Intentionally Clever Ticker Symbols

PowerShares Dynamic Food And Beverage ETF: PBJ – You’d think food and beverage manufacturers would generally be recession-proof, but PBJ hasn’t fared especially well the last few years.  I prefer peanut butter and banana, personally.

Van Eck Agribusiness ETF: MOO – According to the prospectus, the Van Eck Agribusiness ETF invests in companies that derive at least half their income from the agriculture business.  That leaves plenty of room for interpretation.  If McDonalds to started raising their own cows, would they qualify for inclusion in the MOO fund?

First Trust Global Wind Energy ETF: FAN – This one might not be such a bad buy.  Of all the forms of alternative energy out there, wind energy might be the most promising, at least from an investment perspective.

Claymore/MAC Global Solar Energy ETF: TAN – Seems like TAN should be reserved for a tanning salon franchising company, but whatever.

iShares S&P Conservative Allocation ETF: AOK – With only 25% of its assets in stocks, AOK would have served investors well during the recent market crash.  One thing’s for sure:  investors in this conservative all-in-one ETF should have nothing to worry about.

Unintentionally Funny Ticker Symbols

Claymore/Robb Report Global Luxury ETF: ROB – Freudian slip?  Could they be subconsciously saying that most luxury goods amount to highway robbery?  I think they might!

Potash Corporation Of Saskatchewan Inc.: POT – Everybody should buy some POT once per month.  With their monthly 401k contributions, of course.

I’m sure there are many other hilariously awesome ticker symbols I’ve missed.  Post them in the comments!

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Those searching the web for Roth IRA rates are asking the wrong question.  IRA stands for Individual Retirement Account.  A Roth IRA is nothing more than a type of account with certain distinctive and highly-advantageous tax characteristics (see Roth IRA rules):  it doesn’t represent any specific investment;  rather, it is a tax-advantaged account you can use to buy practically any investment you want including Certificates of Deposits (see How To Find A High Interest CD Online)

What “Roth IRA Rates” Really Means

I’m assuming that what one is really looking for when searching for “Roth IRA rates” is how to get the best return for the lowest risk.  The answer to this question depends entirely on each individual’s risk tolerance and time horizon.  For some, CD’s or short-term government bonds are appropriate due to their guaranteed rates.  For others, an aggressive portfolio of stocks might fit the ticket.  And for yet others, the answer may be real estate.  But for most, the optimal portfolio will include a mix of all these asset classes and more.

Since there is unfortunately no such thing as a Roth IRA rate and Roth IRA’s don’t “pay” anything in particular, you’ll have to educate yourself about the investing process in order to make an informed decision.  Don’t worry, investing is a lot easier than it sounds and there are plenty of free and inexpensive resources to help.  For starters, check out my article on basic portfolio theory and my own Roth IRA allocation to get an idea of what a reasonable allocation might look like.

Other great books for beginners:

• The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William Bernstein
• All About Asset Allocation by Richard Ferri (read my review)
• The Bogleheads’ Guide to Investing by Mel Lindauer, Taylor Larimore, and Michael LeBoeuf
• Oblivious Investing: Building Wealth by Ignoring the Noise by Mike Piper (read my review)

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After over 100 years, the tables have finally turned.  It is the United States that now sits at the top of the heap.  Much of the untapped economic potential that so characterized the American Century has been exploited.  That’s not to say there are no opportunities left, far from it!, but most of the low-hanging fruit has already been harvested.  There is a Starbucks or McDonalds on every street corner around the world.  Coca-Cola is the second most-recognized word in the world, second only to “okay.”  The world has been conquered, economically speaking.  There is literally nowhere to go but down.

The Case For Emerging Market Funds

Today’s emerging markets are the super-powers of the future.  The economies of China (particularly China), India, Brazil, and Russia will become increasingly more important as time goes on.  Clearly, the U.S.-centric investing strategy of the past few decades is no longer tenable.  The mean recommended international stock allocation has steadily increased from basically 0% in the 1950’s to between 20-25% today, and rising.  Emerging market funds offer investors a piece of the high-growth, developing-economy pie.  While America is unlikely to actually decline in absolute terms, it will amost certainly gobble up less of the global economic pie over the next 50 years than the last 50 years.  A Great-Britain-like fate isn’t all that bad, but it does mean the U.S. stock returns aren’t likely to lead the world going forward.

How Much In Emerging Market Funds Is Enough?

