10 Years of Dividend Yield Ranges for VNQ

I looked at VNQ (Vanguard REIT ETF) just now and noticed the dividend yield is at 4.21% as I write this.   Thats a bit higher than I recall seeing it.   The dividends you get from VNQ will vary because the dividends of the REITS it holds vary.    The price you pay for VNQ will also vary but because its traded on the open market and its market value fluctuates.   The yield you get from VNQ will depend on what you paid and what the combined dividend of the REITs happens to be.

I pulled the high and low trading value of VNQ for the 2005 to 2015 period (all off Yahoo Finance VNQ).   I also summed up the annual dividend payment for those years.    Between these I figured the range of dividends you'd get if you bought VNQ in each year.    For example: in 2005 the ETF traded between a low of $51.12 and a low of $63.45.    The dividend total for 2005 was $3.56.    If you bought at the low or high your yield would be 5.6% or 7% respectively.

Here's the chart :

And the price  & dividend data :

	max	min	DIV
12/1/2005	63.45	51.12	3.561
12/1/2006	81.15	59.16	3.254
12/3/2007	87.44	60.01	3.111
12/1/2008	68.95	22.52	3
12/1/2009	46.64	19.95	1.964
12/1/2010	57.65	40.33	1.891
12/1/2011	63.32	47.10	2.05
12/3/2012	69.20	57.03	2.343
12/2/2013	78.86	63.40	2.791
12/1/2014	83.09	64.05	2.919
12/1/2015	89.27	71.67	3.124

The yields in 2008 and 2009 are higher for people who bought VNQ at cheap prices after the market crash.    In the past 5 years the dividend yield averaged 4%.

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My Roth IRA returns for 2013

In 2013 my Roth IRA had investment return of 28.0%.    The S&P500 returned 32.39% with dividends reinvested.   So I saw great growth but not as good as simply betting on 'average'.    And from that perspective I did poorly.  Its easy to feel happy about getting 28% but I could have gotten 4.39% more by simply buying a generic index fund.

Apparently I didn't figure my return for 2012 so I'm not sure how I did that year.     I don't have good records for that period but I've got one data point captured in Dec. 2011 and then I know how much I had in Dec 2012 so I can at least estimate based on that period.   At least from Dec to Dec I was up about 10%.  The S&P500 was up 16% for the year total.  Thats not perfect but close enough.   So it looks like I underperformed the S&P that year by 6%.
In 2011 I beat the S&P by1-2% so that wasn't bad.

Back in 2010 I doubled the performance of the S&P500 by getting 30.1% versus 15.06%

So for 4 years I'm  at +15%, +1%, -6% and -4%.    That puts be about 10% above the S&P500 in total for the 4 years.   Not bad I guess.   But the latest trend in the past 2 years isn't good and I'm really just riding the success of 2010.

	Me	S&P500
2010	30.10%	15.06%
2011	3.70%	2.11%
2012	10%	16%
2013	28%	32.39%
net	90%	80%

I've gotten away from my old dividend stock investing strategy due to lack of time and attention and I've now mostly switched over to investing in general index ETFs.   However I do have a preference for dividend focused ETFs.   Over 85% of my Roth account is now split between DVY, VTI and VYM.    DVY and VYM are dividend focused and VTI is just the total stock market.


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Buy 1 : 1,000,000 th Share of a Football Player

For $10 a share you can buy ownership in the profit of Arian Foster.    You can read the S-1 filing on the investment deal for details.  One share will entitle you to your portion of 20% of Fosters earnings.    Sounds like fun if you're a Foster fan but it doesn't look like a great investment to me.   NFL careers are risky and can be cut short at a moments notice.   I wouldn't invest in a single NFL player since its putting all your eggs in a single risky basket financially speaking.  Foster is a very talented player so its not like betting on a random average player, but the risk is still pretty high.

This kind of investment is apparently allowed by the Jumpstart Our Business Startups Act (JOBS).   I'm not sure if this kind of novelty speculation is what they really had in mind.   Hopefully this kind of thing will be seen for what it is :  a novelty.   I don't expect this kind of investment will get much serious consideration or be treated as a serious investment.   But who knows.


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How Balanced is Your Retirement Portfolio?

This is a guest post from Jenna Smith who is an online blogger who normally writes on the topics of personal finance and business. Jenna often writes on family finance and investment, including the role of investment services like Cavalry Portfolio Services. You can read more writing by Jenna at paidtwice.com


There is nothing more important than planning for retirement. Whether you are in your 20s or in your 40s, it is always the right time to start thinking about how you will support yourself in the retirement years. It is essential for you to think about the way in which you will distribute funds in a Roth IRA or 401(k) account. As you devise your portfolio strategy, here are some tips to consider.

1. If you're young, choose high-growth stocks.

If you are young, then you have time on your side. Think about choosing some stocks that are considered a riskier investment. This does not mean that you should not look into the actual value of the company as well as its debt-ratio. You should still make sure that you are investing in companies that have high value. Just know that you can afford to invest in pharmaceutical, "green" or tech companies. These types of companies are set for high growth in the upcoming decades.

2. If you're older, choose conservative stocks.

If you are in your mid 40s or older, then you should choose conservative stocks for your portfolio. Stay away from stocks that have a high risk. You need to have access to funds during your retirement years, so this should be your main goal. You do not have time to waste in losing funds from your portfolio.

3. Give mutual funds a chance.

Mutual funds can provide you with a great opportunity for growing your portfolio in a safe way. Try to find a mutual fund that has consistently performed in the past five or ten years.

4. Stay away from penny stocks.

Penny stocks are a great trap for people of all ages. Older individuals get lured into the idea of making "fast cash" with penny stocks. Younger people believe that they can keep their money in penny stocks for years and experience growth. The truth is that a majority of companies with penny stocks are going through bankruptcy. You should try to avoid investing in these companies.

5. Research the debt-ratio of a company before investing.

Lastly, always make sure to research the debt-ratio of a company before you put your money into the company. If a company has many outstanding debts, then it may be at risk for filing for bankruptcy.
When you invest, it is essential to keep these tips in mind. You will be able to create a solid portfolio by just remembering to consider your own circumstances. Another tips would be to meet with an investment service. You don't necessarily need to pay someone to advise you on everything, but getting some professional advice might be wise decision.


