless you are very smart and very lucky.

So, Please! Please! Please! Let’s be careful out there!

Tuesday, March 26, 2013

Diversification Distribution and Age

Yesterday, I threw out a sample portfolio made up of low cost index funds for someone in his early sixties. Like me, it is pretty conservative. It has been a while since I have visited the subject of diversification as a function of age, so let’s go over the basics one more time.

The old conventional wisdom recommended, “Your age in bonds.” That is at thirty years of age an investor should have 30% of their investments in bonds and 70% in stocks. At 60 and investor should have 60% of their holdings in bonds and 40% in stocks.

The new conventional wisdom states that due to the risk of inflation, the amount held in stocks should be bumped by 15%. Hence at thirty an investor should have 85% of their money in stocks and only 15% in bonds; at sixty that would be 55% in stocks and 45% in bonds.

Personally I have decided that for now I will allow my stock holdings to float between 40% and 55%. Hopefully, I will move toward the lower end of the range when I think stocks are too high and towards the higher end of this range when I believe stocks to be undervalued. If I had to pick one all purpose target allocation for my age it would be 50% in stocks and precious metal and 50% in bonds, money market funds, and CDs.

I have debated whether gold (a commodity) should be considered cash or a stock in this calculation since it neither. I have concluded since its values goes up and down independent of the valuation of the American Dollar, it behaves more like a stock than a cash type investment. Therefore, I throw it in with my stocks. By the way my holdings in precious metals are closer to 2.5% than the 5% I proposed in my sample portfolio.

There are three reasons to invest growth, income, and capital preservation. These goals are interwoven with time. When a young person is in his or her twenties and early thirties growth is everything. Since this is the age of household formation most of a young family’s money is going to buy a house, furniture, and baby clothes. Most likely their only investments will be a 401K and/or a Roth IRA. This is long range money that will not be touched for thirty or forty years. Since the amounts are small and the time frame long, young investors can take greater risks than older investors.

As the investor passes 35, moving towards middle age capital preservation becomes more of an issue. If a 50 year old investor was 100% in stocks in 2008, he would have lost almost half his money with only 15 years to rebuild his accounts before retirement. It is very difficult to recover from such a disaster. If he held half of his money in bonds and cash, he would only have lost 25% of his money. He would be able to use that cash reserve to buy more stocks at bargain basement prices. Today not only would his initial investment been restored to its 2008 level but the new shares he bought at the bottom could have doubled in value.

When an investor finally reaches retirement, there is a new need, income. If he even has a pension, it won’t come close to matching his preretirement income. The difference will come from income generated by his portfolio or from expending the capital he has built over a lifetime. Today the Federal Reserve Bank is punishing savers with its zero interest rate policy. It is very difficult to generate income without increasing risk. Older investors are moving out of bonds that pay little or nothing into riskier investments in dividend paying stocks in search of income. This is dangerous because capital preservation after retirement is of paramount importance since there is no income to rebuild a portfolio after a crash.

In extreme old age, capital preservation is everything. If an investor has been blessed with both a long life and the financial resources necessary to have made that a good life, it is unlikely that she will outlive her money unless she takes unnecessary risks. If an investor is 87 and in reasonable health, how many years worth of capital could she need? The Government would suggest this woman or her agent with durable power of attorney plan for 5.87 years.

Then God, government, and your heirs can fight over what is left.

Monday, March 25, 2013

The Money Equation (Part II Your Investments)

∫ (Money In) d/dt = ∫ (Money Stored + Money Spent) d/dt
(This equation is integrated over your lifetime)

Let’s look at the other half of “Money Stored,” where the magic of compound interest works for you instead of against you. The first step in investment is savings. Dave Ramsey’s seven baby steps are a good way to prioritize this process.

1)$1,000 in a insured emergency fund (a bank account).
2)Pay off all unsecured debt (credit cards)
3)Three to six months total household expenses in that emergency fund.
4)15% of your household income in Roth IRAs and pretax accounts (for most of us that would be a 401K)

I would quibble as to when to start savings in your 401K if your employer offers matching money. For example, if your company offers a dollar for dollar match on the first 3% you contribute, for heaven’s sake take the free money. There is nowhere else where you can get an instantaneous 100% tax free return on your money! You don’t need to start at the 15% level to contribute to your retirement accounts. As time passes, build up to that number, but start as soon as possible.

Now what to do with your savings once you have established a firm foundation to your personal financial condition? I believe that there are a number of proven strategies that will work for you. The key is finding one that matches your personality then holding to that plan with patience and perseverance through good times and bad.

The number one investment mistake is never starting to invest.
The number two investment mistake is getting out of the game at the wrong time.

