There has been some interest in an explanation of how the Vanguard Target Retirement Funds work since I mentioned them in an explanation about Mutual Funds in a past article (read The Beauty of Mutual Funds). In this article, I’ll give you a little explanation of how these funds work and what you might expect from them (past performance is not an indicator of future performance!).

They’re in the asset class titled “Lifecycle” by Vanguard and several other brokerage houses have very similarly structured, lifecycle mutual funds (Fidelity has the Fidelity Freedom Funds if that rings a bell). The concept is as the target date draws closer, the fund will invest in increasingly stable investments that have higher yields. Vanguard recommends the lifecycle funds for those seeking “an all-in-one retirement portfolio that automatically grows more conservative as their expected retirement date nears…”

In looking at the fund’s performance and yield, the trend behaves as you would expect. The Retirement Income (which you would purchase if you are already retired) has the highest yield of 3.75% and the lowest average annual total return of 3.96%. The Retirement 2045 (the one with the farthest horizon) has the lowest yield at 1.34% and the highest average annual total return of 9.12%. The remaining funds trickle in between the two at rates you’d expect given the risk characteristics of the funds. And performance since inception? The same trends you’d expect are reflected with the Income coming in at 6.85% and the 2045 coming in at 15.79%.

The Target Retirement funds are simply holdings, in varying percentages based on risk tolerance, of other Vanguard funds. The table below is a percentage of holdings as of 1/31/05 of several of the funds.

As you can see from the table, the Income and 2005 are more conservative than the 2045 and even the 2045. The first two don’t touch Europe and the Pacific while the 2045 has nearly 20% overseas.

So we’ve talked about their performance, but what about their expense ratios? Each one clocks in at 0.21% to 0.22%, which is low, about on par for index funds. Look at the Vanguard 500 Index Fund has an expense ratio of 0.18%, you can be pretty confident that Vanguard isn’t fleecing you on fees for these Retirement funds. Now, these funds are “Funds of Funds” which in some cases may mean the expense ratio listed is charged on top of the expense ratios of the underyling funds. This is not the case with the Target Retirement funds, the expense ratio is the weighted indirect expense ratio. There is a footnote in the prospectus that does state “Although the Fund is not expected to incur any net expenses directly, the Fund’s shareholders indirectly bear the expenses of the underlying Vanguard funds in which the Fund invests.”

Again, if you are interested in these or other Vanguard funds, request a prospectus! Read all about it before you invest and see if they’re for you. And please don’t read my views on these funds as a recommendation to buy into them, I’m just boiling down all the facts available on Vanguard’s site in one easy place. And I invite one and all to comment on my thoughts of the Target Retirement funds (too conservative even with the 2045?) and look forward to them.

I’ve started the daunting task of trying to understand the intricacies of home ownership, real estate, and mortgages the last few months because I’ve decided I may want to stay in the area a number of years. This also happens to be the inaugural post in the “In Search of a Home” category, so be gentle on it.

Several of my friends have recently purchased homes in the area and two out of the three haven’t been able to put down 20% (the necessary amount required to avoid private mortgage insurance, or PMI). The two that couldn’t make the 20% down payment relied on a piggyback mortgage, or another loan at a higher rate for whatever they were short on to avoid the PMI.

So today on Bankrate.com (an invaluable resource), I read an article titled “PMI industry fights back against piggyback loans” which includes a comparison between the piggyback loan versus the PMI. Boiling it down to its essentials, PMI is getting it’s teeth kicked in and has little going in its favor for someone in my situation.

Bankrate’s assessment? Short run go with piggyback, long-term go with PMI. The reasoning is that your home is going to appreciate and then you’ll cancel the PMI. However, in their example, if you cancel the PMI after exactly two years, it’ll take five to ten years to make it all back. So in essence, long-term means five to ten years. Piggybacks have all sorts of things going for it like the interest being tax deductible (it’s still a mortgage on your home) and a lower overall monthly payment, which is enticing many homebuyers. The downside? The additional closing costs of another loan, which may or may not be significant.

Sounds like a piggyback is what I’ll be looking for unless I can conjure 20% down. Know any cheap homes in the Baltimore, Maryland area?

Most people are aware of the various phishing scams out there like President [insert any non-Anglo sounding name] of [insert a country in political distress in a remote area of the world] wanting to wire out $500M to you or how PayPal wants to know your social security number, password, and mother’s maiden name. Every so often, people still fall for them. Well, are you interested in fighting back?

(read full article…)

Don’t expect to see that on a t-shirt or anything (let me know if you do!) but inflation is hurting our poor defenseless pennies. We all know what inflation is, but most of us don’t really think about it on a daily basis; even when we’re making our most important financial decisions. It’s those stories you hear about a pack of gum cost 5 cents back in the day and now they cost fifty cents or more; that’s inflation, or the erosion of our currency’s purchasing power.