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Tracking More Predictions from Money Magazine

A few days ago I looked at some financial predictions for 2012 that were reported by Money magazine.  It was a mostly mixed bag of failure.   I found 3 more general economic predictions in that issue and we'll talk about those today.   Keep in mind these predictions are for the year 2012 and we're only about 6 months past when the magazine was pointed.    

Jobs   -- Forecast : 8.5%   Actual: 8.1%

On page 86 the magazine indicated an expectation that unemployment would be 8.5%.  Today the April 2012 unemployment rate sits at 8.1%.

Housing -- Forecast : Sales of 4.8M homes and prices up 0.25%, Actual : sales 4.6M and median prices up 10%.

Page 74 they said that 'The median expectation among more than 100 economists and real estate pros surveyed by MacroMarkets is that home values will inch ahead by a mere 0.25%."  and that "Freddie Mac forecasts that only 4.8 million homes will be purchased in all of 2012"   The reality so far in 2012 is a bit different.  According to a Bloomberg article the sales are at a 4.6 million annual rate as of April but median prices have jumped 10% year over year from $161,100 in April '11 to $177,400 in April '12.

Gold prediction by Suze Orman -- Forecast : $2100 by 11/2012.   Actual : $1570 level as of May 2012

Money reported a tweet from Suze Orman she made in Oct. 2011 where she predicted that gold will be "$2100 by 11/2012"    and recommended having 10% of your portfolio in the shiny stuff.   I found her reiterate the $2100 target on Nov. 10th last year    Gold started the year 2012 about $1600 and hit a high of $1781 in February.  Today its back down to $1570 level.    

Generally I'd say all 3 of these predictions are wrong at least so far...

Unemployment is 0.4% better than they expected, Home prices are up 10% and gold has not gained the $500 or +30% increase per Ormans prediction.

We'll have to wait till the end of the year to make a final conclusion.   But for now the forecasts aren't proving very accurate.

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6 Month Check up on Some 2012 Money Magazine Predictions

I was thumbing through a back issue of Money magazine that I had lying around my house.   The Money issue interested me because it was the December 2011 year end issue with the cover declaration 'Make Money in 2012'.  Its about 6 months later so I thought it would be fun to check in on some of their advice and predictions and see how well they've fared.

On page 72 of the issue there is an article about investments that has some predictions from 'Dr. Dooms' for the 2012 outlook.   The for pundits are all long standing bears who "are still bracing for Armageddon."   Here is the advice given by each:


Nouriel Roubini : "Favor U.S. stocks over European equities."


Peter Schiff : "Avoid dollar-denominated assets.  Buy gold and silver."


Marc Faber: "Keep a quarter in cash, a quarter in gold, a quarter in real estate, and a quarter in stocks."


Henry Kaufman: "Buy stocks in firms with strong balance sheets".


Silly thing is that they can't all be right because for the most part they contradict one another.   For example Roubini and Schiff seem to be directly at odds.   Who do trust?  I think its anyones guess.

Lets look at them individually and see how well that advice has panned out...


Roubini:  All he's saying is that he thinks the U.S. market will perform better than European.   We can check that by comparing board U.S. based market index versus a European index.

For Europe we can use VEURX.   It was trading at $22.93 at the open of the year and is now at $21.64.   Its down 1.3%    In the US we can use the VTI ETF.   VTI opened at $65.41 and is at $67.65 today so its up 3.4%.

Schiff :  The advice here is to just buy shiny metal.    Kitco has data on historical gold and silver prices.   Gold opened at $1598 per ounce and is currently at $1592.   Thats a loss of 0.3%.     Silver opened at $28.78 and is now at $28.39.     Thats a loss of 1.3%. 

Faber :  This is a much more specific and diversified strategy.   Doesn't seem like a bad investment mix in general except it may be a bit conservative with 25% in cash and 25% in gold.   We can assume the cash investment is flat.   The gold is down 0.3%.    For the real estate I'll use the VNQ REIT ETF.  VNQ started at $59.05 and is at $62.45 today which is a gain of 5.7%.    Faber wasn't specific about what stocks to invest in so I'll just assume the broad US market which is up 3.4%    Combined the recommended asset mix would be up 2.2%

Kaufman :  Buying stocks with strong balance sheets could be a little vague but I would interpret it to mean stocks that are in a 'value' segment.  I guess you could also assume he means large cap stocks but large cap companies aren't all necessarily carrying strong balance sheets.  Working with the assumption that he means value stocks I'll pick the VIVAX fund to represent value performance.   VIVAX opened the year at $20.79 and is now at $20.79 so it is flat so far.


My verdicts are :

Roubini :  CORRECT - his prediction that U.S. markets would be better than Europe is right so far and the U.S. index has gained 4.7%  more than the Europe.

Schiff : WRONG - gold and silver has lost value so far and underperformed stocks or cash.

Faber : MIXED - His investment strategy underperformed the broad US market but not drastically.  Having 25% in cash makes for a more conservative investment. 

Kaufman:  USELESS  - Maybe thats a little harsh or blunt on my part but honestly I think his recommendation is too vague to be of much use.  He's basically just saying that you should pick good stocks.   OK.   Is that ever bad advice?   Should we buy stocks with weak balance sheets?

This is a pretty mixed bag isn't it?   Seems to me you could have just randomly picked a investment strategy out of a hat and done just as well.    Of course the year isn't over yet. 


I don't mean to pick on these four guys, they just happened to be the four people highlighted in the article.   They of course aren't the only pundits that are wrong in hindsight.   Various guru's have a poor track record.  Jim Cramer can't  beat a monkey at picking stocks.     Meredith Whitney wrongly predicted that the government bond market would be hit with significant defaults.  Of course I'm no better my  own attempts at predicting the future have a pretty poor track record as well.

I personally don't think we should trust the talking head financial experts very far to predict the future of the economy.  It seems more often than not their guesses are no better than flipping a coin.
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What You Should Know about Financial Gurus

You're watching TV and you see an interview with a financial expert who is predicting that the real estate market will go up or down or that gold will rise or fall.    Maybe you should go buy / sell the asset in question.    If that guru on TV says its going up/down then who are we mere mortals to question them? 

Sometimes the gurus on TV may know what they are talking about.   But more often than not they are just voicing their own opinion and in the worst case they may be biased and trying to pitch a product they themselves have a vested interest in selling.