I am learning how to be a value investor. It is a philosophy that works for me. Somewhere along the line, I decided that I would buy stocks like I bought any other major purchase. I would look for the best value at the lowest cost. That has worked pretty well, but it does have it limitations. The text on value investing is The Intelligent Investor by Benjamin Graham. Warren Buffet believes it is the only book on investing you ever need to read.

There is a certain amount of risk involved in owning individual stocks. However, if you keep each holding under 2% or 3% of your liquid net worth, you are probably going to be OK. I think there is a greater danger, buying actively managed mutual funds from a commission salesman. Yes, there are funds that will out perform the market. Proponents of actively managed funds argue that every year there are funds that beat the market. True, but picking them before the fact is the problem. Picking the Super Bowl winner after the game is over is pretty easy. Picking next year’s winner, well that’s a bit of a trick, isn’t it?

Studies indicate that at least 75% of these money managers will underperform the market. In addition a 6% or 7% sales commission means you need 7.5% growth before you break even. There go your first year’s returns. These funds also have annual fees that can run 1% or more of the total value of your account. Numerous studies by John C. Bogle, founder of the Vanguard group and other heavyweights in academia and the industry have demonstrated the near impossibility of an actively managed fund beating the major market averages over the long haul. In addition these studies have proven that those commissions and fees are simply not worth the value of the “professional” management that is playing with your money.

As I mentioned there are inherent limits to buying individual stocks. Picking out stocks like Chevron, Coca Cola, and Proctor & Gamble didn’t require a lot of research on my part. However, the key to safe investment is diversification across many asset categories. Starting with companies like Chevron is easy, but what Brazilian tree farm should I buy? This is where low cost index funds and their younger siblings, the exchange traded fund come into play. I bought Vanguard’s exchange traded fund for developing markets to own a piece of the action in countries like Brazil, Russia, India, and China.

Buying and selling individual bonds can be laborious. In addition individual bonds can be, at a given point in time, illiquid. Perhaps you own a Frederick County Municipal Sewer Bond. To sell this instrument you need to find someone who wants to buy that exact item. In order to attract a buyer you might need to sell at a pretty steep discount. Low cost bond funds can be bought and sold any day of the week for a well understood and relatively stable price.

Finally, I want to own some gold as disaster insurance. What am I going to do with physical gold? Bury it in my back yard? An exchanged traded fund sector fund like GLD (SPDR Gold Trust) solves that problem. For a very small fee my gold sits safely in a bank vault in London. I can buy or sell it like any other stock.

For the record, I hold something on the order of 15% (or a little more) of my liquid net worth in individual shares. The rest is held in low cost index funds, exchange traded funds, or simple cash vehicles like money market funds or certificates of deposit.

Bottom line. You want the safest strategy for your investments? Numerous studies indicate that an age appropriate mix of low cost index funds is the best bet.

Maybe something like this for someone of my age (62)?

Total Stock Funds 45% distributed in index funds something like this:

20% U.S. Large Cap
5% U.S. Mid Cap
5% U.S. Small Cap
10% Developed Markets Foreign Stocks
5% Developing Market Foreign Stocks

Total Bond Funds 35% distributed in index funds something like this:

10% U.S. Treasury Notes
10% Investment Grade Commercial Bonds
10% Tax Free Municipal Bonds
5% Treasury Inflation Protected (TIPS) bonds

15% Cash: This is not as stupid as it sounds. Even if you are young, you will need working capital to pay your monthly bills, an insured emergency fund, and something to take advantage of opportunities that will appear from time to time. Besides that, there are (uninsured) commercial Certificates of Deposit and similar vehicles that offer a pretty good return with a minimum of risk.

5% Precious Metals: Maybe now is not the best time to buy very much gold, silver, or platinum, but long term I would keep a little money in this sector.

Remember, as your stocks fall in value you are selling bonds to buy more stock, thus maintaining your target balance. As your stocks rise in value you are selling shares to buy more bonds. As you continue to work you are adding more money in a manner that maintains your balance.

If all that seems like too much work, just buy a low cost lifecycle fund. A computer will maintain an age appropriate mix of stocks and bonds on your behalf while you sleep or play computer games.

One word of caution about the “experts,” always investigate how they actually invest their own money. If they are not following their own advice, ask why.

The Japanese have a saying about eating the potentially lethal, poisonous dishes prepared from the puffer fish, "Only a fool would want to eat Fugu fish, but only a fool will not taste the delicious Fugu fish." It is both the most notorious and celebrated dish in Japanese cuisine. Perhaps investing in the American markets is the most notorious and celebrated function of life in America. Always start small. If you are frightened by a new method of evaluating stocks open a practice portfolio without using your own money on a website like Google Financial before you invest real money. Be careful. Take your time.

Never stop learning.

