The Wylie portfolio vs Lazy and Kevin!

After yesterday's sell off, I went back and looked at the one day performance of my recommendations compared to the lazy portfolio. I anticipated that my managed funds (Well the NTIAX is an index fund but the others are managed) would have under performed Vanguard's low cost index funds. Now let me be clear- this is not an apples to apples comparison. My allocation is not invested in the same categories as the lazy portfolio. But if somone came to me and said- "I want to invest $10,000 in some mutual funds.., any funds worth researching?" These are the one's I would think about...

After realizing my funds did not lose as much, I ran the numbers on Kevin's actual allocation too.

I am not sure what this indicates exactly- the Vanguard funds invest very broadly so maybe this simply means that yesterday's sell off was very broad and that my funds were a little better positioned for this round. All my stock funds did better than the Vanguard stock funds but the real difference was my bond fund which is a not at all like the broad Vanguard bond fund of the lazy portfolio.

Anyway- not much use in looking at daily performance of funds for the kind of investing I am exploring- except to be sure you can stomach some sadness.



In honor of today's massive sell off, I'm changing the picture on my blog. The old picture is down on the right.

Ironically, the old picture was a bunker on top of Golden Gate Park North of San Fransisco. It's original purpose, I am told, was to serve as a guard post keeping an eye out for dangers from Asia during World War II.

The pundits say that part of today's bloodbath in US markets was due to a huge sell off in China's stock markets. So perhaps no-one was in the bunker...

Actually, if you look closer you can see clearly that there are people in the bunker:

I guess they do not know where the "Off" button for the Market is...

Anyway- my new picture is of a sunset behind the remnants of a forest fire in the Boundary waters Canoe Area. Every now and then, devastation rolls through. Hopefully new growth will come along more healthy and robust (and Green!) than before.


Misleading article about building a 'lazy' portfolio.

Paul Farrell wrote an article the tone of which is "even a second grader can invest in a simple portfolio and beat the market." As I started to read through this, I saw several things that bugged me so I decided to explore in greater detail.

The first thing that stands out is that to set up this portfolio you need a parent who has enough invested at Vanguard to waive the minimum requirements for each fund. So not any second grader could do this but second graders with parents who have some unspecified amount of wealth invested at Vanguard can do this.

Let's assume that not everybody has parents with huge investments at Vanguard but is looking for a way to begin investing. Does this approach still make sense? From what I can tell after poking around on Vanguard's site, this simple portfolio would be assessed a $30 annual fee until little Kevin's account was worth at least a quarter of a million dollars. In addition to that, each individual fund has another annual $10 fee until each holding is worth $10000.

So this lazy portfolio would cost $60 per year in fees. Now $60 is only a very small percentage of $9000 and these funds have very low expenses assessed within the funds themselves, but these fees make me mad anyway and should at least be mentioned.

Then, what really caught my eye was this chart which is terribly deceptive:

The $3000 minimums listed do not represent the allocations used to calculate the actual returns. There is a column called "Allocation" that clarifies the actual allocation used to calculate the returns, but these allocations are not allowed in Vanguard funds to for the typical investor with this much to invest. So for those of us whose parents don't have their nest eggs socked away at Vanguard, this portfolio, with equal $3000 amounts invested in each fund, would have under performed the S&P 500 over a 1 year period, not out-performed it as listed. And the performance above the S&P over the 5 and 10 year periods would not have been as great and none of these returns factor in the $60 in annual fees. Again these fees are not huge but over 10 years they total $600. 1, 5, and 10 year annualized returns with equal weight in the 3 funds would have been: 15.45% 9.38% 7.44% -not shabby, but not what is listed.

I do not want to be too critical of Mr. Farrell because I appreciate his approach in general: to advocate simple, diversified low cost portfolios that take very little management. But part of why I started my project was because none of the pundits writing about various methods for building portfolios actually ground their recommendations in the real world with portfolios you can really build with little money to start and with clarity about the fees.

What I am doing on my blog is using Etrade to propose a portfolio that you can actually buy, with $2500 minimums and no fee $100 monthly additions. Etrade has a $10,000 account minimum or an absurd $40 per quarter fee. So my hypothetical picks would not be good for someone with only $9,000 either. But if you have the $10,000 total, there is no individual fund fee or account fee in addition to this if you are using Etrade. The first four funds I recommend with $2500 minimums in each would total $10,000 but you should be sure and add a little more than this to avoid Etrade's absurd $160 annual fee in case these funds lose value in the short term.