Its hard to know who these gurus, financial experts, economists, etc. that get interviewed as experts on TV actually are.   The TV segment just gives them a credit as an expert then asks them their opinions.   There is no resume and there are usually few if any credentials cited.   They are labeled an expert and we're supposed to trust this because the TV said so.

Well I have one  solution for this. ...   You can read about many of these experts and find out about some of their biases and track records on Eric Tyson's website in a section he calls the guru watch.

Some examples of Eric's work from the guru watch...

Have you just caught an interview with economist Robert Prechter declaring we're heading for a depression?   Check out :  Robert Prechter's track record

Did you read an article about Peter Schiff declaring that the US real estate market is going to see significant losses in the next few years?   Find out about how wrong Schiff's been even though he says “...I Don't Think I've Been Wrong on Anything”'

Is Glenn Beck insisting that gold is a great buy and suggesting you stay tuned for more of his wonderful theories after you hear a brief message from a Goldline?    See if you should listen to Beck's financial advice.

If you're a Dave Ramsey fan then you may have heard of his Endorsed Local Providers.    Find out why you should avoid them.

Ok, so you may be asking yourself:  "who's this Eric Tyson guy and why should we trust him?"    Thats a pretty good question you have there.   Eric Tyson is a well known author of several books.   He has an MBA from Stanford and several other impressive credentials.   But that doesn't matter that much.   The point is that he's collected information on the gurus.   That information is generally public and can be independently verified.   He is providing information about the experts that is useful in itself.   The source doesn't really matter so much since its stuff you could verify elsewhere.   Tyson just collected the information for us.    I do trust Tyson though.   I've read some of his books (Investing for Dummies is one good one).  He knows his stuff and he talks a lot of sense.

So next time you see an expert on TV making predictions about the economy or recommending that we all buy or sell one asset or another, first check out Eric Tyson's guru watch
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Specific Maturity Date Bond Funds

Earlier this year a new style of bond funds was introduced by some of the investment companies.   I read about these in a recent CNN Money article.  The funds are specific maturity date bond funds.   Each such fund holds only bonds that mature in a specific date.   For example a 2012 funds would consist entirely of funds that mature in 2012.  This kind of fund is compelling to me for a few reasons.  

First of all it beats buying individual bonds because with such a fund you will be diversified across multiple bonds rather than having all your eggs in one basket.   You could of course buy a bunch of individual bonds and diversify your holds that way, but this kind of fund does all that for you. 

The second big benefit of a specific maturity date funds is that it will retain the principal of the bonds.   THe way normal bond funds are setup the funds trade bonds in and out in a regular cycle.   One downside with that is that if you want to cash in the fund at a given time then the trading value of the fund as a whole may be negative due to market conditions.   With the specific maturity date fund on the other hand the funds don't trade the bonds in and out, they hold the set of bonds until the maturity date and then liquidate them all at maturity.   In the given year of maturity the funds will be returned to the investors in the form of cash.  However the specific maturity date funds aren't immune from fluctuations in value either.   If you buy a 2017 fund then it could go up or down from now till 2017.   If you do hold the fund till 2017 and then they liquidate you should get your principal value back however.  

There are at least a couple investment houses offering this kind of bond fund so far.

Guggenheim has a set of BulletShare corporate bond ETFs for 2011 to 2017 (BSCB through BSCH).   They also have a set of High Yield Corporate Bond ETFs for 2012 (BSJC) to 2015 (BSJF).    Summary of the Guggenheim BulletShares ETFs.

iShares has AMT-free Municipal series ETFs for 2012 (MUAA) to 2017 (MUAF).

One way to invest in these funds would be to ladder a sum across multiple years.   Say you had $10,000 to invest, instead of putting it all into one fund you could put $2,000 into each year from 2012 to 2016.

I like the idea of maturity specific bond funds.   They offer the safety of diversification and should retain the principal values.   However they are relatively new and not very tested yet.  Hopefully they will work out well.

Avoid Investing in Reverse Merger Companies

 Have you heard of a "reverse merger" company?  The SEC describes a reverse merger as : "In a reverse merger transaction, an existing public “shell company,” which is a public reporting company with few or no operations,1 acquires a private operating company—usually one that is seeking access to funding in the U.S. capital markets."  

I got that quote from an SEC investor warning about reverse merger companies.   On the same topic Forbes says in How to Spot a Pump and Dump of reverse mergers that " this variety of reorganization happens to be a common first step in penny stock scams."

There have been some recent problems with reverse mergers.   In that investor warning the SEC says they have suspended trading in several companies because of concerns over the accuracy and completeness of their financial filings.  The list is :
Heli Electronics Corp. (HELI);
China Changjiang Mining & New Energy Co (CHJI)
RINO International Corporation (RINO);
Advanced Refractive Technologies, Inc. (ARFR);
HiEnergy Technologies, Inc. (HIET); and
Digital Youth Network Corp. (DYOUF):

If you'd bought any of these you'd have lost all or virtually all of your money.

Recently there have been several Chinese companies that did reverse mergers with virtually dead US companies merely as a method of getting into the US stock market.   Several of these companies have had some major issues with their financial reporting.  Some people allege that there are Chinese companies perpetrating financial fraud and reporting false information to the SEC. This article claims: 1 in 10 reverse mergers of Chinese firms on US stock exchanges "fraudulent"    I'll leave it for the authorities to decide who is committing fraud and who isn't.   But there is sufficient reason for concern.  For these reasons I would be particularly careful of Chinese reverse merger companies.    Personally I think that buying stock in foreign companies should be left to the experts and that individuals are best to go with index funds if want to buy foreign stocks.

How do you spot reverse merger??  

An article on Chinese reverse mergers says that one way to tell is if they list a 5.06 item in their 8-k filings.   One such example is the 8-k from Rino International which was one of the companies the SEC stopped trading on.  In their 8-k it says:

Item. 5.06   Change in Shell Company Status.

As a result of its acquisition of all of the outstanding capital stock of Innomind and the Restructuring Agreements, as described in Item 2.01, which description is in its entirety incorporated by reference in this Item 5.06 of this Current Report, the Company ceased being a shell company as such term is defined in Rule 12b-2 under the Exchange Act.

THis is a clear sign of a reverse merger.   You may also tell by finding references to a reverse merger specifically in the companies filings.   THey should expose this as a risk element in their financial statements.   Spotting reverse mergers isn't always easy.   For that reason again, in general I'd recommend avoiding buying stock in foreign companies unless you've done good due diligence to investigate them and ensure they are legit.