* In the interest of accuracy let me add that I have three positions that are neither this nor that a closed end fund and two hybrid (bond/stock) funds. All of them invest primarily in conservative dividend paying stocks or conservative dividend paying stocks and investment grade bonds, just like me. I do not yet have a position in TIPS but I am thinking about it.

Sunday, March 24, 2013

The Money Equation

This is the basic money equation. I cribbed it from the first law of thermodynamics, an energy equation. This is not much a reach for me since one of the ways I view money is as a form of energy.

∫ (Money In) d/dt = ∫ (Money Stored + Money Spent) d/dt

(This equation is integrated over your lifetime)

There are two sides and three parts to this equation. I thought it might be useful to reflect on what it all means.

When I talk about Money In, I mean your salary over the course of your working life. One of the ways to optimize the money equation in your favor is to make this number very large when compared to your expenses. As I have mentioned before, the strategy that I used over the course of my working life was, “Get another degree. Get a better job.” It worked pretty well. A few years before my retirement, my income finally inched up into the top quintile. Sadly, “the good job” is a vanishing commodity in this country. There are too many people with too many degrees and just not enough stable wealth creating jobs. Today everyone needs to start thinking more like an entrepreneur. More than ever, you are your product. Even with relatively scarce degrees like a MSRN or a degree in engineering there are no guarantees of lifetime employment. In fact it is unusual for a person in their twenties or thirties to remain with the same company for more than four or five years. The world is changing too fast. Today the newspapers are full of stories about high school dropouts earning $100,000 a year programming in some new language. Tomorrow there is an oversupply of people with that skill. Something else is hot. What you can do for an employer especially if you are your own employee is more important than credentials. Some authors, especially motivational teachers like Tony Robbins specialize in equipping their students to deal with the psychological demands this new world. Some like Ramit Sethi in his I Will Teach You to Be Rich blog offer practical strategies for getting jobs or raises in a lousy economy.

Money Spent is the specialty of authors who major in frugality. Trent Hamm author of the Simple Dollar (book and blog) does an excellent job teaching his readers how to enjoy life more while spending less. Leo Babauta author of Zen Habits does a very good job simplifying life generally. Of course both Dave Ramsey and Suze Orman are famous for their rants attacking $5.00 lattes as well as the more egregious excess of American consumerism. I was born into a family that jokes that we squeeze a nickel so hard the buffalo bellows. I understand how to use frugality to control the outflow of money. I am sure you are tired of my endless rants against cable TV, cell phones as well as other excesses. Remember the book, The Millionaire Next Door. These men buy their clothes from J.C. Penny’s, their watches from Timex, and they drive used Buicks.

I have chosen to describe the most complex section of the equation, the one that really matters, Money Stored. This is where compound interest either makes you rich or destroys you. Your choice. That unpaid credit card balance is listed as a negative number when calculating your net worth. The interest generated by that debt flows out of Money Spent with no benefit to your life or your bottom line. This is where your savings and your investments generate compound interest that over time generates wealth. Most of us are not so poor that we need to live paycheck to paycheck. Most of us are not so rich that we can neglect at least reasonably responsible financial behavior. We are somewhere in the middle where our decisions concerning compound interest will put us in a net worth category that is below our salary or above our salary. Debt is your enemy. It must be avoided if at all possible. Nothing else will so damage and limit your future. In my next post I will discuss approaches to using compound interest to your advantage through investments.

Danko and Stanley, author of The Millionaire next door proposed a simple test of how well you are doing in the all important Money Stored category. It works very well for people 40 and older, not so well for younger folks.

Current Pretax Salary Multiplied By Your Age Divided by 10

Consider this example:

A man earning $100,000 a year who is 50 years old should have a net worth of $500,000. That would include the equity in his home, his 401K, his cars, furniture, and savings accounts less any miscellaneous debts. If his net worth is half that amount he has a problem. If it is twice that amount the authors consider him a “prodigious accumulator of wealth.”

Saturday, March 23, 2013

Are You a Generous Tipper?

Recently I read another in an endless stream of articles on tithing. It is a subject that fills Christians with dread and guilt. When the subject of “stewardship” comes around in the annual cycle of sermons, the congregation reacts like the sensors on the starship Enterprise when they detect a potential danger. The deflector shields are raised. Warning claxons sound. Red lights flash on and off and the phaser banks automatically power up.

Tithing is the wrong question. The real question is, “What is in your heart?” Are you a generous person? Do you want to give gifts of love from an open heart to a hurting world? Do you want to give justice to those who are in no position to help you? Do you want to give generously to those in need?

I want to propose a simple test to help determine how far up the ladder you have progressed. Don’t worry about where you are standing. Just determine in your heart you want to climb higher.

Are you a generous tipper?

