Ask whether these people are showing you the money. Hold them accountable for your money.
1. Your boss/company. Ask yourself first if you had a good year. If so, do some research on at you should expect to be earning. Try starting with Glassdoor. If you are not making what you want and are not moving in the right direction, consider moving to another company. But, be sure to do through research and then line up a job (in writing) before giving your notice.
2. Politicians. Are you getting reasonable benefit for your taxes? Grade by region. Here’s my grading: City C, County B, State B+, Federal D. If your grade is C or less, consider voting the bums out!
3. Social Security. Ever work out the rate of return on your projected Social Security payments versus the amount you have and will put in. Mine is about 0% return. And that is *if* I ever get *any*. Not much you can do about it, but something to consider when planning your own retirement…. What if I get nothing from Social Security when I retire?
4. Investment Adviser. How does my return stack up to A) The S&P500 total return (including dividends)? B) A 100% bond profile such as Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)? If, overall, it is under-performing both, fire your adviser. If it beats one… ask questions like why it didn’t do better. If it beats both, ask “what risks are you taking with my money!”? If you are your own investment adviser ask yourself the same questions. And, if you decide to fire yourself, consider getting advice from someone reputable and sane like Vanguard.
5. Your credit score. Know your credit score (FICO score). Guess what? If it’s below 711, it’s below average! [Technically below "median", but let's not split hairs.] 720 used to be golden, but today 750 is the new golden score. In some cases 770. If your score is below where you’d like it to be, start getting financially fit. And remember, success doesn’t happen overnight. Success takes time.
Much rhetoric today is focused against “Wall Street”, bankers, hedge funds, and speculators. People are upset about the effects of the Great Recession, but are often misguided about the causes. I submit the idea that the foremost cause of the Great Recession was the business cycle (or economic cycle). If we are to blame the people and institutions behind the business cycle for the Great Recession we must also applaud them for the periods of growth between recessions. To one degree or another we are all participants in the business cycle.
Of course, there have been behaviors ranging from ethical violations to fraud, particularly in the arena of mortgages and mortgage-backed securities, and (MBS) credit default swaps.
While there are flaws and imperfections in the US financial system, the accomplishments of the system deserve some attention. The United States represents an economic marvel of the 20th century and 21st century financial achievements of the American financial system. Like Rome, the United States incorporates the best of other systems. The stock exchange did not originate in the United States, but the US and Europe improved upon it. To the best of my knowledge, the index fund and the ETF both originated in the US.
Right now, today, US investors have access to:
- Low cost online brokerage accounts. It is easy to find brokerage accounts that charge less than $8 per trade and have a list of commission-free ETF trades. With effort, it is possible to find accounts with trades costing less than $5, or even lower.
- Free stock and ETF market data. (For example Yahoo! Finance and Google Finance).
- Superb ETF offerings. (SPY, VTI, SCHB, BND, VEA, VEU…)
- Excellent order fulfillment and pricing (with most brokers).
Just imagine a world without stock exchanges. Could you imagine placing a classified ad or holding a garage sale to trade stock certificates? Ludicrous, right?
The current US financial system is indeed a modern marvel. English, Canadian, and European exchanges have been similarly efficient and successful. Other exchanges around the world are playing catch up, and doing so quickly.
The global world of finance is constantly evolving, but as of today the options available to US investors are quite spectacular. We are wise to take advantage.
We all face occasional financial setbacks. One way to increase feeling of financial loss is to check your portfolio daily. Since I have a private fund that I manage, I feel obliged to stay on top of it daily. I’ve noticed that when the fund is up I feel modestly happy, but when it is down I feel doubly disappointed.
Sometimes various financial stresses come together at the same time. Recently minor financial setbacks have converged for me: modest potential issues with my rental business, and a few percentage points drop in my fund, and long hours at my day job. Navigating these financial stresses involves 1) avoiding impulsive decisions, and 2) carefully considering available options. For example part of me wants to sell the rental property in the next year or so, namely to avoid the occasional headaches of being a landlord and property manager. Another thought is to contract with a property management company, who charges a fee, but helps manage some of the day-to-day property management duties. Finally, I impulsively want to deleverage some of my investments.
I am approaching my latest bought of financial stress as I always do. With contemplation and composure. At least outwardly I am composed and seemingly unflappable. Internally, I am stressed and a bit anxious. This comes with the territory of managing a wide range of investments. This occasional stress is one of the few things I dislike about finance and wealth management. Of course it too shall pass.
