Adding a Misinformed Category
I'm adding a "misinformed" category to my blog. This is inspired by a post by Samerwriter — Common Personal Finance Myths — which challenged quite a few conventional wisdoms. I also often find myself shaking my head when I read personal finance articles on newspapers, magazines, and some of the popular but misinformed blogs. I will make a habit of calling out these misinformation and putting them in the new "misinformed" category. I have already done some of this in my past postings. The charter members of this new "misinformed" category include:
- Is Inflation Dead? — No way!
- Investing a Small Amount — stick to a mutual fund
- More Risk, More Reward? — undiversified risks are not rewarded
- Book Review: Elliott Wave Principle — don't go there
- Prosper.com Or Junk Bond Fund? — you might as well buy a junk bond fund
- Does Your Auto Insurance Cover Engine Failures? — No, it does not.
- Picking Stocks Is a Waste of Time — enough said.
Simplifying Finances: Recent Trades
The financial market had a small scare at the end of February. A 10% drop in the Chinese stock market induced a 400-point drop in the Dow. Recent turmoil in subprime lending had the market go down and then up. I don't know or care where the market is going, but I did take the opportunity for some house cleaning trades. The goal is to simplify my finances in one small step at a time. I closed my ING and HSBC accounts last year under the same theme.
When the stock market is down, money flows to bonds, especially Treasury bonds. This is called "flight to quality." Because bond prices are up, I sold my positions in iShares Lehman 1-3 Year Treasury Bond Fund (SHY) and iShares Lehman U.S. Treasury Inflation Protected Securities Bond Fund (TIP). I bought these bond ETFs when I had a Scottrade account a while ago. I don't need them any more because I'm with Vanguard now. TIP was as low as $98 per share in January. I sold at $101. I parked the proceeds in 4-week Treasury Bills for now. I intend to invest the money in more 5-year TIPS notes at the next auction on April 24th if the yield is attractive then.
I Bonds Rate Pre-Guess for May 2007
It's close to that time again. The Treasury Department will announce a new fixed rate and the inflation adjustment for I Bonds on May 1, 2007. The inflation adjustment will be known for sure on April 17, when the Bureau of Labor Statistics announces the CPI data for March 2007. At this time, we have 5 months of inflation data, just missing one more data point. Feb. 2007 CPI was 203.499, an increase of 1.083 points from the previous month. The reference CPI number in September 2006 was 202.9. If March 2007 CPI comes out to 204.5, a similar increase as in the previous month, the semi-annual inflation adjustment for the next 6-month cycle will be roughly 0.8%.
On the fixed rate side, real yield on 5-year TIPS dropped from 2.4% in last November to 2.0% now (source). Any adjustment to the fixed rate portion will be down, not up. So we are looking at a maximum 1.4% fixed rate, probably lower to 1.2%, plus a ~1.6% inflation adjustment, for a composite rate of 3% or less. I don't think anybody will be excited about this when Treasury Bills are yielding about 5%.
I Bonds haven't been competitive for quite a few years except for one or two special periods. I will revisit this in April but I don't think the picture will change much then.
Carnival of Personal Finance #93
Carnival of Personal Finance #93 is up at Tired But Happy. My entry was Picking Stocks Is a Waste of Time. I haven't gone through the entire carnival yet, but I'm sure there are many good posts as usual.
EDIT: I see there is a similar entry Searching for superior investment fund managers is a waste of your money and time by The Skilled Investor. Well done.
Radio Programs On Demand with Podcasts
I mentioned in my Netflix vs. Blockbuster post that I don't subscribe to cable TV. I use Netflix for entertainment and podcasts for keeping up with the news. Podcasts for radio programs are like TiVo for television or RSS feeds for blogs. You download the programs' podcasts, load them onto a mp3 player, and listen to them whenever you want. I listen to them during commute.
You need a podcast receiving software. I use the free open source software Juice. Here are the podcasts I subscribe to:
Personal Finance: Marketplace Money by American Public Media. Weekly, 1-hour program on personal finance. Hosts also answer listener's questions.
Online Savings Accounts and Their Backers
I mentioned in my previous post What Happens When a Bank Goes Out of Business that I favor larger international or national banks over smaller no-name banks based on the theory that larger banks have larger budget and more sophisticated systems for security. I decided to take a look at the popular high yield online savings accounts and see who their backers are and their relative sizes.
