New Micro-Investment

While considering my current short-term investment options, I was inspired by a couple of things, especially the existence of the micro-lending market, to come up with a plan with my younger brother. This plan would benefit us both if everything works out in both our favors.

The plan is this: My brother decided to go back to school for the first time in years, and small signs exist around that demonstrates his initial commitment. And although, he's also swimming in insurmountable debt, he's also beginning to demonstrate a bit of fiscal responsibility to be on his way to financially fitness again.

His biggest revolving account balance is $7K, and here's the kicker: with a *35%* APR! Even more frightening is that the monthly periodic interest as shown on the statement seems lower than what it should actually be-- and we have no idea if, in the future, that gives the creditor the ability or right to really screw my brother big-time or what else. Well, we decided we don't care to find out.

Here were the terms of the agreement: I help pay off the $7K today. He agrees to pay me back at a 5%-10% annualized rate, depending on factors, including: 1) demonstration of being more fiscally disciplined with his own budget and ability to pay off two other substantially smaller revolving credit accounts and another relative, and 2) proof of very positive status updates and proof from classes-- nothing less than a B+-- on full course load as defined by his school district. (Cognitively speaking, he's smarter than I am. Everyone knows he can do it. He's just lazy. Even he realizes this.)

If none of these terms are met, then at minimum, he owes me the principal back + 10% annual.

If he doesn't pay me back 6 months after the mutually-agreed initial pay-back period, I'll pursue wage garnishment / debt collection against him. There is no way I will not ask for this money back this time around; it's made clear to him; and he understands. If it ever gets to that point, I'll be nice: I'll only ask back principal + 10% + lost wages in pursuing him. :)

Meanwhile, I've just found a great way to secure a 10% annual investment without worrying about market volatility.

Even at the 10% interest rate for $7K, I'll be saving him $1750 a year. Unbelievable.

Personally, the worst that could happen is that I end up with a 5% return, which is equivalent to money-market / 10-year note rates. But I do end up helping out someone in need.

UPDATE:

Loan balance is now at $10K since we added a 2nd, and final, charge account that had a 28% killer APR.

Obviously, giving my brother this loan means, to some, I fail to meet this year's short-term cash reserve goal of being in the $40K-$50K range. However, if I consider this loan as an unsecured, promissory note, just as I already do with about $2K that MT owes me personally, then in another sense, I can count it as part of my net worth. It's a compromise that seems reasonable-- it's not like I just took $10K and dropped it on a fancy international vacation or an always-depreciating and unneeded new sports car.

BOO BOO ON IRA's

My colleague and his friend had asked me about IRA limits for our age and salary levels sometime last week, IIRC. They'd read that the maximum contribution limit between both a traditional and Roth IRA was $4000 annually. I'd read that it was $4000 for *each* type of IRA account.

Man, I was completely wrong! My colleague was right! This is how the IRA formula *should be*:

Annual Roth IRA contribution + Annual Traditional IRA contribution = $4000.

Also, it appears that only those making < $95,000 may legally contribute to Roth IRA's! I really need to read more about this, but what seems to hurt married couples is 1) AMT @ roughly ~$161,000 or so, and 2) apparently married couples can't Roth-IRA-contribute if joint income is around that $160,000 mark.

This whole IRA quagmire is becoming much more complicated than I originally imagined it to be.

Need major sleep. Hopefully, I'll have a better understanding of all this in the next few days.

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OK, one quick thought: How the heck is any average young worker in the US supposed to retire on the $4000 - $5000 / year retirement contribution, even over 30 years? That's only a total of $150K of principal! And, that's not even $150K that had 30 years' worth of investment growth opportunity, either-- only *after* 30 years, is one able to save away $150K.

If a ~10%-interest account was,say, opened with a ~$150K deposit, which then had ~30 years to grow, even so, that's only at most $650K total value after 30 years. This is the best case scenario.

Seldom will be the case that a complete working stiff has $150K to start with, with 30 years of asset appreciation ahead of them, and with the consistent fortitude of earning 10% / year.

The Retiree Portfolio - Location Review

One slight problem with the previous allocation is that the retiree historically prefers making, at minimum, an annual contribution into the Roth IRA account. Now, ideally, the next best place for contribution is the traditional IRA, but it seldom occurs. Whatever fund I put into the Roth IRA must be one whose allocation in the total Retiree Portfolio can increase, even slightly skewed from the original percentages, without veering too far from the general objective for the portfolio.

