bond funds, bonds, finance blog, funds, money

US Debt Ceiling… Sky’s the Limit?

The current debt ceiling is set at $14.294 trillion, and according to CNN Money we are days away from reaching it.  Treasury Secretary Tim Geithner estimates he and his team can keep the US out of default until early August.

I appreciate the increased attention on the US nation debt.  My concern is the the US is beginning to flirt with danger:  increasing risk of a debt crisis.   US debt is a fair ways removed from the debt crises of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain).  However, the current trend of debt as a percentage of GDP is ominous.

A US debt crisis would look a bit different from that of the PIIGS because the US is not bound to a multi-country currency like the Euro.  Devaluation of the USD is likely to be a component of (or reaction to) a US debt crisis.  So are austerity and tax increases.

The danger is that buyers of US debt will demand higher and higher interests rates to compensate them for taking on three key risks,  inflation, devaluation, and default.   As debt increases so do these risks.  As the US refinances debt for expiring Treasurys it does do at greater and greater costs.  As the government raises taxes to combat debt (and pay higher borrowing costs) the US economy is increasingly depressed and tax raises do not result in nearly as much federal revenue as hoped.  Eventually only austerity and devaluation (via the printing press and increases in money supply).

The way I see it, playing brinksmanship now with the debt ceiling in an effort to but the brakes on the US deficit is a reasonable risk.  The current trajectory of the US debt is unsustainable and reckless.  With US debt 90% of GDP and closing in fast on 100%, we are in jeopardy.  This number puts the US next to the troubled Ireland and not far from Italy as shown in this table.

It is time for Congress to get its fiscal act together.  Time is rather short.  I hope we can start making some sort of progress.

bond funds, bonds, finance blog, funds, Index Investing, Low-Cost Funds, money

Money and Investing Celebrities

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.

bond funds, bonds, finance blog, Index Investing, Investing, Low-Cost Funds

8 Questions to Ask your Financial Advisor/Manager (or Self)

  1. What is the average weighted expense ratio for all my holdings?
  2. How much, if anything, did I pay in commissions in the last 12 months.
  3. What was my rate of return in the last 12 months? (post all fees and expenses)
  4. How does that compare to the to rate of return in the S&P 500 in the same time period. (inclusive of dividends)
  5. What is the 12-month standard deviation of my investment portfolio? (a measure of risk)
  6. What is my asset allocation between stocks, bonds, and other?
  7. Do any of my holdings have loads?  If so why?
  8. 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.

bond funds, bonds, funds, Index Investing, Investing, Low-Cost Funds, money, options, Small Business

More Hypothetical Proprietary Fund Ideas

While the Σ1 Fund is currently a real 100% privately-held investment vehicle, all language and speculative plans about its future are currently (9/28/2010) STRICTLY THEORETICAL.  There is currently no SOLICITATION or even OPPORTUNITY for anyone other than Balhiser LLC shareholder(s) to invest in the fund.  Further, there is currently no SOLICITATION nor OPPORTUNITY to invest in Balhiser LLC at present. Thus the HYPOTHETICAL and SPECULATIVE language is merely just words at this point and time.  It is entirely possible that outside investors NEVER be given the opportunity to invest.

I’m wondering… should I revise my $10K minimum investment.  Perhaps $5K-$9K with a ~2% up-front load ($5000 yields $4900 of principal, $5000 yields $5100).  Increments above $5K are $1K with an up/down choice.  Increments are also $1K for investments over $10K.  Additional subsequent investments for current investors are $2K minimum with $1K increments.  Withdrawals minimums are $5K or %100 plus optional $1K increments.  Additional fund investments are subject to the same early withdrawal penalties as initial investments.  ALL requested redemptions are FIFO by default.

Distributions (realized capital gains, dividends, etc) are annual.  How they are distributed is TDB.  My initial inclination is that there is an ex-dividend date on the last trading day of each month, and dividend income is distributed in proportion to #months held * #shares.  Distributions are re-invested by default. Non-reinvested distributions are held in a non-interest-bearing manner until $500 is reached, upon which the total distribution will be paid in full by ACH or check.  Non-reinvested dividends may be paid, upon request, before the $500 minimum is reached, but a distribution-collection fee of $50 will be assessed.  For shareholders with >= $100K NAV none of these distribution restrictions or fees apply.

75% of redemption fees will be paid to Balhiser LLC, the remaining 25% will be paid to the Fund.

Requirements for potential investors:

  • Minimum of 5 years experience investing in stocks, bonds, ETFs, and/or mutual funds.
  • Acknowledgment that this is an investment of at-risk capital that may be subject to forced liquidation without notice during volatile and illiquid market conditions. This could result in severe or even total loss of investment.
  • Acknowledgment that options WILL be part of the Fund’s holdings/obligations.  While the primary target use of options is “covered-call” writing the notion of “covered” is not strict.  The fund may consider an RNM (Russel 2000 mini call option contract) to be “covered” by ownership of “an appropriate amount” of SPY (S&P500 ETF) shares.
  • Acknowledgment that ETF futures contracts may part of the Fund’s holdings/obligations.
  • Signed (and notarized) legal waiver that specifies that in exchange for participating in this fund, fund participant, fund participant beneficiaries and/or heirs, agree to hold legally blameless the fund manager and Balhiser LLC  for losses sustained by the Fund.
  • Solid familiarity with E-mail and the Internet and Internet-based “paperless” documents and communication.