Clearly, emerging market funds belong in everybody’s portfolio.  But how much is enough?  By all accounts, roughly 18-20% of the total global market cap is in emerging markets, making that a good starting point.  But there are other considerations.  More important than achieving a market-cap weighted equity allocation, in my opinion, is figuring out how much risk you are willing and able to take and allocating accordingly.  For some, an 18% allocation to emerging market funds may be far too much to stomach.  For others, it may be too little; however, I would caution against going too far above their natural market weight for a few reasons.  My own retirement portfolio reflects the market weight, more or less.

• Higher Risk Does Not Equal Higher Returns – Higher risk equals the potential for higher returns.  They are far from guaranteed.
• Emerging Market Stocks Have High Valuations – Since the high growth potential of emerging markets is no secret,  the market has to a large extent already eliminated the possibility of out-sized future returns by bidding up the holdings of most emerging market funds in advance.

Advantages Of Emerging Market Funds

As an asset class, emerging market funds have a few distinguishing characteristic that makes them very desirable from a diversification standpoint.

• Low Correlation To Developed Markets – While developed markets have become increasingly coupled of late, emerging markets seems to have resisted this trend somewhat.  Emerging market funds still tend to zig when U.S. markets zag, making them valuable diversifiers.
• High Potential Returns – Emerging market funds have the potential to deliver huge returns over the long term.  It’s true the market has already priced in high growth rates and there’s a lot of risk involved, but you’ve still got a better chance at earning high returns in emerging markets than domestically.
• Diversification – Even if you don’t think emerging market funds will beat domestic funds over the next 50 years (I’m sure such people exist), it still makes sense to hold them if only for diversification’s sake.  Two asset classes are better than one.

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The Flexible Savings Account’s Fatal Flaw

The ability to use pre-tax funds to cover health expenses is a great boon for employees; however, like always there is a catch.  Contributions to FSA’s are use-it-or-lose-it.  If you accidentally contribute more than you end up needing, the company gets the money back.  That’s right, this rule basically makes it legal for a company to take back money it has already paid you, predictably leading to all manner of last-minute scrambling to spend leftover FSA contributions, an effect I doubt congress had in mind when it created the plans.

Some healthcare costs, such as yearly physicals, semi-annual teeth cleanings, diapers and baby formula, etc are predictable and easy to plan for.  Others, such as broken bones and automobile accidents, are practically impossible to predict.  And so employees are left with a dilemma.  Should they contribute only what they know for a fact they will use by the end of the year and risk missing out on paying for life’s unexpected health problems with pre-tax money?  Or should they contribute a surplus and then scramble to spend the extra funds on things they don’t really need when the anticipated emergency never materializes (or worst of all, lose the money entirely)?

How To Fix The Flexible Savings Account

The solution to this problem is simple and obvious:  take the employer out of the equation entirely and have the IRS take care of it.  Simply set a yearly maximum and allow families to deduct qualifying health expenses up to that amount.  Cheaters will be kept in line by the same mechanism currently in force, namely, the audit.  After a few years the IRS will have ample data to construct a detailed statistical model of normal taxpayer behavior, and obvious abusers will be easily caught.  As with any deduction, the taxpayer will be responsible for keeping receipts and detailed transaction records dating back at least several years.  This way, consumers get a break on their medical expenses without employers being put to unnecessary expense.

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How To Compare An Immediate Annuity Online

There are many tools dedicated to allowing you to price out an immediate annuity online, the most popular of which (or at least my favorite) is probably immediateannuities.com.  The interface is ugly, but it’s easy to use:  you just enter your age, gender, state, and either how much you have to invest or what your desired monthly income is.

If you choose the lump sum option, you will be taken to a page with an estimated monthly income based on the size of the lump sum you intend to invest and a variety of beneficiary riders (Do you want payments to continue to a beneficiary after your death?  How long?).

If you choose the monthly income option, you will get an estimate of the lump sum you would have to invest to achieve your desired monthly income for a variety of rider options.

While you can choose to receive specific quotes tailored to your situation from various insurers, it is not necessary to enter any private information to use the above annuity estimation tool.  Of course, your health, family history, and individual needs will factor heavily into your final quote, but this tool can help you price and annuity online without having to entire a high-pressure sales situation.  Besides, knowing what the competition is offering can be an invaluable negotiation tool.

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The Average Credit Card Debt In America

At the end of 2008, the average credit card debt in America per household, regardless of whether or not they actually held a credit card, was $8,329.  Obviously, since not every household has a credit card, this average is less than useful.  The average credit card debt in America of households actually possessing a credit card was significantly higher:  $10,679, up from $10,637 the year before.

