John C Bogle, in his speech at The Money Show in Las Vegas, Nevada on May 15, 2006 divides the total stock market return into 2 parts:

1. Investment Return, consisting of the initial dividend yield on stocks plus their subsequent annual earnings growth, together constituting what we call “intrinsic value”; and
2. Speculative Return, reflecting the impact of changing price/earnings multiples on stock prices.

The Total Return is simply the sum of these two figures.

For example, if the P/E of a stock did not change, a 4 percent dividend yield plus earnings growth of 6 percent would give a 10 percent investment return. If the P/E rose, say, from 15 to 20 over 10 years, that 33 percent gain would add almost 3 percent per year to the return, increasing it to 13 percent. If the P/E were to decline to 12 over that same 10 years, it would reduce the returns by more than 2 percent.

According to Bogle, it really is that simple. As proof he points out that over the past 100 years the average annual total return on stocks was 9.6 percent, virtually identical to the investment return of 9.5 percent. 4.5 percent of the return was from dividend yield and 5 percent from earnings growth. Speculative return, therefore, contributed a mere 0.1 percent per year over the long haul, but it created many fluctuations in the short-term.

Bogle’s message:

. . . in the long run, stock returns depend almost entirely on the reality of the investment returns earned by business. Momentary investor perception, reflected in speculative return, proves to be an illusion that counts for little.

My question is, should P/E ratio be used to determine when to buy into the market? Or, do I buy in even when the P/E ratio is at a historical (and unsustainable) high? It would seem that the only logical time to buy is if the P/E ratio is below a certain level that would make the long term holding of the equity more profitable than holding bonds or other interest bearing assets.

John C Bogle, concludes his speech at The Money Show in Las Vegas, Nevada on May 15, 2006 with a discussion on the selection criteria for mutual funds. Concluding that fund expenses, or the cost of ownership, matter.

The great irony of investing, then, is not only that you don’t get what you pay for. The reality is quite the opposite: You get precisely what you don’t pay for. So if you pay for nothing, you get everything.

Because the expected return of the average equity fun is completely unacceptable, Bogle outlines 4 possible investment strategies:

1. Select the funds with the best recent short-term records.
2. Select the funds with the best long-term records.
3. Select the funds with the lowest costs and lowest portfolio turnover.
4. Select an index fund that simply holds the stock market portfolio.

Selecting Short-Term Winners

Mutual fund investors really like to select funds that have the best recent returns.
How has that strategy worked?
According to Bogle, the top ten performers among the 851 equity funds in operation during the great market bubble of 1997-1999 generated an average return of 55 percent per year during the upswing, for a cumulative return of 272 percent for the full three years. Then, when the bubble burst, over the next three years (2000-2002 inclusive), all these funds dropped and not a single fund in the original top ten ranked higher than #790 out of the original 851 funds! So that the top ten funds found themselves in the bottom 5 percent. For the full six-year period the cumulative return averaged 7 percent, not too bad if you ignore the fact that the S&P 500’s cumulative gain over this same period was 30 percent. But for most shareholders of these funds, it was a real disaster. Most began investing after seeing the returns achieved in the first 3 years, and so totally missed the upside but then caught the full force of the downside. Their investments tumbled by an average of 34 percent per year over three years.
So they did not see a gain of 7 percent, but a loss of 57 percent for investors -— more than half of the capital they had invested. For Bogle the message is clear: avoid performance-chasing based on short-term returns.

Selecting Long-Term Winners

If Short-Term Winners are losers, how about investing in funds that have the best return over the long-term?
What at first glance might appear to be a good idea, doesn’t look so great after Bogle puts the numbers to it.

Of the 355 equity funds in existence 35 years ago in 1970, 223 -— almost two-thirds -— have gone out of business!
60 of those that remained had completely underperformed the returns of the S&P 500.
Another 48 funds provided returns within one percentage point, plus or minus, of the return of the S&P 500. Leaving just 24 ‘winners’. Meaning that only one fund of every 14 beat the market by more than one percent per year. 15 of those 24 funds beat the S&P 500 by less than 2 percent per year. So nine ‘real winners’, funds that out-paced the market by more that 2 percentage points over 35 years, remain.
Interestingly though, six of those nine winners achieved their gains over 10 years ago, after which their more recent records turned lackluster.
One of these six funds reached its peak way back in 1982, and two other in 1983, and the remaining three peaked in 1993 or earlier.

Only three funds, Davis New York Venture, Fidelity Contrafund, and Franklin Mutual Shares, 1 out of every 120 that started the race, have been able to maintain a record of sustained excellence.
But as Bogle warns, “before you rush out to invest in them, think about the odds that they will continue to outperform for the next 35 years, let alone the odds that they will even exist 35 years hence.”

Selecting Investments that Operate at Low Cost

Neither short-term performance nor long-term performance cannot help us select the right fund because performance comes and goes. But, according to Bogle, costs go on forever and are a factor that usually persists over sustained periods of time. Included in cost is not just the fund’s expense ratio but also the cost of its estimated portfolio turnover.
Portfolio turnover has to be included because transactions cost money and Bogle’s rule of thumb is that turnover cost is equal to 1 percent of turnover rate.

The combined costs range from 0.9 percent in the lowest cost quartile to 3.0 percent in the highest cost quartile.
That difference of 2.1 percentage points is a large portion of the 2.7 difference between the returns of the two groups over the past ten years. But there is more. The low-expense, low-turnover funds also assumed 34 percent less risk giving an annual risk-adjusted return of 3.8 percentage points. When these returns are compounded over time, the difference skyrockets.
According to Bogle, “fishing in the low-cost pond” should enhance your returns, as evidence that while the value of the high-cost funds did double over 10 years, the value of the low-cost funds tripled.
Yes, costs matter!

Selecting Index Funds that Own the Entire Stock Market

If low cost funds are good why not focus on the lowest-cost funds of all, index funds that own the entire stock market? Such funds often have expense ratios less than those for the low-cost quartile. Using a complex exercise called “Monte Carlo Simulation,” Bogle says we can project the odds that a passively-managed index fund will outpace an actively-managed equity fund over various time periods. The result: In any one year, about 29 percent of the active managers would, on average, be expected to outpace the index; over five years about 15 percent would be expected to win; over 10 years, 9 percent; over 25 years, 5 percent, and over 50 years just 2 percent of active managers would be expected to win.

Are you feeling lucky? Think you can pick that 1 out of 14 that will outperformed the S&P 500 by 1 percent or more per year over the next 35 years? Selecting that 1 fund is rather like looking for a needle in a haystack. If you want to invest, and not gamble, Bogle suggests investing in stock index funds (and bond index funds) which he says constitute the overriding portion of his own portfolio.

If, as I said at the outset, the road to investment success is hazardous, filled with dangerous turns and giant potholes, never forget that simple arithmetic can enable you to moderate those turns and avoid those potholes. So do your best to minimize your investment expenses and your own emotions, rely on your own common sense, be very careful, and then stay the course.

I just read about the Citi Driver’s Edge Platinum Select MasterCard. It has a number of features that look fantastic:

• You get rewards just for driving. You’ll earn $1 in Drive Rebates for every 100 miles you drive—up to $500 in Drive Rebates a year. Drive 20,000 miles a year? That’s $200 a year just for driving! To track miles and get rebates you just mail in your receipt whenever you get an oil change or other receipt.

