Speculating on Food and Finance

It is hard to miss the news these days about financial company stocks getting pummeled. At some point, banks and investment companies are going to hit bottom. Buying on that day should net some nice profits once financial companies rebound. Of course, no one knows when that day will come. And even a 100% increase ain't that grand if it takes 10 years to earn. That said, Morningstar posted a nice article identifying some ETFs that track financial companies.
  • KBE KBW Bank ETF (major banks)
  • IAT iShares Dow Jones U.S. Regional Banks Index (regional banks)
  • XLF Financial Select Sector SPDR (diversified financial)
  • VFH Vanguard Financial ETF (diversified financial)
  • IYF iShares Dow Jones US Financial Sector (diversified financial)

Also check out:
  • IXG iShares S&P Global Financials (global financial)
  • SWFFX Schwab Financial Services (diversified financial- no transaction fee)
  • ICFSX ICON Financial (diversified financial- no transaction fee but high turnover)

Another trend that has not gotten as much media coverage (Yet!) but is still in the news on a regular basis is the spike in agriculture prices. Russell Bailyn, whose new book, Navigating the Financial Blogosphere I recently reviewed, wrote a nice overview of the food price situation.

Russell does not mention specific securities in his article so I rounded up a few. Here are some securities that offer various levels of exposure to agriculture commodities:

  • DBC PowerShares DB Commodity Index Tracking Fund (Broad Commodities)
  • DJP iPath Dow Jones-AIG Commodity Index Total Return ETN (Broad Commodities)
  • DBA PowerShares DB Agriculture Fund (Corn, Wheat, Soybeans and Sugar)
  • JJA iPath Dow Jones-AIG Agriculture Total Return Sub-Index ETN (Corn, Wheat, Soybeans, Soybean Oil, Coffee, Cotton and Sugar)
  • JJG iPath Dow Jones-AIG Grains Total Return Sub-Index ETN (Corn, Wheat, Soybeans)

You can even find securities that track individual commodities, but again Morningstar offers insight into why these might not be smart plays.

I do not own any of these, and am not recommending them. M* (Morningstar) points out that in November, XLF was the second most shorted security on the American Stock Exchange.

Shorting a security is when an investor borrows a security from her brokerage, sells it (let's say at $100 a share) and hopes it loses value. Say it goes down to $75 per share. The investor then buys back the number of shares she originally borrowed and returns them to her brokerage pocketing $25 per share. Of course if the price goes up, she has to by back the shares at the higher price potentially costing her far more than she originally invested, depending on how far the price climbs. You can learn a lot more about shorting stocks by reading An American Hedge Fund by Timothy Sykes.

The point is that a lot of folks are speculating on financial securities and there is no way to know if agricultural commodities will continue to rise, but the securities above will rise or fall along with those sectors. I only know that I don't know enough to get into this game...

"But wait, Wylie... I want to speculate on commodities and throw my money away. What are these ETN things you list?"

First of all... you're crazy.

Second, that's a good question. We'll look into that soon!


Opening a New Online Bank Account

I discovered bankdeals.blogspot.com a long time ago. Ken, the author, was one of the first sites to link to mine for which I was very grateful. More importantly, his site is a great resource for researching bank offers of all kinds, all around the country.

For a while I have been watching this site and keeping track of banks that offer much better rates than my own.

After reading chapter one on banking in Russell Bailyn's new book Navigating the Financial Blogosphere, I was inspired to take a look at how I park my cash and make some changes.

Many online savings accounts offer interest rates that are outperforming all the diversified mutual fund portfolios I have been tracking since May 1st. In reality, the top savings rates 5-5.50% are pretty close to the results of the mutual fund portfolios since the 5% rate is annual and most of the funds are up about 3%. YTD most of the Mutual fund portfolios have earned around 10%, but with a lot of volatility.

But your cash has to sit somewhere and 5% with no risk is not a bad place to park it. I mentioned above that my current bank's rates are not competitive. The truth is that I do not keep much cash there, so my motivation to change has not been great. Let's look at how I manage my cash, why, and the changes I am making.

I currently bank with Citibank. I have my paycheck deposited automatically into my checking account and I maintain a small balance in my savings account. I use yodlee.com to keep track of my bank, investment, retirement, mortgage, and credit card accounts. As paychecks come in and bills come due I pay my bills online and move any leftover cash from Citibank into my Etrade brokerage. I don't do this so I can invest the extra savings, but because cash in my Etrade account earns a tax free 2.70% APY compared to my Citibank Savings account which earns a taxable 1.76% APY.

