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Monday, January 31, 2011

How Beginner Investors Can Get Started

This weekend a 25-year old caller with $200 per month to invest asked Bob Brinker how to get started with an investment program.  Bob Brinker suggested the caller contact "Fidelity" and ask about dollar cost averaging into the "Total Stock Market."
This is great advice from Brinker.  I just checked with Fidelity and they said if a new investor sets up the investment into a ROTH or regular IRA with a $200 per month investment, then they will waive the minimums for the index fund. I would recommend the 25-yr old caller put the money into a ROTH. Of course I'm assuming since they only have $2,400 a year to invest they probably meet the ROTH income requirement for 2011 and have ALREADY invested in their 401K at work to take full advantage of any matching. After that, their funds should go to a ROTH IRA.

I often read others suggest using ETFs (exchange traded funds) but those usually come with transaction fees to buy. Some brokerages waive transaction fees if you buy ETFs they sponsor, but they may have a "small account fee" that cancels your savings. 
Someone just starting out needs to be very careful about hidden expenses.  A "small" $4 transaction fee on a $200 investment adds 2.0% to the expense charged by the ETF.
$4.00 / $200.00 x 100% = 2.00%  !!!
Many of the fund companies will let you into their index funds well below the minimum if you sign up for automatic investment.  I did that with Vanguard years before I heard of Brinker.  I set up an account then to invest $2,000 a year into a regular IRA account using excess taxable funds.  I forget the details but I believe I transferred $100 every two weeks  from my checking account to Vanguard until the IRA was full ($2000 max per back then. I was paid every 2 weeks with direct deposit to my checking account.  After that, the funds went to their money market fund until the clock reset for the next year and I could move money to the IRA again.  Schwab will let you buy their very low expense ETFs with no transaction fees but I'm not sure what their fees are for small accounts.

I'd call Fidelity, Vanguard AND Schwab and ask each of them what would be the total cost in each of the first five years to invest $200 a month into their total stock market index fund or a similar ETF.  Tell them you are willing to set up an automatic monthly transfer from your checking account to get the lowest fees.  After 5 years, you should have the $10,000 minimum to get their lowest cost mutual funds.  There is good competition for this type of saver because smart savers usually turn  into very large accounts in the long run.  (Disclosure, I have large accounts at all three but I am not compensated to recommend them other than they may advertise via Google ads on my web sites and blogs.)  Often you can get some fees waived if you can convince them you will move more money to their accounts in the long term and that you will call their competition and go with whomever offers you the overall lowest cost to invest $10,000 over the next five years.

If you are older and want some in stocks and some in fixed income, then don't pay a fee to someone to do it for you.  Bond funds are risky now with the yields so low.  Fees eat up a significant portion of your return even if rates are flat.  Do what I do.   Build it yourself with the fixed portion in a savings account and the equity portion in the total stock market.
ING Direct has a pretty good rate now for savings accounts (1.10%) so you can electronically link between ING and your brokerage account. Then you can move money back and forth easily. I have accounts (CD & Savings) there. I'd shop around at Best Savings Account Rates to find the best rates because they change. Currently, 1.30% at American Express Bank is the best I'm aware of and is what I recommend people use for new savings accounts.
These books offer great advice on how to keep expenses low to maximize your returns.

I do not recommend anyone's newsletter, even mine, until you have at least $10,000 put away in a Total Stock Market index fund and have read these books.  Once you have maybe $50,000 to $100,000, then I think it makes sense to try and beat the market with 20% of the money via managed mutual funds or "do it yourself" perhaps with the aid of "Kirk Lindstrom's Investment Letter."

Bogle on Managed Mutual Funds:
Actively managed mutual funds? Yes. But only if they are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging. (Don't be disappointed if the managed fund loses to the index fund in at least one year of every three!)" The Little Book of Common Sense Investing”, Chapter 18
Bogle on individual stocks for your “Funny Money” account:
Yes, Pick a few. Listen to the promoters. Listen to your broker or adviser. Listen to your neighbors. Heck, even listen to your brother-in-law.The Little Book of Common Sense Investing”, pg 202
Good Luck!

Sunday, January 23, 2011

Bob Brinker's Municipal Bond Advice

This weekend Bob Brinker started out talking about the mess many of the states of the US are in. He called the politicians in Sacramento, California's capital, dysfunctional.  I agree.  To get elected, the politicians in California gave outrageously excessive pension promises to public unions in exchange for endorsements.

Brinker named the eleven states with triple A  (AAA) credit ratings for their general obligation bonds. The eleven states are
  1. Delaware
  2. Indiana
  3. Maryland
  4. Missouri
  5. Utah
  6. Florida
  7. Iowa
  8. Minnesota
  9. North Carolina
  10. Georgia
  11. Virginia.
Bottom Line according to Brinker:
"If you are looking at any of those eleven triple A rated states, then you are looking at good paper."
Brinker said states with AA ratings "can be held in a portfolio" if they maintain those ratings. He said he would not worry about owning any of these and he personally owns GO bonds from Virginia and Georgia.

Brinker recommends staying away from these six states:
  1. Arizona
  2. California
  3. Illinois
  4. Louisiana
  5. New York
  6. New Jersey,
  • "I would avoid.  I would not purchase in terms of their municipal securities."
Of the double A (AA) rated GO bonds, Brinker said, 
"Generally speaking" of the other 33 states "you are probably OK."
Note, if your money is in a retirement account such as at Vanguard, then the tax savings of Muni bonds do you no good.  