I've written before about my issues with coming up with accurate statistics- indeed the chart above does not clarify if dividends are reinvested or not to achieve these averages. But I am going to show you the results of my picks according to the same source Mr. Farrell uses so you can compare:

The lazy portfolio beat my hypothetical portfolio over the past year, but my portfolio come out ahead over 3 and 5 year periods. The Mid Cap Growth fund I recommended has not been around for 10 years so I cannot compare a total 10 year performance, but the other three funds I recommend have all outperformed every one of the Vanguard funds over 10 years.

My point in all of this is that it would be nice if people talking about how simple it is to invest would be clear about fees and minimums and use actual, possible scenarios that anyone can follow (at their own risk of course!).


Tips for saving while keeping fit

Jonesy suggests: "Cancel the gym membership you never use and go for a run. Buy a set of used dumbells and exercise while you watch 24 and LOST."

and Sean adds: "You don't need the fancy equipment and gym clothing to sit in a chair and pump out a dozen bicep curls. A bit of a tangent, but when I still had my gym membership, I loved to go because they had tvs built into the cardio equipment. It was great for the winter, and it was a good motivator, too. 'If I stop now, I won't see the end of Seinfeld! Keep going!'"

"The other side of that is that I could never understand the people who would stand on a treadmill and flip channels for, literally, 5-10 minutes to find something good before starting up. You could have at least been walking! What a waste."
  • So to clarify- If you do not use your gym membership enough to justify the cost- cancel it and exercise at home. If going to the gym is important to you then do not cancel it to save money- instead, be sure you are not wasting time- or hogging the treadmill- by surfing and standing!
This also makes me think of another tip:
  • Be sure you are taking advantage of all the benefits of your health insurance.
Blue Cross (evil institution that they are- but that is another story) offers a $150 rebate per year if your membership costs at least that much.


Credit card offers and stopping junk mail

I get a lot of credit card offers. From time to time, I purchase something like a car or major appliance and will apply for a card or two offering 0% interest for a year so I can pay off the purchase over a long period of time at no extra charge. So while I find the credit card offers annoying and incredibly wasteful, I pay attention to them.

Last week a friend asked me if I knew of any credit cards offering 0% balance transfers to finance a new refrigerator and dishwasher. Instead of going through my junk mail, I went to the interweb. After a great deal of crazy and masterful searches on the google I found the incredibly obscure yet highly useful site:
I clicked on their balance transfer cards link and was able to quickly dig into the fine print to find some options with no balance transfer fees- one of three keys to using this technique without paying one cent. (The other two keys are to pay the minimum balance on time every month and pay the balance in full before the 0% ends.)

Then I realized... "I don't need this junk mail."

I used my mad google chops and found the Federal Trade Commission instructions for stopping unsolicited junk mail credit card offers. This page includes a number of steps to opt out of advertising abuse. The sad news about all this is that these blocks are temporary and even worse- in fine bureaucratic form- the time periods are not the same. This sadness is offset a bit by the astonishing fact, that the time periods are listed! Well except for when they are not...
  • Call 1-888-5-OPTOUT (567-8688) 2 years
  • Write the three major credit bureaus Equifax, Experian, and TransUnion and tell them to quit sharing your info with advertisers (click the link for addresses and a form letter to use). Not clear how long this will last.
  • The site to stop telemarketers is also included: www.donotcall.gov 5 years
  • And lastly, the Direct Marketing Association’s information is included so you can contact them and tell them to leave you alone. 5 years
I put myself on the do not call list and immediately (well after a few weeks) noticed a almost complete end to telemarketing calls. If the credit card offers list works half as well, the Lorax will be one happy mossy, bossy man-like creature.


IRA Rollovers and Roth IRAs

Sue Stevens finished her series of articles on IRAs and talked about Rollover IRAs and I learned something new! I had no idea that legislation was passed to allow people to take 401(k)s or 403(b)s and roll them directly into a Roth IRA- starting in 2008. I have 403(b) money in an old account and have pondered rolling it into an IRA and then converting that to a Roth, but that always seemed like a hassle- so I am interested to find out more about this.

Basically if you have a 401(k) or 403(b) plan and leave the company you are contributing to the plan through, you usually have three options.
  1. Cash it out and pay penalties and taxes (don't do it).
  2. Stop contributing, but leave it alone (some 401(k)s may not allow this)
  3. Roll it into a rollover (traditional) IRA and as of 2008, into a rollover (Roth) IRA
The other thing she mentions is that IRAs and 401/3(kb)s have different dates at which you can begin to take money out without penalty. You can take penalty free distributions from a Traditional or Roth IRA at 59 1/2 but you may be able to make withdrawals from a 401(k) or 403(b) at age 55 if you no longer work at the company you funded the account through.