I have seen the burden of giving, particularly the tithe, result in hardened self righteous hearts. Do you know there are Christians who leave a Bible tract as a tip for a waiter or waitress rather than any money? Really! It happened to a friend. I heard one story from the father of a waitress. Someone left his daughter a Bible tract disguised as a $20.00 bill—no money—just a stupid Bible tract. Disgusting! If you can’t afford to leave the traditional 15% for a waitress who is doing her job, you have no business eating in that restaurant. Nationwide, severs earn about $10.00 an hour. Come on folks, do you want to live on $20,000 a year?

Don’t stop there. Leave a tip for housecleaning when you stay at a hotel. It isn’t required, but how would like to earn a living cleaning up other people’s messes? The median salary for hotel housekeepers is $19,261. Leave her a couple of bucks and a thank you note. It won’t kill you. By the way, after recently spending Saint Patrick’s Day weekend in a hotel located in a major metropolitan area, let me add something else. If you or one of your three drunken buddies sharing your room happens to throw up in the bed, leave your housekeeper forty or fifty bucks.

You can even do more. I have done things like this maybe a half a dozen times (or less) in my entire life. Folks, I am still climbing that ladder. Once, I burned some photographs from Hawaii onto a CD and carried them over to the Walmart photographic department to have some enlargements printed. A young Indian woman was running the department. It was the first time I ever loaded electronic images into their machine. She spent considerable time and effort teaching me how to load the images and how to crop them for best effect given the size of the print. When I finished, I left for a little less than the required hour. Upon my return the enlargements were ready. She went over the prints with me, one at time, to be certain I was satisfied. Obviously she had been playing games with the color settings on the machine because the colors in the enlargements were better than the colors in the original prints. On impulse, I gave her a $3.00 tip when I paid the bill. I had never done such a thing in a retail store before. I also told her, “You’re much better than the kind of people who generally work in a place like this. You should think about opening your own business.” She burst into tears. It turned out she was studying accounting in night school and wanted to hang out her shingle as a CPA. I never expected such a response to such a simple communication.

This day ask God, “Teach me how I can become a blessing to others.” He might just answer your prayer.

Saturday, March 9, 2013

The Confessions of a Credit Card Thief

If you use a card, credit or debit, there is a risk that your account will be compromised. That is true even if you are very careful. My credit card has been compromised on two occasions. The first time the management of my credit union suspected an inside job. Although the thief was never caught, he or she was most likely an employee of my beloved credit union. On the second occasion, my credit card company flagged a suspicious transaction. After some research, I discovered that the thief had made a purchase from a website that was officially closed through a third party, something similar to PayPal. Evidently the merchant account was still open even though the website was closed. It wasn’t difficult to get those charges reversed, but I was left without a credit card for a couple of weeks. My wife and I share one credit card account. At times I think I should get a second card for just this kind of eventuality.

In an article entitled, Secrets of a Former Credit Card thief, the author interviews Dan DeFelippi, a convicted credit card thief who avoided hard time by copping a plea and going to work for the U.S. Secret Service. DeFelippi reiterates all the stuff we already know, but it worth revisiting this material.

DeFelippi is not the first thief I have heard who suggests that credit cards are safer than debit cards. He points out that debit cards access real money, your money. While you will probably be made whole if you are a victim of fraud, the burden of proof rests with you. The bank will require you fill out a lot of paperwork. Processing this paperwork takes a lot of time. He also indicates the issuers are quicker to flag potential fraud on credit cards than with their debit cards. Once my card was shut down when my wife tried to buy a pair of shoes on line in England. Since the charges hit when we were out of town, I didn’t discover the problem until I tried to pay for dinner using my card. Good thing I was carrying enough cash to cover the cost of our meal.

DeFelippi bought credit card information on line for $10.00-$50.00 per card. Some of this information was obtained from waiters and waitresses who use handheld skimmers to copy the information off of the magnetic strip on the back of the credit card. Some of it was obtained from fraudulent websites that exist to steal credit card information. Some of these sites actually will deliver a product but theft is their business. DeFelippi recommends that you limit your online purchases to merchants you know are reputable. Obviously, never use a website without a secure link for credit card transaction (https web address). He also cautions against making any purchases through WiFi connections; consider any such connection as compromised.

DeFelippi states that checking activity on your credit card accounts EVERY DAY! is the one most important thing that that you can do to prevent and limit your exposure to credit card fraud. He suggests a free service that will collect all this information in one place.

Allthough phishing schemes using phone and email marketing still exist, most consumers know enough never to give out any credit card information to anyone who asks for it on an unsolicited phone call or through an email request. Unfortunately, this kind of fraud is still perpetrated against the elderly who are not tech savy.

DeFelippi doesn’t like ATM machines. He prefers to limit his use of these devices to those found at a bank. There have been too many instances where skimmers have been installed in ATM machines located in bars and convenience stores.

