Archives For December 2007

Ryan over at UncommonCents has written a pretty good post titled Working Backwards: What’s an Index? What’s getting confusing about indexing is the sheer number of indexes that are now available. For instance, here’s a list of some of the MANY indexes that are available:

Dow Jones




MSCI Barra


Standard & Poors


Wisdom Tree

I’m sure there are others that I haven’t thought of. If I have missed some, please leave a comment below and I’ll include them.

Which one should you use?

I would say the most-used index is the S&P 500 Index. However, that’s not to say that it is the most appropriate index to use for all portfolios. A portfolio that is invested in mostly small-cap stocks should not be compared just against the S&P 500 since it is composed mostly of larger companies.

Over the next few weeks I’ll take a more in-depth look at each of the index providers. Until then, read Ryan’s post if you are wondering what an idex is.

Here’s some “lovely” news on the credit card front:

According to Money, credit card defaults are alarmingly high. According to the article credit card delinquencies are part of the fallout from the subprime mess. So, this really shouldn’t be a surprise to any of us.

All of this bad news has hit the financial sectors pretty hard this year:

I wonder what this chart will look like at this time next year…

Don’t know what your New Year’s Resolution is going to be yet? Here are a few great ideas:

  1. Quit Smoking. You might think this doesn’t have anything to do with finances, but you would be wrong. Let’s say you smoke 2 pack a week and pay $4.00 a pack. Quitting will save you $576 a year. Actually quitting will save you more since you probably purchase other items every time you stop for cigarettes (a drink, gum, a magazine, etc.). Plus your health insurance costs might go down, and your health will improve dramatically, saving you untold amounts of money throughout your lifetime.
  2. Boost your retirement contributions by 3-5%. Here’s a (potentially) easier goal to implement. You probably won’t even notice the effects on your paycheck, especially if you utilize a Traditional retirement plan. If you get a raise this year, this should be even easier. If you think this will be hard, up your contribution by 1-2% a few times throughout the year. Then pat yourself on the back for being more responsible than most Americans.
  3. Pay off your credit card(s). Seriously. Unless you have more than $20,000 in credit card debt, you should consider really devoting yourself to this goal and accomplishing it by the end 2008. You can do it! Get a roomate or a part time job if you have to. Sell your car, or some possessions on ebay. Cancel cable, move in with your parents, ditch your non-thrifty friends. Oh, and quit spending your free time shopping!
  4. Improve your image at work. Your strategy here will vary depending on your situation, but it might really pay off to make a list of ways to impress your boss and co-workers this year. Get there a half hour earlier each day, even if it’s just to read some industry-specific periodicals. Spruce up your work wardrobe with a few professional pieces. Volunteer to serve on a committee or to organize an event. Even if the task seems frivolous (like planning the company picnic), it can show that you are invested/interested, put you in contact with some new people around the company, and get your name out there. Invite a few higher-ups to lunch and pick their brains; socialize more with co-workers; etc.
  5. Reconnect with your spouse. Again, this can be an indirecly financial resolution (and not just because divorce is seriously expensive). A good relationship can lower stress, which saves money on OTC medication, improves productivity, and might even make you less likely to spend money on things like alcohol, cigarettes, eating out, and shopping (all of which are sometimes used to escape/fill a void in your life). So take an interest in each other, show respect for what they contribute to the family unit, spend more time together (and not just around the TV). You’ll be surprised how far a few nice gestures can go!
  6. Get involved in a community organization. This can be great for expanding your network while simultaneously allowing you to contribute to the community in a meaningful way. Being a part of something that anchors you to the community is great for your sense of self-worth–plus all that time volunteering and in meetings is time you’re not spending at the mall, eating out, or otherwise wasting money. So get involved at church, join your HOA board, or volunteer to serve on the board of a non-profit whose vision you share. (If you don’t have any ideas, a good start might be to get involved with a non-profit your boss and/or company supports).
  7. Lose 15 pounds. Statistically, 80% of those reading this could stand to lose at least this much weight. Losing weight may involve spending a bit at the outset to join a gym or a program like Weight Watchers. But you’ll save on medical costs down the line, you’ll feel better about yourself, and you may be forced to drop some expensive habits such as drinking wine 3 nights a week in order to meet your goals. So next time you’re considering an afternoon of potential spending at the bookstore or mall, opt for a trip to the gym instead.
  8. Cut your travel budget. Go back through each month in 2007 and tally up how much (roughly) that you spent traveling. Most people know exactly what their cable bill is each month, but they don’t budget for travel because it’s such a moving target. You probably spent a lot more than you think you did. Easter with the in-laws? 4th of July at the lake? Ski trip in Feb? Family vacation in August? Thanksgiving? Christmas? New Years? Plan ahead for 2008. If you must travel, book well in advance for discounted air fair and accomodations. But why not also substitute a few of those more expensive outlays with more affordable experiences? Forego DisneyWorld for a fun weekend at the neighbors’ lakehouse (or your own), for instance.

Don’t try to do all these things all at once. You’ll be much more successful if you pick one or two and really focus your efforts on them. What are your New Year’s Resolutions?

More from Meg at The World of Wealth

Here’s my roundup for the week of December 17.

MBH warns to be careful about tipping our hand.

JD has some advice and tips for first time homebuyers.Here’s a couple of tips from me:

1. Don’t buy more house than you can afford.

2. Most people can and should forget about ARMs and instead go with a fixed-rate mortgage.

3. Don’t buy more house than you can afford.

Oh, and…

4. Don’t buy more house than you can afford!!!!!

Like me, NCN would like people to stop asking him if he would like to apply for a credit card.