• 6% cashback on gas for the first year. Obviously driving a lot = $$$ for gas. Assume you get 20 miles per gallon. Driving 20,000 miles, that’s 1,000 gallons. At $3 a gallon, that’s $3,000. Times 6%, that’s another $180 cashback on gas alone. (My take on this is that at $3.00 a gallon it is a savings of 18 cents per gallon.)

• You also get 6% back at supermarkets and drugstores for the first year (3% after that). You earn 1% on everything else. Here is Citi’s example chart of how this could add up:

Any catches?

• There is a cap of $1,000 per year.

• If you don’t make a purchase in a year the rebate will expire and points must be redeemed within 5 years.

• The DriveRebates are redeemable as straight cash only towards car expenses. But that’s any car expenses - buying a car, leasing a car, oil changes, new tires, repairs, etc.

• They can also be converted to ThankYou points. So, $100 in Driver’s Edge rebates can be converted to a $100 Gift Card at Target, Chevron, Gap, etc.

Thanks to MyMoneyBlog for pointing me to this card. Have signed up and this will now be my regular card for monthly expenses.

Andrew Feinberg has an interesting article on Kiplinger, Boiled Shrimp and the Sunk-Cost Fallacy, dealing with our tendency to throw good money at an investment that has gone bad.

I know dozens of friends, clients and acquaintances who under perform the market largely because they can’t part with their losers. If they buy a stock at $50 and it falls to $30, the last thing that they think about is selling. They focus on their sunk cost of $20 per share and all they want to do is get even. The fact that the stock may have plunged from $50 to $30 for a very good reason doesn’t interest them. They can’t sell because they have a large sunk cost and because they believe that, by not selling, they are somehow avoiding the loss.

Now, when this $50 stock reaches $5, they really, really can’t sell. Now it’s even more painful than before. The sunk costs are greater. The wounds to the ego are greater. And besides, math illusion enters the picture. Almost everyone thinks it is easier for a $5 stock to double than it is for a $25 stock to do the same. (That’s actually not true — low-priced stocks under perform every other kind of stock — but people intuitively believe it anyway.)

But what is an investor to do? Cut your losses and run!!

But the reason economists call it the sunk-cost fallacy is because your future attempt to enhance the value of your portfolio should be independent of what has occurred in the past. It is perfectly irrelevant that JDS Uniphase (JDSU) once traded for $150. The only interesting question is whether the stock is a buy or sell here at $3.59 per share. (Focusing on the $150 price is called anchoring, and it is yet another bane of investors.)

He gives a real good real world example:

You buy two nonrefundable movie tickets in advance. In between your purchase and the time of the show, you discuss the movie with 12 people you know well. Each tells you that you will loathe the movie, that it is the cinematic equivalent of Chinese water torture. Would you go see it anyway because you’ve already spent $24? A behavioral finance expert would say you shouldn’t. Why compound your financial loss by spending two or more hours of your life being unhappy? Why not do something more enjoyable instead? Why throw good money — in this case your enjoyment of life, which is what money sometimes helps you buy — after bad?

Reminds me of the story of the guy who tossed a $20 bill down the outhouse hole — when asked why he said he had dropped a dollar but had to make it worth going after.

An article in the Fort Wayne News-Sentinel reports on a Junior Achievement poll stating that one of every 10 teenagers uses credit cards and that some are as young as 13! I wonder if the kids are paying their own bills or if mom and dad are paying most of these?

According to Junior Achievement and the Allstate Foundation, it would take a teen making minimum payments nine years and almost $2,000 in interest fees to pay off a $1,000 card balance at an 18 percent annual interest rate.

Since it takes 10 years to clear your credit once it has gone bad, is it any wonder that so many people under 25 file for bankruptcy?

Survey Highlights

• Only 10.3% of respondents indicated that they own credit cards, but as teens grow older, incidence of credit card ownership consistently climbs. Among teens ages 13-14 only 5.0% reported owning credit cards. At age 17, the percentage of ownership climbs to 9.8% and then doubles again to 19.6% for teens 18-or-older.
• Only 4% of students reported being victims of credit card fraud.
• Of teens owning credit cards, 83.6% reported paying the balance in full each month. Only 0.7% admitted to occasionally skipping payments. The minimum payment is made by 15.7% of teens.
• The most frequently charged item is “clothes,” with 67.1% of teens making this purchase with their credit cards.
• Teens are not reluctant to use the Internet to make purchases. Results indicate that 59.3% of teens have made online purchases with their credit card.
• Do teens make huge purchases on their cards? Not according to the I-Poll results. Nearly three-fourths (73.8%) charge $100 or less per month. Included in this percentage is the 44.8% who charge less than $50.
• Almost a quarter of all teens (22.7%) pay for less than 15% of their own expenses. Those self-sufficient teens who pay 76% or more of their expenses represent only 20.1% of students surveyed. As teens grow older, they take responsibility for paying a greater share of their expenses.

If you are tired of getting offers for credit cards in the mail you can opt-out simply by going to the web site http://www.optoutprescreen.com or by calling (888) 5OPTOUT.

We are always being warned that these offers, in the wrong hands, are prime material for identity thieves to use to perpetrate their deeds. So, if you don’t want to be shredding 10 offers a week, you can now opt-out. If, on the other hand, you are looking for a better deal on credit card interest rates or looking for 0% balance transfers then you might want to continue getting these offers.

If you do opt-out, you can always sign back up by calling the number or going to the web site again.

In the 5th chapter of The Automatic Millionaire, Bach discusses the necessity of putting money aside in case of emergency; whether the emergency be a job loss or medical bills. He calls this the “sleep well at night” factor. Most people live paycheck to paycheck and many families depend on 2 paychecks to make ends meet. He credits his grandmother with telling him when he was younger, “when the going gets tough, the tough have cash.” We may not be able to prevent bad things, such as a job loss, fire or flood damage, or becoming disabled, from happening to us but we can protect ourselves financially by having a cushion of money available (and, although he does not mention it, appropriate insurance).

Bach sets up 3 rules for setting up your emergency fund. First is to decide how big a cushion you need. He recommends having at least 3 months worth of expenses set aside (note this is not 3 months worth of income). Although he says more money can be put in this emergency fund, I disagree. Your regular investment account can be tapped after three months. This emergency fund is to give you liquidity in case of emergency. Your regular investments should be earning a better return than your emergency fund and should be accessible within 3 months of the emergency, if needed.

The second rule is not to touch the emergency fund. This money is for true emergencies. He compares it to a fire extinguisher that should be used only in case of fire not every time you think you think you smell smoke. He describes a real emergency as something that threatens your survival — not just your desire to be comfortable.

The final rule is to put this emergency fund money in the right place. The money needs to be earning a decent return and regular savings accounts and suitcases in the back yard just won’t cut it. He suggests shopping for the best money market rates at regular local banks as well as at online banks or to use government I-Bonds. He gives a list of online banks that would be worth looking into and does warn that some banks have minimums required to open a money market account but many will let you open an account with a smaller amount if you have money direct deposited into it. The problem I see with the government I-Bonds is that they have penalties for early withdrawal, so investigate these carefully before using them.

In the course of his discussion he suggests putting at least 5% of your salary away each month towards this rainy day fund. There is no discussion if this 5% is in addition to the 10% minimum he suggested for your retirement fund or if it is done in lieu of retirement planning until the fund is built up. Again, I think his emphasis is so much on the “Automatic” in the title, that he is not really worried about making a coherent, step by step plan.