My Citibank account has refunded all ATM fees (in the US anyway) for a long time, which is the main reason I have kept it. I have been able to use any ATM in the USA without worrying about fees. These days, many banks offer this service, so it is worth re-evaluting.

My Etrade brokerage account notes that 2.70% tax free is equivalent to a taxable 3.65% for those in the 35% tax bracket. I am not in that bracket, so my after tax rate is not that high. Since there are many banks offering over 5%, I do not need to worry about my exact after tax earnings. I will make more in a taxable account as long as it earns over 3.65% before taxes and finding a bank that pays that will be easy.

Two other things to note, especially as banks struggle and potentially go out of business. My Etrade Brokerage account is covered by federal insurance up to $500,000. Banks are covered
for up to $100,000 (though not all banks are covered so do your research). Again, I do not have enough money for this to factor in my decision, but if you have over $100,000 you are looking to park somewhere, think about how to spread it around to ensure that it is all covered, in case any given institution goes under. Second, if you are at risk of paying the Alternative Minimum Tax, taking a lower tax free rate may avoid even greater taxes by keeping your adjusted gross income low enough to avoid the AMT. If this is an issue for you, you may want to consult a professional.

Here are the top deals for savings accounts listed at bankdeals (12/28/07):

I am not interested in promo rates, though there is no guarantee any of these rates will stay where they are, especially if Ben Bernanke keeps lowering rates over at the Fed. I'm also not interested in a high minimum amount requirement. UFB Direct is interesting at 5.22%, but I am going with Etrade at 5.05% and here is why:

When I transfer funds from Citibank to my Etrade brokerage, the funds take a long time to become available in the Brokerage account. With an Etrade bank account I will be able to transfer funds between my brokerage, retirement and bank account with no delay. Etrade is giving me $25 to sign up (but this offer ends on the 31st so act fast if you want it). Also, there are incentives in both Etrades brokerage and bank account to maintain certain minimum balances for more benefits and to avoid account maintenance fees. If I moved the cash I have in my brokerage to UFB, I might lose some of those benefits or owe fees.

I also set up an Etrade MaxRate checking account which has a 4.0% APY. I will switch my direct deposit to this account once it is up and running and I have the ATM card and have given everything a test run. This means that even during the brief period my paycheck sits in my checking account before I pay my bills and transfer any savings, I will be earning a higher rate as well.

In summary I was using Citibank checking for ATM fee refunds and transferring savings into my brokerage earning a tax free 2.70% APY. I am switching to Etrade Max-Rate checking with unlimited ATM fee refunds, and 4.0% taxable APY and will transfer cash savings to Etrade Complete Savings earning 5.05% taxable APY.

Some tips:
  • Don't close your old bank until your new one is active and you have used it. If issues arise- your ATM PIN does not work for example, and you have already closed your old account, you will create undue stress for yourself.
  • Etrade Max-Rate checking has a fee unless you: 1) Maintain a minimum average balance of $5,000 in your Max-Rate Checking Account 2) Set up and maintain a direct deposit of $200 or more per month (A combination of direct deposits totaling $200 does not satisfy this requirement) 3) Maintain a combined balance of $50,000 or more in linked E*TRADE Securities, E*TRADE Bank, and employee stock plan accounts (including vested in-the-money options, stock option plan shares, ESPP shares, and released restricted stock) accounts 4) Execute at least 30 stock or options trades during a calendar quarter in a linked E*TRADE Securities account.

Portfolio Update 12/28/07: WylieMoney Inches Ahead Down the Stretch

The WylieMoney 20 Mostly Managed portfolio had the best week last week, almost assuring that from May 1st through the end of 2007, the funds I picked for my hypothetical portfolio will outperform the Index fund and ETF equivalents and my own Roth IRA and Brokerage.

The WylieMoney Slowly portfolio has lead YTD, but since I am adding one fund per month, YTD is not really relevant.

I'll take a snapshot Monday night and review the final results for 2007.

WylieMoney 20 Mostly Managed

Three Fund Index

WylieMoney Slowly

Lazy 20 Mostly Index

ETF 20

S&P 500


Book Review: Navigating the Financial Blogosphere

I stumbled across Russell Bailyn's blog a while ago, and have enjoyed his articles so when he posted that he was publishing a book, I requested a copy to review.

Navigating the Financial Blogosphere serves as an excellent introduction to financial planning that references online (often free) resources for each topic covered.