I simply wanted to share the fact that, at times, maintaining a financial course can be emotionally challenging. I spend a lot of time talking about how successful investing can be easy… and in many ways it can be. Creating a financial plan can be fairly simple, but sticking to it at times can be stressful and nerve wracking. Financial discipline is worth it, and financial impulsiveness should be kept to a minimum. That is what I intend to do; even when it is not so easy.
Jim Cramer, Suze Orman. Warren Buffett, Peter Lynch, Bill Gross, John Bogle. The first two are the closest to household investing celebrities and arguably have the biggest media presence. The latter four are perhaps the biggest names in investing when it comes to mutual funds.
While I occasionally enjoy Cramer’s style, I generally dislike his advice. I believe that his high-energy style encourages high turnover, higher trading costs, reduced tax efficiency, and decreased diversification. Suze’s style is more focused on emotion, spending habits, relationships. I believe she offers a kind of emotional support and tough love that can help folks get out of debt and overcome financial life challenges. Suze’s style is particularly well-suited towards women investors (I’ve heard this from several of my female friends). She has a good grasp of mortgages, credit, foreclosures, and debt management. However, when it comes to stocks, bonds, mutual funds, ETFs, 401Ks, and the like, I find her advice spotty, inconsistent, and occasionally wrong.
I have a better overall opinion of the advice of Lynch, Buffett, Gross, and especially Bogle. I’ve found Lynch’s books useful and I’ve liked his advice about almost everything except bonds. And the performance of the Fidelity Magellan Fund under his management was exceptional. Gross balances out Lynch, because Gross has an impressive track record of bond investing with PIMCO. Buffett also boasts an impressive investing and management record. Finally, Bogle popularized and perfected index investing through Vanguard Funds.
It’s a shame that there is no investing superstar celebrity that provides solid, clear, and broadly applicable investing advice. Perhaps that is because prudent investing advice is somewhat boring. So generating excitement is done through either stock-picking mania (which I consider imprudent) or human interest stories (which tend to be getting out of debt, or get-rich-quick). Another challenge is appealing to a wide range of investing situations and widely different levels of financial literacy.
I’m frequently looking for ways to make this finance blog appeal to a wider audience. That’s why I’m looking at investing celebrities today for clues to make this blog’s message more powerful. As of now, my biggest takeaway is that if I focus more on the emotional and relationship aspects of investing and spending, I may be able to more effectively connect with women investors.
When I was born, my birthday gifts included US savings bonds ($50 dollar face value, I believe). I’ve had a savings account since about age 7, and started reading brokerage account statements at around age 9. My brokerage college fund started with $1000 and nicely grew to about $4000 by the time I started college at the tender age of 17.
Before the age of 10, I was enthralled by the concept of compound interest. I was curious about the difference between monthly, weekly, daily, hourly, and by-the-second, even instantaneous compounding. Little did I know at the time that this concept lead to the mathematical concepts of limits, calculus, and the number e, Euler’s number.
Needless to say, I love math and finance. But I first experienced a truly heart-pounding thrill when I started online trading sometime in the late 90′s. I could see the bid and ask constantly moving, and tried limit orders. The asks kept rising, and I kept inching up my bid. Eventually my bid got hit and I was an owner of my first online stock. This was different than buying mutual funds on the phone from Vanguard, and getting quarterly paper statements. This was in real time and it was exciting.
I’ve read a lot about Peter Lynch, including his books, and I’ve learned some lessons good and bad. The bad lesson, as I read his words, was “Don’t buy bonds unless they paying at least 8 or 10 percent.” The good lessons were “Don’t buy what you don’t understand.” and “boring investments are good… boring names, unsexy, but solid investments are good.”
My next financial thrill revolved around options sales and purchases. I even recall making a 20-option spread trade that was scary, but ended up netting me about $3000 in a very short time.
I have also has some thrill involving real-estate offers, counter-offers, counter-counter offers, and purchases. Mostly, tension and anxiety are better descriptors than excitement. Mild disappointment mostly describes failed attempted real-estate purchases. Moderate to exuberant happiness describes my successful real-estate bids.
In the last year or two, my trades have not elicited an significant cardiac or endocrine event. While almost always cerebral and well-considered, my trades have occasionally made my heart go pitter-patter and my endocrine system give me a pleasant rush. But lately the trill is gone. My pulse is steady and the motions are vaguely methodical and systematic.