In exchange for these concessions, the fund manager agrees to the following “skin-in-the-game” and transparency conditions:

  • So long as fund assets (or total net unredeemed funds invested) exceed $50K, the fund manager and/or Balhiser LLC will maintain a minimum of $25K invested in the Fund.
  • So long as fund assets exceed $50K, the fund manager and/or Balhiser LLC will reinvest all fund net distributions and net fund management proceeds into the Fund.
  • So long as FE>$50K. Fund manager and/or Balhiser LLC will be subject to same fees, terms, and conditions as all other investors PLUS will have to provide an ADDITIONAL 60-day advance notice to all fund shareholders (via email or other means) prior to any sale of holdings in the Fund.
  • 100% of Balhiser LLC/fund manager redemption fees (fees incurred for “personal” withdrawals) will be paid to the Fund.
  • End-of-month NAV reports will be delivered by email to shareholders. (delivered within 5 business days)
  • Subject to NDA: Unaudited Annual Report detailing complete fund holdings (delivered within 20 business days). Disclosure to CPA is permitted.
  • Subject to NDA: Upon request unaudited inter-year report (delivered within 30 business days). A $250 fee applies.  Disclosure to CPA is permitted.  Fee is waived once per year for investors with >= $100,000 invested in the Fund.

Base Management Fee Rates (similar, but not identical, to an expense ratio)

  • 7.8 basis points per month (0.078%) of previous close-of-month fund NAV.
    [~0.95% in simple interest, or ~0.9772% compounded annually]
  • Base management fee reduced by:
    • 10% for investors with >=    $50,000 NAV (or $50K net unredeemed investments).
    • 25% for investors with >=   $100,000 NAV (or $100K net unredeemed investments).
    • 33% for investors with >=   $250,000 NAV (or $250K net unredeemed investments).
    • 50% for investors with >= $1,000,000 NAV (or $1M net unredeemed investments).
bond funds, bonds, finance blog, Index Investing, Low-Cost Funds, options

Small Investors: The Best of Times

The small investor has some truly excellent options these days.  Two in particular are just this side of awesome.  The first is index ETFs (exchange-traded funds).  The second is low-cost online trading.  ETFs and cheap online trading form a powerful combination for the small investor.

In addition, the wealth of online investment information is voluminous, and in many cases free.

So for the small investor (whom I define as someone with < $1,000,000 of net assets to invest), 2010 is a pretty great starting point to get serious about personal finance

I recommend that before you embark, that you have at least a 3-month emergency fund and little to no credit-card debt.  If this doesn’t describe your financial situation, this article doesn’t currently apply to you.  [Please consider paying down those credit cards and then saving up a modest rainy day fund!]

However, if you meet these basic criteria consider the following suggestions:

  • Open a Vanguard account with a minimum of $3000.  Put those first funds in either the Prime Money Mkt Portfolio or the Tax-Exempt Money Market
  • Keep putting spare money into Vanguard.  Once you hit $10,000 to $25,000, consider other Vanguard offerings.  If you are unsure of what to invest in, call a Vanguard adviser.
  • Consider maxing out your 401k contribution, if your income permits.  Keep that “rainy day” fund in mind.  A rainy-day fund is cash, money market, or diversified short-to-intermediate AA or better rated bonds or CDs.  Stocks, mutual funds, etc. don’t count for rainy day cash.
  • Keep that Vanguard account.  If your tax situation permits, consider making Roth IRA contributions.  Vanguard is a good place to hold these, Fidelity is another.
  • Once you’ve got your rainy-day fund to 9 months or more, and can maintain solid 401k and Roth IRA contributions, congratulations.  You may be read to become a “big-time small investor”.

Enough preamble.  Let’s assume you are ready.  Now what?

You can select any number of online brokerages and invest for less than $9 per trade.  That includes option trades.  Some even allow futures trades.  So, the world is your oyster.

However, prudence is crucial.  There are just so many opportunities, options, pitfalls.  May I make a few suggestions?

  1. Start by investing in ETFs.  Consider, SPY, VTI, BND, VEU,  and, now, VOO.  These are excellent diversified ETFs with very low expense ratios.
  2. Want to dabble in individual stocks?  Diversify.  If you buy some tech stocks, also buy some consumer goods, or basic materials, or utilities.
  3. Want to dabble in options?  Try starting with writing (selling) covered calls on your ETFs.
  4. Futures?  Think once, think twice.  Do some research and think a third time.  The just maybe you might given them a try.  But, please, please do so with caution. [Note futures contracts require a margin account… please tread carefully with margin (aka leveraged) investing.]

That is just a start.  Might I also point out that an investor today could construct an excellent life-long portfolio with just VTI, BND, and VEO… re-balancing annually as age and situation dictate?  As age 60 approaches, mixing in a few laddered CDs (bank certificates of deposit) is not an unreasonable option.  Owning and paying-off a home is also a reasonable retirement goal.

I, however, am now content to fully adopt a reasonable and prudent approach.  I also dabble with a small Crazy Ivan Account (CIA), and with (limited) option strategies.  I also incorporate rental real estate into my investing mix.

The point I want to emphasize is that there are so many opportunities for the modern small investor.  It is easy to feel overwhelmed by the choices.   But, by starting with the basics — Vanguard mutual funds, low-cost diversified ETFs, and online investing — it is possible to construct and manage very solid personal portfolios.

Best wishes.

bond funds, bonds, decisions, finance blog, financial

Buying US Debt?

Why not evaluate US government bonds like corporate bonds?  Take a look at the balance sheet, cash flow, and anticipated future cash flow.  Look at current management… where are the they taking the organization?

The data:

So the trend is not so good. Ever increasing debt implies more debt supply. Can the demand keep up. Not at current yields, no. Yields up, prices down.

Management? Fiscal discipline? Not anytime soon. Cash flow? The situation is not positive.

So I’m not very inspired to buy US Debt today. Maybe, maybe TIPS. But traditional US Bonds? Not with a credit report like this.