Along this same vein, Bach mentions, almost as an afterthought, that you should not ignore your credit card debt while building up this emergency fund. Instead he says you may want to set aside just one month’s worth of expenses until you are able to get your credit card debt paid down. I think that Dave Ramsey is more on track in this area, just $1,000 set aside until you are able to get those pesky credit cards paid off.

I just saw that the Personal Finance Course offered at the University of Utah has been put up on the web. The site has the class syllabus, overheads used in class, and a spreadsheet that contains just about every form and calculation you might need.

HatTip: savvy saver for pointing to this Personal Finance class.

Over at Seattle’s Rain City Guide, Eileen wrote about the fun of owning multiple companies and the necessity of keeping the tax man happy. She brought up some things I never thought about such as having to have one of your companies charge sales tax to each other when they are both working on the same project! She just went through an audit and it sounds like it was a painful process.

For example, if I own two companies, a construction company and a company that buys property, subdivides, remodels, build new, etc., and if an employee from the construction company builds for the venture company, then I must charge sales tax to myself!. Yes, I know the LLC’s and the Inc.s are their own entities, but it never occurred to me that I’d have to charge myself sales tax and give it to the state even if I’ve already paid sales tax at the point of sale. Similarly, if I bring my computer from home (or office furniture or ANYTHING and GIVE it to one of my companies, I must again pay sales tax. I own the computer, I own the company, I paid sales tax when I bought the computer. However, the state wants it’s $ so they consider that I sold the computer and therefore must pay sales tax.

Another example. If the construction company pays an architect for plans for the venture company, then I must charge tax and pay it to the state, even though architects are a service industry and don’t incur sales tax. I could elaborate but it’s just more of the same. Reminds me of my restaurants I had in the 80’s. I had a similar audit and because I gave free meals to my employees(100 of them at $2/day for 5 years), I had to pay sales tax to the state on those FREE meals. Go Figure.

But, lesson learned and I’m now cutting paychecks out of 4 different companies. Four sets of W-2’s, etc for each employee. Yuck

The restaurant example also floored me! I would never think that I would have to pay sales tax on something I gave my employees! The taxman though wants to get his cut any way he can!

There are some credit card terms that can be especially problematic that you should be on the look-out for:

• Two-Cycle Billing
  Think you paid off your credit card? Think again. More and more credit card companies are using what is called “Two-Cycle Billing” which penalizes customers who occasionally carry a balance If you didn’t get the full balance paid last month, but paid it off this month you would expect not to have to pay any finance charge this month. Not so. With the two-cycle billing system, if you do not pay your balance in full last month, you will have an interest charge this month for the amount that carries over, even if you pay it in full this month.
• Universal Default
  Universal default means that your credit card company can raise your interest rate if you’re late on another credit card or bill. In other words, if your credit-history takes a hit, so will your interest rate.
• Over-Limit Fees
  If you have maxed out your credit card but continue to charge, don’t expect the charges to be declined. No, your credit card company is more than happy to charge you an over-limit fee of $30 or more each time you go over your credit limit.
• Close Early on Due Dates
  Many credit card companies now consider your payment late if it arrives on the due date after a certain time of day, not withstanding the fact that the mail never arrives before that time. Late payments will incur a late charge and can, of course, jack up your interest rate.

I was just reading a post over about budgeting over at lifehacker.com and was amazed at some of the comments. The number of posts by people in their 20s who have outrageous student debt and low paying jobs really floored me. Most were complaining that it is impossible to set aside 10% of your income every month, let alone the 20% the article suggests. But the numbers in this comment really floored me:

Hrm. I’m a college student and I’m not getting rich by any means. I also live at home, and work part time. That said, I pay for all of my own expenses (including what amounts to slightly more than my board and utilities costs), and I save 20% of whatever I bring in in a given week. No matter how big or small said check is.

I started a Roth IRA when I was 19 with $600. I’ve grown that in value to ~$1500 in three years. I haven’t contributed anything to it since.

I’m also up to my ears in student debt: $132,000. So I guess that makes me worse off than most all things considered…

So he is still in school, but has already chalked up $132,000 in student debt! What kind of a job would you need to be able to get to make that kind of expense ‘justifiable’? The reason I ask is there are other comments like this one:

Most people I know have college degrees and make $10-15/hr in lower-level white-collar jobs. They need a reliable vehicle to get to work, because for most of the US, this is a car culture. Most people I know are relatively maxed-out without frivolous spending; they might be able to manage 10% if they never ate out (including fast food), did not eat organic, and never went anywhere. Most people are not able to hack a lifestyle quite that austere, especially with stressful, low-paying, and unsatisfying jobs. (Should they quit? Sure. Can they? Not realistically.) So I don’t think we’re necessarily talking about the guy with the BMW whose girlfriend has the Louis Vuitton bag… we’re also talking about the guy who just wants to go see a first-run movie once every few months.

The comment author might need to reevaluate the definition of ‘reliable car’. A 3 year or 4 year old Ford Focus is a reliable car. A new or newer Toyota Camry is a splurge.

Richard Jenkins has an thought provoking article on MSN Money, A simpler way to save: the 60% solution. Jenkin says that after 20 years of doing regular budgets he has found that when money gets tight it is becafuse his committed expenses exceed 60% of his income. Much like how a bank determines how much house you can afford as a percentage of your income, Jenkin realized that when his regular, committed expenses exceed the 60% mark, he began to run into financial trouble. Lets look at how Jenkin defines his system.

Committed expenses include taxes, insurance, charity, regular bills, and basic living expenses such as food and clothing. I wonder how to include clothing as a regular expense. My family may go months between expenses for clothing. Under my current budget system I set aside a dollar amount each month that is held in reserve until needed, but that does not sound like what he means as a ‘committed’ expense, but more like the next category, “irregular expenses”.

Jenkin describes “irregular expenses” as a short-term savings fund that can be transferred to checking as needed. This fund is designed to pay for things like vacations, home and car repairs, furniture, and new appliances. From his description these all seem like big ticket items, but I wonder if other expenses would go in here? My AAA Motor Club renewal? Clothing? Haircuts?

The next category is “fun money” to spend as you see fit, for comic books, eating out, music, your hobbies, etc. Jenkins allocates 10% this category, but for our family that would be extremely excessive. I doubt we spend more that 5% in this category each month. Possibly this is because with 6 kids still at home there are too many regular, committed, expenses to be able to afford much more.

This leaves us with 20% of our income. Jenkin has half of the 20% in to retirement savings account such as a 401k, IRA, or whatever account you use to save for retirement. The remaining 10% is put into long-term savings (or debt reduction if you have unpaid credit card balances). This money is being set aside for future car purchases, major home fix-ups, and other investments.

So, in reality 10% is truly being saved for retirement and the rest is either being spent or being set aside to be spent. 10% towards future big ticket items, 10% towards personal spending money, 10% towards irregular expenses, and the remaining 60% goes towards regular monthly expenses. The key is watching that you don’t make too many commitments and exceed your threshold for monthly expenses.

I like the simplicity of this plan, but am afraid it may only work for those who, like the Jenkins, already have budgeted for quite awhile and already have their cash flow under control.

