Tips for Being a Better Saver

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We’ve all heard that American households don’t save enough. At around 4.3% of income, many families are not amassing a nest egg large enough to weather a family emergency, invest in retirement, or deploy savings strategically: say, to make large purchases with cash and avoid costly payment plans. The results can be devastating. Luckily, all hope is not lost. There is low hanging fruit available for any family that wants to boost its savings rate.

Keep Your Service Providers on their Toes

If you dutifully pay your phone, cable and utility bills year after year, your service providers love you. They’ve likely ratcheted their prices upward, hoping you’ll just keep paying. Call to let them know that you’re a valuable customer and that you’re exploring other providers. It can lead to savings of $10-20 per month.

Or better yet for cable, cut the cord entirely, using services like Hulu plus, Netflix and Amazon Prime to replace 90% of your cable content at a fraction of the price. The same goes for cell phone service, which for some families is the largest bill behind their mortgage. Once invincible, these wireless carriers are finally seeing competition in upstarts like Ting and Republic Wireless that provide low cost cell service (20-50$ per month!) without contracts or convoluted service plans. The average person pays $70 per month for their phone plan. With Ting, that amount will get you a plan for two without a contract.

Make Your Taxes Work for You

Do you cringe when you read about taxes? It’s understandable. But the tax code, properly harnessed, can provide a huge boost to savings through deductions, credits and tax shelters.

Firstly, maximize your legal tax shelters to the largest extent you can. This means pumping money into 401(k)’s, IRA’s and Health Spending Accounts. These accounts play an interesting trick: they grab your money before the government can see it, and therefore the money isn’t taxed in the year of contribution.

Another way to put money straight into your pocket is to engage in tax loss harvesting. This scary sounding term is actually quite simple: during bad stock market years, pick a stock or fund that is doing poorly and sell it for a loss. Then take that money and quickly repurchase similar (but, for legal reasons, not identical) investments. Your investments won’t have changed much, but to the IRS you have just lost money and deserve a tax deduction of up to $3,000. At a 25% tax bracket, that’s $750 per year in your pocket.

These tricks should lower increase your tax refund. But be careful. Studies show that people are more likely to spend lump sums, thinking of them as windfalls to be enjoyed. Instead, talk to your employer about increasing your withholdings. Doing so will spread some of that refund across your paychecks in small, easily savable amounts.

Remember the Big Picture

As you use these trick to reclaim your financial turf, be sure to ratchet up your savings in parallel so that you’ll never miss that new cash. Money sitting around without purpose is likely to be frittered away. Your best bet is to make the transfers automatic and just forget about them.

And above all, take a moment to write out your goals. List a few 1-year, 5-year and10-year goals (and put them on the fridge if you have a strong stomach). Keep them in mind and if your resolve wavers, think of the goal: the shiny car, the smiling child, the comfortable retirement. And then get back to saving!

Photo – Phillip Brewer

 

Exotic Retirement Locations

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There are many factors to consider when deciding where you are going to retire to: climate, living expenses, even language. Here are three places you can choose to retire in without breaking the bank and still have a taste of the exotic.

First off is Puerto Vallarta, Mexico. This beach resort city can only be considered a slice of paradise. All this at a great price too. It somehow manages to retain its air of historical significance: Mexico-ness, if you will, while thriving as a modern city. It has everything a retiree needs: great restaurants, golf courses, marinas and of course, beaches. This is a great overseas retirement option as the experience is worth much more than it costs.

Another great overseas retirement option is Malaysia. This foreigner-friendly melting pot of multiple ethnicities is a beautiful yet downright cheap place to stay in. A 2 bedroom apartment costs less than $300 a month and a great meal at a good restaurant costs around 5 bucks. A lot of water based activities, such as snorkeling and scuba diving, are available. Kuala Lumpur in particular has a very active city life and has enough attractions to make sure your stay, however long it is, will never get boring. Another great thing about Malaysia is how easy it is to become a legal resident there.

And now for my own personal favorite: Ecuador. With beautiful weather all year round and temperature ranging between 60 to 750F, there is absolutely no need for heating or cooling systems, thereby reducing the already low living expenses. The average rent is around $600 for a nice 3 bedroom apartment. Ecuador is a tropical paradise, with a large area of jungles to explore. With beaches, jungles and even volcanoes, there is a little bit of something for everyone. All this at dirt-cheap prices too.

There are many different exotic locations around the world that people can go to for retirement, but I believe these are the cream of the crop. Considering price, ease of access and overall attractiveness of most overseas retirement options, these are the best you can get on a budget. Of course if you are not constrained by such a negligible thing as money, you are free to go wherever you want. But if you are like me and just want to have a good, peaceful retirement at an affordable price, it doesn’t get much better than these.