If you have significant funds in a retirement account at Vanguard's prime money fund and don't want to move to another institution (such as mysuggestion to use American Express Savings paying 1.3% APY  in my newsletter), then  I suggest making a ladder of CDs with Vanguard's CD Ladder tool.  Divide the funds into 5 buckets.  Keep 1 bucket (20%) in Prime money fund ready for any buying opportunities (such as a 10% market correction) or potential rebalancing, then put the remaining 80% into CDs for 3, 6, 9 and 12 months.  As the 3,6 and 9 month CDs mature, buy a new 1-YR CD.  After 9 months, you will have four one year CDs with one maturing every quarter.  When interest rates normalize, you can put the CD funds that mature into the total bond fund again. 

You can get an idea what different banks are paying for CDs and savings accounts for various amounts by using the rate tool here.  I use American Express in my newsletters because it is available to everyone and it is "too big to fail."  It is also
simple to calculate returns each month for American Express since there are no restrictions to complicate the calculation.   

You can often find better deals with more restrictions such as the 1.3% at Capital One plus 10% bonus and up to $60 credit detailed here, but you have to be a member of Costco.  If you are not a member of Costco, CapitalOne Bank is advertising 1.25% plus a 10% bonus.

Bob's Guest was Perry Mehrling, author of The New Lombard Street: How the Fed Became the Dealer of Last Resort

Perry Mehrling

    Thursday, January 13, 2011

    Bob Brinker's Current TIPS Advice

    In Honeybee's excellent summary of Sunday's Moneytalk, she quoted Bob Brinker as saying:
    "That means if rates go up then you can expect the net-asset-value of that security to go down......For that reason, especially given the fact that the rates are near zero, I am not, I am not recommending TIPS."
    The base rates for 10, 20 and 30-YR TIPS are currently 0.93%, 1.64% and 1.89%, respectively. TIPS pay the base rate PLUS the current rate of inflation.  Only the 5-yr has a negative 0.29% base rate but that means as long as inflation is more than 0.29% per year for the next five years, you'll make money. 

    When it comes to inflation, you have to remember that Brinker said higher oil prices are not inflationary. He also said the stock market would go up in 2008 when the price of oil came down. Both statements were flat out wrong as the price of oil is a component of CPI which is the official measure of inflation.  Also, the price of oil crashed when the global economy crashed. The guy is a great entertainer, but some of his understanding of basic economics is as good as Paris Hilton's.

    By all accounts, it appears inflation bottomed just below 1.0% and has turned up. The FED announced it made its mission to move CORE inflation ABOVE 2.0%.... With their tendency to get this wrong, I expect inflation to eventually be higher than they target.

    You can't lose with individual TIPS if you hold to maturity. The 10-yr still has a positive real return BEFORE TAXES which can be good for IRAs where you can't easily move money to a savings account paying 1.3%:
    The US Government said today there is an acceleration in inflation at the producer level, PPI.
    Producer Price Index News Release: The Producer Price Index for Finished Goods rose 1.1 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.8 percent in November and 0.4 percent in October and marks the sixth straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.0 percent, and the crude goods index increased 4.0 percent. On an unadjusted basis, prices for finished goods advanced 4.0 percent in 2010 after climbing 4.3 percent in 2009."
    TIPS funds, such as Vangard's VIPSX and Fidelity's FINPX, could show a negative return if interest rates go up without higher inflation but individual TIPS bought from the US Treasury in IRAs and held to maturity will never lose money AND pay a positive, real return.  This is great for ROTH IRAs where I have some.

    Good information:
    Consumer Reports:  Most Reliable Cars for 2011
    Good news for GM according to Consumer Reports.  Bad news for Chrysler.  Honda at the top and Ford not far behind.  Hyundai and Kia excellent value.  Summary, excerpts and video here

    Monday, January 10, 2011

    Survey Best CD Rates

    The top CD annal percentage yield (APY) this week is at Discover Bank for a 10-year certificate of deposit currently paying 3.00%. 

    With the 10-year US Treasury paying 3.31%, there is little incentive to lock up money for 10 years at banks.   For shorter periods, like one to five years, you do better with bank CDs.  For example, Melrose CU &  Bank of Internet are paying 1.41% for their 1-yr CDs while the 1-YR US Treasury pays only 0.26%.

    With rates so low, banks will try to sell you their annuity products. Make sure you read my article: Beware of Annuities.
    The table below shows the best CD rates for other terms. If that table is hard to read, then try Very Best CD Rates.

    "Highest CD Rate Survey + Current US Treasury Rates" \
    Rate (APY)
    (Click link for Full Rate Sheets)
    Vanguard Daily
    Vanguard Prime Money Market Fund
    Vanguard Tax Exempt
    Vanguard Tax Exempt Money Market Fund
    FDIC Daily Savings
    Best Savings Account Rate Survey 
    6 Month CD
     Bank of Internet USA 
    1 Year CD
    1.41% Melrose CU &  Bank of Internet
    1 Yr US Treasury
    US Treasury Rate Quote
    18 - Month CD
     Pacific Mercantile Bank  
    2 Year CD
    Melrose CU &1.60% @  Bank of Internet
    3 Year CD
     Melrose CU 
    4 Year CD
    Melrose CU 
    5 Year CD
    Melrose CU
    5 Yr US Treasury
    US Treasury Rate Quote
    7 Year CD
      PenFed CU
    10 Year CD
    Discover Bank
    10 Yr US Treasury
    US Treasury Rate Quote
    Vanguard Money Market & US Treasury Rates shown for Reference  Vanguard Money Market Rates shown for Reference  
    With rates so low, banks will try to sell you their annuity products. Make sure you read my article: Beware of Annuities

    Historical CD Rates: 
    Click charts to see full size images

    1-Month CD Daily Chart
    6-Month Certificate of Deposit Historical Chart
    6-Month CD Daily Chart
    6-Month Certificate of Deposit Historical Chart

    Related information:

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