This is not to say that all reverse mergers are bad.   Its just a financial mechanism.  Some well known names like Atari and US Airways went through reverse mergers.    Unless you're talking about a well known entity then I think that the risks involved in buying a reverse merger company are too high for us normal people and so we should avoid buying into reverse mergers.

Double Your Money

Most people are eligible for a 401k plan at work.    Most 401k plans offer some sort of employer match to your contribution.   That 410k employer match is FREE money from your employer.    Employer matches often match 100% of your contribution up to a fixed limit.   That employer match is effectively doubling your money.  You won't find another guaranteed 50-100% return out there so the 401k employer match should be your #1 priority for retirement savings.  Unfortunately far too many people don't contribute to their 401k plan and miss out on this free employer matching money.


401k Participation Rates 

Overall roughly 2/3 of people with 401k plans participate in the plan.  The exact participation rates vary and go up and down over the years.     USA Today reported:   "Overall participation rates in 401(k) plans fell from 65% in 2009 to 60% this year,"   The participation rate numbers are a bit higher for people with employer matches but still not nearly 100%.

I found an older study  How Workers Use 401k Plans but it mostly has data from the 1990's. 

The study says that "For all workers, participation rates are higher when there is an employer match, 67 percent versus 60 percent."   So that means that from their data they found that there were 33% of people who did not participate in their 401k plan even though there was an employer match.
 A survey from Schwab found a bit higher participation rates.   They say: "Plan participation increases to 76 percent of all eligible employees when a 401(k) match is offered compared to 70 percent when no employer contribution is available,"    From their figures the 76% participation rate would mean 24% of people with a 401k match don't contribute.   A Fidelity report says that they found in 2007 that "The average employee participation rate for companies that offer a match is 63 percent. At companies that do not offer a match it is 57 percent."   That would mean 37% of people don't take advantage of a match offered.    Thats three different sources citing figures of 63%, 67% and 76% for the participation rate with employer match plans.  This tells us that there are anywhere from 24% to 37% of people eligible for employer matching 401k funds who are NOT participating in the 401k plan at all.

Thats a lot of people who are losing out on a lot of money.   We're talking tens of billions of dollars lost across the country.   For an individual family the difference can be like a 3-5% pay raise.    Typical employer match rates are in the 3% range.  The exact nature of the match varies but according to Fidelity about 35% of plans offer 100% match on the first 3% and another 14% offer 50% match on the first 6%.  

About 20-30% of Americans are leaving +3% of free income on the table by not utilizing their 401k employer match.


"But I NEED the money"
I'm assuming that many if not most people who don't participate in their 401k are not contributing because they feel they need that money to live on and pay the bills.  I understand if you are struggling and living paycheck to paycheck that it can feel impossible to save money for retirement.    But missing out on 50-100% return on your money is simply throwing out money.     You need money right?   Do you know a better way to turn $100 into $150 or $200 instantly?   Unless you've got a magical investment secret nobody else knows about then you should jump at a chance to have your employer match your funds.    This is the best way to save for retirement.   You have to somehow find a way to put something into your 401k to get that matching free money.   Even if you start with a very small amount its a start.   $20 a month today could grow to $50  a month next year and $100 a month the year after that.   I know its sometimes easier said than done and sometimes people are in a real tight spot.  If thats honestly you you then you have to do what is right to put food on the table.   But for most of us we can find a way to squeeze a few bucks out of our budget by simply giving up some luxuries, being more frugal or otherwise tracking and controlling our spending.

Plus keep in mind that the money you put in your 401k will often help reduce your tax bill.   If you're a single person making $45,000 with a standard deduction then you're paying 25% on every additional dollar in taxes.    That means that if you put $100 into your 401k then its only $75 less out of your paycheck.   Of course if you're in a lower 10-15% tax bracket then the tax impact is less.   But in any case the bite you feel out of your paycheck is less due to the tax benefits.

Even if you have to cash out the 401k later and pay the 10% early penalty you'll still come out ahead if you get a 50-100% match. 

Here's an example of that: Lets say you make $20,000 and get a 100% match on the first 3% of your pay.   If you put 3% of your pay into your 401k then your employer with match it with another 3%.   3% of $20,000 would be $600 so your $600 will be matched with $600 from your employer to give you $1200 total.   Now lets say you pull that $1200 early cause you are unemployed for an extended period.  You'll have to pay a 10% penalty on the withdrawal.   10% penalty on $1200 is $120.   Initially you put in $600 and you get $1,080 out after the penalty.  I'm not figuring taxes but that would be a wash since you'll either have to pay them now or later.

Roth IRA's aren't better

People LOVE Roth IRA's.   Thats understandable.   The Roth IRA is a great retirement vehicle. However Roth IRA's do not guarantee you free money like a 401k employer match.    Would you rather have $100 in a Roth IRA or $150 or $200 in a 401k? 


Now you might think that taxes make the Roth IRA win.   It is feasible that taxes could make a Roth IRA better.  However that is a very unusual scenario that would be based on paying virtually no taxes today and a fairly high tax rate tomorrow.   You'd have to go from pauper in your working years to a prince in retirement.  If your tax rate is 0% today then its almost a given that you won't be in a very high tax bracket in your retirement years.  If you're the exception to that then send me an email, I'd love to hear your story.   For the other 99.99% of us the Roth IRA is not going to come out ahead even with wacky up side down tax implications.

Think of it this way:  We can't tell what the future will bring but I'd rather have $200 in retirement today than $100.  A bird in the hand is better than 2 in the bush.   $200 today versus $100 is kinda like 2 birds in the hand versus one in the bush. 2 birds in the hand should be 4 times better than 1 in the bush.    Ok so if thats getting to smartsy clever then how about I just end with this :

$200 > $100   


Bottom Line:  If you are eligible for a 401k employer match then you should contribute to your 401k up to the point of the match.  If you don't then you're losing out on free money.

Securities Investor Protection Corporation, SIPC

The Securities Investor Protection Corporation, or SIPC, is an insurance program for investment accounts.  The SIPC is kinda similar to the FDIC in that it is created by the government in order to help protect individual peoples finances.   The SIPC is however very different than the FDIC in how it functions.   The SIPC insures investment accounts like stock brokerage accounts but theres lots of limitations and details about the insurance..   It doesn't guarantee the performance of your investments, but it just protects your ownership of your investments in case the brokerage firm that holds them goes under.