Realize you are at risk of identity theft every time you use plastic. We can’t live without those cards anymore, but if we exercise caution we will probably be OK, at least most of the time. Also, this might be a good time to check out identity theft insurance. You might be able to add an identity theft rider to your existing homeowner’s policy for a relatively small sum.

Friday, March 8, 2013

Post-Traumatic Growth

“When we are no longer able to change a situation, we are challenged to change ourselves.”
Viktor E. Frankl

Since we were children we have realized life is not always fair, that in this world there are circumstances beyond our control impacting our bodies, minds, or our relationships. I have lived long enough to see people I know suffer some pretty horrendous events that had a catastrophic impact their lives. I have seen people lose their jobs in the depths of serious recessions; I have seen good people deal with brutally unfair divorces; I have seen people suffer terrible heart attacks; I have seen people deal with what may be the single most frightening word in our culture, cancer. Today I consider some of these people my heroes. As they suffered they overcame. They became better, more mature, more loving, stronger human beings. Until yesterday I did not know there was a psychological term for this phenomenon, Post Traumatic Growth.

“Post-traumatic growth refers to positive psychological change experienced as a result of the struggle with highly challenging life circumstances. These sets of circumstances represent significant challenges to the adaptive resources of the individual, and pose significant challenges to individuals' way of understanding the world and their place in it. Posttraumatic growth is not simply a return to baseline from a period of suffering; instead it is an experience of improvement that for some persons is deeply meaningful.”

Politicians, salesmen, the media all focus on what is wrong with the world, what you can’t control. You will never hear me say, “It’s easy.” Life isn’t always easy or fair, but in such circumstances you are given a choice. Do you focus on, where I am or do you focus on who I am?

The world will tell you there is no hope. Generally, in this culture the people shouting these messages of despair have something to gain in the way of money, power, or sex from you if you choose to believe them.

Some of what follows comes from a Labor Day 2011 speech by Tony Robbins. Some of it comes from observing the overcomers in my life. Some of it comes from Viktor Frankl, a Jewish psychiatrist who not only survived the Holocaust, but used those experiences to found a new school of psychotherapy.

1)Put your mind in a compelling future. The only thing that is certain is change. No matter what your condition, it will change. You can't always control your situation but you can choose a vision of your future.

2)Focus on what you can control. Find something that you can do that at least has the potential of improving your situation or the situation of others. You can choose what you feed your mind. You can find role models you wish to emulate.

3)Take action. Once you have found things you can control, do whatever you can do to improve the situation. I know a breast cancer survivor. When she was in chemotherapy she was such a blessing to others that the technicians in the clinic jokingly told her they didn’t want her to get well because then they wouldn’t have her making their world a better place.

4)Celebrate small victories. It seems that the overcomers in my life love and appreciate life in a new way. It seems small victories and simple pleasures take on a new meaning to overcomers once they have faced down death or made it through something like a really bad divorce.

5)Do something for somebody else. There is always something you can give to another person. Even if you have nothing you can give someone your blessings.

Live to become a blessing no mater what your circumstances.

“We who lived in concentration camps can remember the men who walked through the huts comforting others, giving away their last piece of bread. They may have been few in number, but they offer sufficient proof that everything can be taken from a man but one thing: the last of the human freedoms -- to choose one's attitude in any given set of circumstances, to choose one's own way.”
Viktor E. Frankl

Wednesday, March 6, 2013

I Don't Understand Annuities

Annuities violate my prime directive, “Never buy anything you don’t understand.” Annuities are complex insurance vehicles filled with conditions and clauses that are not placed there by the company for your benefit. This subject is so complex it is really beyond the scope of a blog article. However, I have received enough questions on this topic that I feel I should at least warn my readers to be very very careful when exploring these products.

Annuities come in two basic flavors fixed and variable. Fixed annuities can be considered a Certificate of Deposit (CD) wrapped in an insurance product. Variable annuities can be considered a choice of mutual funds wrapped in an insurance product. There are so many variations and options in different kinds of insurance coverage, investment choices, and riders for anything and everything it is almost impossible to get any useful information without requesting a specific proposal from a salesman. I tried to get some basic information without providing my age, my wife’s age, state of residence, etc. etc. I was informed that the information they use to make their calculations was proprietary, but I was able to pry at least this little rule of thumb out of the sales representative. If a man dies before he is 85 to company wins. If he dies after 85 he can consider himself the winner. I am not sure I believe it is that simple.

Annuities are typically sold to frightened old people with the guarantee of lifetime income. Any time a salesman is selling fear or greed. Run Away!