There are as many approaches to 'providing' financial advice as there are financial advisers. And like anything, some are good and some are bad. On page one of Russell's book, he explains:

"All too often we trust the insight of so-called experts when it comes to managing our money and helping us make financial decisions. The problem is that many of these experts are driven by a profit motive, which leads to distorted information. Other experts have become comfortable with the idea of giving the same advice to different groups of people."

Russell goes on to explain his approach and why he works that way. As one of the "so-called experts" it is impressive to see that Russell explores what he is doing and why from the outset, in an open and honest way.

His book is organized and reads like a series of meetings with a financial planner. The very first topic talks about banking which inspired me to look at my own bank and make some changes. More about that soon.

Anyone interested in learning more about financial planning, especially those who are prone to browsing around online, should find this book very helpful. If you are thinking about hiring a financial planner, I strongly recommend you pick up this book first. If you read through this and research the topics you are most interested in, following the links provided, you will get far more bang for your buck from your planner as you will have a good base understanding of the topics you are exploring.

Many of the blogs Russell references are blogs I have found as well, but I still found the book well worth reading. The only criticism I have is that the chapter on Mutual Fund investing is a little light. Russell states, "In the blogosphere, at least at this point, no individual blogs have been written that strictly focus on mutual funds." I humbly submit that WylieMoney.com is a blog that explores mutual fund investing in depth. This book was being written while my blog was in its infancy... maybe I'll make the second edition. (hehe).

Anyway, I'll post soon about actions I've been inspired to take, reading Navigating the Financial Blogosphere. If you've got some amazon.com gift cards to spend, you can find Russell's book here:


Portfolio Update: 12/21/07 0% is better than a loss

The S&P 500 portfolio as represented by the ETF SPY, had a strong enough run to pull ahead of a diverse portfolio of 20 ETFs. Will S&P hold on to its 0.03% lead? The ETF 20 portfolio has climbed back from a loss to a solid 0%. The tension is intense...

A Week and one trading day to go!

Actually, an interesting change this week is the fall of the Lazy 20 Portfolio. The WylieMoney Slowly and My Roth IRA both jumped past the Lazy Index fund portfolio. I'm wary to make too much of any of these snapshots in December as any given day can see several funds making year end capital gains distributions and that can seriously throw the one day performance average. We'll see how things stand next week.

This graph representing performance since May shows a lot of swing, but a flat ending. Year to date, most of the portfolios were up around an average 9-11%.

WylieMoney 20 Mostly Managed

Three Fund Index

WylieMoney Slowly

Lazy 20 Mostly Index

S&P 500

ETF 20


Portfolio Update: 12/14/07 Capital Gains Bring Sadness

Ever look up your fund's daily performance and find it is down 10, even 12%? Every so often, a market will collapse, but when a market is down 1- 1/2% but your fund, which invests in a number of stocks in that market, is down 10% for the day, the cause is almost always... Capital Gains Distributions.

Look below at Friday's one day change for JAOSX Janus Overseas and and JAGIX Janus Growth and Income. Since I own both these funds, I am experiencing a little bit of the sadness about the taxes I will owe. Ok, the sadness has past. It is hard to feel too sad about paying taxes on 12% of a fund that has returned over 26% this year alone (JAOSX)!

Anyway, the daily numbers on several of the portfolios below are all over the place as distributions are made and I hypothetically reinvest them.

Despite that, and the recent slate of down days, the trends in the portfolios are continuing. The Three Fund Index continues to inch closer to first and the last place S&P 500 remains in last place but continues to post the best one week results.

WylieMoney 20 Mostly Managed

Three Fund Index

Lazy 20 Mostly Index

WylieMoney Slowly

ETF 20

S&P 500


Today is the day I'm adding SLASX: Selected American Shares

Today is the day I'm adding SLASX to the WylieMoney Slowly hypothetical portfolio. I'm not
actually adding money to any real funds since I have not had time to research which ones have and have not paid capital gains distributions.

Why buy a fund today (placing the order before 4pm!)? Read here.


Portfolio Update 12/07/07: Gains All Around

All the portfolios I track had a good week, but not much changed regarding the overall ranking. WylieMoney 20 Mostly Managed portfolio continues to lead, with the Three Fund Index right behind.

The S&P 500 continues to close the gap vs the other portfolios with bond, international and more real estate exposure. This week capped off a nice rebound from few weeks ago when all the portfolios were close to going negative!

