JLP wrote a post today about how he prefers to invest in each of the market sectors equally, instead of going the route of some total market funds and weighing them based on market capitalization. He illustrates this point by highlighting the fact that the iShares DJ Total Market Index Fund (IYY) has over 17% invested in the financial sector, which has been taken out to the woodshed as of late. See? His strategy of equal weight has prevailed!

JLP vs. iShares: JLP Wins!

I ran some more numbers, using Google Finance to extrapolate the performance of these funds over the last year (year to date, so 11 months) and then over 5 years to see if his equal weighting plan would’ve held up. The result? Investing in his allocation beats the current iShares DJ Total Market Index Fund allocation (assuming it never changed in five years and JLP’s allocation numbers were accurate) by 0.7%. The JLP Fund would’ve returned 12.7% year over year whereas the iShares DJ Total Market Index Fund returned 12.0% year over year. (If you look it up on Google Finance, the numbers don’t match up with the iShares DJ Total Market Index Fund historical figures because the allocation likely changed).

For those who love numbers, here were the ones I used:

What This Means

Unfortunately, like many things, not much except to provide a warning. The benefit of hindsight is that you know what already happened (duh!). In this particular case, we now know that JLP’s theory held up as long as your transaction costs didn’t eat up that 0.7% in returns (and it might very well have, depending on how much you’re investing). However, I would warn against this type of thinking, justifying your decisions after you’ve made them based on their performance.

Hindsight is dangerous because past performance is not linked to future results, everyone who reads a prospectus knows this, however not everyone believes it. Why do casinos put a roulette wheel’s history on a screen? They know that people who see a lot of red numbers are more likely to bet black. Hindsight makes sense for things that are linked, like your life decisions, but they aren’t good for random walks.

What is the most important thing about emergency funds? Capital preservation. Your emergency fund is supposed to be the foundation onto which the rest of your personal finance house is built upon and it’s not something that should be meddled with unnecessarily. You should pour it, let it sit, and hopefully never have to touch it. However, if you ever find yourself in a situation where you’ll need it, you want it to be there just as you had left it. That being said, a friend recently asked me if I ever thought about putting my emergency funds into a money market account or if a high yield savings account is better.

Money Market Deposit Accounts (MMDA)

For those who aren’t familiar with money market deposit accounts, they are basically savings accounts where the bank has greater discretion in terms of what it can invest in. In return for this greater flexibility, the banks often will give you higher interest rates but may demand that you give them at least 7 days notice before withdrawals (Federal Reserve Regulation D).

• Principal is safe.
• Interest rate is higher than regular savings.
• Potential 7 day lag in accessing funds.

High Yield Savings Accounts

ING Direct, the high yield savings account that I believe has been around the longest, is offering 4.20% APY on their online savings accounts. Comparatively, Bank of America’s Balance Rewards Money market savings account’s highest APY is only 3.05% and that’s if you have over two and a half million dollars in your money market savings account. BoA’s money market account likely isn’t the highest around but it’s not even within spitting distance of ING’s 4.20% rate for nothing (and ING isn’t the highest rate around either!).

• Principal is safe.
• Interest rate is higher than regular savings.
• 4-5 day lag in transferring funds from high yield savings to your bank

Money Market Mutual Funds

A money market deposit account may be confused with an actual money market mutual fund, which is a wholly different animal. A money market mutual fund is like any other mutual fund with its own risk and return profile. You might be offered a higher rate of return but in this particular case you have no guarantee on your principal. If things go south in whatever the fund invests in, like in any mutual fund, your emergency fund could find itself depleted. I would not invest my emergency fund in anything that doesn’t guarantee my principal.

However, let’s say you wanted to take the risk, what are the returns like? Vanguard’s Federal Money Market fund, just to take a random example, currently has a yield of 4.69% and an expense ratio of 0.24%. So, even if we ignore the expense ratio and look strictly at the yield, you’re talking 4.69% versus a 4.20% at 100% safe ING Direct. Half a percent isn’t worth it for me to open an account, transfer money, and take the risk.

• Principal is not safe.
• Interest rate is higher than regular savings.
• Lag if you don’t have checkwriting rights.