SIPC covers cash and securities held in a brokerage firm.   If a brokerage firm were to fail financially then SIPC will step in to help salvage the assets and ensure that individual investors don't lose their assets.
 The SIPC insures up to $500,000 in assets including $250,000 in cash per individual.    

The SIPC helps recover missing assets.    If a brokerage fails and during its bankruptcy some of the assets are lost or otherwise missing then that is what the SIPC helps recover.

What the SIPC doesn't do
It does NOT protect your stocks or other investments from loss of value due to market losses.  So for example if you bought Blockbuster stock before they went bankrupt then that is your problem and the SIPC won't help.  The SIPC does NOT protect you if you are sold worthless investments.  SIPC does NOT protect futures contracts, currency,  investments in limited partnership or unregistered annuities.    When they say they don't cover currency I believe that means people who are dealing in trading foreign currencies.

SIPC doesn't really protect you from fraud in general.  If you buy 10,000 shares in SuperGoodStock company from TonySoprano Brokerage, LLC firm and then find out when you try to sell your shares that SuperGoodStock is fictional and not worth the paper its written on and TonySoprano Brokerage's phone # is disconnected and their offices are vacant with a for lease sign then I don't think the SIPC can help you there.  

How it works

First if a brokerage fails the SIPC will step in to help sort things out.    You will get back ALL the equity assets that are registered in your name.   After that the brokerage firms remaining assets are pooled and then divided up to pay off all customer claims.  If there is a short fall of the assets then the SIPC will help make sure you get at least $500,000 of your assets including up to $250,000 of cash assets.

The $500,000 limit does not mean that you automatically lose anything over $500,000 that you have in a brokerage.   For example if you have $2 million in assets that are all in mutual funds registered in your name then you should get all $2m in those assets back since they are legally registered in your name.  If you have $2 million in cash then you may only get $250,000 back since that is the limit of cash the SIPC insures.   Cash is cash so it might get 'lost' during  the bankruptcy of a brokerage.

Making sure a brokerage is insured

You definitely want to only work with brokerage firms that are covered by SIPC.    You can look up members of SIPC at the SIPC website via their member database.



Disclaimer:  I'm not an expert on this stuff and I'm only interpreting what I read on SIPC.org and other websites.  If your brokerage firm goes bankrupt then you're best off contacting SIPC to file a claim and find out exactly what you may or may not be covered for.

My Roth IRA Performance for 2010 = +30.1%

As 2010 has drawn to a close its a convenient time to summarize my financial performance for the year. Today I'll review how well my Roth IRA did in 2010.

I looked at My Roth IRA Performance Compared to Benchmarks back in Feb 2010.   At that time I was up 34.6% from Nov. 2008 to Feb. 2nd 2010.  That was an odd time period and I'm not sure why I decided to look at that 15 month span.  


From 1/1/2010 to 12/31/2010 my Roth IRA investments went up 30.1%.

I think that I did quite well with my investments this year.  Of course it may be entirely dumb luck that my returns are that good.   I'm not about to declare myself a stock wiz and quit my day job.   But whatever the cause I'm happy with the results.


Comparison to benchmarks

Its important to compare your investing results to the general market.   30% sounds great but it wouldn't be very impressive if the S&P 500 was up 40%.  

2010 performance of benchmarks:
S&P 500 = 12.9%
Margaritaville = 10.5%
Dow Jones = 14.5%
NASDAQ = 15.8%

I measured the Dow performance with IYY, the S&P 500 with VFINX. and ONEQ for the NASDAQ index.  Margaritaville is a 33%/33%/33% mix of VIG, VYM and BND.

The 30% return for 2010 in my Roth investments is about double the benchmarks.   I did quite well compared to benchmarks for the year.

My investment strategy

Generally I've used a High Dividend stock strategy for my Roth purchases.  Everything in my Roth account pays a decent dividend and some of them pay fairly high dividends.

I've own some large cap telco stocks with good dividends, some REITs , I own an oil royalty trust and some pharmaceuticals like Bristol-Meyers Squibb.   I've also bought some ETFs that are high dividend index funds.   I sold off my GE after I realized I had no good reason to own it.  I also sold my HOG after it had doubled.

I figure the yield of my holdings probably averages around 5-6%.

Commissions and trading activity

I made 14 trades through the year.    I made 8 purchases and sold 6 positions.   I paid $7 for each trade in commissions.   I use Scottrade for my Roth IRA.  The cost of that is figured in the 30% return.     Commissions can add up if you make a lot of trades and can be a high expense especially if your total investment isn't that great.   You should watch the cost of your commissions for this reason.  If I had made 14 trades at $7 a pop and only had $5000 in the fund that would be pretty bad since that would equate to about 2% expenses.   But for me my balance is high enough that my commission costs are closer to the expense ratio of index funds.. 


Disclaimer :  This is not investing advice and I'm not going to tell you what stocks to buy.  

Why Do I Own GE Stock?

I own some General Electric GE stock in my Roth IRA.   Lately I realized that I don't have a very good reason to own GE.   Worse yet I don't have a complete explanation for the reasons I had for buying it in the first place.

Why I bought it initially
I originally bought the stock about 2 years ago when it was trading at $20.86 and the dividend was around 31¢ per quarter.   That gave it a yield of around 6%.   Not long after I bought the stock, GE slashed their dividends in a fairly historic change for a company that had paid dividends for decades without dropping them.

I know when I bought GE that their good dividend and the fact they are a solid blue chip company were factors in my purchase.   I figured that its not likely that GE would go bankrupt.     But other than these 2 reasons of good yield &  blue chip status, I don't know what other factors I used to make the purchase decision.  I might have looked at PE or PEG or other financial data, but I honestly can't remember.  

I wouldn't Buy it Today
Today GE's dividends are not especially attractive.  I could get around 3% dividends in a diversified ETF like PEY or VYM.   I don't really expect a lot of growth from GE.  Its not a growth company and their growth is likely to be proportional to the growth in the economy or population base more than growth based on new or expanding business. Their income statement lately isn't too impressive.   PE is over 17 right now and other financials are good but not great.  Its not a bad stock but not something I'd droll over as a great deal.    Note that this is not an in depth analysis of the stock but just a quick look at its financials. 

