Financial Planning Stuff You Need to Know

The Hidden Costs of Mutual Funds –> Indexing is Better

Chris Long — Mon, 01 Mar 2010 14:52:35 +0000

When I wrote about the advantages of index funds a few years ago I left one out: Because index funds don’t trade as often they generate much lower trading fees vs. actively managed funds. Unfortunately these fees are not included in the expense ratios reported by the fund, so actively managed funds are really at a greater cost disadvantage that you would expect. Check out today’s WSJ for more details http://online.wsj.com/article/SB10001424052748703382904575059690954870722.html?mod=WSJ_hps_MIDDLEThirdNews

Bet On Red!

Chris Long — Thu, 25 Feb 2010 20:27:30 +0000

I’m sure you have seen those mutual funds ads where they brag about their performance. Well I have a new fund that blows most of them away! It’s called Bet on Red — 100% return last year — really! Watch the video for the whole story . . .

Tax cut expiration makes Roth conversion more advantageous in 2010

Chris Long — Fri, 05 Feb 2010 16:00:08 +0000

With the Bush tax cuts expiring at the end of this year and unlikely to be renewed, taxpayers in the highest income brackets that are considering a Roth IRA conversion should think about doing it this year.
The highest federal tax bracket next year will go from 35% to 39.6% meaning the taxes on a $1,000,000 conversion will increase by $40,600 in 2011. If you will turn 59 and ½ next year you may want to consider waiting because the penalty for early withdrawal will expire for you next year lowering the tax on your conversion form 45% in 2010 (35% + 10% early withdrawal penalty) vs. 39.6% next year.

Young tax payers in any tax bracket with small IRA balances may also want to convert this year. That is because by converting now they will be able to shelter any future gains on their current IRA from taxes, and for a young person those gains could be substantial. For example the future gain on $10,000 for a 30year old could be $310,000 by the time the person reaches 70. In addition if your current IRA contributions were not tax deductible because your income was too high, most or all of your Roth conversion could be tax free.

One last benefit for converting in 2010 is that you are able to spread any taxes you do owe over a 3-year period vs. paying them all this year.

Investing – Some Lessons From 2009

Chris Long — Mon, 18 Jan 2010 16:49:07 +0000

2009 was not a year for investors with weak stomachs. After a plunge of 46% from August,2008 through March, 2009, the U.S. markets started rising, recovering almost all of the losses since last August. The same was true for international stock markets. Unfortunately, many investors I spoke with locked in their losses by selling in late February, and then never got back in and missed the 50% rise from March on.

Lesson 1:

When the markets fall by 40% or more in a year it almost always signals we are near the bottom of the market. The major post-WW2 declines have been about 40% (1974, – 37% in 9 months; 2001-2, -35% in 14 months; 2008-9, -46% in 6 months). So once the market has declined sharply in a short period selling will almost guarantee a big loss.

Lesson 2:

Although the market declines are steep and fast, so are the rebounds (1974-5, +45% in 14 months; 2002-3, +47% in 14 months; 2009,+63% in 6 months). Most people who sell at the bottom are also slow to get back in since they are afraid of future declines and miss out on most of the rapid gain.

Lesson 3:

Younger investors should not be soured on investing. Poor market performance in their younger years could benefit them in the long-term. If you are in your 20s or 30s the markets have not seemed to be a great place to put your money. That is not long-term thinking. Your time horizon is at least another 30 years. The lower prices are now, the more shares you can buy and the more room your have for appreciation.

Make Your X-mas Spending Checklist

Chris Long — Fri, 11 Dec 2009 21:52:09 +0000

Even affluent families can easily overspend at this
time of year. Although one year of overspending will
probably not affect your long-term goals
significantly, a pattern of over spending certainly will.
Plus, if you have children think about the messages
and values you will demonstrate to them with your
spending patterns.
Here are some quick ideas to help you stay on
budget.
1. Make an overall budget and then assign
certain amounts to each category (e.g. Presents, Decorations,
Travel, etc.).
2. Have a plan for how you will pay for your holiday expenses before
you spend the first dime. (Hint: borrowing money is not an answer).
3. Assign each person responsibility for a category, (tip – assign the
most frugal to the budget items most likely to be exceeded.).
4. Suggest a holiday grab bag for adults so you are not buying gifts for
siblings, parents, etc. who may not need nor want a gift; or consider
a card exchange only.
5. Put all receipts in an envelope and review them on occasion to see
who has been naughty or nice with keeping to the budget.
6. Resist the urge to splurge, even with all of the sales and media
attention to them. What the media isn’t focusing on is the damage
to your long-term goals that overspending creates, even when you
buy on sale.