The list of banks were selected from the Bank Deals blog. The deposit data were collected from the FDIC web site. The last column shows the combined total domestic deposit as of Sept. 30, 2006, the latest available from FDIC when I checked. If a bank is owned by a bank holding company which also owns other banks, deposits from all banks under the same holding company are added together. Please note only domestic deposits are counted. Deposits outside of the United States are not included. Citibank, HSBC and ING all have large presence outside of United States.
Book Review: Common Sense on Mutual Funds
Today I'm reviewing the book Common Sense on Mutual Funds by John Bogle (see my other book reviews). You can browse the book's table of contents through Amazon reader.
John Bogle (Wikipedia bio) is the founder of The Vanguard Group, winner of TFB Award for Best Mutual Fund Company. I have the highest respect for Mr. Bogle for his innovation and altruism. Instead of making Vanguard a for-profit entity, which would've reaped billions of dollars for himself, Mr. Bogle gave the company to the fund investors, the general public, and only took compensation as an employee.
The book is divided in five parts:
Picking Stocks Is a Waste of Time
The 2/26/2007 issue of the Wall Street Journal had a special section for stock score board. If you don't have access to WSJ Online, it's worth digging it out from a library. I'm highlighting something I noticed in that section which makes the point for the title of this post — picking stocks is a waste of time.
When you invest in individual stocks, instead of mutual funds or exchange trade funds (ETFs), you can invest in the right stocks in the wrong time, or you can invest in the wrong stocks in the right time. Timing, or better put, luck, dominates any skills you think you may have.
Exhibit A. Chico's FAS (CHS) was one of the best performing stocks in the last 10 years. At the beginning of 1997, CHS traded at about $0.25 a share, split adjusted. At the end of 2006, it was worth over $21 a share. An average return of over 50% per year for 10 years. Fantastic stock! But, there's always a but, it was also one of worst stocks in the last 1-year period. At the beginning of 2006, CHS was worth $43 a share. By the end of 2006, it lost 1/2 of its value. Good stock in the wrong time. Since 2007 began, it went up 9%. S&P 500 was flat to slightly down during the same period. Will CHS continue its long term upward path, up 50% a year for 10 years, or will it continue its downward movement from last year, down 50% in one year? Or will it do something else? Whatever your answer is, are you sure?
Bogleheads Forum Moved To Diehards.org
They changed the forum's name to Bogleheads to avoid Morningstar's potential claim to the Vanguard Diehards name. The forum's name really doesn't matter. What matters is the community. Since I last wrote about it on Feb. 27, the forum has grown from 400 members, 1,800 posts to over 1,000 members, 6,200 posts. That's phenomenal growth in just two weeks. How exciting! Once people see the light of freedom and community ownership, they flock to it.
Most of the prominent members of the old Vanguard Diehards forum have joined the new forum, including book authors Taylor Larimore, Mel Lindauer, Michael LeBoeuf, Larry Swedroe, and Rick Ferri. They sometimes still post on the old forum. I suspect over time they will post more and more on the new forum because that's where the growth is. Many members of the new forum never posted on the old forum because they objected to Morningstar's $5 charge on posting privilege. They joined the new forum and became active participants instead of lurkers on the sideline.
Does Your Auto Insurance Cover Engine Failures?
If your car's engine died, does your auto insurance cover the cost of replacing it? That's the question in this post on The Simple Dollar:
How The Simple Dollar Just Saved Someone $2,850 (And A Personal Finance Tip To Boot)
Trent, the blogger who wrote it, claimed that he was able to save someone $2,850 by pointing out that the "comprehensive" part of that person's auto insurance covered engine failures, not caused by a collision, but just during the normal course of driving. Baloney. I left comments for Trent but he doesn't want to admit he was wrong, saying "it varies from insurance policy to insurance policy." I'll assert that no auto insurance policy in the United States covers normal engine wear and tear. Manufacturer's warranty or extended warranty maybe, but not auto insurance. If you don't believe me, please check your policy or ask your insurance company/agent. If your policy covers engine wear and tear (I'm not holding my breath), I'd love to switch to that company.
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