My love of research, introspection, and contemplation remains. Trading, for me, is just a means to an end. Increasingly dispassionate. In the end I hope and believe this makes me a better trader. As always, time will tell.
By most accounts I paid more federal income tax than GE for 2010. Personally, I paid more in regular federal income tax than I did for my brand new car. When you factor in social security tax, medicare tax, state tax, and property tax that is an additional $16,700 or so. I probably paid about another $4200 in sales tax, gas tax, liquor tax, fees, tariffs, assessments, regional assessments, urban renewal, licensing, and other government fees. I’d bet I paid more (federal income) tax than GE, and I’d bet almost everyone reading this blog did too, but I’m even more sure that GE paid it’s accountants more than I did. I wonder how many millions GE spent on accounting, preparing, and filling its 2010 return?
I don’t blame GE for taking advantage of the system… minimizing tax is one of the key responsibilities to its shareholders. But I am troubled by the corporate tax system. Why should GE pay 0.0% and IBM pay 24.8%? Shouldn’t large U.S. corporations play by the same rules? Shouldn’t the rules be more even across companies? Who wrote these crazy rules? Well, that last question is rhetorical, obviously!
I think a 35% base corporate income tax rate is way too high, but 0% (for GE) is way too low. My opinion is that a 15-25% corporate tax is much more internationally competitive. But even at 15%, GE’s 14.2 Billion USD profit should be taxed at a little bit more my than my way-way-way less than a million, barely-6-figure, USD income.
The Crazy Ivan Account (CIA) is currently up to $25,730. Current holdings are all ETFs: 100 shares JNK, 100 shares SPY, 50 shares EFA, plus some cash. So there’s some large-cap U.S., some high-yield (junk) bonds, and some foreign stock.
Right now “Ivan” is pretty sane, vanilla, and diversified. And he has been doing very nicely.
In the previous blog post I wrote about the mechanics of options to help smooth out and reshape investment volatility. In this blog post I want to discuss another investment tool: short selling.
Short selling involves borrowing shares of stock and selling those borrowed shares. This immediately does two things to your portfolio: 1) It gives you a liability for the shares, 2) It gives cash proceeds from the sale.
An investor, Alice, may choose to short a stock (or ETF) because she expects its price to fall. She may expect one security to fall relative to another security. For instance, if Alice expects AAPL to outperform MSFT over then next six months, she could short MSFT and use the cash proceeds to purchase AAPL. Even if MSFT goes up, Alice will make money so long as the value of her AAPL holdings go up more.
Suppose things don’t go according to plan for Alice. For some crazy reason MSFT shares go way up, while AAPL shares remain flat. As this trend continues, Alice’s portfolio net asset value (NAV) erodes. This decreases Alice’s margin and increases her portfolios’ leverage. If the trend continues Alice will eventually receive a margin call and have to cover her short position by buying MSFT stock to close her short position.
There are a few details to be aware of before entering a short position on a security. The first is determining whether (and how much) stock is currently available for short-sale. Once you’ve determined that your chosen stock is available for shorting, you should find out the particular terms for borrowing the stock. For instance, you may forfeit a small percentage of your short-sale proceeds. Often highly liquid stocks will be cheaper to borrow than less liquid ones.
Once you’ve found an stock with short-availability and an acceptable borrowing rate, you can execute a short-sale. Since you will have a negative position (say -100 shares) you will pay rather than receive dividends on every share. See also this helpful explanation of how, where, and why short-shares become available.
That’s the basics of short-selling. Short-selling provides an alternative way to bet against a stock. Buying puts is one method, short-selling is another. Short-selling is allows going long-short… picking winners AND losers. Short-selling is a tool that opens many investing opportunities and exposure to additional investing risks.
With only a few weeks remaining in 2010, now is a great time to make any tax-planning adjustments.
Step 1 is determining your general current capital gains and gross income situation. Do you have carry-forward tax losses? What are your current 2010 realized net short-term and long-term capital gains? What are your unrealized capital gains? What is your 2010 “ordinary income” situation looking like?
Answering these questions gives you a starting point for year-end tax planning.
For example, if you have big long-term capital gains because you sold a bunch of company stock to make a down-payment on a vacation property, you make ask yourself, “is paying 15% tax on these gains a good deal, or do I want to try to offset them with a few capital losses?”