The biggest problem with annuities is the cost when compared to benefits. The sales commissions on these products seem to typical run around 6%-7% of the entire principal. However, they can run as high as 14%! It is very difficult to determine how much you are actually paying as these charges can be hidden by various methods.

Annuities are almost irrevocable contracts. Once you sign off on an annuity consider that money lost and gone forever. Some annuity contracts allow for withdrawal with prohibitive surrender charges that run about 7% of the account value after one year. Although they can run as high as 20%! If granny suddenly needs that money for long term care she is out of luck. Again, it is difficult to make any definitive statements about annuities. Options that allow for penalty free withdrawal after 7 to 11 years are available. Also some policies allow penalty free withdrawals of up to 10% of the principal per year for medical emergencies.

Variable annuities complicate matters even further as they have high management fees. The annual insurance fee will run around 1.25%, annual investment fees 0.5%-2.0% a year, additional insurance riders typically add another 0.6%. The total annual fees after that 6% sales commission could easily add up to 3.0% a year. Compare that to no sales charge and an annual management fee of less than 0.5% for index funds.

The guarantee provided by the typical annuity comes at a very steep price.

I attempted to locate some information on the cheapest simplest annuity possible from Vanguard, a company with an enviable reputation for lost cost high quality financial products. The deferred fixed annuity is just about as simple as it gets. Deferred means you don’t collect any money until some time in the future. The interest collects tax deferred, but will be treated as regular income at withdrawal. It comes with a 2% sales charge that is calculated into the quoted rate of return. As far as I could determine there are no additional charges. In Maryland the four year guarantee rate of return on this product is 1.25%. That means that nearly two years will pass before you break even. I asked the sales representative why I shouldn’t just buy a CD guaranteed by the Federal Deposit Insurance Corporation and save the 2.0% sales commission. She didn’t have an answer.

Like any other financial option, no investment is always going to be a bad idea. It all depends on the price that you pay for the product you receive. Many years ago when inflation was running wild my parents bought some annuities. Today they are both in their nineties, still receiving a guaranteed lifetime income sold to them when interest rates were at historic highs. I have no doubt the insurance company that sold those annuities to my parents is hating life. Given today’s artificially low interest rates driven by the Federal Reserve Bank and the future risk of inflation, I just can’t understand why I would want to substitute an annuity for low cost short and intermediate term bond funds that essentially serve the same purpose.

Then there are options for “annuitizing” tax deferred retirement accounts into a guaranteed lifetime income stream. This is an entirely different subject.

As I said in the opening paragraph, I don’t claim to understand annuities. Each individual contract is a unique product. If any of you wish to add to my understanding with specific quantitative examples, I really welcome your comments. Just sell me the steak not the sizzle.

Monday, March 4, 2013

Let's Have a Good Clean Fight.

If you get married you will fight about money at some point in time. Count on it. Fights are OK, if and only if the both of you always fight fair. There are some basic ground rules that specifically apply to money.

1) No Secrets!
2) No my money or your money only our money.
3) Fight before the fact not after the fact.

The rest of the rules of fair fights in marriage are generally applicable to all subjects.

Financial discussions should start during the engagement. You will be forming a partnership, a legal, financial, spiritual partnership. Two will become one, at least in the eyes of God and the law. Do not keep any secrets from your fiancée. If you have debts put them on the table. If you have assets put them on the table. If you have a salary put it on the table. If you or your family has any kind of problem or history with money put it on the table. The more you discuss before the marriage the fewer and less dangerous the arguments that will take place after the marriage.

I guess until the groom says, “With this Ring I thee wed, with my body I thee worship, and with all my worldly goods I thee endow: In the name of the Father, and of the Son, and of the Holy Ghost. Amen,” you can still back out.

After the service decide money questions as a couple. This is where the monthly budget conference, as painful and time consuming as it might be, will save a lot of trouble in the long run. If you think budgeting is an ugly process, consider your wife’s response if you came home with a $12,000 bass boat bought without her foreknowledge or permission.

As a couple, hammer out how much money is coming in and how it is going out in advance. Exhaustive, detailed monthly budgeting forms are available from just about any of the major teachers. They are also available in basic personal finance books. The key here is once both husband and wife agree to the monthly budget they have signed a contract with each other. Anything in the budget can be spent by either party without question. Anything that is not in the budget can not be spent without the signatures of both parties on the proposed amendment to the contract.

Dave Ramsey suggests a “blow” budget category. This is an envelope containing money that can be spent on any purpose without question. It will absorb small mistakes in the estimating process as well as keep husband and wife from engaging in acts of violence over trifles. I would even be willing to go one step further, a separate his and her blow envelope. How much goes into those envelopes remains a part of the formal budgeting process.