There 3 good lessons I can learn from this :

1. I should have better documented my reasons for buying GE in the first place.   If I can't remember why I bought it in the first place then I don't know if those reasons still hold.  Maybe I bought it for reasons that are no longer true.  I don't know.   I need to document my investing decisions better so I know why I've done things.   Maybe I made a stupid mistake when I bought it but its hard to learn from a mistake if you can't even remember exactly why you made the mistake in the first place.

2. I should keep better tabs on my investments to evaluate them on a periodic basis.   If a companies fundamentals go up or down over time that may change whether or not I think they are a good investment.   I don't recall really looking at GE before lately to reevaluate if it is or is not a good investment.   I should do that probably quarterly at least for all my holdings.

3. I shouldn't get stuck trying to recover losses.   I'm pretty sure that after GE initially slashed the dividend and the stock plummeted I held on to it at least initially in part due to a desire to recover the price I paid for it.  yeah I paid over $20 for GE, but thats not a good reason to ride GE into the ground in a vain attempt to get back to even.  GE may never go above $20 again.

Disclaimer:   I do not give investment advice.   This should not be construed as a 'sell' recommendation on GE.  This is just me thinking out loud about my own stock purchases and investment strategy and process.

Are Rolex Watches an Investment?

On an episode of the Suze Orman show a caller had bought a Rolex watch and she commented how she'd been told that the Rolex would be a good investment.   My wife and I laughed at the idea that a luxury watch was an investment.   It was a little shocking to hear someone claim that.    But much to my surprise I'm more shocked to find out she wasn't too far off base.

New Explorer II Rolex watches are priced about $6,200 - $6,300 on Amazon.com.   Thats just one price sample but good enough for my purposes.   I checked out eBay and find Explorer II's selling for a range around $4,000 and up.   But it seems that older versions of the Explorer II style also sell for similar prices.   The resale value of a Rolex model doesn't seem to vary too much based on the age of the watch.   So a 10 year old Explorer II is going to fetch a similar price to a 20 year old or 2 year old watch.


In the 1970's you could have bought a new Explorer II for around $400.   If you can resell that same watch today for $4,000 then thats a 10 fold increase in value over 40 years.     That equates to 5.9% annual compound growth.  

The site Minus4Plus6 has a table showing the price evolution of Rolex models over time.    I took the prices for the 17 watches with the longest history of at least a couple decades and figured the annual growth rates.   The average annual growth increase of the Rolex watches I looked at was 7.7% and the median was 7.3%.   The low was at 4.9% and the high at 12%.   10 of the watches increases 7-8% range.    In general looking at the price appreciation of the Rolex models it seems that a 7% annual increase in value is fairly typical.    7% annual increase is pretty good really.  But there are various downsides to such a collectible investment to consider.

Success with Collectibles requires Knowledge

In order to do well with any collectible you have to know what the items you're collecting.   The same is true with a Rolex watch.  I personally know very little about Rolex watches so if I were to go buy one as a collectible theres a good bet that I would buy a watch that isn't as favorable and doesn't retain its value as well.   I might over pay for the watch when I buy it.   If buying used you also have to be aware of forgeries when dealing with an expensive luxury item like a Rolex.   To succeed financially with a collectible you have to know the items well.  

Maintenance and service costs

One big 'gotcha' about the investment value of a Rolex is the cost of servicing.   A Rolex may very well last a lifetime but the mechanism may need periodic servicing or repairs over the years.   That cost can be significant. Having your watch serviced or repaired by a qualified shop can cost several hundred dollars.   A couple service or repair bills over 20-30 years can turn the net present value of a Rolex from positive to negative.

Lack of Liquidity

I'd consider a Rolex to be semi liquid.    You can probably run down to a pawn shop and sell any Rolex within a day.   So in that regards its a pretty liquid item.   But while you may be able to sell a Rolex quickly but you won't necessarily be able to get a good price for it.  To get a good price you may have to take some time selling the watch.   As an individual it may be hard to sell a watch for top dollar and you may have to settle for a price a bit below the real market rates in order to sell it within a reasonable time frame.


Taxes

Technically a Rolex that sells for more than you paid would be a collectible item that is taxable.   When you have a gain in value of a collectible it is taxed at regular income tax rates.  Most investment vehicles like stocks and bonds pay a more favorable capital gains tax rate.   I doubt most people will actually claim such a gain on their taxes either because they aren't aware its taxable or because they think they can get away with it.   But such a gain IS taxable so that should be a consideration.

Add It All Up

Overall a Rolex is not a 'horrible' investment.    The 7% typical growth in value is actually fairly good.   But if you add in the details like service and repair costs, expertise to succeed, lower liquidity and income tax implications the investment in a Rolex is not as good as what you should expect with stocks or bonds.

Bottom line :  Rolex' investment value should be considered a secondary benefit of buying the luxury watch brand and not a primary reason for a purchased.


Photo by char1iej

Problem With Commodity ETFs

Businessweek recently ran an article about commodity ETFs.  They pointed out a problem with some ETFs that causes them to poorly track the underlying commodityy.   Their article which was creatively titled Amber Waves of Pain spells out how differences in future prices can eat away at ETF gains on commodities.  You can read the whole article for the specifics but the basic reason is that the ETFs lose take a loss every time they make certain futures trades on the market and these losses add up over the long run to greatly undercut the ETFs gains.  The Businessweek article concluded that you should not buy commodity ETFs at all because of this.  

We can compare the market price of the oil ETF versus the market price of crude oil.   For the ETF we'll use United States Oil Fund (USO) and the crude oil prices are online at the Dept. of Energy site.

Note: the cost of the crude oil doesn't include any of the carry costs of the oil.  If you owned actual crude oil then you would have to have facilities to store the oil and ship it and such which all costs money.  That could be a significant amount over time and would cut into any increases in the market prices.  

Lets say you decided to buy an oil ETF back in 2006.   If you bought USO when it first started trading in April 2006 you would have paid $68.82 on close of opening day.   Today USO is trading at $32.58.   Thats a loss of about 52.6% from your initial investment.   In the same timeframe the price of crude oil has actually gone up.  In April 2006 a barrel of crude was at about $62.99.    Today crude is trading at $76.77.   Thats an increase of about 21.8%.  


Change from April 2006 to August 2010
United States Oil ETF (USO) =  DOWN 52.6%
Crude Oil prices =  UP 21.8%

Yikes!   Thats horrible.   If you bought USO thinking that your investment would track the price of oil then its definitely not done so.