Here are some more credit card facts I found interesting and that really drive home our addiction to credit:

• Total outstanding credit card debt owed by Americans was $972.73 billion in 2008, up 1.2% from the 2007 total.
• Average balance per open card was $1,157.  Remember that many households own more than one card (I have three, unfortunately).
• 13.9% of our disposable income went to pay consumer debt.
• 73% of American households possess at least one credit card.
• Anchorage, Alaska has the highest average credit card debt in America per household.  Lincoln, Nebraska has the lowest.

Are Current Credit Card Debt Levels Worrisome?

The actual amount of the average credit card debt in America doesn’t worry me.  While $10,679 is a lot of money, it’s not an obscene amount.  What worries me more is the fact that 13.9% of America’s disposable income goes directly to the credit card companies’ top lines.  With the average credit card rate hovering around the 15% mark, it takes a surprisingly little amount of accumulated debt to start generating sizable monthly debt obligations.

With consumers already facing reduced incomes and greater uncertainty due to the recent recession, it’s hard to imagine us being able to afford to spend our way out of this mess.  Certainly not if we are spending almost 15% of our disposable income paying for stuff we’ve already bought.  At the end of the day, just how much will be available for future purchases?  Not much, I’d wager.

Source:  Credit Card Statistics, Industry Facts, Debt Statistics

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Forex Futures Will Not Make You Rich

Since the forex futures market is loosely-regulated at best, traders have the ability to commit to buy or sell massive amounts of currency with a relatively small upfront investment, sometimes as little as 5% of the value of the trade.  Needless to say, that kind of leverage is dangerous, especially when applied to an asset as volatile and unpredictable as currency.

Now I’m not going to say the forex market can never present a compelling investment opportunity, and I suppose one could make the argument that a small allocation to forex futures (along with commodities) could serve as a good portfolio diversifier consistent with a conservative investing strategy, but the fact of the matter is that the forex market is dominated by large institutions trading massive amounts of currencies every day.  The small independent trader hasn’t a prayer against the big guys.

Naive investors often convince themselves they see patterns in the data and that they can use those patterns to predict the market.  In reality, if you stare at a random series of numbers long enough, your brain will inevitably begin to see “patterns” in the data.  But if the random sequence didn’t cause the market to move a certain way, it has no predictive power.  Because of the leverage involved, the vast majority of small investors who try to play the forex futures market will get burned.  Repeat after me:  forex futures will not make me rich, forex futures will not make me rich…

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Finding A High Interest CD Online

There are a growing number of websites and tools dedicated to finding you the best high interest CD rate.  Most of them are pretty similar to each other so it doesn’t particularly matter which you use, but here are two of my favorites:

• Bankaholic – Bankaholic has a high interest CD quote tool that let’s you search CD rates for a variety of maturities from 3 months to 5 years, both jumbo and regular.  It also includes minimum deposit information as well as a star rating of the issuing bank’s financial stability.  But since high interest CD’s are FDIC insured, I worry too much about those.
• Bankrate – Bankaholic actually uses Bankrate’s CD search engine to return its results so you’ll get the the same information; however, Bankrate offers the option of searching for locally-available banks only in case being able to visit a branch is important to you.

Choosing A High Interest CD

While high interest CD rates have largely equalized throughout the country, occasionally slightly higher or lower rates will prevail in some geographic area of the nation for whatever reason.  It is important to realize the highest-paying CD may be offered by a bank several hundred miles away.  If availability of a local branch is important to you, you probably aren’t going to get the highest rate available.

When all is said and done, the only differences between one high interest CD and another are

1. maturity
2. rate

You should first decide how long you’re willing to have your money locked up and only then seeking the highest rate within that duration.  While most banks will let you cash out early, you usually have to sacrifice a certain percentage of your accrued interest in order to do so.  If you know you’ll need the money in less than a year, it doesn’t make sense to buy a 5 year CD for a higher rate since the early-redemption penalties will more than wipe out the extra earnings.  All CD’s are FDIC insured up to the usual limits, so financial strength of the issuing bank shouldn’t be too much of an issue.

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Still The Best High Yield Savings Account?

ING was first to the watering hole, but intense competition the last few years has severely eroded ING’s competitive position in the online high yield savings account niche.  As of 11/01/2009, the ING Direct Orange Savings Account yields a respectable 1.30%;  however, competitors Ally Bank (1.55%) and HSBC Direct (1.35%) both currently offer higher yields and have for some time now.  Since a savings account is basically a commodity, it makes sense to always go with the highest rate, right?  Not necessarily.  Even though ING Direct isn’t the highest-yielding high yield savings account these days, I am still a customer and have no intention to switch to a competitor anytime soon.