REIT would not be a good choice-- REIT's are recommended to only occupy 10% of the *equity* portion of an S&D portfolio.

VISVX (small value) could be a good choice-- for someone much younger than the retiree, like, say, me for instance. Inflating VISVX's share in the portfolio introduces more volatility risk.

Which leads me to the next best two choices: VTSMX (total US market) or VGTSX (total international). To me, VGTSX seems to be the better of the two choices. Why? I don't doubt that the ratio of international equities will increase in the face of US domestic equities considering the free market international trade occurring nowadays. Short of world courts coming down hard on alleged unfair Chinese government subsidization of imports and reversing the ballooning trade deficit (the largest single-country deficit ever in US history), curtailing dollar devaluation, and the like, international will only grow in proportion, with possible temporary hiccups, for the coming years.

Without further ado, here's the updated equity allocation scenario:

VTSMX - 25% - 100% (25% allocation of total portfolio) into the taxable account.
VISVX - 5% - 100% (5% allocation of total portfolio) into the traditional IRA account.
VGTSX - 25% - 60% (15% allocation of total portfolio) into the taxable account, 20% (5% allocation of total portfolio) into the Roth IRA account, the remainder 20% (5% allocation of total portfolio) in the traditional IRA account.
REIT - 5% (I *might* eliminate. Need further analysis.) - 100% (5% allocation of total portfolio) into the traditional IRA account.

The Retiree Portfolio- Execution

Today, in the traditional IRA account, I displaced VWELX positions to build up the fixed-income allocations for the Retiree Portfolio:

VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

As of today, VTSMX position is now up to 16% in the taxable mutual fund account.

Retiree Portfolio Next Step: Location

The Retiree whose Retiree Portfolio I'm helping construct owns the following types of long-term investment accounts:

56% of the assets are in a traditional IRA account.
4% of the assets are in a 2006-contributed Roth IRA.
The remaining 40% of ther assets are in a taxable account.

With that being said, the Retiree Portfolio's asset location is envisioned as follows:

VTSMX - 25% - 100% (25% allocation of total portfolio) into the taxable account.
VISVX - 5% - 100% (5% allocation of total portfolio) into the traditional IRA account.
VGTSX - 25% - 60% (15% allocation of total portfolio) into the trad. IRA account, the remaining 40% (10% allocation of total portfolio) into the taxable account.
REIT - 5% (I *might* eliminate. Need further analysis.) - 100% (5% allocation of total portfolio) into the Roth IRA account.

The majority of fixed-income assets will be placed in the traditional IRA account.
VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

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Last night, in the Retiree Portfolio's taxable account, I executed yet another order to exchange from the Prime Money Market Fund into VTSMX, further advancing their eventual VTSMX position defined above by 20%. To date, that means 16% of the total Retiree Portfolio is now in VTSMX. I'll continue flushing out the remaining 9% VTSMX position very soon.

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After some thinking, here's an asset location update for The Retiree Portfolio:

VTSMX - 25% - 100% (25% allocation of total portfolio) into the taxable account.
VISVX - 5% - 100% (5% allocation of total portfolio) into the traditional IRA account.
VGTSX - 25% - 60% (15% allocation of total portfolio) into the trad. IRA account, the remaining 40% (10% allocation of total portfolio) into the taxable account.
REIT - 5% (I *might* eliminate. Need further analysis.) - 100% (5% allocation of total portfolio) into the Roth IRA account.

The majority of fixed-income assets will be placed in the traditional IRA account.
VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

Mixing Passive- and Active-Managed Funds

My coworker posed the following question today:

"If one already owns a total market fund, why buy Wellington?"

OK-- this question might be completely oversimplistic. We need to understand what sometimes turns out to be a complex web of circumstances that would whittle this question down and give it more relevancy.

So, first of all: colleague and I had began reading up on various investment strategies and, at one point in time, I thought we were largely on the same page. Lately, I've noticed he's focusing questions on stock picks, which, I have to be honest with you, Dear Colleauge, it's already challenging enough defining our own core portfolio, let alone be worried about something that's infinitely more complex than asset allocation (with few exceptions).

We were relatively debt-ridden at the time. Now, what are we taught to correctly do with debt? Yes, pay it down first before anything else. We've been dealing with that ever since.

Colleague is starting their savings from scratch. Colleague is in their late-20's to early 30's.