Summary

Put part of your emergency fund in a high yield savings account, keep some reserve in a local bank so you can get to it ASAP. I don’t know why anyone would have any funds in a money market deposit account given current high yield interest rates. I also don’t know why anyone would put their emergency fund in a mutual fund, money market or otherwise, because of the risk, even if it’s low, you could lose your principal. We’re in a strange place now where high yield online savings accounts are giving such great returns and all these traditional products, like MMDA’s, are really not worth it anymore.

Where do you put your emergency savings and why?

Look! It’s a new credit scoring system for the credit bureaus! Isn’t that great!? It is, except it doesn’t address any of the problems I see with the credit reporting industry. In my mind I have a set of features I think all the credit bureaus should institute if they want to clean things up and make life easier for everyone. As great as that sounds in principle, the problem is that consumers aren’t the primary customers of credit bureaus; banks, credit cards, and other lenders are. All the features I’m about to list are ultimately great for both parties but I think the bureaus are too short sighted to realize this, but I’ll scream into the abyss and ask for these things. Maybe Congress can do something useful and force them offer these. (some of these features may or may not be already available, I haven’t checked, so let me know it’s already available!)

Easily Freezing and Unfreezing Your Account

This is one feature that companies offer nowadays and some states require it, but ultimately it’s very difficult to do. The bureaus should offer online account access that lets you freeze and unfreeze your account with the click of a button. You don’t want credit, tell them to freeze your account and not to let any requests through. If you want credit, log in, unfreeze it, apply for credit, when you’re granted it, freeze your account again. Yes, I understand that that credit bureaus want you to pay for this service but when they’re giving away your information for a fee, it’s not unfair for them to offer this simple service to you.

Email Notification of Inquiries

At a minimum, set up a service in which credit history requests trigger an email that gets sent to an email account of your choosing. Again, I realize that this has costs associated with it but roll that into the cost of a credit inquiry in the first place. It can’t possibly be all that expensive, per inquiry, to set up a system in which an email can be sent out.

Option To Accept or Deny Inquiries

Now, let’s say you opted to keep your account unfrozen, you get email notifications, what if you could accept or deny inquiries? You could deny all those unsolicited credit requests but keep all the legitimate ones, hopefully you can keep them straight in your head.

Reject Non-Perfect Inquiries

When I reviewed my credit recently, I had an incorrect address and two social security numbers listed on my account. I thought to myself – “how could I possibly have two social security numbers!?” When I asked the bureau, they said that sometimes that happens and that errors often result in inaccuracies in one’s history. The social security number was close but one number was wrong, isn’t that grounds to deny a request? Apparently not! Apparently, according to the CSR, it happens all the time. Well, I think it shouldn’t happen all the time and that it should happen, um, never.

If Nothing Else, How About A Password

So you apply for a credit card, enter in your credit bureau password. If nothing else, this is the easiest way to ensure that the request legitimately originated from you in the first place. This seems so simple to me that it should’ve already been implemented.

How This Helps Banks, Lenders, Credit Card Companies

Financial institutions shouldn’t be trying to deluge every single person in the world with credit card offers, they should be deluging those people who want to be deluged. It’s called targeted advertising, it’s why beer commercials are shown during football games, it’s why jewelry commercials are shown during the holidays and Valentine’s Day, and it’s why you see clothing and fragrance ads in men’s and women’s magazines. You might get a few errant signups by shotgunning the masses but it’s far more effective to send offers to those who are interested.

Lenders may complain that this will slow the credit process down (and these will), but if you’ve been reading the news, don’t you think it the market could’ve used some slowing down? Credit was flowing too fast for too long and now the likes of Citi, HSBC, Bank of America, Countrywide, and company are feeling the pinch. Slowing down isn’t necessarily a bad thing, unless you’re the one waiting to be bailed out. How is this related? Sometimes what you expect to be bad, in this case a slowdown in the credit approval process, might actually be good.

Why is it bad to buy a mutual fund at the end of the year? The primary reason for the warning against buying mutual funds near the end of the year is because mutual funds usually do their mandatory distributions at the end of the year. What’s bad about this is that you’re now forced to pay taxes on that mandatory distribution even though you didn’t earn any of the capital gains. I think an example will clear things up.

