Investing Column

I am not an investing expert but that doesn’t stop me from writing about it! :) In these posts I’ll discuss investing principles, ideas, and comment on current events as they happen. The investments themselves could be in the stock market, real estate, or potential small businesses or franchises… basically anything that could help increase one’s cash flow.


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How I Calculate My Asset Allocation

Stock market crashI was logging into my Vanguard account when it told me that my current mix of investments differed from my target by more than 5%. A few years ago, sometime shortly after I opened the account, I set the target asset allocation based on the classic “120 minus your age” rule of thumb for your investment mix of stocks and bonds. I’ve seen the rule expressed as 120 minus your age, 110 minus your age, or a nice round 100 minus your age. The higher the first number, the more aggressive the investment mix.

Rules of thumb work well when you need an answer quickly. They are a terrible idea when you have the time to do a more rigorous analysis and you decide to use the rule of thumb because it’s easier. They’re also bad because they make you feel like you did the work when you didn’t. The best way to figure out your asset allocation, at least in my non-financial planner opinion, is to separate your money into “goal buckets” and then decide the rate of growth you need for each and then determine your allocation that way.

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4 Tips for Finding Peace of Mind as an Investor

investing peace of mindWe live in times where it can be difficult to be an investor. It’s hard to know what will happen next, no matter who you are, or where your money is invested. Every day, it seems as though there’s a big move one way or the other, and it always seem as though everything is on the verge of a meltdown.

If you want to find some measure of peace of mind as an investor, here are 4 things you can try:

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What are Baby Bonds?

baby bondsOne of the ways that you can diversify your portfolio is to add bonds to the mix. There are a number of different choices when it comes to bonds. You can purchase bonds from the government, including foreign and city governments. Additionally, you can get bonds from corporations.

When many people think of bonds, though, they immediately think of U.S. Treasury bonds, often savings bonds, even though it’s possible to invest other types of bonds. It’s also common to think of bonds purchased in huge amounts, especially when it comes to institutional investors.

Average investors, though, can use bonds in their asset allocation by investing in baby bonds.

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Can You Profit Buying Dividend Stocks Before Payouts?

Dividend Cash!Costco, one of my favorite companies (and one I am invested in), announced that it would be paying out a special dividend that would total more than $3 billion based on the number of shares outstanding. Companies don’t often pay out special dividends but given the uncertainty of tax rates next year, Costco is one of several companies paying out a special dividend in 2012, rather than 2013.

This highlights one of the long running myths of dividend investing – that you can buy a stock just before it pays out the dividend and then profit from it. It’s known as buying the dividend and it doesn’t work.

Unfortunately it’s not true. A broker might tell you that it’s a good strategy but it’s not for two reasons:
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5 Things You Should Know about Mutual Funds

InvestingOne of the ways that investors — particularly beginning investors — add diversity to the portfolios is with the help of mutual funds. Mutual funds can provide you a way to get the benefit of a variety of investments without the need for individual stock picking.

However, before you get too excited about mutual funds, it’s important to have a handle on what you should know about these investments. Here are 5 things you should know about mutual funds:

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How are Master Limited Partnership (MLP) Dividends Taxed?

Santa Barbara Oil RigFor the last few years, I’ve started investing in blue chip companies that offer nice dividends, as an alternative to high yield savings accounts (not a replacement alternative, more like a much riskier alternative), and one type of company I’ve stayed away from has been Master Limited Partnerships. I knew that taxes were going to be trickier with MLPs and I did some brief reading, enough to know it was trickier than simple reporting, but now I want to know more.

Today, we’ll describe what an MLP is, how it differs from a “regular” company, and the tax considerations when you invest in one.

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Vanguard’s Benchmark Switch Reduces Costs

Vanguard LogoWhat’s in a fund’s benchmark? Apparently a lot.

It’s been several years in the making but Vanguard is changing the benchmarks it uses for its index funds. I didn’t think much about the news but it turns out it was a cost saving movie. When mutual fund companies, like Vanguard, use a benchmark for its funds, it has to pay that benchmark a fee. The licensing fee is not insignificant and can amount to close to 0.01% tacked onto the expense ratio of a fund.

If 0.01% seems like chump change, it is and it isn’t. For a low cost mutual fund, 0.01% is a big chunk when the fund itself is only charging around 0.15%. 0.01% is nothing for an actively managed fund that has an expense ratio north of 1%!

One fund that I invest in, the Vanguard Total Stock Market Index has an expense ratio of 0.18% (the Admiral Shares sport a 0.06% expense ratio), will be changing its benchmark and hopefully that means a svelter expense ratio.

As I’ve always believed, it’s difficult to make a meaningful impact on the performance of your portfolio (index is best!) so it’s best to control what you can – how much you pay to invest. I’m glad to see that Vanguard is continuing their commitment to lower costs, I wonder if changing benchmarks will have any impact on performance.

 Investing 
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Lending Club Now Offers Hedge Funds

One of the corners of personal finance that I don’t often tread is the world of peer to peer investing. As a resident of Maryland, I can’t invest in notes at places like Lending Club and Prosper unless I purchase them on the secondary market, through one of their marketplaces. That simply isn’t all that appealing to me, it’s like buying notes that someone has decided they no longer want (that may be drastic but it’s the truth – someone wants out, do I want to offer up the lifeline?).

As a result, I haven’t been following the evolution and maturation of peer to peer investing as I probably would’ve been had I been more closely involved. So when I met up with the folks at Lending Club during FINCON, I was surprised to learn that there are other options for investors who would like to be involved but can’t due to residency.

Lending Club now offers (but doesn’t advertise it for obvious reasons) a few options for accredited investors and qualified purchasers. If you heard about Peter Thomson’s Thomvest investing in a fund at LendingClub, he was increasing his stake in one of the company’s hedge funds.

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