On Vacation, Back in November
I'm leaving for my vacation tonight. I will be back in November. Because I have no access to the Internet while I'm on vacation, this blog will not be updated again until I come back. I hope the flood of posts in the last two weeks made up for my absence.
I'm going to miss some exciting events while I'm gone. Or maybe not that exciting compared to my vacation. There will be two TIPS auctions in October. A 10-year issue will be announced on October 9, auctioned on October 11. A 5-year issue will be announced on October 18, auctioned on October 23. The current yield is 2.2-2.3%. Personally I won't buy again until the yield goes above 2.5%. If you are interested in buying though, you can monitor the yields with my TIPS yield curve RSS feed and estimate the final price with my TIPS pricing spreadsheet.
FOMC meets again at the end of October. The current options market implied probabilities are 55% for no change, 40% for a 1/4-point cut, and 5% for all other scenarios. It probably will go unchanged then.
Carnival of Personal Finance #121
Carnival of Personal Finance #121 is up at Ask Mr Credit Card.
The host wove the posts into a cool presidential election debate. My entry in this week's carnival was Investments I Don't Have. Here are a few articles I'd like to comment on.
Property tax problems for customers of bankrupt lender at Don't Mess With Taxes. It never occurred to me this would be a problem because I always paid my homeowner's insurance and property tax on my own. This is one more reason you want to find a lender that does not require an escrow or impound account for insurance and tax. It makes things much simpler.
Subprime Correction Is Over, Really
It took a week after my pronouncement that the subprime induced stock market correction is over. Now it's really over. The major indexes for both the U.S. and the international market, the Dow, S&P 500, MSCI EAFE, all went over their previous highs.
I'd like to enter these notes for myself as lessons learned from this episode of the stock market correction.
1. Stocks are stocks. During the correction, different classes of stocks – large cap, small cap, value, growth, REITs, international, emerging markets – all went down. Some went down more than others, but they all sank, because they are all stocks. Diversification within stocks didn't help much, at least in the short term. The only thing that held the floor was bonds. If the purpose of asset allocation is to reduce short-term volatility, first look at the stocks/bonds ratio.
Book Review: Where Are The Customers' Yachts
I heard about the book Where Are The Customers' Yachts a long time ago but I've never read it. Perhaps the title did the job too well. It came from an old joke that goes like this:
An out-of-town guest was given a tour in New York. The guide pointed out the beautiful yachts in the harbor and said "Look, those are the bankers' and brokers' yachts." The guest asked "Where are the customers' yachts?"
Moral Hazard: Deposit Insurance and Subprime Bailout
Moral hazard refers to the fact that if people don't have to face the consequences, they tend to take on more risk than they should. I learned a great deal of this from the book The Greatest-Ever Bank Robbery. In the 1980s savings and loan crisis, some banks were widely known for losing a lot of money, yet people still continued to pour in large sums of money to them through brokered CDs because they offered higher interest rates than other banks, and because the deposits were insured by the federal government. The troubled banks were gambling with the deposits on high risk loans or stealing them outright. If they won, the bank owners would profit. If they lost, the deposit insurance would pick up the tab. But because the deposits were insured, people didn't care whether the banks would lose them or not. The crisis became much larger than it otherwise would have been.
The typical means of offsetting the moral hazard is via insurance limit, deductible, and coinsurance. Suppose if the deposit insurance in the U.S. is set up similarly to what's in the UK, the first $4,000 is covered in full, and the next $66,000 is covered for 90%, people would be much more careful about where they place their money. If they used a bad bank, they'd lose 10% of their money over $4,000. Therefore they'd choose carefully who they bank with and not jump on whoever offers 0.1% higher interest rate. FDIC estimated that the NetBank shutdown would cost it $110 million. If the FDIC insurance had a coinsurance component, NetBank would not have been able to attract as much asset, and its closure wouldn't have cost as much. I think the deposit insurance system in the UK is designed much better than that in the U.S.
Fast forward 20 years to our recent residential real estate market. People with poor credit bought houses using zero down, interest only loans with teaser rates. They were gambling that the house prices would continue going up 15%, 20% a year. If they won, they'd profit handsomely. If they lost, well, the lender can take the house back. Here the moral hazard plays out again. Because there is no downside risk, people took on more risk than they should.