Let’s say you bought a hundred shares of Blueprint Growth Fund and the next day, the fund announced a $5 distribution. You’ve opted to reinvest distributions and so that $5 does back into the fund and the price per share didn’t change total value of your investment doesn’t change. Okay, you didn’t lose any money yet… until you do your taxes because that distribution is considered capital gains and now you’re taxed on it. (If you didn’t opt to reinvest, instead of having the same number of shares, you’d have $500 of shares less and $500 in your bank account before taxes, same result) If you had owned the shares at the beginning of the year, it’s likely that your gains would’ve been more than the distribution and you would’ve been a-okay (just business as usual). However, since you bought so late, you’re paying taxes on gains you never enjoyed… unfortunately one of the drawbacks of mutual funds.

In theory, this is just like what happens if you buy a stock right before the company announces a dividend right?

How can you avoid this? Look up or call the fund to see when the distribution date and buy it afterwards.

Why does this matter? It makes sense to avoid this if you’re near the end of the year. Otherwise, you should be buying and holding and not trying to time the market, so I wouldn’t worry too much about it otherwise. Consider this one of the minor course correction type ideas in the nice long voyage that is your personal finance life.

Every year, Business Week does a little thing I call the 12 Days of Christmas Index. They take the cost of all the items in the song “The Twelve Days of Christmas” and see how much they would cost if you were to go out and try to buy them. They do make it a really fun endeavor as they compare the prices of buying one of each item (for a total of twelve), buying the whole song (364 items in total), buying all the items online (again, 364 items). They break down what items increased the most, what items didn’t, what items decreased, etc. All in all, it’s really entertaining and what’s surprising is that sometimes the “index” mirrors current economic trends.

For example, the five golden rings cost $325 last year, they’re up to a whopping 21.5% to $395 this year. Anyone tracking the cost of an ounce of gold, now over $800 an ounce, won’t find this surprising at all. Other notable increases were those eight maids a-milking, up to $47 from $41, helped along by the federal increase in the minimum wage.

So, how much would one of each item cost? $19,507, up 3.1%.
How much would the whole song cost? $78,100, up 4%.
And what if you bought these online? $128,886, up 2.5%.

I’m not sure what my fiancée would do if she came home and saw eight smokin’ hot maids a-milking (for only $47!)

A stock market correction is when a major index (or the market in general) falls 10% in a relatively short period of time. In our case, as a result of yesterday’s decline, the Dow has fallen about 10% from its highs in October and so many pundits are calling it a stock market correction. On Monday, after that big two hundred point plus drop, we were solidly into market correction. On Tuesday, we snapped out of it as Citi received some overseas investment from Abu Dhabi (oil helped too) and the market responded favorably by bouncing back. So, why does a market correction matter?

Honestly, I don’t think it does. It’s valuable to know that you’re 10% away from highs because you’re now no longer talking about the random walk and starting to discuss trends. A few percent either way can be considered part of the noise, 10% starts getting you thinking because 10% is more than can be considered standard deviation. However, outside of knowing you’re 10% away from highs, I think it’s not terribly important to know that a “correction” has occurred. The reason I say this is because you don’t know, at that exact moment you recognize a correction has occurred, whether you’re going to continue to trend downwards or bounce back.

On Tuesday, the market bounced back by tacking 1.69% back onto the Dow. Tuesday easily could’ve been a day in which we saw larger losses. Tuesday easily could’ve been a day in which we saw smaller gains or losses, we simply cannot see the future and thus cannot make any decisions that we’re 100% confident in. It’s kind of like the cup and handle technical indicator, as great as past performance may be, it’s not an indication of future performance.

What can you take away from a market correction? I think that if you have money on the sidelines that you’ve been holding off on putting into a market, seeing a market correction might be a good time to buy back in. The only thing you can be confident about is that you aren’t buying at the highs of the market. While you might be buying while the market slides down that slippery slope, at least you know you didn’t buy at the highs of the market.

Beyond that, I don’t think you can really take much away from knowing a market correction has occurred.

Back in March I met with a financial planner and found the entire experience a little underwhelming. I thought I’d be meeting with a professional, someone who could give me some good solid advice for the way forward, but I got little more than a few pitches for insurance and some high cost mutual funds I wouldn’t touch with a ten foot pole. That post garnered twenty-seven posts with people chipping in on their experiences and I was curious if there was something more to financial planning than selling insurance and mutual funds?