ING Direct is still my high yield savings account of choice for a few reasons:

• Simple, Easy-To-Use Interface – As somebody who designs software for a living, clean, usable interfaces are very important to me.  ING Direct’s website couldn’t be easier to use.  By contrast, some of ING’s competitor’s have clunky, non-intuitive interfaces (HSBC comes to mind, although they may have improved things recently).  A high yield savings account online interface needs to do one thing and one thing only:  allow me to transfer funds to and from my checking account.  That’s it, and ING’s interface does this very well without the clutter so common on other banks’ websites..  Not too sure about the Orange color scheme, but that’s a debate for another day.
• Competitive Rates – It’s true that ING Direct rarely has the highest rates, but it’s also rarely the lowest.
• Good Customer Service/Reputation – I’ve never had a need to call ING’s customer support (why in the world would somebody need to, anyway?) but by all accounts it’s among the best in the biz.  That’s nice to know.
• Large, Financially-Stable Company - Yeah, I know high yield savings account deposits are FDIC insured so there’s no danger of losing money should the bank go under, but that’s not my primary concern here.  ING has the financial resources to continually upgrade their IT infrastructure in order to provide an even quicker and easier online banking experience in the future when new technology becomes available.  Many of ING’s competitors aren’t in such a favorable position and it’s conceivable their IT infrastructure would be one of the first areas to see cutbacks.
• It’s Just Not Worth The Trouble Of Switching – An extra 0.2% might earn me an extra $50 per year or so.  It’s just not worth the hassle of setting up a new account somewhere else, transferring the money, and then closing my ING account.  Yeah, I know it would only take 15 minutes, but $50 per year just isn’t worth 15 minutes of my time.  I don’t keep enough money in my emergency fund to make a difference.

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Types Of Mutual Funds

Open-Ended Mutual Funds

Open-ended mutual funds are what most people think of when they think of mutual funds, much more-so than the other types of mutual funds..  Their distinguishing characteristic is that they have no set limit on the number of shares outstanding.  When you buy an open-ended mutual fund, new fund shares are created by the fund company on your behalf.  Similarly, when you sell shares the money goes back to the fund company and you are paid out of the community pot.

Open-ended mutual funds can only be traded once per day, after the market has closed for the day.  When you make a buy or sell order, you won’t actually know what price you will get until an hour or so after the market closes.  The transaction price is always the closing Net Asset Value (NAV) of the fund for the day i.e. the weighted average cost of the underlying securities.

There are two primary subtypes of open-ended mutual funds:  index funds and actively-managed funds.

• Index Funds are passively-managed, meaning they simply track an un-managed basket of stocks meant to represent a particular market segment.  Index funds exist to track the entire U.S. Stock Market (VTSMX) and entire WORLD market (VTWSX) all the way down to narrow market segments such as Real Estate Investment Trusts.  Since index funds simply attempt to track the market and not beat it, overhead costs are extraordinarily (they don’t need to employee expensive analysts or hot-shot fund managers).  Vanguard index funds are generally the largest, least-expensive index funds around, although smaller competitors have been steadily gaining ground (Dimensional Fund Advisors is one such competitor).
• Actively-Managed Funds are managed by a manager who actively attempts to earn above-average investment returns by making strategic buy and sell decisions.  Since this type of investing strategy is very labor-intensive, overhead costs are generally quite high.  There are company analysts, economists, researchers, and fund managers to hire.  Hence, actively-managed funds start out at an immediate disadvantage since the manager has to outperform the index by the amount of its hefty expense ratio just to break even.  One additional unwanted by-product of this strategy is more-frequent realization of capital gains, leading to higher tax obligations. For these reasons and more, I favor index funds.

Closed-Ended Mutual Funds

Closed-ended mutual funds are among the rarest types of mutual funds these days.  Once quite prevalent, they have mostly been relegated to a niche market for sophisticated players.  Unlike open-ended funds, closed-ended funds have a set number of shares outstanding and their market price at any given point in time has as much to do with supply and demand for these shares as with the underlying holdings.  It is not uncommon for closed-ended funds to trade at prices significantly higher or lower (usually lower) and the value of their underlying assets.

Closed-ended funds can be bought and sold throughout the day and are almost always actively-managed.  Since their prices sometimes differ dramatically from NAV, the occasional great deal can be found in this segment of the market.  Usually, however, investors are better off with an open-ended fund.

Exchange Traded Funds (ETFs)

Exchange traded funds (ETFs) are basically modern closed-ended funds in that the have a fixed number of shares outstanding and are traded throughout the day;  however, most ETFs are index funds under the hood (although actively-managed ETFs are on the horizon).  Because they don’t have to deal with investor redemptions and other such issues, ETFs are generally more tax-efficient than comparable open-ended index funds (with a few exceptions).  They also generally sport lower expense ratios, which is a significant advantage.

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