Colleague has previously expressed keeping their core portfolio simple, containing at most 2-3 core funds. These would include a total market fund, a fixed-income fund, and something else. Hopefully, Colleague sticks with this.

Now, Colleague and I have previously reviewed various Vanguard funds, one such being Wellington. Wellington's attraction stems from its built-in equity to fixed-income ratio (roughly 60/40), its value tilt, a factor which has commanded a return premium over the years, its proven ability to ride out the most recent bear market, 2000-2002, without significant value decreases, its high dividend rate for investors interested in and income fund, its classification as a balanced fund, and, most importantly, its extremely low expense ratio, practically unheard of for being an active-managed mutual fund.

Wellington sounds like it *might* be for an aggressive retiree due to its aggressive value tilt, equity allocation, while providing income in the form of dividends.

If someone *only* owned a Total Market fund in their portfolio, they're viewed as very young, with many years of life and career (which will mean a long series of contributions ahead of them), and very aggressive, without the need for dividends.

I had the Retiree Portfolio often discussed in this blog temporarily park a significant portion of assets in the Wellington fund when I was unable to expeditiously define the asset allocation because of the following characteristics: its one-stop solution, its AA mix, its blend, along with its superior handling of market downturns.

A hypothetical 50/50 mix of Total Market fund / Wellington would exhibit the following characteristics:

Stock Style Diversification

31 31 20
5 4 4
2 2 2


0 100 0
0 0 0
0 0 0

Considering this mix, the only issue I see is that the portfolio's equity portion seems tilted towards large-cap with little exposure to mid and small-cap positions for an early saver. Also, there doesn't seem to be much diversification with the fixed-income portion: it's 100% intermediate-term. However, everything else seems OK: it's balanced, it's blended, and the fixed-income durations don't go beyond intermediate-terms.

So, not a bad mix, depending on an individual's needs and goals.

RETIREE PORTFOLIO DRAFT #2

After some consideration, Draft #1 was seen as "a bit too aggressive" for a portfolio aimed to generate and maintain income, quell volatility, reduce risk, and introduce value stabilization by *some* S&D and diversification (yet not be aggressively eager about this), while simultaneously being SIMPLE and ELEGANT.

In fact, I'm shifting the focus of the porfolio composition from a multi-asset S&D (slice and dice) makeup into a portfolio that consists of 3 core holdings, with some smaller side dishes. The 3 core holdings are VTSMX, VGTSX, and... um, fixed-income positions of some form.

The 60/40 equity/fixed-income makeup is still maintained.

I still plan to divide the equity allocation into 50/50 domestic/international. Here's where I disagree with critics of my portfolio, who believe that I'm internationally over-weighted. My rationale is I want my portfolio to reflect the WAP (world allocation portfolio) and the global economic integration that's steadily increased over the past many years.

To address all these points, I might eliminate the following assets:

- REITs
- Int'l small-cap stocks
- Emerging market stocks

I'm also reducing positions in the following:
- Domestic value stocks
- Possibly the high-yield corporate bonds

When taking into account all of these factors, here's Draft #2, showing the direction the retiree's portfolio is heading:


VTSMX - 25%
VISVX - 5%
VGTSX - 25% (Total International Fund)
REIT - 5% (Again, I *might* eliminate. Need further analysis.)

VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

Morningstar's X-Ray provided the following asset breakdown for the Draft #2 portfolio:

Asset Allocation

Portfolio
Cash 3.04
U.S. Stocks 34.70
Foreign Stocks 24.35
Bonds 37.20
Other 0.71
Not Classified 0.00


Stock Style Diversification



25 26 19
10 7 4
5 3 1

Not Classified 0.00%



65 35 0
0 0 0
0 0 0

Not Classified 0.00%

general principle #2 to retire sooner: never forget the costs (part i)

Just as the only things certain in life are death and taxes, investing also carries its own costs and consequences that are certain and inevitable with *any* investment strategy, albeit real estate, stocks, CD's, savings accounts, mutual funds, or an equity position in your friend's startup restaurant business.

There's simply no avoiding the following four investing costs, unless you commit fraud or achieve financial nirvana:

- Risk
- Fees
- Taxes
- Inflation (which could be lumped with "taxes", since inflation = currency tax)

Some people might say they're done with "investing" for what the term's popularly known for. They'd rather be conservative, and just "save." (To confuse you even more, by strict economic definition, almost all of us are really "saving", not "investing.")