WylieMoney 20 Mostly Managed

Three Fund Index
Lazy 20 Mostly Index

WylieMoney Slowly

ETF 20

S&P 500- SPY


Misleading Claims About Mutual Fund Turnover

Late November I mentioned that fool.com claims:

"Index fund turnover is around 5% or lower."

as well as:

"A managed mutual fund has an average turnover rate of approximately 85%..."

The statements are simply not true. I like the Motley Fool web site and have read many great articles there so I am surprised to find such inaccurate and misleading statements in the section of their site they are calling "Investing Basics."

I mentioned that the index fund claim struck me as odd because so many of the index funds I track have much higher turnover. A faithful WylieMoney reader let me know that morningstar tracks 706 index funds. Of those, 149 have a turnover ratio of 5% or lower.

So the claim 21% of index funds have turnover of 5% or lower as of the end of 2007 would be truthful. But the claim that "Index fund turnover is around 5% or lower" is just not true.

I imagine it is possible that at one time the average turnover for all Index funds could have been 5%. Perhaps more index funds track indexes which change more often now. Who knows?

The claim "A managed mutual fund has an average turnover rate of approximately 85%..." also does not ring true, but I can see where this may simply be bad grammar. As one who is not grammatically gifted, I have a little more sympathy here, but if what they are trying to say is: "The average turnover of all Managed Mutual funds is approximately 85%", then they should say that. They may also want to mention that general claims like this aren't worth much.

The reason this bothers me is that general claims about fund categories confuse people and create stereotypes that lead to bad decisions.

If you think that you can pick an index fund and will end up with turnover lower than a managed fund in the same category because of statements like these, you are making a big mistake. It is true that if you randomly pick funds from each type, you are more likely to come out with lower turnover from an index fund, but if you are picking funds randomly, you're not being smart.

Take VISGX Vanguard Small Cap Growth Index fund which has a turnover of 40%.
Compare that to BGRFX Baron Growth a managed small growth fund with 21% turnover.

Bottom line is, with Mutual Funds or anything else in life, general claims aren't very useful for informing specific decisions. If turnover is a factor in your choice of a fund (and it should be, even in tax deferred accounts) research the turnover whether it is an index, managed, or quant fund. Also, take everything you read on the interwebs with a grain of salt (this site included!).

I emailed fool.com about this. I hope they either change the wording or explain why I am wrong!


What credit crunch? Part 2

I just don't get it.

Maybe I'm being obtuse.

I read more and more articles about all the adjustable rate mortgages people have that are about to reset and how the entire country will go into foreclosure and the government and banks should do everything they can to help out all the poor souls who got in over their heads when times were good.

Actually, this article gives me some hope that the world is not going crazy... as it outlines a plan in which most people are left being responsible for their own decisions.

If you have an adjustable rate mortgage, refinance it, plain and simple. But wait you say, rates are not good... there is a credit "crunch."

Is it possible that the only crunch you should be worried about is the crunching of cold hard cash in you pocket after you lower your monthly payment?

I live near Boston, not a cheap place to live. 30 year fixed mortgage for no points available today at 5.625%.

I don't care what your lender told you your ARM might reset to, if you can't afford your home loan at 5.625%, you can't afford your home. (Sure there are evil lenders who mislead borrowers, and they should be punished and their victims should be helped).

If you live in the Boston area, check out Powder House. I get no compensation for the referral, I used them myself to refinance several years back for 5.375% with no points. Their closing costs are not the lowest, but for these rates with no points, I have not found a better deal.


December pick for the WylieMoney Slowly portfolio

The December pick for the WylieMoney Slowly portfolio is a Large Cap Blend fund. I have been adding one fund each month since May. Actually buying funds towards the end of the year can be tricky. Since these are hypothetical investments I have not been paying too much attention to when capital gains distributions are made, but it is not a good idea to buy a mutual fund for a taxable account right before a capital gains distribution. You end up paying taxes on gains that you did not make yourself.

There are lots of opinions about this topic but the bottom line is, if a capital gain distribution occurs in a fund you own in a taxable account, you will owe taxes on the distribution. So the factors to consider in your decision when to buy the fund should include when the distribution will happen.

One common misconception is that all mutual fund distributions take place in December. SSEMX, for example, made a distribution in mid-October.

Anyway, you can research when capital gains distributions will occur online on the mutual fund company's website, and even if a fund has not posted the distribution date, check when the fund made its distribution the year before to get a sense and contact the mutual fund company to see if you can get more info.

So now to see if BIGRX Amer. Ctry Inc & Grth (My original post) is still the best option in this category.