Of course there are the obvious considerations when discussing money or any other subject in a relationship that include no physical or emotional abuse. Character attacks with or without profanity are not allowed. Keep on subject. In this case, the money that is coming in is usually pretty well defined. Where it will go is the topic of conversation. Folks, this is a zero sum game. If the wife wants $300 in this month’s clothing allowance, it has to come from somewhere. That might mean, no money spent in restaurants this month.

You are living in the present moment. What happened in the past is not a subject of this month’s budget summit. If you bought that $12,000 bass boat last year, your wife is not allowed to bring it up to fuel her fires in this month’s argument. That includes any sentence that begins with, “You always _____”

One of the biggest differences between marriage and dating is the simple fact that you can no longer go home to your own apartment at night. Believe me, that is a huge difference. You can’t run or hide from your joint money problems. If you need a timeout; well, even the NFL allows each team 3 timeouts in each half. They last a predetermined amount of time. Then the game starts over. If you are getting angry, go ahead call a timeout, but then return to the table at a predetermined time.

Let me add one especially for women. He can’t read your mind. If you think he doesn’t understand something that is obvious and important to you, ask him. Do not assume he should be able to read your mind. He can’t.

The Bible suggests, "Don't sin by letting anger control you." Don't let the sun go down while you are still angry.” At the end of the day remember you are still husband and wife. Remind yourself of all that good stuff you swore in an oath before God and man, including that you will love, honor, and cherish your spouse until death do us part.

Ecclesiastes 4:12, “Though one may be overpowered, two can defend themselves. A cord of three strands is not quickly broken,” is often applied to a Christian marriage. If you work together with the guidance of the Holy Spirit the odds are definitely in your favor. The median net worth of married-couple households in a 2002 Census Bureau wealth study was $101,975; for single men, median wealth was $23,700; for single women, $20,217. I expect these numbers are somewhat skewed by the age of the respondents, but every study I have seen indicates that married couples do better financially than singles.

Sunday, March 3, 2013


“You have sown much, and bring in little; You eat, but do not have enough; You drink, but you are not filled with drink; You clothe yourselves, but no one is warm; And he who earns wages, Earns wages to put into a bag with holes.”

Thus says the LORD of hosts: “Consider your ways!
Haggi Chapter 1: 6-7

I don’t write about compulsive buying very often. It is not a problem that has plagued me or the people I know. At least no one I know is willing to admit they have such a problem. In 7 Money Habits That Can Make of Break You, Todd Tesidder puts forth the proposition that problems with debt are often habits deeply rooted in emotional difficulties. It is difficult for me to accept this notion when applied to financial issues even though I know it applies to my problems with diet and weight. Once again, I am reminded of the importance of mercy in our dealings with ourselves and with others.

Tesidder offers a simple test to determine if you’re an emotional spender:

•Do you use shopping to relieve stress or escape boredom?
•Do you use shopping as a pick-me-up or entertainment?
•Do you celebrate by shopping for a treat?
•Do you ever shop as a form of “retail therapy?”
•Do you use shopping for social connection?
•Do you have clothes in the closet with the tags still attached?
•Do you have more than one of the same item?
•Is your credit card bill so large that you can’t afford to pay it off at the end of the month?
•Do you ever feel an endorphin rush when making a purchase?
•Do you experience anxiety, guilt, or remorse after shopping?
•Do you ever hide purchases from friends or loved ones?

He suggests that if you answer yes to two or more of these questions you have an emotional problem with shopping that is really a kind of addiction. By the way, if applied to diet, I answer four of these questions with a yes. Gambling, shopping, and sex all produce an endorphin rush that can become psychologically addictive. Any time we are addicted to a behavior we are not fully in control of our lives. Depending on the severity of the problem we may only need to consciously postpone the unwanted behavior until it is appropriate or we might need to be in counseling and/or a support group.

There are also powerful cultural drivers encouraging irresponsible spending and debt slavery. Advertisers, as well as well as the spirit of the age, tells us we deserve it all just because we are alive. The notion of entitlement is a powerful drug. “Everybody else is doing it,” is an excuse that begins in childhood. If my neighbor has the latest smart phone or an expensive SUV then I must deserve to have one too, even if I can’t afford it. No, you are entitled to buy what you can reasonably afford. This year it might be a 10 year old Honda Accord that costs $3,000. Fifteen years from now when you can pay cash, go ahead and reward yourself with that BMW. A desire for instance gratification based on the notion that I am entitled to whatever I want is a recipe for disaster. Don’t list to the siren song of the credit card companies and their allies.

Your self worth is not defined by your possessions. If I owned a Porsche 911 Turbo or a Ferrari Berlinetta I would still just be me. Wherever you go, there you are. Although I certainly recommend appropriate dress, especially in the workplace, ultimately clothes do not make the woman. What is on the inside makes the woman.