Jim takes a look at six bank account types and how to analyze them.

Here’s Nickel’s thoughts on the new energy bill.

FMF on how to be rich.

The Finance Buff tells us why banks push us to use debit cards.

Jeremy takes a look at Fed’s plan to address the mortgage crisis. – I had meant to blog about this but never got around to it.

Jonathan wonders what if you had to live solely off Social Security? – It wouldn’t be fun, that’s for sure!

The Digerati Life: when beating the stock market is an illusion. – GOOD STUFF!

Finally, a GREAT BIG CONGRATULATIONS on recently ,a href=””target=”_blank”>celebrating her 2nd blogging anniversary! – She’s also going to celebrate her birthday tomorrow. Happy Birthday!

I was standing in line at the grocery store earlier this evening when I saw a copy of The Economist on the rack in the checkout lane. The cover story titled The End of Cheap Food caught my eye. It made me sad because I hate paying high prices for food. LOL! The article is an interesting read because it lays out the reasons why food is getting more expensive and why it’s likely to stay this way for a while. The main reasons for the rather large increase in food prices mentioned are:

  • China and India becoming wealthier nations. As wealthier nations, they are consuming more meat, which requires more grain to raise the animals.
  • America’s obsession with Ethanol is causing more farmers to grow corn, which comes at the expense of other crops. Less of the other crops means their prices rise. See how this all works together?

If you have a few minutes, I urge you to read the article. Read it and be prepared to spend more of your hard-earned dollars on food. Either that or consider allocating some of your money to a commodities fund like the iPath Dow Jones-AIG Agriculture Total Return Sub-Index ETN (JJA). Take a look at how it’s allocated:

iPath Dow Jones-AIG Agriculture Total Return Sub-Index ETN

With an expense ratio of .75%, it’s hardly cheap. I’m not recommending this particular ETN (it’s only been around since October 23, 2007), but it could be an interesting way to take advantage of the rising food prices.

Here’s a quote from John Bogle regarding the subprime mortgage crisis and the part that the rating agencies played:

I have always been skeptical about the rating services. I think there was tremendous reliance on rating services. It is irresponsible for a giant financial institution to let someone else tell them the quality of the investments in their portfolio. Asking the rating agencies, who get paid to rate each of these CDOs, was like asking the barber if you need a haircut!

Good point. However, I don’t think the financial institutions had any idea what their portfolios were worth!

The other interesting quote came when Bogle was asked where he thought the Dow Jones Industrial Average would be ten years from now:

Well, the Dow is a peculiar piece of work. The Dow yield is 2.2 percent now, vs. the S&P’s 2 percent. Since I’m expecting a 6 percent to 7 percent return on stocks, the Dow ought to grow at 4 percent to 5 percent a year. So over ten years, growing 4.5 percent a year, it would grow by 55 percent and so it would be slightly over 20,000, give or take. But anybody who is expecting that ought to be prepared for a lot of bumps along the way.

I’m not a betting man, but if I were, I would bet (justified or not) that the Dow would be higher than that in ten years. This is pure speculation on my part, but I just think there’s a lot of foreign money out there and that money is going to prop up our stock prices.

Finally, did Bogle change his rule of thumb that states that a person’s bond allocation should be equal to their age? For example, a 40-year old should have 60% in stocks and 40% in bonds. When asked how a person who was 20 years from retirement should invest, Bogle said (emphasis mine):

People are retiring later in life nowadays. I’m 13 years past 65, and I still have plenty of energy to work every day. I got up at 5:30 this morning in New York and was ready for an 8:30 meeting in Philadelphia. If I can do it, I don’t see why anyone else can’t.

Take someone who is 45. They should be 70 percent stocks and 30 percent bonds. People think I’m being too conservative, but I would remind them that corporate earnings grow at about the rate of our GDP. Corporate after-tax profits as a percent of GDP have gone above 10 percent for the first time in history. Normally they are 6 percent of GDP. I don’t look for that to go any higher.

Hmmm… Interesting stuff. Be sure and read the rest of Bogle’s interview in the 2008 Fortune Investor’s Guide.

The January 2008 issue of Money featured an interesting article by Michael Sivy titled The 4% Solution, which is about finding yield for a retirement portfolio. The article mentioned a simple portfolio that currently yields a little over 4%. As Michael mentions in his article, the reason 4% is so important is that most retirees are advised to limit their annual income from their portfolio to 4%. If a retiree can get that 4% in the form of yield, they shouldn’t have to eat into their principal.

The Simple 4% Portfolio

A Simple 4%-Yield Portfolio

To construct the above graphic, I used today’s prices for the current price and the distributions from the past 12 months for calculating the current yield.

It’s important to note that this portfolio is not without risks. For instance, 10% of the portfolio is invested in financial preferred stocks using the PowerShares Financial Preferred Portfolio (PGF). Although preferred stocks are safer than regular stocks, they are still subject to market declines. Another 10% is invested in high-yield bonds via Vanguard’s High-Yield Corporate Fund Investor Shares (VWEHX). Corporate bonds typically carry more risk than government bonds. The remaining 80% of the portfolio is invested in the SPDR S&P Dividend ETF (SDY), which tracks the S&P High Yield Dividend Aristocrats index.

I did a small amount of research and found out that the PowerShares Financial Preferred Portfolio holds 28 preferred stocks, the Vanguard High-Yield Corporate Fund holds 240 bonds, and the SPDR S&P Dividend ETF holds 50 stocks. This leads to the question: Is there enough diversification there?

Personally, I think I would prefer a more diversified portfolio. More on that later.