No matter, because, really, any strategy or action with the intention of, at its minimum, equity preservation falls under investing.

However, what's traditionally considered conservative investment products and vehicles may in fact be hurt by any of the four cost aspects listed above and can even perform *more damage* than other investment vehicles traditionally *viewed and misunderstood* as riskier to your long-term financial goals.

Yes, you heard that right. Being conservative may be more hazardous to your financial well-being-- depending on a reasonable set of circumstances, which I'll delve into in the future.

As time goes by, I'll touch upon these 4 costs of investing. Hopefully you'll end up understanding why you should scrutinize every investment choice against these costs, and how I will use this knowledge as advantageously as possible.

general principle #1 to retire sooner: pay off consumer debt

Principle: Pay down all short-term consumer debt first, before even thinking about investing.

In fact, paying down consumer debt actually is "investing", in some sense, as we'll see later.

As guilty as I personally am of violating this particular principle, I can't stress it enough, even if my left hand is discplining my right hand for not behaving. That kind of deal.

What's short-term consumer debt? Basically, any account or balance whose interest is largely non-deductible, severely hinders equity growth or accumulation, and ultimately subtracts from your total asset is considered short-term debt.

The following are usually considered short-term consumer debt, in order of priority:
- Credit cards (which can be viewed as a "short-term loan")
- Personal loans
- Auto loans

Consumer debt encourages to borrow against your future earnings. You're short-term borrowing today, but you'll need to pay it back tomorrow. The later you pay back, the larger the interest penalty.

Obviously, the decision to draw these types of debt differs on a case-by-case basis. For example, if personal loans are secured to execute and start up a sound business plan, then the return (and its corresponding risk) of profits from that business more than offsets the risk incurred of accruing interest.

But, ultimately, think of paying off credit card debt as a way of earning indirect interest. If credit card interest is fixed at 15%, then paying off that credit card effectively yields a 15% interest *after-tax*, because you'd be using after-tax money to pay the balance. So, in a rather real and reasonable sense, paying down a credit card balance fixed at 15% interest is equivalent to the balance money actually earning *more* than 15% from stocks or mutual funds! That's impressive in its own right!

You may argue why car loans are considered short-term consumer debt. In many places in the world, a car serves pretty much as a necessity. However, it isn't *necessary* to buy the latest and greatest car that your bank account can stomach. Ideally, cars should be purchased in cash.

Additionally, there are many ways to trim the fat off your credit card balances, such as by balance transfers, or making mini aka micro aka partial-balance, intraperiod payments.

With balance transfers, however, do keep in mind the issuing bank's gotcha's such as promotional low or 0% APR's, transfer fees, balance transfer balance limits, overage fees, interest rate increase date, etc. Balance transfers only benefit if you discipline your financial house to pay off the balance transfer before the promotional APR's increase. Furthermore, if you find yourself sequentially conducting more than one balance transfer for a particular balance, take this as a red flag that perhaps your debt-to-income ratio, along with your spending habits, needs a good, hard look.

Regarding micro/mini/partial-balance payments, submitting multiple payments throughout the month to the credit card issuer before the monthly bill arrives reduces the finance charge / interest amount you would've ended up paying, even if the total amount of the micro-payments equals the one payment submitted at the end of a billing period. Since most credit cards nowadays allow you to either manually pay or set of periodic, scheduled payments online, micro-payments are one easy way to keep dollars in your wallet vs. giving them to a corporate bank.

That's it for Principle #1. Follow the included link to find out more ways to make your credit card debt more manageable, giving your better nights of sleep.

Please provide your comments and feedback on exactly how valuable, or how obvious and mundane, this post was for you.

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Next week will be a momentous one in my recent history: my credit card debt will finally decrease from 5 digits to 4! I'm so excited. Two weeks after that, I should witness nearly zero credit card debt for the first time in a year!

retiree portfolio update

Today, Retiree and I finally wrangled his money from Brokerage2. Retiree seemed puzzled regarding why I stubbornly insisted to be on the conference call with him and Brokerage2. When I saw Retiree's equity positions with Brokerage2, each one had the word "Margin" next to it.

Retiree definitely is in no condition to be playing around with margins. Really.