The real secret to building a budget that really works isn’t tracking what you spend, any more than counting calories is the secret to losing weight. The key is creating a sustainable structure for your finances, one that balances spending and income and that leaves enough room to handle the unexpected.

David Bach gives the third of his secrets to financial security in this chapter of The Automatic Millionaire. The first two were 1) Pay Yourself First 10% of your pretax income and 2) Make it Automatic. The third secret is to Buy a Home and Pay It Off Automatically. Bach gives reasons you should buy a home, reasons you should pay it off, and reasons you should do it automatically.

He begins by saying that the first landlord you should become is your own. Turning some statistics on their head to say what he wants, he points out that since homeowners are 31 times richer than renters you should become a homeowner so you can be richer. He gives 6 reasons why your first step should be to buy a home: forced savings, leverage, OPM - Other People’s Money, tax breaks, pride of ownership, real estate has been a great investment.

He then discusses paying the mortgage off early either by using a biweekly payment plan or by sending in extra money with each payment. I have never understood the biweekly plan. Unless the homeowner is paid biweekly, where are they going to get the money to make the extra payment and how do you budget for it? Much more reasonable to pay extra with each payment. Also, earlier in the chapter Bach talks about the advantage of using leverage and OPM as positive reasons for buying a home, why is he now advocating paying the home off early rather than investing in more real estate?

And finally he advocates setting up your mortgage payment to be paid automatically by your bank each month so that you don’t have to think about it and you won’t be tempted to send in just the regular payment instead of the extra.

In this next-to-the-last chapter of The Automatic Millionaire, the author, David Bach, deals with what most personal finance writers place higher on the list, paying off your credit card debt. Bach states that Automatic Millionaires do not do debt, they only borrow to pay for things that appreciate in value, like a home.

After going through some pretty sad statistics on credit cards, Bach sets up a couple of steps for getting rid of your credit card debt:

Stop Carrying Credit Cards
You cannot get out of a hole if you keep digging. Recovering alcoholics do not carry a flask with them, just in case, neither should you. I don’t know that you need to destroy all your credit cards, but I do agree with the author that there is no need to carry them around with you.

Renegotiate Your Interest Rates
Here the author gives some advice on how to negotiate with your credit card company to get a lower interest rate. I have done this, and don’t call without ammunition — know what good deals you can get, because the first thing they offer you will not be their best offer.

Consolidate Your Credit Cards to the Lowest Rate Cards
Actually part of the above step, as you are talking to your credit card company, ask them if they also have a ‘deal’ for transferring balances, and let them know you are asking all your credit card companies for their best deal. Be careful of any fees for balance transfers, although if it reduces the interest rate a $50 one time fee may not be a bad deal but $0 is better.

Devote Half of Your “Pay Yourself First” Money to Paying off Credit Card Debt
Here again Bach deviates from the standard personal finance advice. Most writers have you pay off all your credit card debt before starting your retirement fund. Bach’s proposes using half of the 10% you are setting aside for your “Pay Yourself First” money to pay off your past. He contends that people need the emotional satisfaction of building for the future while paying down their debt.

Use the DOLP Method to Pay all Remaining Credit Cards.
This is Bach’s cute acronym for “Dead on Last Payment” since he is going to have you cancel each card after it is paid off. No matter this may hurt your credit. The actual ‘method’ of this system is to divide each card’s balance by the minimum payment for that card and pay the card with the least number of remaining payments off first with your extra cash. He does not mention snowballing the minimums together as you pay them off like most other writers.

Automate Your Credit Card Payments.
His final step is, of course, to make this all automatic by having your credit card companies auto-deduct the payments from your checking account each month or using bill payer option with your checking account. I don’t think I would want to give my credit card company access to my checking account but would have no problem setting up automatic payments from my checking account to the credit card companies using the bill payer option. It especially makes sense to set it up so that the minimums come out each month, then you can send in any extra to pay them off early.

In order to increase my net worth I am investigating rental property. I know nothing of being a landlord and so have begun my research on the internet and at my local library. I am not 100% sure that I have the temperament to be a landlord but I am interested in investigating the possibility. I also know some people who own rental property and will pick their brains as soon as I learn enough to know what to ask.

So far I have found three web sites that look to have quite a bit of information. Here are the sites I have investigated so far:

• FatWallet Investment Forum - especially the 1600 messages in the “Investment / Rental Property” thread.
• MrLandlord.com - “where rental owners ask landlording questions and get answers and tips from other landlords”.
• Creative Real Estate Online - “Financial Independence through Education”

The books that I have checked out of the library include the following:

• The New No-Nonsense Landlord by Richard H Jorgensen
• Landlording: A Handymanual for Scrupulous Landlords and Landladies Who Do It Themselves by Leigh Robinson
• The Landlords Handbook by Daniel Goodwin, Richard Rusdorf, & Barbara McNichol
• Simply Essential Landlords Kit with CD by Timothy Madden
• How to Find and Manage Profitable Properties by Robert Irwin
• Property Management for Dummies by Robert Griswold
• How to manage apartments for maximum cash flow and resale value

As I go through the books and websites I will post my impressions.

I listened to Paul Merriman of Merriman Capital Management give his ‘The Ultimate Buy-and-Hold Strategy’ workshop online. He makes a very good argument for diversifying your portfolio through no-load mutual funds. I found that Merriman’s article on this subject has also been updated, showing how a series of simple concepts can benefit patient investors. This update to the strategy also incorporates the five intervening years of returns and adds a new portfolio to the mix.

He recomends putting your ‘investment plan’ into writing so that it is mechanical and you are able to remove emotion from the buy/sell process. My summary of the strategy is designed to help me ‘think-through’ his advice and write my thoughts as I do so.

According to Merriman, the average investor is unable to successfully use market-timing strategies. His investment firm decided to seek out a buy-and-hold strategy that could be be used to increase investment returns and reduce risk.

In theory, a “perfect” investment strategy would be cheap, easy to implement and risk-free. It would make you fabulously rich in about a week. Tax-free, of course. We haven’t found that combination, and we don’t expect to. But the Ultimate Buy-and-Hold Strategy is the best real-world substitute that we’ve found.

This strategy is designed to produce higher returns at a lower risk with minimal transaction costs.

The Ultimate Buy-and-Hold Strategy uses no-load index funds to create a sophisticated asset allocation model with worldwide diversification and the addition of value stocks and small-cap stocks to a traditional large-cap growth stock portfolio.

This strategy is not available through a single mutual fund but can be built using a combination of low-cost index funds. It is definitely not a short term strategy but, as the title of the strategy suggests, is a buy-and-hold strategy for the long term. The strategy promises there will be times your portfolio will not ’shine’ but, based on historical data, this strategy should produce good returns on a long-term basis while minimizing downside risk.

The Ultimate Buy-and-Hold Strategy is not based on anything that happened last year or last quarter. It’s not based on anything that is expected to happen next quarter or next year. It makes absolutely no attempt to predict what investments will be “hot” in the near future. If that is what you want, you won’t find it here.

But if you want superior long-term performance from a buy-and-hold approach, the Ultimate Buy-and-Hold Strategy is the best way I know to get it.

The strategy’s success is based on investing in a diverse set of asset classes rather than trying to buy or sell at exactly the right time or choosing the right stocks or mutual funds.

