Archives For April 2011

NOTE: I updated the graphic so that it now also tracks the MSCI EAFE Index and the MSCI ACWI Ex US Indexes.

Here are the April total returns for the S&P 500, S&P Midcap 400, S&P Smallcap 600, Barclay’s Aggregate Bond Index, Oil, and Gold (click on the graphic to download the PDF).

It’s hard to believe that crude oil is up over 22% so far this year.

Of the 86 years of monthly data I have for the S&P 500, April 2011’s 2.96% total return ranked as the 33rd best April. The historical average return for April is 1.68% while the goemetric average is 1.459%.

I haven’t done a question of the day in a while.

Yesterday’s post got me to thinking about this. So, here’s today’s question(s) of the day:

Would you allow your grown child to live with you? Under what circumstances? Would you have rules?

Here are my thoughts…

I haven’t discussed this with my wife, but I might be willing to let a kid move back home if they went to college. They would need to get a job and they would need to live a like a pauper while they were living at home. I would require them to set up a savings account for an emergency fund and a downpayment on a house. I might also require that they give me account access to it so that I could hold them accountable. I would also require them to put the maximum amount into their 401(k). They would also need to contribute to the family food budget and handle some of the chores arount the house.

I don’t think these stipulations are unreasonable. What do you think? I hope it never comes to this, though.

Let’s say you make $75,000 per year and you are saving 10% in your 401(k). Now let’s say you get a 5% raise, which puts your new annual income at $78,750. Now, before you go make a budget based on your new income, I want you consider increasing your 401(k) contribution percentage by 1% to 11%. To see why, take a look at the graphic below, which shows three scenarios. The first column is the current income of $75,000 and a 10% contribution to the 401(k). The next two columns are at the new pay level. The second column shows what happens if the 401(k) contribution stays at 10% and the third column shows what happens if you raise it to 11%.

By raising the contribution percentage to 11%, you’ll accomplish:

1. Raising your contributions by $1,163 per year instead of just $375.

2. Your Federal income tax* will only go up $388 instead of $506.

3. You’ll still have a net income increase (after taxes AND 401(k) contributions of $2,200 over your previous income.

It’s amazing what a difference 1% makes. Sure, you could keep your contributions at the 10% level and still increase the dollar value of your contributions by $375 per year. But, by increasing the percentage amount by 1%, you’re taking advantage of the raise and bringing down your income tax liability and STILL bringing home close to $200 more per month. It’s a win-win situation.

That said, it’s VERY IMPORTANT that you make the changes to your 401(k) as soon as you find our about your raise. Otherwise, you run the risk of getting too comfortable (or dependent) with your new income and then it will be that much harder to increase your contribution percentage. That additional contribution amount could mean an additional $57,000 to your retirement plan in 25 years (assuming an 8% rate of return and not assuming future contribution increases).

This is how we build wealth.

* Based on 2010’s income tax brackets, standard deduction, exemptions, and the child tax credit (assuming a family of four).

I was going through my email and found a link to this interesting interview with Peter Schiff, author of one of my favorite books from last year, How an Economy Grows and Why It Crashes*. I thought this question and answer was interesting:

Question: So, with a more thoughtful and sober monetary policy from the central banks like the Fed and others, you’re suggesting that maybe oil demand wouldn’t be as high?

Schiff: Well, if you went to an auction and everybody had $100, nothing would sell for more than $100 because nobody would have more than $100. If you gave everybody $1,000 and you auctioned off the same merchandise, it would sell for more money because the people that are bidding have more money to bid.

And that’s what’s happening. All the central banks are printing money, and now that money is there, that money is chasing oil. They’re not pumping as much oil as the central banks are printing money. The supply of money is growing much faster than the supply of oil, so therefore the price of oil has to rise. That’s what’s going on.

The ironic thing about it is the Federal Reserve is likely to respond to higher oil prices by printing even more money, claiming that the higher oil prices will slow the economy. And they think that what they need to do is stimulate to offset that. And of course, by doing that, that just means oil prices will rise even faster, because then there will be even more money. The process will continue, on and on.

There’s no mention in the interview of speculation. Interesting.

*Affiliate Link

I have been wanting to do a community book review for a while now. Thomas Sowell’s Basic Economics 4th Ed: A Common Sense Guide to the Economy, would be a great book to start with. It’s a long book but it’s easy to understand and I think readers would get something out of it.

Here’s the way I see this happening:

• Bloggers could pick the chapter(s) they’d like to cover. Read and write a review of their chapters and post it on their blog.

• AFM readers who don’t blog but would still like to be involved in the project could write a review and submit it to me and I could post it for them.

The cool thing about different people writing reviews is that we can hear different opinions.

If you’re interested, leave a comment below. If you haven’t purchased the book, you can pick on up at Amazon* or pretty much any book retailer. Be sure and get the one that looks like the picture above (the 4th edition). It’s a thick book but don’t let that scare you away. Thomas Sowell is a talented writer and has a way of writing about economics that is both interesting and easy to understand. There are NO CHARTS OR GRAPHS in this book.

My target date to start this project is May 30th. That will give us plenty of time to get the books, read, choose the chapters we want to cover, and write the reviews.

Questions? Leave a comment below.

*Affiliate Link

There’s no getting away from taxes…

Washington considers annual flat fee for electric cars

“Electric vehicles put just as much wear and tear on our roads as gas vehicles,” said Democratic state Sen. Mary Margaret Haugen, the bill’s lead sponsor. “This simply ensures that they contribute their fair share to the upkeep of our roads.”

“…their fair share…”

That’s got to be one of the most obnoxious phrases that politicians use, in my opinion.

In Oregon, lawmakers are considering a bill to charge drivers of electric and plug-in hybrid vehicles based on the number of miles they drive. In Mississippi, lawmakers briefly considered a similar plan. In Texas, significant opposition scuttled an electric vehicle fee.

I’m against these fees. People pay fees when using electricity to charge their cars. I definitely don’t like the taxes to be based on the number of miles driven as it seems too intrusive and too much like a “big brother” scheme.

According to the article, the $100 fee would still be a bargain as people who drive a vehicle that gets 23 MPG an average of 12,000 miles per year, pay roughly $200 in gax taxes to the state of Washington.

I have been meaning to post an update on the 7Twelve Portfolio but haven’t done so this year. Here are the latest numbers as of this morning’s prices (you can click on the graphic to view a PDF version):

For those of you not familiar with the 7Twelve Portfolio, I would suggest you start here:

An Introduction to the 7Twelve Portfolio

10 Questions for Craig Israelsen, Author of “7Twelve”

The 7Twelve Portfolio’s Performance for 2010