Upon asking the Brokerage2 CSR who was helping us what the "margin" label now indicates, especially since Retiree insists every position was placed using his own cold cash, she replied that it was purchased via margin monies at some point in time. Therefore, the "margin" label stayed. Huh??

Plus, each transaction cost $15. Talk about a relic from the dotcom days. Talk about a crack outfit.

Anyhow, we're now expecting a check in the amount of nearly $6000 to arrive at Retiree's doorsteps within the next couple weeks.

The only significant capital left sits in a CD that will mature by the end of this month.

retiree portfolio update

I'm beginning to think Brokerage2 was established during the dot-com frenzy. Everyone has a heavy ethnic accent, trade commissions are similar to the ridiculously high rates of the dot-com days ($19.95 / trade), and their online trading system is rife with so many bugs and errors. It seems they catered to a niche ethnic market hoping to ride the bubble and cash in. It seems the only one cashing in was Brokerage2, despite the brokerage having gradually downsized over the years, according to the retiree.

It turns out they've listed every one of the retiree's stock equity position as a margin purchase! When confronting the retiree about this, all I received was silence over the phone. And more question marks. Since I was rather slammed at work, the retiree ended up calling Brokerage2, and did his own interrogation, but didn't prod as intensively as I would've liked.

What I hope to accomplish by tomorrow is the following, when teleconferencing with the retiree and a Brokerage2 CSR:

1) Ascertain why on their website, each equity position shows the word "margin" next to it, when Retiree is telling me they were purchased with his cash,
2) Realize the net cash-out amount of the Brokerage2, and request cost basis for each equity position, and
3) Cash out of there like no other.

Ultimately, regardless of that final cash-out amount, the balance has been bouncing around like a rollercoaster ride for years now. Retiree probably doesn't understand what's going on and how I'm trying to accomplish what I projected to accomplish-- almost as if I care for his money more than he does.

Furthermore, this issue is just a small wrinkle-- one of the last few wrinkles in a nearly year-long struggle to get a firm grasp on his holdings. The biggest, most urgent aspect of the Retiree's portfolio is determining a precise, methodical investment strategy that we'll fundamentally stick to for the rest of his lifetime. Although urgent, this needs to be planned with extreme caution. Any slight disruption might unsettle the complete grand plan.

introducing the 2007 retiree portfolio

I've been tasked to manage a retiree's portfolio on a trial basis. Note that this is with real money and, yes, for a retiree, frankly this isn't much cash at all. The following is a very rough framework for the portfolio.

The assets below were once spread between so many accounts and brokerages that, over the course of nearly one year, I was "discovering" a new account every month. I'll just say this: this person had at least 5 separate Roth IRA accounts. Sure, I can understand justifiable reasons for opening up 5 separate Roth IRA accounts, but not if the reason is so the account-openin' sales rep can pocket some commission or kick-back from the brokerage house.

All values are in thousands.



The goal is to grow the portfolio value by at least 10% CAGR (compound annual growth rate) to $138,600-- minus variances from actual, final principal values above, along with various fees and taxes, along with losing >23 days since the start of 2007. Unfortunately, until all assets and finally transferred the way we've planned it, I'm not exactly how many days since the start of 2007 is "lost" as potential opportunity cost until everything is finally settled. Another factor is that not all of the principal will be in equity and bond allocations-- there might be a small percentage stashed into a money-market fund.

Additionally, principal value will be used to purchase whatever funds I've allocated in a staggered schedule, so there might be some slight, hopelessly-complex calculations that would factor this staggering in-- it might be much ado about nothing, but I suppose one method of systematically doing so is by documenting purchase lots.

Finally, for future back-testing purposes, the projected 5-year asset value of this portfolio will be a hair > $200,000. The projected 10-year asset value of this portfolio will grow to nearly $330,000.

It appears starting principal will be lower than expected for now. Requesting a disbursement from Brokerage2 has stalled for now since they're not a big outfit. Transferring an IRA requires an in-person visit to a national brokerage house (otherwise a "medallion authorization" is required-- no notaries, only a certified bank certification of signature) which presents its set of logistical challenges. And finally, we're awaiting the CD maturation in late February '07.

Our starting basis as of the middle of January '07 is roughly $110K. Once allocations and locations are finalized, an update presenting the equity / fixed income breakdown will allow you to see where future return projections are headed.

Lastly, I'm still testing out various portfolio strategies. I'm hoping by the time the CD matures I'll have a strategy primed for execution. Stay tuned.