Personal Finance Quiz, September 2007
Here are some of the questions from visitors to this blog who looked for the answers using a search engine. Without searching, which ones can you answer? Regular readers should be able to answer most of them. Oh, may be not the last one. Let's see who can answer them all.
Q. Are FHLB bonds taxable?
Q. Is Fidelity TIPS fund good?
Book Review: Your Credit Score
Today I'm reviewing the book Your Credit Score by Liz Pulliam Weston. The author Liz Pulliam Weston is a columnist at MSN Money. I picked up this book from the library when I browsed for new personal finance titles.
I hear a lot of buzz about the credit score and I don't understand what the hype is about. After reading this book I still don't understand why people think everybody should care about what their credit score is and everybody should manage their financial affairs around how the credit score is calculated.
The book gives information on what the credit score is, how it is used, what factors influence the credit score calculation, and how to improve your credit score if you have a bad one. Then it also says:
Rebalancing With New Cash
This is a continuation of the previous post about my asset allocation.
Portfolio rebalancing is often described as looking at one's portfolio at the end of the year, selling some winners and buying some losers, so the portfolio goes back to the intended asset allocation. I don't do that. I don't sell anything unless I'm trying to simplify my positions.
I rebalance throughout the year with new cash. Because stock funds usually grow faster than bond funds, although my asset allocation is 60% stocks 40% bonds, my new cash is invested about 35% stocks 65% bonds. That way the growth on existing investments plus new cash will maintain the 60/40 ratio. If stock funds did well in some months, they would get little or no new cash because the investment growth already took care of it. If stock funds did poorly, they would get more or even 100% of the new cash. If stocks funds did really badly, I may even sell some from short-term bonds and buy more stock funds. But if stocks funds did really well, I don't sell from stock funds. Instead I let the bond funds catch up with new cash.
Tax Equivalent Yield Calculator Updated
Since I introduced my tax equivalent yield calculator in my post Which Vanguard Money Market Fund? in April, I've had very good feedback from people who used it. People told me it's the only calculator on the web that takes into consideration for Treasury fund, the standard or itemized deductions, and AMT. It has been viewed more times than any other post on my blog.
I added a new section for AMT-free tax exempt money market funds. Fidelity is the only place I know which offers this kind of funds. These funds do not invest in private activity bonds which are subject to the AMT. The AMT-free funds yield slightly lower than funds which include private activity bonds. But if you are subject to AMT, you may fare better in an AMT-free fund after you take into consideration the AMT.
For example, at the time I'm writing this post, the yield on Fidelity California AMT Tax-Free Money Market Fund (FSPXX) is 3.57%. The yield on Vanguard California Tax-Exempt Money Market Fund (VCTXX) is 3.73% but the Vanguard fund has 17.8% of its holdings subject to AMT. For a California resident in 35% AMT bracket and 9.3% California state income tax bracket, the Fidelity AMT free fund is better after tax. The Fidelity AMT free fund requires $25,000 minimum initial investment, although you can drop down to $10,000 after the initial investment.
What Type of Bank Is Your Bank?
No, it's not a trick question. While most people think a bank is a bank is a bank, the financial institutions we usually call a "bank" actually come in many different flavors. Some are organized under federal laws, some under state laws. Some are a special kind called thrift, savings and loan or savings association. Some are members of the Federal Reserve, some are not. Depending on the types, they are regulated by different entities. I learned these from the book The Greatest-Ever Bank Robbery which I reviewed a few weeks ago. Here are some categories of banks in the United States:
1. National Bank. These institutions are organized under federal laws. Their primary federal regulator is The Office of the Comptroller of the Currency (OCC). All national banks are required to be members of the Federal Reserve. Their names typically (but don't have to) include the word "national" or end with "N.A." which stands for National Association. For example Zions First National Bank and Bank of America N.A. are national banks.
2. Federal Savings Association. These institutions are organized under the federal Home Owners' Loan Act. They are required to do a substantial amount of business in mortgage lending. Their primary federal regulator is a different branch of the Treasury department called The Office of Thrift Supervision (OTS). They are NOT members of the Federal Reserve, but are instead members of a parallel Federal Home Loan Banks system. Their names often (but not always) include the word "savings" or end with "FSB" which stands for Federal Savings Bank. For example Washington Mutual Bank and ING Bank, fsb are federal savings associations.
Subscribe