Or, you may ask the inverse question… “I have a bunch of unrealized long-term capital gains; Should I sell now and realize them for the ‘bargain price’ of 15% tax?”
Some of these financial questions are tough to answer. That is why I pay my CPA $80/hour to help me answer them. [This is a bargain price; my previous CPA was $150/hour. Finding a good one for $80/hour was a godsend!] If your struggling to answer them, I’d encourage you to set up an appointment with your CPA, or if you don’t have one a local CPA. Bring your best answers or guesses, and you might be surprised how much they can enlighten you in one short hour.
A little year-end tax planning could save you $500, $1000, possibly several thousand dollars. If you have to pay $80, $100, or even $250, for this I’d say its money well spent.
Just a quick chart, globally-exposed ETF building blocks with VTI, JNK, IGOV, and EFA.
GRAPH: Possible portfolio construction pieces
And on the short-side, ETFs: BIL, BWX, IEI, IEF, ISHG, ITE, and TLO.
GRAPH: Possible short-side (deconstruction) pieces
These ETFs are building blocks I’m considering for a long-short portfolio. As you can see it would be a US-equity-long, global-equity long, high-yield (junk bond) long, USD (United States Dollar) short portfolio.
I’m also very interested in call option writing to blunt some of the equity exposure, whilst still remaining equity-long.
The CIA Account (yes, its redundant) closed today at $24,127. The covered-call SPY play and the TOT stock buy continue to pay off.
The beta computation saga continues. I came up with a modified version of the example beta computation method from:
http://faculty.babson.edu/academic/Beta/CalculateBeta.htm
I incorporated a couple modifications (specific to Excel 2010):
- Install the “Analysis Toolpak” Add-in:
- File->Options->Add-ins->”Go…”->”Analysis Toolpak”
- Data->”Data Analysis”->Regression
- You will have the option of “R Square”. You will have a couple coefficients, the first (top) is alpha, the second (bottom) is beta.
The “Babson Method” is equally effective. Take your pick. Beta and “R square” together are more useful than beta alone. Remember that a low R-square (say <0.5) means that (historic) beta is not particularly useful for explaining the movement of the stock or asset in question. Moreover either method also supplies a (historic) alpha… a measure of that assets excess return versus the benchmark.
Like any backward-looking analysis, historic alpha, beta, and R-square provide ways to look a that asset’s past. One hopes that they provide some measure of an asset’s future… this may or may not prove to be the case.
I still see a minor factor that makes either method slightly imperfect…. the lack of accounting for total return. The basic method don’t account for (re-invested) dividends. However this is fairly easily remedied by factoring in dividend payments into the asset returns. It is likely that there are other refinements to be found.
Previously I started blogging about the very different approaches my parents took with respect to money and investing. In this blog post I continue that discussion with a story of how I became even more passionate about investing.
My parents divorced not long after I started attending college. Because of the way divorce law works, my Mom received the majority (perhaps two-thirds) of the family assets plus a fairly significant monthly alimony payment. Over the next ten years Dad rebuilt his financial life, benefiting from the remarkable 90′s bull market and intelligent investing. Over that same period, Mom’s financial fortunes floundered. I witnessed both financial journeys as a powerless spectator.
The sad irony is that Dad, the savvy investor, was willing to listen to my investing ideas, whereas Mom stubbornly refused almost all of my investing advice. I saw Mom make one bad investing decision after another. She put the house on the market but could not sell it because her asking price was about $100K too high. She loaned money to business partners without a written contract… money that was never paid back. Most upsetting to me: She let her investment adviser, Sam W., manage her IRA, losing money with highly under-diversified utilities stocks and funds in the midst of this tremendous bull market. The contempt and disappointment I feel towards Sam still lingers with me to this day. That Mom blindly trusted this man, who likely had little interest in her well-being, and shunned her son’s financial advise left me with stunned disbelief.
I was interested in investing from the time I learned about compound interest at around the age of 9. I was fascinated by the math of computing compound interest monthly, daily, hourly, continuously. I was intrigued by the concept of companies, shareholders, stock exchanges, and business. But it was in watching and living the real-world consequences of my parent’s good and bad investing actions, that my lifelong passion for investing was forged.
