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

Choose your Fear: Motivating Financial Choices

I freely admit fear is a motivating factor behind my financial decisions.  High on my list of fears (worries, concerns) is inflation.  For a variety of valid economic reasons, long-term bond returns are generally worse than equity returns in an inflationary environment.  In other words, an uptick in inflation hurts bonds more than it hurts stocks.

Fear of market volatility steers me away from stocks, fear of inflation steers me away from (long-term) bonds.   In the current interest rate environment, real rates of return on short-term Treasury debt are negative.  High-quality corporate bonds are only paying a pittance.  And as I have recently blogged, TIPS based on the CPI-U, are not looking so good either.

What options are left to the anxious investor?  Some remaining choices are:  foreign-debt ETFs (as a hedge against US and US dollar inflation), foreign-equity ETFs, and junk bonds.  Perhaps, value stocks as well.  Unfortunately each of these options comes with their own particular set of risks and worries.

The moral of this stories is there are few low-anxiety options for the investor who fears volatility, uncertainty, and inflation.  Retirees looking to reinvest expiring bonds and CDs are finding few good investment options.

There remains on strategy to fall back on to help ease financial anxiety: diversification. Diversifying between equities, bonds, and cash.  Diversifying between US and foreign equity. – Diversifying between large-cap and small-cap. Diversifying between long-term and short-term debt.  Diversifying between high-quality and high-yield (junk) debt.  And, yes, even diversifying between value and growth.

Still, I choose my fears.  Inflation is number 1.  Volatility is number 2.  Fear of missing gains is number 3.  Inflation concerns and dismal interest rates are motivating me to hold more equities (via low-cost equity ETFs) than I otherwise would.

bond funds, bonds, finance blog, money

IMF Chief’s Arrest

In brief, I say about Dominique Strauss-Kahn’s arrest, innocent until proven guilty. The markets are under no such obligation of assumption. Speculation and rumor are as viable as fact in bond markets, stock markets, commodities markets, options markets… you name it.

The impact of Kahn’s situation has short-term ramifications on the European debt crisis as most loudly exemplified by the Greek debt crisis. Strauss-Kahn’s personal crisis could slow or alter IMF/World Bank actions.

I am not surprised, but I am disturbed by the general media reaction to the allegations against Kahn.  “Innocent until proven guilty” should trump “presumed guilty upon allegation”.  Recent examples of the Duke Lacrosse Team and Kobe Bryant loom large as examples of premature media reaction.  I hope that cooler heads will prevail; that the facts will come out… either way (possibly somewhere in between)…  in the slow, laborious, and languid way that the law dictates.  Until then I assume innocence.

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.

bonds, finance blog

US Treasury Debt and other obvious warnings

It doesn’t take a rocket scientist to warn about the US’s debt woes.  For example this finance blog warned about it April of 2010.  And Bill Gross and PIMCO quit holding US Government bonds recently.  Now S&P joins the bandwagon with a warning that US Treasury debt’s AAA rating is at risk.  This in effect would mean lowering the government’s credit score.

Predicting particularly congressional outcomes is not my strong suit.  But I have been predicting growing US debt online since 1998.  Then the debt was a mere $5.3 trillion.  And I’ve been right that not only nominal debt, but debt as a percentage of GDP would rise.

To so many investors like myself the unsustainability of our current fiscal course is blatantly obvious.  During the day I work for a successful tech company, and I get a significant portion of my pay that varies based on the companies performance.  If profits increase my coworkers and I get more cash; if the profits dwindle so does my pay.  If the company stock rises, so does my compensation.  And if it falls, my compensation falls with it.  It is a smart system, commonly called profit sharing.

Might I suggest a similar compensation plan for federal government workers.  I’d call it deficit sharing.  (I’d prefer to call it surplus sharing, but get real.)  Beyond a certain point (say the average US annual wage) base pay is fixed and all future raises are in terms of variable pay increases.  And variable pay is awarded at the end of each fiscal year.  The proportion of the federal deficit to federal spending prorates this variable pay.  If someday there is a balanced budget there is a 1.0X multiplier to variable pay.  If there is a deficit then variable pay is reduced.  Should there be a surplus a multiplier of greater than 1 would apply.  Share and share alike.  The private sector employees do… and right now we are sharing the sacrifices.  So should Federal employees.

What to do you think America?

bonds, finance blog, money

Year-End Portfolio Tax Planning

With only a few weeks remaining in 2010, now is a great time to make any tax-planning adjustments.

Step 1 is determining your general current capital gains and gross income situation.   Do you have carry-forward tax losses?  What are your current 2010 realized net short-term and long-term capital gains?   What are your unrealized capital gains?  What is your 2010 “ordinary income” situation looking like?

Answering these questions gives you a starting point for year-end tax planning.

For example, if you have big long-term capital gains because you sold a bunch of company stock to make a down-payment on a vacation property, you make ask yourself, “is paying 15% tax on these gains a good deal, or do I want to try to offset them with a few capital losses?”

Or, you may ask the inverse question…  “I have a bunch of unrealized long-term capital gains;  Should I sell now and realize them for the ‘bargain price’ of 15% tax?”

Some of these financial questions are tough to answer.  That is why I pay my CPA $80/hour to help me answer them. [This is a bargain price; my previous CPA was $150/hour.  Finding a good one for $80/hour was a godsend!]  If your struggling to answer them, I’d encourage you to set up an appointment with your CPA, or if you don’t have one a local CPA.   Bring your best answers or guesses, and you might be surprised how much they can enlighten you in one short hour.

A little year-end tax planning could save you $500, $1000, possibly several thousand dollars.  If you have to pay $80, $100, or even $250, for this I’d say its money well spent.

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.

bonds, finance blog

To Make Finance Interesting

I went to a get together tonight with some friends, and talked about all sorts of topics.  The least popular, by people’s reactions, was personal finance.

People, in my experience, find Madoff somewhat interesting.  They sometimes find a bit of Wall Street bashing a bit entertaining.  And they find John Bogle and ETFs plain boring.

My issue is that I find the details of ETFs, markets, exchanges, and bonds fascinating.  I want to get inside of people’s heads to understand just why is finance boring or even vaguely repulsive?  My first thought is that somehow people feel that making money from investments is less morally redeeming than through work.  Another thought is that “respectable people don’t talk about money.”  Perhaps they find finance and all its jargon overwhelming.  Perhaps they have other more important things to focus on than their portfolio.

My mission with this finance blog is to find ways of helping people make better financial decisions.  A secondary goal is to bolster confidence in these financial decisions; to help people sleep easily at night with their financial strategy.  Finally, if possible, I would like to help people see finance through my enthusiastic eyes… as the minor miracle that it is.

The first two goals seem very achievable, while the third seems ever remote.  Really making sound financial decisions, and feeling secure in those decisions is important.  Perhaps, making finance interesting is not so important.  There are a handful of people, like myself, who find finance intrinsically interesting, while the vast majority of people could care less about money, investing, stocks, commodities, ETFs, options, futures…. hey, you in the back, quit snoring… mutual funds, gold, ETNs, annuities, insurance, loans, equities… oh, crap I think I might have dozed off a bit myself.

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).