The truth is this: Your choice of asset classes has far more impact on your results than any other investment decision you can make. I know this flies in the face of a lot of conventional wisdom and of almost all the marketing hype that comes out of Wall Street, so I want to repeat it. Your choice of the right kind of assets is far more important than exactly when you buy and sell those assets. And it’s much more important than finding the very “best” stocks, bonds or mutual funds.

In the next post on this subject we will look at building the ‘ultimate’ portfolio.

Paul Merriman of Merriman Capital Management recently presented his ‘The Ultimate Buy-and-Hold Strategy’ workshop online. The presentation makes a very good argument for using no-load mutual funds to create an asset allocation plan that will beat the market over the long haul and with less risk. Merriman’s article on this subject has been updated, giving the same details as the workshop and showing how investors can implement this strategy.

The first portfolio that Merriman presents is the industry standard 60/40 ratio of equities and bonds; providing growth from the equities while the providing stability and income from the bonds. This is the way most pension funds, insurance companies, and other large institutional investors traditionally allocate their assets.

According to the author, this portfolio produced a compound annual return of 10.4 percent between January 1970 through December 2005, a period which included three major bear markets and had a standard deviation of 11.6. Standard deviation is a statistical way to measure risk. The lower the standard deviation, the more predictable and less volatile the investment. This long-term return of 10.4 percent with a standard deviation of 11.6 will be used by the author as the benchmark against which he measures the Ultimate Buy-and-Hold Strategy.

Hundreds of thousands of investors would be better off with Portfolio 1 than they are with their current investments, which offer too little diversification and too much risk. If they did nothing more than adopt this simple mix of assets, which is easily duplicated using a couple of no-load index funds, these investors would be more likely to achieve their long-term investment goals than they are now.

Therefore, I believe Portfolio 1 is a relatively high standard from which to start. In my view, anything worthy of being called the Ultimate Buy-and-Hold Strategy must beat Portfolio 1 in two ways. It must be expected to produce a return higher than 10.4 percent and have a standard deviation lower than 11.6.

The next article will look at the make up of the bond portion of the investment portfolio before looking at how to allocate the equity portion to attain “The Ultimate Buy-and-Hold Strategy”.

Laura Rowley, Yahoo! Finance columnist, asked readers for their best ideas on how to raise money-smart kid](http://finance.yahoo.com/columnist/article/moneyhappy/6038) and reproduced some of her favorites. She introduces the idea of saving money by waiting six months to get “Over the Hedge” from Netflix for $2.50 instead of seeing it now at the theater for $8 or more per person at the theater:

Imagine this was a stock: If you could confidently predict it was going to drop 94 percent in six months, wouldn’t you wait and buy low?

Here are a couple of the reader’s comments that caught my attention:

At the end of every year, whatever our nephew saves and invests — in stocks — we match. That includes Christmas money, birthday money, and anything else he manages to save up. We started last year and bought him a few shares of Disney (DIS) since that’s what he wanted to buy. It worked. We have him reading to tell us how the stock is doing, how much it goes up and down. Next December, he’s thinking about eBay (EBAY). He has from Christmas until the second week of January to decide where his “401(k)” is going. — Rebecca A. Gushue

I really like the idea of matching my kid’s long-term savings. Right now the kids get $10 on the 5th and 20th of the month (dad’s payday) which is divided up between spending, savings, and tithe. I would like to see part of that savings go towards long term savings and this would be a good way to encourage it.

I encourage my kids to live in an eBay world, where closets of unused sports gear can be turned back into cash. It also shows them depreciation when they say, “That cost me $100, and all I got for it was $10!” I also point out car commercials and teach them about leasing vs. buying, new vs. used. I invest in real estate and often take my kids to the closing. I explain what it means to pay rent vs. receive it. I think that it’s important for kids to understand the process and not to be afraid of investing. — Mark Adams

Hmmm. Might have to have them go on eBay to check out some of their recent purchases…..

HatTip to: Blueprint for Financial Prosperity

Looking for a way to teach children about handling money responsibly?

This little piggy has 4 compartments:

• SAVE: Put coins and bills in here for things you want to save up for.
• SPEND: This is the money you’re planning to spend soon.
• DONATE: Pick your favorite charity and save for it here.
• INVEST: This is the money you plan to invest in the stock market for the long term.

Kind of a cute idea. I wonder if it is just for kids?

Die Eigenheit levels all his guns at Robert Kiyosaki’s “Cash Flow Quadrant” and similar authors, hitting them broadside with some very apropos criticisms.

He claims that only the author profits from these finance books they sell. And the advice of each book depends on you buying another book, workbook, tape series, or seminar.

The author gives his own ‘free’ advice on how to get rich:

Einzige’s Get-Rich-Quick Secret

• Do something that others value

Einzige’s Corollary

• Do your thing better and/or cheaper than the next guy

The site has a link to John T Reed’s page about real estate investment and a very long post calling Robert Kiyosaki to task:

Rich Dad, Poor Dad is one of the dumbest financial advice books I have ever read. It contains many factual errors and numerous extremely unlikely accounts of events that supposedly occurred.

I just checked out The Lazy Persons Guide to Investing by Paul B. Farrell from my library. The subtitle is “A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing with Their Money.” A quick scan makes it seem to be pretty simple but looks like it could be a good review of different investment methods that do not require one to actively manage your money. I am working at putting together my investment strategy right now.

Here is the table of contents for the book. As I read different sections I hope to write out my thoughts.

Introduction: America’s Laziest Portfolios

PART 1. THE CONTEST WINNERS
1. The Couch Potato Portfolio Is Microwavable
2. The World-Famous Coffeehouse Portfolio
3. Dr. Bernstein’s No-Brainer Portfolio
4. A Challenger Jumps in Ring! Scores on Points

PART 2. RECESS FUN: TESTING THE SIX LAZIEST STRATEGIES
5. Strategy One: Zero Timing Wins
6. Strategy Two: Frugal Saving Wins
7. Strategy Three: Compounding Wins
8. Strategy Four: Asset Allocation Wins
9. Strategy Five: Buy’n'hold Wins
10. Strategy Six: Do-It-Yourself Wins

PART 3. SIX MORE BORING, LAZY PORTFOLIOS FOR AMERICA
11. The Dummies Ultimate Keep-It-Simple Portfolio
12. Dilbert’s Anti-Weasel Defense Portfolio
13. Motley Fools Morph into Index Champions
14. Idiot-Proof Portfolios for the Financially Challenged
15. Where Do Active Money Managers Put Their Own Money? In Safer Passive Index Funds!
16. Even Nobel Economists Prefer Lazy Theories

PART 4. ADVENTURES OUTSIDE THE (VANGUARD) BOX
17. The Care and Feeding of Your 401 (k) Plan
18. Happy Hybrids: One-Fund Mini Portfolios
19. The ETF Zoo: Spiders, Qubes, Diamonds, Webs, Vipers
20. DRIP-DRIP-DRIPping with No-Load Stocks
21. You Wanna Be the Next Super-Mario?
22. The Superpowered Zero-Funds Portfolio
23. Lazy Portfolios for Not-So-Lazy Kids

PART 5. WHEN LAZINESS FAILS YOU AND YOU’RE ITCHIN’ FOR SOME ACTION!
24. Sssssizzle … Fizzzzzz … That’s Your Brain Frying on a Hot Stock
25. Plan B: How Investors Learn to Live with Two Brains and a Split Personality

The Home Stretch

Epilogue: The Ultimate Secret of Success for Millionaires and Lazy Investors

The Complete Library for America’s Laziest Investors

Business Week Online has an interesting story on whether the ID theft scare is actually hype by the media rather than an actual threat with harm being done.