Lets look at the performance of raw crude oil prices versus the USO ETF since the start of 2009:

As you can see the raw crude prices went up around 80% and the ETF only went up about 20%.  


Not all ETFs are Equal

USO is only one of the ETFs that tracks oil.  Others include Powershares DB Oil (DBO) and iPath crude oil index (OIL).  Lets compare the 3 ETFs over time from the start of 2009.   I made the following chart on Yahoo finance:

Sorry if thats a little bit of an eye chart. The blue line is USO, red is DBO and OIL is in green.   In the time period shown, DBO is up about 15%, USO is down about 7% and OIL is down about 12%.   Thats a huge variation within just 1.5 year period between 3 ETFs that all track oil.

Depends on Structure of ETF

The USO ETF holds future contracts and is susceptible to the problem with trading futures.   Other ETFs may not have this kind of problem.   For example the SPDR Gold Shares (GLD) ETF trades in gold but does not use futures.  The GLD ETF actually buys and holds physical gold.  

Bottom Line:  If you're looking to buy a commodity via an ETF be aware that the ETF may not track the actual commodities gains very well.   Each ETF is different  and some may perform better than others.

Quick Look at Franchises

Little while ago I ran across this article Most Popular Franchises. Its an interesting piece and talks about the popular franchises and gives some financial data on their franchise fee rates and the default rates.   It got me thinking about opening a franchises as a business.


I've often thought a franchise might be a good way to start up a business.   A franchise has some strong pluses.   Just off the top of my head : There is an established national brand name.   The franchise company will help you with training and developed processes.   Basically someone else has already made the business as a whole successful and your part is simply running a new location for the business and sharing the profits from doing so.   I like the franchise model in a lot of ways.  

The down sides of a franchise are there as well though.  You have to pay someone else a fee to start the business.   You have to run the business according to their rules and policies.  The franchise may be required to buy supplies from the company only and pay relatively higher prices for them.

There is a ton of information on franchises on the Entrepreneur magazine website.   They have a whole section related to franchisees.

In 10 reasons to buy a franchise  they talk about the franchise business being a proven formula, giving better access to financing from the franchisor and SBA and having higher rates of success.

They also have articles with the pros of franchises and the cons of franchises.  For the pros they list collective buying power, sales and marketing assistance and national and local advertising.   For the cons they talk about things like loss of control, being locked into a contract and extra costs.

I think another good starting point would be the article Are you suited to be a Franchisee?

I've only just touched on the topic of franchises here and there is a lot more information out there.

A Bunch of Retirement Savings Statistics

If you look at current workers who participate in retirement plans we see that 51% of workers participate in a retirement plan of some sort.

The percent of households who have IRA's is about 40%.  The median balance in IRA accounts in 2008 was $55,000.   So we can infer from this that 20% of households had over $55,000 in their IRAs as of 2008.   Knock about 25% off that assuming it was lost in the decline of the stock market between 2008 and today and you're down to $41,000.


There are 31 million people covered by federal, state and local government pension systems.   But that number includes retired people.   Looking at just state and local government pensions there are 7.4 million people currently receiving benefits and there are 14.4 million total participants.  Thats about 51% who are retired and 49% who are not retired.  If we assume the same ratio for federal employees then for all government plans we've got around 15 million current workers covered by government pensions.

Take another look at workers who participate in retirement plans  and we see it says 20% of the people have defined benefit plans.   Most of those people on defined plans are among the government workers mentioned above.

17% of the population is below 125% of the poverty level.  On the other end there are 2.7 million people with assets of $1.5M or more.    So thats about 18% of the population who is poor or rich.  I wouldn't expect either group to have a lot in retirement funds.   Poor people have no money to save and rich people would likely hold their wealth differently than IRAs & 401ks.    If you look at financial assets then we see that for people in the bottom 20% of income only about 10% have any kind of retirement account.   That means that 18% of the total population has low income and no retirement account.

Younger people are less likely to save.    If you look at the percent of households with IRAs we see that only 28% of people under 35 years old have IRAs.  The percent jumps to 40% for 35-44 year olds and hits 50% for people 55-64.    Younger people are also less likely to have any retirement accounts.   Only 40% of people under 35 years old have a retirement account while 60% of people 55-64 do.   The amount in the accounts also goes up with age.   For people under 35 years old the median value in their retirement account is just $10,000 but for people 55-64 the median value is $98,000.

Are Credit Unions Better Than Banks?

Lately it seems I've seen a few bloggers or  personal finance experts advocating joining a credit union over a bank.   It seems to be prevailing opinion that credit unions are generally better thank banks.   But I've wondered how much of this was just backlash against the "big banks" getting bailouts from the government and how much was really about credit unions being better.

I've been unconvinced that credit unions are all that great.  I've only been a member of a credit union once and I left them unhappy.  My father also had a problem with a credit union a few years ago.  My limited personal experience with a credit unions hasn't been positive.  But then I've never had a ton of success with banks either.  Eventually every bank will do something to annoy me.


I decided to do some research and compare banks and credit unions over all.    I should note that some of the data below comes from credit union organizations so it would be right to question if its biased, but I am trusting that they aren't publishing lies.


Interest Rates = winner Credit unions

Current data comparing rates between credit unions and banks is published at the NCUA site.

A Comparison of Historic Rates published at NCUA shows the rates for credit unions versus banks for 2003, 2004 and 2005.  In most cases the rates for credit unions were better than banks.  Here is a table comparing some of the rates for 2005 :

	Credit Union	Bank	Difference
36 month used car	5.62%	7.49%	1.87%
30 year fixed mortgage	6.38%	6.39%	0.01%
3 year ARM	5.55%	5.66%	0.11%
credit card	12.06%	13.27%	1.21%
6 month CD, ($10k+)	3.13%	2.88%	0.25%
Money Market	1.44%	0.99%	0.45%
Regular Savings	0.67%	0.67%	0.00%

On average you get better rates with credit unions over banks.

Fees = winner credit unions

According to the CUNA, the average NSF fee is $25 at a credit union and $30 at banks.   Average credit card late fee is $20 for credit unions and $35 for banks.


Better Customer Service = winner credit unions

The Ohio Credit Union League published an article that cites a Gallop poll of consumer satisfaction for banks and credit unions.