There are other factors to consider when making this decision- but direct to Roth rollovers and thinking about access before 59 1/2 are good issues to be aware of.


Nice explanation of Traditional and Roth IRAs

Sue Stevens over at Morningstar has an easy to understand and very thorough overview of everything you should know about Roth IRAs. This includes more obscure options for claiming a loss, and good lists of how to make early withdrawals without penalty and without owing taxes.

She also did an overview of traditional IRAs and is planning to do an overview of rollover IRAs.


8 Food related tips for living below your means

  • Shop at Market Basket and Trader Joe's instead of Stop and Shop, Safeway, Bread and Circus or Whole foods. This can save you money even if you have to drive a little further to find a market basket. There are always one or 2 things that will be cheaper at some other store, but the prices for the exact same item at Market Basket compared to other stores you might be using is likely to disturb your calm. Also- they have fresher produce than the other stores near us...
  • Make your lunch at home. Once you start shopping at Market Basket, you will find that making 5 lunches for $10 is easy. Compared to $8 per day, eating out (I'm low-balling the cost of doing this in Boston where I work) you can easily save $30 per week or over $100 per month.
  • Geoff recommends: "Take your lunch to work. Throw together some leftovers." I include this suggestion as separate from the one above since bringing leftovers is not the same as getting in the routine of making your lunch and thinking about both, depending on how busy you are from week to week, is a good approach. If you are eating out at night or going out for lunch one day, and it is only a dollar or two extra for enough food to leave a full lunch worth of leftovers for tomorrow, pay the extra dollar or two to avoid spending eight more dollars tomorrow.
  • Holly Recommends: Plan ahead for food when traveling. Obviously if you do not travel a lot this may not save you a ton- but if you go skiing or to the beach on the weekends or constantly buy bottled water or snacks when stomping around town, you could easily save money.
  • Geoff recommends: "Only drink water at restaurants. Drinks are marked WAY up, and you need more water anyway. And you don't need the calories from soda or alcohol."
  • Sean adds: "And don't get alcoholic drinks at a chain restaurant that doesn't list the prices next to the drinks. They're way more than you realize. Even then, I've had some places do something like a bait and switch where I order one drink (margarita) and get something different (some sorta fruity margarita). No big deal, right? Well, it cost $2 more, plus he put in the more expensive tequila without asking. I took his tip and gave it to the next server that brought me water." (I like the way Sean ignores Geoff's advice to avoid alcohol but to be smart about ordering it. I too feel compelled to remind folks to approach all things in moderation and that includes saving.)
  • I would add that I have often found that when you eat at a chain you often pay more than you would for a locally owned restaurant in general. Finding good local spots as opposed to cheaper, but not so good restaurants is not always easy but digging around online can help a lot.
  • Furthermore, I am compelled to add- don't eat out often. If you want to save money, there is no way around it- eating out is expensive compared to what it costs to make a tasty nutritious meal. Plus if you save a lot not eating out all the time, you can splurge when you do go out, and actually enjoy a meal and a night that you would not be able to beat at home. So in opposition to the spirit of this list, here are some of my favorite expensive nights on the town:


Non-Ret: Small Cap Growth

My Pick: Baron Growth BGRFX

Searching for funds available from etrade for no transaction fee, I used the new screener tool to identify Small Cap Growth funds with lower than average turnover and expenses and sorted out the 5 best performing funds over the last few years.

Expenses for Small Cap Funds average higher than Large Cap Funds so below average can include a ratio over 1% but there are cheaper options like Bridgeway Small Cap Growth which has low .81% expense ratio. Furthermore, I own this fund and am a big fan of manager John Montgomery. Just dig around Bridgeway's site for a glimpse at a rare approach to running a company. One example, salaries at Bridgeway are capped at 7 times the lowest salaried employee. You'd be hard pressed to find a non-profit that holds to that standard, much less an investment company... And the updates Bridgeway sends out for its funds are the most sensible updates I have read. Most managers give 'updates' that are half sales pitch in disguise (or not so disguised) and half regurgitation of the conventional wisdom of whatever the macroeconomic trend was over the last quarter. John talks about what has happened with his holdings and how his approach is doing- he tells it straight. If you are curious about what I mean go here and download the September 10 2006 quarterly report.