The conclusion of the article is what caught my attention:

Perhaps the most spooky thing about the ID-theft scare is that chances are high the data weren’t stolen by some shadowy hacker in Estonia, after all, but someone very close to you. Fully one-fourth of the respondents in the 2003 FTC study who had been the victim of a financial fraud said they knew who had committed the crime, and in half those instances the perpetrator turned out to be a friend, relative, or neighbor.

So, like many crimes, the perpetrator is most likely to be known my the victim. As I told my wife this morning, she is more likely to kill me than anyone else is!

We recently discussed the first of five portfolios that Paul Merriman of Merriman Capital Management discussed on the recent online broadcast of his workshop, ‘The Ultimate Buy-and-Hold Strategy’. This strategy is also spelled out in an article of the same name on his website. That first portfolio, Portfolio 1, presented a baseline portfolio consisting of the industry standard 60/40 ratio of equity and bonds.

The primary focus of the online workshop was about allocating the equity portion of your portfolio, but Merriman has a few things to say about bonds before moving on. Bonds are placed in a portfolio primarily to give price stability (as measured by standard deviation), as well as to produce current income. What type of bonds should one include in their portfolio? Merriman says that the bonds with maturities greater than five years do not provide a consistently better return than shorter-term bonds. And what little gain they may provide comes with considerably more risk. He says the best returns are from bonds with maturities between one and five years.

Merriman recommends splitting the bond portion of your portfolio evenly between bonds with maturities up to two years and bonds with maturities up to five years. This mix, he says, can be found in the typical short-term bond fund.

The average maturity of the bonds in Portfolio 1 is between eight and 13 years. Those bonds have considerably more volatility than is warranted for the amount of return they provide. To build the Ultimate Buy-and-Hold Strategy our first adjustment will be to move the bond portion of our portfolio to short-term bonds. Since my investments are at Charles Schwab, I checked the funds they have available and the Schwab Short-Term Bond Market Fund (SWBDX) appears to fit the bill.

The result, based again on 1970 through 2005, is Portfolio 2. This combination has a total return of 10.4 percent, almost exactly the same as Portfolio 1, along with a standard deviation of 10.8 — a bit lower than that of the benchmark Portfolio 1. This gives the portfolio a little more stability and about the same return. (When rounded, the annualized percentage figures are both 10.4. But in fact there’s a small difference, which is reflected in the hypothetical growth of $100,000. We don’t believe that 60 percent equity and 40 percent bonds is the right balance for all investors. Many young investors don’t need any bonds in their portfolios. And many older folks may want 70 percent of their portfolios in bonds. But the 60/40 ratio of Portfolio 1 is nevertheless a very good long-term investment mix. It’s the industry standard, and that’s what we will use as a benchmark in this article.

In the articles to follow in this series we will see what Merriman recommends regarding the equity portion of the Ultimate Buy-and-Hold Strategy.

The New York Times is reporting that Google now wants to keep track of your credit card numbers.

“The goal here is to make it be one nanosecond from the time the customer decides to buy to the time the transaction is complete and the product is on the way.”

You can check it out for yourself at checkout.google.com or check out the video tour

Find it with Google.  Buy it with Google Checkout.

Want a faster, safer and more convenient way to shop online? You got it.

• Stop creating multiple accounts and passwords.
  With Google Checkout™ you can quickly and easily buy from stores across the web and track all your orders and shipping in one place.
• Shop with confidence.
  Our fraud protection policy covers you against unauthorized purchases made through Google Checkout, and we don’t share your purchase history or full credit card number with sellers.
• Control commercial spam.
  You can keep your email address confidential, and easily turn off unwanted emails from stores where you use Google Checkout.

I have enjoyed listening to Paul Merriman’s investment podcasts and his ‘Ultimate Buy-and-Hold Strategy‘ workshop was recently broadcast online. I am attempting to figure out how to allocate my investments and Merriman’s presentation spells out what he thinks is the best way to earn a superior, yet safe, return.

In my previous post looking at Portfolio 2, Merriman details the type of bonds that should be a part of our investment portfolio. Now he turns his attention to the equity portion of the portfolio. He begins by reminding us that large companies like General Electric, Citigroup, Microsoft, etc, which make up the standard pension fund’s equity portfolio, were all small companies at one time, and each grew rapidly and paid their early investors handsomely.

Small companies can grow much faster than huge ones, the first and most fundamental way to diversify a stock portfolio is to invest some of your money in stocks of small companies.

Merriman recommends weighting your portfolio heavy on the small cap stocks by splitting the equity portion of your investment portfolio in two, half in large-cap stocks and the other half in small-cap stocks. Now we have Portfolio 3, a pie with three slices. According to Merriman, from 1970 through 2005 this combination would have returned 11.2 percent annually, much better than the 10.4 percent return from Portfolio 1. The concentration of the small-cap stocks has, however, raised the standard deviation to 12 percent from 11.6, a small, but acceptable, increase in volatility.

Merriman says:

I think it’s interesting to note that in this hypothetical scenario, Portfolio 3 adds $1,042,078 to the long-term investment results of Portfolio 1, with very little additional risk. This difference is roughly 10 times the entire initial investment of $100,000.

Merriman does have suggested portfolios available on this web site depending on where you have your investments. Since mine are at Schwab, I have used their fund screener to find out what is available. The following small-cap equity index funds are available:

And for the large-cap portion of the portfolio Schwab has the following funds available:

Next in the series we will be looking at the place of “value” stocks in our portfolio.

Rick Warren, best-selling author of The Purpose Driven Life, was quoted by the Sydney Morning Herald about being a Christian and being rich:

“I don’t think it is a sin to be rich, it’s a sin to die rich, I want people to make as much money as they can as long as they give it away as much as they can.”

I think he is wrong. It is not a sin to either to be or to die rich. It is the same problem people have with the passage “The love of money is the root of all evil” (1 Tim 6:10) - It is not the money that is the problem. That is too simple. Poor people can love money just as much or more than the rich.

“Where your treasure is, there your heart is also.” I am working hard to provide for my family. By most of the world’s standard we are rich. But at this point I am sure that I will not have enough saved for retirement. What am I to do?

Warren Buffet just gave away a wad of cash — and will continue giving it away. But when he dies he will still be rich. Same goes for Bill Gates. As a matter of fact, Buffet had to hire Gates to help him give away his money! But back to the point. The amount of money they have, you have, or I have has nothing to do with our spirituality. The amount of money they give away, you give away, or I give away has nothing to do with our spirituality.

I am working on loving God with all my heart, soul, strength, and mind. I am working on loving my neighbor as myself. But I am also working on providing for my family as best I can. The two do not conflict. I just need to remember that the more money I have, the more opportunity I have to be a blessing to my neighbor.

MSN Money reports that your ATM card and checking account are much easier for someone to target than your credit card and you have much less protection. According to the article “checking-account fraud appears to be rising, and some banks are playing hardball to try to stem their losses.”

Here are the reasons the article gives for checking-account fraud to be

• Banks typically don’t use software to spot suspicious trends like they do for credit cards.
• ATM machines often don’t verify a card’s magnetic strip is real.
• Banks can blame the victim especially if the person has your PIN.