Was I talking to the wrong type of financial planner? There are so many certifications for people in the financial world that it’s hard to keep them straight. I knew about Certified Financial Planners but there are Chartered Financial Consultants, Chartered Investment Counselors, Certified Public Accountants and Personal Financial Specialists. Each one focuses on a different niche in the personal finance world and I start to wonder if I talked to the wrong person… or did I?

What’s your take on financial planners? Any advice on what I should do?

Lesson of the Day: Don’t open a Bank of America checking account unless they’re offering you at least a hundred bucks to sign up. This time, Bank of America is saying “welcome to the neighborhood” with their latest re-packaging of this offer. The offer itself is pretty simple, just open a new personal checking account with BoA, deposit $100, and in 90 days BoA will deposit $100. This offer only applies if you are a new customer. If you don’t apply online via this link, then visit a branch and tell them you want offer AOU2611. This offer expires Jan 01, 2008.

(Click to continue reading…)

Zecco offers 10 free trades a month. Buffets offer all you can eat, which means you can get as much as you want for no additional cost. Casinos offer you all sorts of free “comps” to get you to come back into their casino. All this stuff is free, but it doesn’t meant that you should take advantage of it!

With Zecco, free trades sound great in principle because free is always good but they’re actually bad for most of us. The prevailing attitude, to which I subscribe to, is that you should be buying and holding, not actively trading a lot. If you’re a day trader with your finger on the pulse on the market, perhaps free trades is right for you. However, if you’re a “check your stocks at work for a few minutes each day” type of person, then ten trades a month is too much and feeling compelled to use them is dangerous. Buying and holding is preferable because you let time smooth out the volatility in the market, you let time lower your tax liability, and you let time temper your emotions so you don’t make rash decisions. Free trades are great, as long as you don’t feel compelled to use them.

How about buffets and their great all you can eat nature? For a while I would feel stuffed after going to buffets because I felt compelled to “eat my money’s worth” and eat as much as I could. If I paid one flat price and could eat as much as I could, I would try to eat as much as I could! Except that’s horrible! I’d feel bloated, then tired, then lazy the rest of the day… all because I felt compelled to take advantage of the free offer. Buffets are great, as long as you don’t feel compelled to actually eat all you can eat.

Lastly, casinos give you complimentary items just to get you to come back. They’ve done they math, they realize that every person they get into the casino will earn them a certain number of dollars. If they can get you back for the cost of a breakfast, that’s a win-win for both sides. You get the breakfast, they get the business, everyone wins… except for you because you probably will lose more than the cost of the breakfast right? So, comps are great, as long as you recognize what they’re trying to do (I can’t possibly say, don’t gamble because that’s how you got the comps in the first place!)

So… next time you see something advertised as FREE, think about it for a second. It might be no cost financially at the moment, but is it really the right decision?

I received an email today from Comcast about how they recently changed their policy regarding accounts:

Comcast takes the security of our customers personal and account information very seriously. As part of our ongoing effort to ensure the security of our customers information, we have recently enhanced the security of the Comcast.com account management system.

As a result of these recent enhancements, if a Comcast.com account is inactive for 180 days, it is removed from our system.

In order to keep your Comcast.com account active, please log in today with your user name and password: www.comcast.com/login.

First off, anytime someone emails me to log into my account, I never click any links in the email. Never ever. I don’t care if it’s some stupid account on some random free email account that you wouldn’t care gets stolen. The fact of the matter is that thieves know that people use the same username and password on multiple accounts so a free email account could yield a free bank account as well. Lastly, I can just go to Comcast.com directly and login there to confirm whatever.

Secondly, if this is legit, Comcast is ridiculously stupid because they should check to see if the account is connected to an active customer account (it is). If it is, then ignore this stupid little rule because they’re obviously “active” because they’re paying for service! If it’s not connected, then I suppose you can request that someone log in every 180 days (though the chances of a non-Comcast subscriber caring about their Comcast account is exactly zero).

Moral of the story – Companies may be stupid and make legitimate but dumb requests, but don’t be a dummy and get phished.

FYI, the email I received, according to the headers, was legitimately sent from a comcastonline.com’s server but…

• The email was “from” a comcastsupport.com email…
• The link in the email was to to comcast.com…
• And the link itself was to gothere2.comcastonline.com…

Seriously Comcast, you gave me 2034982304938 reasons to think it was a phishing email (all they missed was the link going to thisisacomcastphishingemail.com).