More importantly, this fund has performed quite well since its inception, and even though it has lagged other funds in its category recently, I have confidence that this fund will do well in the long run. It uses a specific approach to picking funds that has not been rewarded recently, but by sticking with their approach the turn around should be fun to watch, even if it does not happen soon. The reason I am not picking it is that through etrade it has a $500 additional contribution minimum. This is frustrating because, Bridgeway itself has a $100 minimum and why etrade has upped this for this family of funds in particular escapes me. I confirmed Bridgeway's minimum and can confirm that they have great customer service, while trying to get anyone at etrade to respond with questions about this kind of thing can literally take months and seriously damage your calm. But that is a tale for another day.

The fund I am picking is curious because it came up as a Small Cap Growth fund and Morningstar, Yahoo finance, and Google finance label it Small Cap Growth but they all also label it Mid Cap Growth. Why do they flip flop?

Here is yahoo's take:

And here is google's:

Morningstar has the same assessment but their graphic makes it clearer that this fund is right on the line between small and medium sized companies as far as the companies it invests in. My suspicion is that the style box uses a weighted average and the 'category' is not weighted- regardless you can see that about half the fund is invested in 'medium' sized companies and half is in 'small' sized companies.

If etrade offered a no transaction fee growth fund that fit into the limits of this hypothetical portfolio that was significantly weighted in only small companies and had performed in line with the average small cap growth fund, I would likely pick it here, but no such fund is available.


Living below your means- three new tips

Thanks for the suggestions!

Sean posted an excellent tip:

"A trick I was taught is to pay yourself first. These investments are for you and your future and not to be considered another expense along with rent/mortgage, car payments, insurance, etc.

So, what you can do is direct deposit a piece of your paycheck into a separate account, and then use that account to either save for the initial investment, as you point out, or feed those investment accounts. This way, you never see the money, and, really, once you get used to that $50 or $100 not being in your paycheck from week to week, you don't notice it. And then you can increase it by living further below your means, piping a raise right into it, or some other method.

Something else I used to use when I didn't have a lot of money is sharebuilder.com. The fees add up quickly, but for a would-be investor without a lot of starting capital, I think it can be a good entry into the game."

I have not looked into sharebuilder.com and am curious how their fees work. Regardless, the pay yourself idea is a great tip, especially if your habit is to spend the money in your checking account.

David offers:

"I often buy generic products at the grocery store, and when my employer didn't pay for my lunches, I always brought a lunch."

We'll post more about packing your lunch later- and possibly we'll explore how to find an employer who will pay for your lunches, or maybe we will just mock David to try and abate our jealousy.

Finally, Holly wrote a post a while ago and suggests that you make your own coffee. This can easily save you $100 a month if you currently buy coffee out every morning. I like Holly's approach too- do not 'cut out' going to Starbuck's or Dunkin Donuts if you enjoy their sugary treats. Just do not go every day. And if you experiment, you will likely find you can make coffee you like more than what you are paying more for.

Please post any ideas you have as a comment to this post and I will add them to the list as well. You can also email your ideas to me at wyliemoney at gmail dot com.


Tips for living below your means

The hypothetical portfolio I am putting together is designed for an investor who wants to buy a selection of Mutual Funds and add to their investments by adding $100 per month to each fund. To put this plan into action, you would need to come up with up to $2500 per fund for the initial investment and then another $100 per month for each fund.

Here is a breakdown of the amounts for three, five and ten funds:
  • For three funds $7500 initial, $300 per month.
  • For five funds $12,500 initial, $500 per month
  • For ten funds $25,000 initial, $1000 per month
So how can someone come up with this much money on a modest income or on any income for that matter? The answer is simple- live below your means. Many folks live above their means and increase their debt month after month. This plan is not for them. Many spend what they make and as they earn more money, spend more. This plan is not for them. No matter how much you make, the way to save and build wealth is to live comfortably below you means. And while the approach is simple enough, executing is not always easy, especially if you live in an expensive city.

So I am going to start a collection of ideas to reduce the cost of living, making it possible to save and invest. Please post any ideas you have as a comment to this post and I will add them to the list as well. You can also email your ideas to me at wyliemoney at gmail dot com.
  • The first suggestion comes from Dave over at east3rd.com. Dave recommends bicycling to work in general and saving money is not his primary motivation- but any time you find a way to save $70 per month, it is an idea worth sharing.
  • Sean suggests paying yourself first by directing a small portion of your paycheck straight to a savings account.
  • David mentions buying generic products at the grocery store. I would add that you should not get hung up on only buying generic products. If there are one or two things you really think taste better, buy the brand you like and treat yourself.
  • Holly suggests that you make your own coffee. This can easily save you $100 a month if you buy coffee out every morning. I like Holly's approach too- do not 'cut out' going to Starbuck's or Dunkin Donuts if you enjoy their sugary treats. Do not go every day and when you do go, you'll enjoy the treat even more.