When Index Funds Perform the Best

Chris Long — Mon, 02 Nov 2009 15:54:00 +0000

I read an interesting article in today’s Wall Street Journal about when index funds do the best vs. actively managed funds. Index funds do the best in the asset classes that are seeing the strongest returns. The study was based on a 10-year period from 1997-2007. The reason for this is active managers tend to deviate from their primary asset class (e.g. Large-Cap manager buying Mid and Small Cap stocks) when the primary asset class has performed poorly and then miss the quick run up when the primary asset class recovers.

Does this mean that you should use active managers for poorly performing asset classes? No. The problem with this conclusion is not that actively managers are picking better stocks in their primary asset class but they are moving outside their designated asset class to try and improve performance. When they do this they change your overall asset allocation and risk/return profile without telling you. If you wanted to you could do the same thing with index funds but at least you would be aware of the changes you were making.

The article also did not address if they active managers’ performance was after all fees and expenses. Actively managed funds have management fees that average 6x higher a low cost index funds. In addition if you buy an actively managed fund through a broker you load fees in addition. There is also the issue of taxes. An actively managed fund turns its stock portofilio over about 3x/year which could generate signficiant short-term capital gains on which the mutual funds shareholders are taxed on lowering their overall retrun. An index fund may only turn over 20% or less of its portfolio generating much lower taxable gains.

My advice: Stick with low-cost index funds, for superior long-term performance.

Mortgage Rates Headed Up?

Chris Long — Thu, 22 Oct 2009 16:49:05 +0000

According to the Wall Street Journal mortgage rates could be headed up now that the Federal Reserve is wrapping up its mortgage purchase program. The Fed bought large amounts for mortgage debt to stabilize the mortgage market and keep rates low during the recession. Without that support some are speculating that rates for a 30-year fixed mortgage could rise to 6% by next spring

Refinancing: Not All of Your Savings Are Real — “Shockingly” Most Mortgage Brokers Will Not Volunteer this Information

Chris Long — Tue, 25 Aug 2009 13:42:46 +0000

I know many people (including me) that have refinanced recently and lowered their monthly payments. However, not the entire reduced payment amount is real savings. Some of the lowered payment comes from stretching out the term on the loan. Below are the details of my recent refinance this spring:

Chris’ Mortgage Refinance:

Old Mortgage

Interest Rate: 5.875%

Amount Owed: $267,000

Monthly Payment: $1845

Terms: 30yr Fixed

Payoff Date: 2035

New Mortgage

Interest Rate: 4.875%

Amount Borrowed: $267,000

Monthly Payment: $1413

Terms: 30yr Fixed

Payoff Date: 2039

Lowered Monthly Payment: $432

Savings: ???

By refinancing it appears that I “saved” $432 per month, but how much did I really save?

New Mortgage (Shortened Term)

Interest Rate: 4.875%

Amount Borrowed: $267,000

Monthly Payment: $1412 $1671 (Includes $258 of principle payments to keep the same loan payoff date)

Terms: 30yr Fixed

Payoff Date: 2039 2035

Monthly Savings: $432 $174 ($432-$258)

In reality I was already making extra principle payments on the original loan to pay it off by 2026, which is 30 years from the date I bought my house. I recommend that you follow the same strategy when you refinance so that you do not inadvertently spend extra money by extending the period of your loan.

So be careful when you refinance. Although you will save, don’t use the opportunity to borrow more by extending your loan term. Make extra principle payments or save/invest that amount for retirement.

Consumer Reports Updates its Homeowner Insurance Ratings

Chris Long — Wed, 12 Aug 2009 13:27:22 +0000

The September 2009 issue of Consumer Reports Magazine has a report rating homeowners’ insurance. The three top rated companies were Amica, USAA, and Chubb. USAA is limited to people who have a connection to the military. All three carriers were rated highly for paying claims in a timely matter and the amount of the settlement.
Popular carrier State Farm was rated mid-pack and Allstate was near the bottom of the rankings.

The article has some great advice about raising your deductibles to save money, avoiding small claims which could raise your rates or get your dropped, and checking rates every few years.

You can read the article at www.consumerreports.org/ (online subscription required)

Index Funds Make Even More Sense in a Downturn

Chris Long — Mon, 03 Aug 2009 21:21:40 +0000

According to the Wall Street Journal many large institutional investors are turning too index funds after finding that actively managed mutual funds have not performed well during the downturn.

They would rather have the guaranteed lower cost of an index fund vs. the unfulfilled promise of better performance through an actively managed fund.

This is the strategy that I use with my clients. Although some actively managed funds will out perform an index fund the percentage that do is actually less than chance would predict. It is also difficult to predict which managers will outperform and index fund year after year. This is especially true for bond funds. According to Morningstar the Vanguard Total Bond Market Index Fund has outperformed 83% of its peers over the last 10-years.

Index funds charge substantially less than their actively managed peers. A low cost index fund costs about 1% per year less than its actively managed peer. That means that the actively managed fund would have to outperform the index fund by 1% per year just to be equal. That is very difficult to do for almost all managers.