Percent of customers "very satisfied" were :
Credit unions = 73%
Banks = 58%
S&L's = 59%

The American Consumer Satisfaction Index has scores on industries.   The overall score for Credit Unions was 84 and the banks got a 75.   They have scores for individual banks and Bank of America scored 67, JP Morgan Chase got a 68, and Citibank got 68.   All other banks got a score of 80.   So the smaller banks did much better than the biggest banks in terms of customer satisfaction.

Other Considerations

Sometimes the location of a bank branch matters to you more than other factors.    The location and convenience of ATMs may also be a big deal for you.  But for some people neither of these really matter all that much.    The features and ease of online banking like bill pay or other online transactions may also matter a lot.  

Bottom Line:   Looks like over all that credit unions win on better rates and better service.    There may be other considerations that would cause you to go one way or another.   I'd do the comparison myself between credit unions in your area and banks.

Women Are Better at Investing

Do you think women or men are better at investing?   I found a number of studies that showed women performed better at investing then men.

Merrill Lynch did a survey report to compare  the investing habits of women and men.

The reports had the following paragraph:  "Women are far less likely than men to hold a losing investment too long (35% of women reported having done so at least once vs. 47% of men) or wait too long to sell a winning investment (28% vs. 43%). Men are also more likely than women to allocate too much to one investment (32% vs. 23%), buy a hot investment without doing any research (24% vs. 13%) and trade securities too often (12% vs. 5%)."

In various ways women made fewer mistakes than men in handling money.

The report goes on to say:  "Of men who reported buying a stock without doing any research, 63% said they did it again, whereas only 47% of women repeated the mistake. Nearly half (48%) of all women who waited too long to sell an investment did it again, but 61% of men repeated the mistake.  And among men who ignored the tax consequences of an investment decision, 68% did it more than once while only 47% of women did."

Not only did women make fewer mistakes they also learn from their mistakes and are a lot less likely to repeat them.

Another study reported on by the New York Times looked at the performance of women who ran hedge funds versus that of men who ran hedge funds.  The article says:

"BusinessWeek notes that according to the research, from January 2000 through May 31, 2009, hedge funds run by women delivered nearly double the investment performance of those managed by men.
On average, funds managed by women produced annual returns of 9 percent, compared with a 5.82 percent average annual return by funds run by men.
Furthermore, in 2008, during the height if the financial crisis, funds run by women were down 9.6 percent versus a a 19 percent decline in those run by men."


This survey found that :
"To wit, approximately half the men surveyed (49 percent this year and 53 percent last year) viewed themselves as the primary financial decision maker, compared to only 12 percent of women this year and 13 percent last year.
- Not surprisingly, eight in 10 women (83 percent) felt it was important that both partners should contribute to household finances, compared to only six in 10 men (65 percent)."

Of course these are just generalizations.    Individual men and women won't necessarily follow the trends and there can of course be men who are better than women and vice versa.

So whats the point of this?   For some of us its just an interesting report.   But for some people this might help us improve our own finances.    If you had previously assumed men were better at investing then this data should make you reconsider.   I think women should have more confidence in their investing instincts and some men should trust the opinions of women a little more.

My Roth IRA Performance Compared to Benchmarks

From November 2008 to February 2nd, 2010 my Roth IRA is up 34.6%.    I'm including the $10,000 that I put in for calendar years 2008 and 2009 but excluding the $5000 that I just put in for 2010.    +34% is a very good increase for a year and a couple months.   But the market as a whole has been up substantially in 2009.  Theres a saying that a rising tide raises all boats.   This leaves me wondering if my +34% increase is any good or if I might have done better simply throwing my money into index funds.    I decided I should compare my performance to the standard stock indexes and other investments to see how it stacks up.

What Benchmarks should I use?
I'm going to compare my performance to the standard stock indexes.   The S&P 500 is a standard for measurement of US stock market.   Its not the best index or the smartest investment but its a standard benchmark.  You can also look at the other major indexes like the NASDAQ and the Dow Jones Industrial average.   I'm also going to compare against a very simple portfolio of 3 index funds.  I've talked about Lazy porfolio investing before.  Its a simple way to get a more diversified portfolio with a few index funds.  One of the Lazy portfolios that I like is the 'Margaritaville' which consists of 33% each in Inflation index bond index, US stock market and foreign stock markets.   You can get that by buying Vanguard funds.  VIPSX, VGTSX and VTSMX.  Its diversified and simple.

If I take the S&P 500, NASDAQ, Dow Jones and  the Margaritaville portfolio and then figure their performance for the period Nov. 2008 to Feb. 2010 I can use them as my benchmarks to see how well my Roth IRA performance stacks up. 

Performance from Nov, 2008 to Feb. 2010:
My Roth IRA = 34.6%
S&P 500 =15.9%
Margaritaville = 20.6%
Dow Jones Industrial = 10.3%
NASDAQ = 27%

The performance figures above are adjusted to include dividend payments or capital distributions.   My Roth IRA came out ahead in this period compared to all the benchmarks. 

What if I'd thrown my money into a mutual fund?   
Comparing my performance to mutual funds is not too straight forward.  With the Yahoo mutual fund screener I can look for the performance of funds over the past year.   They measure the 1 year performance going back 12 months from today.   So that would be from Feb. 2nd 2009 to Feb 2nd 2010.    Back in Feb 2 2009 my Roth IRA was valued at about $7700.   So my Roth IRA balance has gone up 72% in the past 12 month period.   Using the screener I can find funds that have gone up 50% or more in the past year.   Only 1850 funds have gone up 50% or more.   There are 19,550 funds total in their database.   So the performance of my Roth IRA for the past 12 period has been better than 90% of all mutual funds.   But that is comparing my Roth IRA performance to safe treasury or bond funds that you shouldn't expect high growth from.   If you narrow the screen down to just US stock funds then 670 funds are up 50% or more out of 8400.  That is less than 8%.  Either way I'm beating over 90% of the mutual funds.

 The 34% return I got in my Roth IRA from Nov. 2008 to Feb. 2010 has been better than indexes or most mutual funds.    This is confirmation that I did in fact out perform the market.

Of course this is just 1 years performance.   This does not mean I'm especially skilled at stock picking.   I might have totally lucked out in this past year and stumbled randomly into a few stocks that just happened to perform extremely well recently.    Who knows, maybe next year the S&P500 and the Dow will beat my investments by 20%.

I'm not going to draw any conclusions on this other than the confirmation that my 34% is better than average and better than just going with an index. 


Disclaimer:   Nothing here should be viewed as investment advice in any way shape or form.