These experiences are probably why I am so driven to help people avoid making big financial blunders. I’ve seen and felt the effects of load funds and self-serving financial advisers. I’ve seen the impact of poor diversification. I’ve seen the tears of losing a home, losing a business… due to poor financial choices.
I’m often looking for ways and words to become more persuasive. I’m looking for ways to help people build interest and confidence in shaping their own financial destinies. I’m working to develop tools to simply and explain the financial world. I’m working to create this financial education blog which will someday become part of a personal finance book.
Finance is my passion. This passion is often hard for people to understand. Perhaps this blog article will help people understand. Probably some of my readers share a passion for personal finance and investing. If you have a similar passion, I hope you will consider sharing your financial stories that shaped your financial lifestyle.
I will try to use as little math and jargon as possible…
Beta is one way to look at a stock’s behavior relative to the rest of the stock market. The most common way to compute beta for a stock is to compare its price over a 3 year period versus the S&P 500. The beta for a stock can be computed with daily, week, monthly or other data. Generally the difference in the final answer is small between these. Personally, I favor a beta based on daily closing values, but for this blog post I’ll stick with a monthly beta computation.
Lets compute beta for CSX versus SPY (an S&P500-based index EFT) using Microsoft Excel 2010:
- Go to Yahoo Finance and type in ticker symbol CSX.
- Click on “Historic Prices” and set the range from Oct 18, 2007 to Oct 18, 2010. Select the “Monthly” radio button.
- Scroll to the bottom of the page and click “Download to Spreadsheet.”
- When prompted select “Open With -> Microsoft Excel”.
- Cut and paste the data in the “Adj Close” column to a new spreadsheet.
- Repeat the above process for SPY. Put the SPY data in a column adjacent to the adjusted CSX closing price data.
- Compute the variance of SPY for example SPY data points e.g. “=VAR.S(C4:C40)”
- Compute the covariance of CSX with respect to SPY e.g. “=COVARIANCE.S(B4:B40,C4:C40)”
- Beta is, by definition, the value in step 8 divided by the value in step 7. However I have found this not the case when using the MS Excel 2010 formulas above. The next steps tell how I “fix” this beta.
- Compute average values for CSX and SPY: e.g “=AVERAGE(B4:B40)” and “=AVERAGE(C4:C40)”
- The fixed value is the result of step 9 * the SPY average/the CSX average. This is CSX’s 3-year, monthly beta.
Using this method, I compute a beta for CSX of 1.00. This is a fair bit different that the value of 1.24 reported by Yahoo Finance. I used the same process for MSFT and compute a beta of 0.93 versus Yahoo Finance’s 1.03 for Microsoft stock. Looking for a more out-there beta, I repeated the process for C (Citigroup). I computed a beta of 4.39 versus Yahoo Finance’s 2.65. For another comparison Google Finance reports betas for CSX, MSFT, C of 1.2, 1.05, and 2.54. Finally, MSN Money reports betas of 1.21 ,1.06, and 2.55.
It irks me that 1) these 3 finance sites don’t detail their beta-computation methods, 2) They produce different results, 3) My method produces different results, 4) MS Excel doesn’t [I don't believe] offer a beta or beta.finance function, 5) I have to tweak MS Excel data to get a more reasonable beta computation.
Be that as it may, I managed to explain one way of computing beta, and did so with a minimum of math. Please feel free to flame this post and tell me a better way. Until then feel free to try my method, or create your own modified method.
P.S. — I did some web searching and found an alternate method that is pretty decent:
http://faculty.babson.edu/academic/Beta/CalculateBeta.htm
They also perform a monthly 3-year beta computation. I like that it is clear, correct, and easy to follow. I don’t like that it uses an older version of Excel and that it requires graphing and essentially reading the numbers off of the graph.
- What is the average weighted expense ratio for all my holdings?
- How much, if anything, did I pay in commissions in the last 12 months.
- What was my rate of return in the last 12 months? (post all fees and expenses)
- How does that compare to the to rate of return in the S&P 500 in the same time period. (inclusive of dividends)
- What is the 12-month standard deviation of my investment portfolio? (a measure of risk)
- What is my asset allocation between stocks, bonds, and other?
- Do any of my holdings have loads? If so why?
- How diversified are my holdings?
Bonus: Please update me on my portfolio’s tax efficiency and tax efficiency strategy.
Feel free to take good notes, and, if you like, send the answers to me. I’d be glad to give you my personal assessment/opinion.
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