The article goes on to give a number of ways that thieves get your account information as well as ways you can be smart and protect your account.

What is really scary is the story the starts the article. I cannot imagine watching the money drain out of my account, being hit for overdraft charges, and having the bank not allow me to close out the account and hold me responsible for all the fees.

I always enjoy seeing what different web sites submit each week to the various finance carnivals and this week is no exception. What is different is that Dogberry Patch participated in 2 carnivals.

raising4boys.com is hosting Carnival of Personal Finance #55. There are a number of interesting looking articles besides the one from this site.

Mighty Bargain Hunter is hosting Carnival of Investing #29 with almost 2 dozen submissions.

The great thing about the various carnivals is not only the exposure you get for your own blog but I have found a number of blogs that I now visit often or have added to my Newsgator RSS reading list.

Andrew Tobias’ The Only Investment Guide You will Ever Need begins by promising that this book will not make you rich. He gives a number of examples of types of investment guides to avoid. He apologizes for the immodest title of the book but says you do not need most investment guides that are available, and of the few good ones, you probably only need one.

Anyone who steers you to commodities, collectibles, chain letters disguised as cosmetic companies, or is full of enthusiasm at the prospect of making you rich, should be avoided like the plague. He claims there are very few ways to get rich quick, and even fewer that are legal. Placing a bet on number 22 on a roulette wheel carries the same risk as most of these so-called investments, they just have a better story, or pitch.

In the next chapter the author will guide us towards reducing our spending in order to increase our savings.

Paul Merriman of Merriman Financial writes that investors in their 20s learn the 10 lessons he outlines, they should end up “with hundreds of thousands – maybe even millions – of extra dollars to spend”, in other words, much better investor than most people their parents’ age.

These lessons are not hard. They’re easy. My daughters, ages 14 and 11 respectively, have no trouble with them. I don’t think you will, either.

You will want to read the entire article and answer the simple questions after each lesson.

LESSON 1: Save vs. Spend.

You can’t be a successful investor unless you’re an investor. And you can’t be an investor unless you have some money to invest. To do that, you have to save some money instead of spending every dollar. Is that so complicated? Yet you would be amazed at how many people just can’t seem to set money aside for the future.

LESSON 2: Save Now vs. Save Later.

If you save $100 when you’re 25, at a growth rate of 10 percent your money will be worth $4,526 when you’re 66. That’s $45.26 for every dollar you save. If you wait until you’re 30, you’ll have $28.10 for every dollar you save. If you wait to age 40, your $1 will grow to only $10.83. Wait until you’re 50? Forget it: $4.18.

LESSON 3: Save More vs. Save Less.

I recommend you get in the habit of saving 10 percent of what you earn. Live on 90 percent, and you won’t suffer very much. If you need more spending money, get a second job. (You’ll have more to spend and less time to spend it.)

LESSON 4: Stocks vs. Bonds.

Buy a stock and you’re an owner. Buy a bond and you’re a loaner. Which pays more, stocks or bonds? In the 75 years from 1931 through 2005, large U.S. stocks earned annualized returns of 10.5 percent. That meant that an investment of just $1 grew to $1,787. In the same 75 years, long-term U.S. government bonds earned returns of 5.5 percent. That meant an investment of $1 grew to $55.45.

LESSON 5: One Stock vs. Many Stocks.

But more than 30 percent of the individual stocks you could have bought in 1996 are worth less today than they were then. If you bought a stock chosen at random and held it for 10 years, there’s three chances out of 10 you would have lost money.

By contrast, if you had invested in 1996 in a mutual fund that invested in U.S. stocks, there’s less than a 1 percent chance that fund would have lost money. This is why millionaires invest in lots of stocks. You can do that too, using mutual funds.

LESSON 6: Pay Taxes vs. Don’t Pay Taxes (legally, of course).

As soon as you start earning income that you have to report on a tax form to the IRS, you are eligible for one of the best tax breaks you will ever get from the federal government. It’s called a Roth IRA; the letters stand for Individual Retirement Account. You could think of it as your own private pension.

LESSON 7: Load Funds vs. No-Load Funds.

When you invest in a load fund, you pay a sales commission. When you invest in a no-load fund, you pay no sales commission. Fund loads are complicated, partly because the fund industry wants them to be hard to understand.

LESSON 8: Low Expenses vs. High Expenses.

All mutual funds charge expenses, and investors who own a fund share common costs. But some funds charge a lot more than others. The expensive ones argue that you get more, but this is a case where the statistics indicate that the opposite is true. Every dollar you pay in expenses is a dollar of your investment return that goes to somebody else, not you.

LESSON 9: High Tax Efficiency vs. Low Tax Efficiency.

This is a variation of Lesson 8. Recurring expenses act like an anchor being dragged behind a boat. The same is true of taxes. Some funds are tax-efficient because they don’t buy and sell their stocks very much, so they don’t create a lot of capital gains on which their shareholders have to pay taxes. Some funds are specifically managed to keep taxes low.

LESSON 10: Automatic vs. When You Feel Like It.

Put your investing on automatic pilot. You can put your savings on automatic by having money taken out of your paycheck or your bank account regularly so you don’t have to think about it.

To Summarize:

Don’t spend everything you earn. Make your savings automatic, and start saving money as early as you can. Invest 10 percent of your pay in low-cost, tax-efficient no-load mutual funds that invest in stocks instead of bonds. To whatever extent you can, make your investments in a Roth IRA or a Roth 401(k).

Put all these lessons into practice and you won’t be sorry. That’s a promise.

Read the entire article.

Paul Merriman’s gives 10 basic principles for successful investing . They are principles anyone can follow because they are not overwhelming, complex, or difficult.

Here are his first five:

1. Have a plan. Even if it’s simple, even if it’s imperfect, having a plan is much better than simply following your whims and emotions. Put your plan in writing and keep it handy.

2. Start investing as soon as possible. We have said it repeatedly: Time is your best ally. Give your plan time to perform and you’ll get the benefit of compound interest. This is especially effective in tax-deferred accounts.

3. Diversify your investments. Your job and your home are both dependent on your local economy. If you invest in your company’s stock as well, you may be putting too many proverbial eggs in one proverbial basket. Diversify asset classes (stocks, bonds, cash) and diversify geographically by having some of your money invested internationally.

4. Invest regularly. Investing is a process, not a onetime event. If you make investing a habit and routinely “pay yourself first” from your income, you’ll maximize your chance for success. Best: Set up an automatic savings plan at work so you don’t even see the money before it is invested for you.

5. Maintain a long-term perspective. Microsoft Chairman Bill Gates, now the richest man alive, once said he only looked at the price of Microsoft stock about once a month. Gates knows a secret that too many investors ignore: Focus on long-term results, not what’s immediately in front of you.

Go read the rest of his 10 principles.

It is time to continue putting our ‘investment plan’ into writing. Previously, in Portfolio 3 we looked at blending small- and large-cap stocks in the equity portion of our portfolio based on Paul Merriman’s ‘The Ultimate Buy-and-Hold Strategy‘ workshop which was presented as a webcast online and in the updated article.

Merriman’s next step is to differentiate between “growth” stocks and “value” stocks. Growth companies are those with rising sales and profits and which seek market dominance and are among the largest stocks in The S&P 500 Index. Value companies are those companies that, for one reason or another, are seen as bargains that are expected to return to “normal” levels.