The answer is no. BIGRX American Century Income and GROWTH is not categorized as a Large Cap Blend Fund anymore and it has not performed as well as several other options.

A few funds show up in a search in Etrade's fund screener for Large Cap Blend funds when I screen for only no-load funds with turnover less than 75% and expenses less than 1%. A few Janus funds show up but when I look them up on Morningstar, they look more like Large Cap Growth funds than Blend funds (a mix of growth and value stocks). Plus, I already have several Janus funds and diversity among fund companies is important in addition to diversity across categories and investment types (Stocks, bonds, etc.).

So my next addition to the WylieMoney Slowly portfolio is SLASX, Selected American Shares S. With a crazy low turnover of 9%, and relatively low expense ratio of 0.9% this funds' solid, consistent performance makes it a good pick.

The low turnover should translate into a very small capital gains distribution (if it makes on at all). The fund's prospectus specifies that the distribution will happen in December.

So on the first seriously down day in December, I will add $2500 in SLASX to the hypothetical WylieMoney Slowly portfolio.

Portfolio Update: 11/30/07 Back in Black

All 8 portfolios climbed back into the black since May 1st and year to date. The WylieMoney 20 Mostly Managed portfolio remains in the lead.

The Three Fund Index continues to hold up well.

WylieMoney 20 Mostly Managed

Three Fund Index

Lazy 20 Mostly Index

WylieMoney Slowly

ETF 20

S&P 500


What is this thing called "Mutual Fund Turnover?"

oneopinion left a comment and asks: "...why is high turnover a negative in a mutual fund and why do you set a turnover rate of 100% as the maximum?"

Thanks for the question. First, let me clarify, I did not set 100% as a maximum, and I do not have a maximum for new picks for my hypothetical portfolios. I do, however, prefer low turnover so lower expenses or much better long term performance would be necessary for me to choose a fund with high turnover over a comparable choice.

The question was why?

The hypothetical portfolios I have been tracking are for a non-retirement account so any capital gains would result in hypothetical taxes owed and higher turnover is more likely to lead to more capital gains

Morningstar.com defines turnover ratio:

"This is a measure of the fund's trading activity, which is computed by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets. A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In practical terms, the resulting percentage loosely represents the percentage of the portfolio's holdings that have changed over the past year. A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities. Morningstar does not calculate turnover ratios. The figure is culled directly from the financial highlights of the fund's annual report."

The Motley Fool sums it up thusly:

"Turnover Rate and Taxes. A fund's turnover rate basically represents the percentage of a fund's holdings that it changes every year. A managed mutual fund has an average turnover rate of approximately 85%, meaning that funds are selling most of their holdings every year. Because buying and selling stocks costs money through commissions and spreads, a high turnover indicates higher costs (and lower shareholder returns) for the fund. Also, funds that have large turnover ratios will end up distributing yearly capital gains to their shareholders. Shareholders will have to pay taxes on these gains, and paying these taxes can be a real killer. Keep an eye on the turnover rate of any fund you own, and look to own funds with low (preferably no higher than 25%) turnover rates. (Index fund turnover is around 5% or lower.)"

Emphasis added.

I have no idea why fool.com claims that index fund turnover is 5% or lower. In my portfolios of index funds and ETFs almost all the funds have turnover much higher than 5%.

Take VIGRX Vanguard growth index. It has a turnover ratio of 28%. Not bad, but nowhere close to 5%.


Portfolio Update 11/23/07 Emerging Markets and Domestic Bonds

Updating at the end of the week tends to smooth over the craziness that happens day to day. This past week stocks plummeted mid week, only to recover much of the loss on a big Friday Rally.

The WylieMoney 20 Mostly Managed Portfolio retains the lead, but the simple Three Fund Index portfolio is proving to be a contender.

When you look at the performance of all of the portfolios since May 1st, you will find that the top performer is Emerging Markets though these past two weeks have ended with a sharp decline in Emerging Market funds (SSEMX down over 13% since Halloween!). What may be surprising is that in many cases, the second and third best performers, better than general international index funds, are domestic bond funds. Click on the images below for a larger view. Are you reading anywhere else that domestic bonds have out-performed even international equity funds (excluding emerging markets) over the last 6 months?

When investors move from stocks to bonds, that often portends ruin:

Will that be the case for 2008? Only time will tell.

WylieMoney 20 Mostly Managed

Three Fund Index

Lazy 20 Mostly Index

WylieMoney Slowly

ETF 20

S&P 500