Let’s ignore the bigger macroeconomic issues as to why inflation exists and whether it’s good or bad, because honestly I don’t think most people care. We can let economics and policy makers analyze those aspects because it matters to them (it better!). For us little people, let’s talk about how they measure inflation. There are two indexes (indices if you prefer) most people talk about: the Consumer Price Index (CPI) and the Producer Price Index (PPI). They are the big indicators and the US Bureau of Labor and Statistics tracks them both. In summary, the CPI tracks price changes with respect to the consumer and the PPI tracks them with respect to the producer. They say in the long run the two trend similarly but in the short term the PPI will lead the CPI (which follows intuition, producers raise prices before consumers feel them). Well, when the Federal Reserve meets (8 times a year) to decide whether or not to adjust the short term interest rates, the CPI/PPI is a factor they take into consideration.

Well, how does this affect me/you? Basically, your investment’s true return is really its stated return minus inflation and taxes. Nearly everyone accounts for taxes because you take money out of your pocket. Inflation is an invisible tax because you’ll just lose purchasing power, not actual dollars.

But I don’t invest a lot of money; where else will this affect me? Your salary! Are you happy with that 2% raise? You would be if everyone around you also received a 2% raise (or less), but what if I told you the historic rate of inflation was 3.257% since 1913 (according to the inflation calculator on the USBLS website)? That meant if our rate of inflation this year were 3.257%, you actually took a purchasing power pay cut of 1.257%!

We arrived at 3.257% because in the 92 years since 1913 (to 2004), $100 (1913 dollars) is now worth $1908.08 (2004 dollars), or a 3.257% annual increase.

How do the interest rates of ING Directrel and Emigrant Direct sound now? How about that bond? When you have to beat 3.257% CPI-based historic inflation rate, it doesn’t look as appealing huh? Look at some of the actual historic rates and you can see that in some years the rates were much higher (though you would expect rates of return for CDs, bonds, and the like to be much higher as well). So think about the rate of inflation next time you make any sort of financial decision, it’ll open your eyes.

I was reading Capital Ideas today and the lead post was titled “Bad Customer Service: Baskin Robbins” and it was about the promotion Yahoo! ran yesterday where registered members could print out a coupon for a free scoop of ice cream in celebration of Yahoo!’s 10th anniversary. If the closest Baskin Robbins was too far away, I may have run into this very scenario. In essence, he brought the coupon in and Baskin Robbins wouldn’t honor it. Now you have a disgruntled customer posting on his blog about the awful customer service of an ice cream chain that isn’t doing as well as, say a Coldstone Creamery (they’re awesome by the way).

(read full article…)

Update: Ameritrade has officially terminated FreeTrade and turned it into TDAmeritrade Izone, but you can get $0 commission trades through Zecco and $4.95 trades through TradeKing

Is this legitimate or even possible? Freetrade claims to give you your first 20 trades (market, limit, stop, stop-limit, short sell, odd-lot and OTCBB) for free. Your next 80 trades are only $3, the 100 after that are only $2, and anything else is $1. Your first thought would be SCAM until you see “by Ameritrade (not TDAmeritrade)” right next to its name. The next cheapest brokerage house is BrownCo at $5 a pop. Still skeptical? So was I so I signed up.

How can they afford to do this? Well, you know how ING Direct is all virtual and so they can give you such good rates? Freetrade follows that philosophy and all your interaction with Freetrade will be entirely electronic. You won’t be able to call them up and ask a question, all correspondence will be via email. You won’t receive a paper statement and you can only place trades via the Internet or through the automated telephone system. You will not be able to talk to a human being. Again, if you’re not comfortable with that then I would strongly suggest you don’t use them.

I wanted to see how it worked so I signed up for a “Cash, Margin & Option” account. You’ll be required to fill out all sorts of personal information including your current profession, salary, and employer so have that information handy. The entire process took me only a few minutes and before I knew it I had directions on how to wire them money. Since it’s automated, I could either pay them $25 to initiate a wire transfer or simply do it myself (and pay my own bank fees) with their provided directions. After your initial wire, all other transfers can be ACH. There is a minimum account balance requirement of $5,000 for it to become and remain Freetrade” account, otherwise it considered an “Ameritrade” account with $10.99 trades!

The account itself is like most other brokerage accounts except you don’t have real time quotes (you can buy Ameritrade’s Screener for $9.99/month) and you don’t get access to any research. For me, that’s not important because my Roth IRA is held at TD Waterhouse (now TD Ameritrade) so I can use the research and RT quotes there (At nearly $18 a trade, I better). A few other niceties that you won’t are automatic dividend reinvestment and fractional share purchases, but that may not be significant for you.

Any hidden fees? There are a few that they don’t advertise (obviously, but hardly hidden) and that you should check out. Click on Account Services and then on the link for Fee Schedule and you should see them. Your first two incoming or outgoing wire transfers are free, otherwise they’re $25, and brokerage transfers are $25 inbound and $50 outbound.