Growth stocks are usually the popular stocks, those that have been bid up by investors wanting to own a ‘good’ stock. Value stocks are those that have become unpopular to investors and can therefore be bought at a bargain. These ‘unpopular’ stocks historically outperform the ‘popular’ stocks.

Normally this is a very subjective call. It is the stuff that ‘active’ managers of investment funds are supposed to be paid to do. The Ultimate Buy-and-Hold Strategy uses a purely mechanical approach to identify value companies. The companies with the lowest price-to-book ratio are classified as value companies.

Therefore, we will create Portfolio 4, the next step in building the Ultimate Buy-and-Hold Strategy, by splitting the equity side of the pie into four pieces instead of two, adding U.S. large value stocks and U.S. small value stocks. This boosts the portfolio’s annualized return by almost a full percentage point, to 12.1 percent, while reducing the standard deviation to 11.8.

So, the bond portion of our portfolio is in shorter-maturity bonds (as per Portfolio 2) and the equity portion is divided between large- and small-cap stocks and between large- and small-cap value stocks. According to Merriman this diversification has improved the return of our portfolio from 10.4 percent to 12.1 percent, or 16 percent! All this with only a very slight increase in volatility.

Merriman does have suggested portfolios available on this web site depending on where you have your investments. Since mine are at Schwab, I have used their fund screener to find out what is available. The following value index funds are available:

Next, in Portfolio 5 we will look at adding international stocks to our portfolio.

CNNMoney.com reports that crooks are hijacking online brokerage accounts by using spyware to steal account details, either liquidating the account or manipulating stocks. The spyware is operating from remote locations, sometimes in Eastern Europe, U.S. market regulators said on Friday.

Crooks will load a victim’s computer or a public PC with a spy program to monitor a user’s activities and capture vital information, such as account numbers and passwords.

The program then send the captured information back to the crooks, who can then log into the victim’s accounts.

Once inside, the thief may sell off an account’s portfolio and take the proceeds. Or electronically hijacked accounts may be used for “pump-and-dump” schemes to manipulate stock prices for profit.

Home computers infected with virus’ or trojans are susceptible but public computers in Internet cafes and wireless connections in hotel rooms are especially vulnerable.

Sharebuilder is having a sale of sorts. From October 16th through the 27th it will only cost $4.95 to sell any holding that is only a partial share. If you own 3/4 of a share of something it will only cost you $4.95 instead of the regular $14.95. But you cannot take advantage of this price if you own more than 1 share of any stock or mutual fund.

My plan is not to sell anything in my ShareBuilder account for years, but if you have been buying something like Berkshire Hathaway (BRKb) that sells for $3,300 a share, and have been wanting to sell, this might be a good time.

Bank of America’s unexpected reduction of commissions down to Zero ($0) for self-directed investors who have $25,000 invested with them.

Free ($0) online equity trades at BAI represent the latest opportunity for consumers nationwide to benefit from a broader relationship through Bank of America, with preferred pricing across banking and investment products. Approximately fifty-two million American households, or forty percent, are immediately eligible for this offer based on household assets.

What is this going to do to the big 3? Ameritrade, E*Trade, and Schwab? Will they lower fees to be competitive? It will be interesting to sit back and watch.

My traditional IRA and Roth IRA are both at Schwab. My costs, since I invest in no-fee mutual funds, are zero. But I have thought about using ETFs (Exchange Traded Funds). Being able to trade those at no cost would be a big plus.

I have just opened up some ING DIRECT custodial accounts for my 4 minor children. Although there are online banks that are paying higher interest, none are offering a $25 bonus for opening the account. I have put $250 into each or their accounts to qualify them for the $25 but plan to withdraw the $250 after the 30 days required to qualify.

I choose ING DIRECT because the rates were competitive (especially if you factor in the $25 account opening bonus) plus there are no fees or service charges. After I remove the $250 in 30 days, ING does not require any kind of minimum balance. Also, I can access the account 24-hours a day over the internet and almost half the day by phone - even on weekends! And, of course, ING Direct accounts are FDIC insured up to $100,000 per depositor. It will be a while before we get close to the top limit.

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The kids each get $10 on the 5th and 20th of each month. It is their ‘payday’. 10% gets set aside for a tithe to the church and 20% is to go to long term savings. This leaves them $7.00 to ‘manage’. They can spend it on pop at the gas station, candy, or, put it aside to buy the newest Lego creation.

Their ING accounts is where we will put the $2 ‘long term savings money’. I can transfer the $2 per kid twice a month and let them watch their savings grow. I am hoping that by getting accustomed to saving 20% of their income they will be farther ahead than I am when they approach retirement.

I just wrote about opening ING custodial accounts for my 4 minor children When you open an account with ING they give you the opportunity to refer 25 people to them. If the qualifications are met then the person that is referred (that be you) gets $25 and the person who referred you (that be my kids) gets $10. So, if you are interested in opening an ING account and can deposit a minimum of $250 for 30 days, then ING will give you $25 - not a bad return on your investment. And - one of my kids will receive $10!

Thank-You and Thank-ING DIRECT.

To get the $25 bonus just remember:

• You need to use one of the active links to be eligible for the bonus.
• You need to fund the account with an initial deposit of at least $250 and leave it in the account for at least 30 days.
• When completing the application, you will not need any kind of Reference or Promotion Code. The link you click has the promotional information built into it.
• Full disclosure: One of my kids will get $10 from ING DIRECT for referring you.

Please: Open the ING account with this link if you cannot deposit the $250 and leave it in the account for at least 30 days. By using this link, you will not waste the link. Of course you also will not get the $25 account opening bonus nor will my kids earn the $10 referral bonus, but you still get a great account!

Still Interested? Just follow the directions below:

1. Click on one of the one-time-use ‘ING $25 Bonus’ links listed below.
2. Read the terms, and then click on the ‘Open now!’ button.
3. Verify that the link has not already been used. The new page should say:

Start savings with a great rate. To receive your $25 bonus, open and fund your Orange Savings Account with at least a $250 initial deposit.”

If, instead, the top paragraph says:

The link you’ve used to open a new Orange Savings Account is no longer valid - it has either expired or has already been used.

or

Bonus Promotion Error
The bonus promotion you would like to use is not responding either because:

then the link has been used and you just need to come back here and choose another one.

Each of the links below is good for only one use. I will attempt to remove those have been used and add new links to the list as needed:

Please leave a comment below telling me whick link you just used. I will be able to keep the links more up-to-date this way.

Sorry! They have all been used. I am hoping to set my grandkids up with accounts and then will have some more.

• 179 used links deleted
• 180 ING $25 Account Opening Bonus - Melanie - used
• 181 ING $25 Account Opening Bonus - Melanie - used
• 182 ING $25 Account Opening Bonus - Melanie - used
• 183 ING $25 Account Opening Bonus - Melanie - used
• 184 ING $25 Account Opening Bonus - Melanie - used
• 185 ING $25 Account Opening Bonus - Melanie - used
• 186 ING $25 Account Opening Bonus - Geoff - used
• 187 ING $25 Account Opening Bonus - Geoff - used
• 188 ING $25 Account Opening Bonus - Geoff - used
• 189 ING $25 Account Opening Bonus - Geoff - used
• 190 ING $25 Account Opening Bonus - Geoff - used