Escaping debt is no different than dealing with any other problem. First of all you must admit you have a problem. Complacency or its near kin, despair, will not help. Then make a plan. In this case the plan is called a monthly budget. Right now, in this present moment start to take action. Procrastination and good intentions don’t help.

In my case that means walking a 2.5 mile loop around my little town even if the weather is crummy and I am not in the mood.

Friday, March 1, 2013

It Ain't Rocket Science

Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.
Peter Lynch

I tell people that what I am doing is not rocket science. Sometimes I practically beg people to get involved in investments, but they think success requires something they do not have, either they believe they lack basic math skills or arcane information obtained from the power of the dark side.

Here is all you need to get started. First get rid of your credit card debt. Next have AT LEAST! three months expense money in a boring federally guaranteed savings account. That’s it. Your next step could be as small as $35.00 (given the current price of silver) for a single American Silver Eagle. If you want to take your first baby step into a low cost index fund or an Exchange Traded Fund (ETF) you will need $3,000 to start with most Vanguard funds. You can find funds that only require an initial investment of $1,000. At Charles Schwab, my broker, there is no minimum investment requirement and no maintenance fees. To start buying all you need to have is the amount of money you want to put into your first investment.

Peter Lynch, the genius who built the mighty Magellan Fund said, “All the math you need in the stock market you get in the fourth grade.” He also stated, “Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.”

Keep it small. Keep it simple. Although you will violate this rule in the earliest days of your journey, if you never invest more than 2% of your liquid net worth (liquid net worth: your net worth excluding the equity in your primary residence) in any single stock or less than 7% in any given sector, you will always be able to sleep at night. Barring a global crash (such as happened in 1929) it is unlikely you will lose your shirt. Consider the infamous Dotcom Crash of 2000. Shares in some Internet stocks lost ALL their value almost overnight. Even if you lost 80% of 7%, that is only 5.6% of your liquid net worth. Painful? Yes, but not the end of the world.

How does this investing in what you already understand thing work? My wife has no particular interest in investments. Her Master’s degree is in social work. She has no math skills beyond basic algebra. On two occasions she has actively promoted an investment. She practically begged me to buy shares in Yankee Candle. I couldn’t smell any difference between their scented candles and any other scented candles, but I followed her advice. Yankee Candle was a 3 banger. When Yankee Candle went private, we reaped a 300% increase in our initial investment. Her other recommendation, Johnson & Johnson, hasn’t been a barn burner, but it is a steady performer. Year after year it goes up in value and pays out an ever increasing dividend.

In our society, it's been the men who've handled most of the finances, and the women who've stood by and watched men botch things up.
Peter Lynch

Of course after you have received that flash of insight from the great beyond read the free research reports offered by your broker. Peter Lynch reminds us, “If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.”

As I encourage the frightened to take their first steps into the world of investing, I remind them, “Never invest in anything you couldn’t explain to a junior high school student. Peter Lynch is even more emphatic. He stated, “Never invest in any idea you can't illustrate with a crayon.” Today Chevron buys oil at $2.16 a gallon. It sells me mid-grade gasoline for my Acura at $4.05 a gallon. Chevron is a well managed company that makes a good profit, has a good cash flow, and pays a good dividend. Of course the same could have been said of British Petroleum until one of their drilling platforms caught on fire. That is why you don’t want to have more than 2% of your liquid net worth in any individual stock.

In baseball, a lifetime batting average of 300 will get you into the Hall of Fame. Just think about that for a minute. You are considered an immortal if you can hit the ball 3 out of 10 times. In investment you do need to do better than that, but even a batting average of 600 will reap a greater harvest than you can imagine. Your winners do not need to grand slam homeruns. In fact, most of them will be singles, just gradually drifting upwards in value over time, fluctuating up and down with the market, sometimes stalling out for a year or two along the way. You will have a few big winners. That is all you need. Remember, the most you can lose in a single investment is all of it. It is unlikely that you will ever lose more than 50% in any single investment even in a miserable year like 2008. With the use of automatic stop loss orders you can limit the amount you choose to lose.

There is no upper limit on your winners. Back in 1996 Apple sold for less than $5.00 a share. Today, even after losing more than ½ its value Apple still sells at $441.40. It doesn’t take but one big winner to buy that house South Kohala with a nice view of the Pacific Ocean.

Take your time. Start small. Keep it simple. Hold an age appropriate reserve in bond funds, CDs, and the like. Diversify. Diversify. Diversify. Most of what I buy is pretty safe, boring, and obvious. It is unlikely I will ever have my own TV show. However, over the course of 10 years, through savings and investments, I built a position that allowed me to retire at 62. It works. I promise you patience, persistence, and compound interest over time can perform wonders.

And remember: The journey of a thousand miles begins with a single step.