I have yet to wire money into the account (I opened it yesterday) or enter any orders in but I will update this article as soon as I do and let you all know how it goes. Anyone any experience with Freetrade? For me, the Ameritrade name gives it legitimacy and I’m not too worried about it.

I saw an interesting article (technically it’s a book review) on Forbes.com written by Robert Lenzner and Victoria Murphy and wanted to bring it to you folks to see what you thought. It was written three years ago but the book is interesting and the darkness it sheds light on is intriguing.

Basically they reviewed Trading With the Enemy: Seduction and Betrayal on Jim Cramer’s Wall Street by Nicholas Maier, a former employee of Cramer & Company. The book alleges that James Cramer used his own TV appearances and CNBC anchors to pump up stocks that his hedge fund would then dump, taking the gains the security made after the media attention. Maier says that Maria Bartiromo and David Faber were the two unwitting anchors who Cramer used in the scheme and they were eager to break stories, to no fault of their own because they’re reporting news, so the sham was easy to set-up.

A quote from Maier after Cramer went on TV to promote a great long-term investment: “Our real strategy, however, was all about taking profits now. Back at the office, we were supposed to dump stocks after a quick half-point gain. On TV, Jim would tout a stock we owned, but if it moved up, we would sell.” The book keeps on going with other schemes and plots used by Cramer & Co. I mean things like after-market orders on the hot 90s IPOs so they’d stay hot the next day were commonplace according to Maier. Since then, three pages from the book were removed, they accused Cramer of using insider information, and it was republished.

My own take? I’m sure these backroom type deals happen all the time just like I’m sure insider trading on tiny scales happens too. That’s just the nature of the markets and everyone will try to get an edge wherever they can. The SEC just needs to be diligent and make sure the egregious offences are taken care of. If I find this book in a library I’m going to pick it up but I doubt it’s worth buying a book on speculation and unsubstantiated accusations.

Any thoughts?

The two tenets of investing in the stock market are: “Diversification” and “Buy Low, Sell High.” Simple in spirit, difficult in execution. Mutual funds help you with the first rule of “diversification”, but you’re on your own with “buy low, sell high.” You’ve probably heard of mutual funds before and chances you may even own shares in a mutual fund, but do you really understand how they operate? What’s the load on your fund? Who is the investment manager and what is his or her track record?

(read full article…)

The current economic nature of the airline business is a blessing for flyers and a nightmare for airline employees and shareholders, but this situation won’t last forever. Eventually a few big airline companies will fold, a few budget airline companies will become bloated, and the great prices and frequent flyer plans we see today will slowly disappear. So while the pickings are still lush, let me introduce Southwest’s Rapid Rewards program.

Basics:
Each one-way flight is worth a point. You receive a free round-trip ticket after 16 points in one calendar year, or eight flights.

Value of a Point:
You can find these Rapid Reward Vouchers on sale on Ebay for around $300 a piece, which makes the value of each point approximately $18.75. The average major carrier will required 25,000 miles for a domestic flight and if we figure that flight to cost $300 on Southwest, each mile is worth about 1.2 cents, which is approximately what industry experts value a mile at. To convert the points into miles, you’re getting approximately 1,562.5 miles per point.

1 Point = $18.75 = 1,562.5 miles

When you compare prices of flights, that’s where it starts to get a little interesting. The cheapest flight possible on Southwest is a $39 one-way flight (worth 1 point), so you are in essence only paying $20.25 one-way when you factor in the value of a point. However, this isn’t predicated on whether you sell the ticket or not because if you plan correctly, you can use that rapid reward ticket for a flight across the country that will cost way more than $300. Also, when you use the rapid reward ticket, you get the Fully Refundable version of the ticket, not the Fun Saver Non-Refundable Cancel-And-You’re-Hosed ticket.

Additional Ways to Earn Points
There are always ways to earn bonus points, some of them absolutely free. Gone are the days when you would get 4 points per booking via Southwest.com but here are a few good ones:

• Book At Southwest and get 3 Points per Roundtrip (Exp. April 1st)
• Double Credit Cities - Depart out of or arrive in one of a few select Southwest hubs and receive double credit (4 pts) - Currently Baltimore/Washington International (BWI) and Chicago Midway (Exp. March 31st).BWI Double Credit bonus extended to Aug. 3rd!
• Sign Up for A Southwest Visa Card - You get 1 point per $1,200 spent (compared to $12 from a 1% Cash back card, you are earning more from this reward) and 4 points for signing up. The Annual Fee is $59 but the 4 points are worth $75.
• Download DING - Southwest’s newest software that allows them to send deals directly to your desktop. Sign up for the Rapid Rewards newsletter and they might send you an offer of 2 points for signing up!