Our Response to the Heartbleed Bug

You may have heard in the news that many major Internet sites were affected by the Heartbleed Bug. We want to assure you, our users, that FutureAdvisor’s security and engineering team has been following developments since the vulnerability was first announced, and has taken the necessary steps to assess our systems and address any that were affected.

Bottom Line

Our security assessment confirmed that FutureAdvisor systems storing customer information were not affected by the Heartbleed Bug. The systems that were affected have been patched and are no longer vulnerable.

Technical Details

The Heartbleed Bug is a vulnerability in certain versions of the OpenSSL software package that is used to secure web site connections. Our endpoint systems for these SSL connections were affected, but our security team has ensured that they are now patched and no longer vulnerable. As an extra precaution, we have also rotated all of our SSL certificates.

What Do You Need To Do?

We have verified that none of the affected systems stored customer information and have no reason to believe that any customer accounts have been compromised. However, if you are concerned, we recommend you change your FutureAdvisor password, especially if you’ve used the same password on other web sites that were also affected by the bug.

We take the security of our customer information very seriously. Please don’t hesitate to contact us at help@futureadvisor.com if you have any other questions or concerns.

Top Investment Trends For 2014

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We’re now firmly into 2014, and a few important changes for savings are worth making note of. MyRA is the most significant change in offering a new class of retirement investment for those on middle incomes, but we also expect a reversion to more normal stock market returns after 2013 and continued expansion of lower fee investment opportunities via ETFs.

MyRA Expected To Launch By The End Of The Year

As announced in the State of the Union address in January, a new government initiative makes it even easier to save for retirement, particularly for those on lower incomes. MyRA (My Retirement Account) is expected to let you open an account with only $25 and add to it from your paycheck in increments of as little as $5. There are not expected to be any fees. These low minimums make it extremely easy to start saving for retirement, and automatic paycheck deductions are a great strategy for building up a nest egg automatically over time.

However, this savings structure is only useful to you if your employer does not offer a 401(k) and  unfortunately the money will only earn a low rate of return, even though that return is guaranteed by the government. So as soon as you have a reached a $15,000 in MyRA You can move to a private IRA with more investment options to create a diversified portfolio.

If you aren’t currently saving for retirement, myRA could be a way to started given the low cost and low contribution requirements. Look out for the pilot launching towards the end of the year.

Stock Market Returns Expected To Be Less Than 2013

2013 was a very strong year for the US stock market by historical standards, and looking back over history has about a 1 in 10 chance of being repeated.

However, valuations of US markets now look high relative to history so valuations are unlikely to increase. This is based on Nobel Prize winner Robert Schiller’s analysis that suggests stock prices relative to average stock earnings for the past 10 years are at a relatively high level. In addition, corporate profits are also high by historical standards which makes earnings growth harder to achieve.

Therefore, it’s likely that the US stock market will grow in 2014, but single digit growth is most likely for the coming years. Looking back at over a century of data the US market has grown at 6%, so that’s a reasonable benchmark for 2014 market growth. At the moment the S&P 500 is basically flat for the year so far.

Investment Fees Continue To Fall

Exchange Traded Funds (ETFs) have significantly reduced the cost of investing in a diverse set of stocks for American investors. For example, Vanguard now have an S&P 500 tracker that costs just 0.05% a year in fees. We continue to see the range of assets covered by ETFs and the costs of certain funds decline. Even small savings here can be impactful in saving investors significant retirement dollars, for example paying 1% less in fees during your working years, can example you to have 20% more invested when you reach retirement according to academic research. So continue to look for lower cost funds within your diversified portfolio. To take advantage of this trend, online tools like FutureAdvisor can help you determine a low cost, balanced portfolio for free.

2014 won’t yield drastic changes for investors, but do consider if MyRA is right for you, don’t expect the high stock market growth of 2013 to repeat and continue to look for low cost options for your investments, so that fees don’t eat away at your retirement dollars.

Photo – Christine and David Schmitt

How People With Over $20M Invest

 

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Wealth Distribution Of Those With Over $20M

The IRS discloses average income details for wealthy Americans. The data above shows the distribution of assets for Americans with over $20M in wealth for 2012. The bulk of assets are held in stocks, either those that trade on the stock market or privately held equity, and if you treat non-corporate business assets and limited partnerships as similar to stock, then you have the wealthy investing over half their wealth in stock-like investments. Real estate represents 10% and bond 11%. Within bonds, there is a heavy skew towards state and local bonds, which suggests large ownership of municipal bonds given their tax advantages for high income earners. Cash holdings at 6% appear to be an inefficient investment, particularly since for an individual with $20M or more 6% cash means $1.2M or more in cash. This more than anyone would need for discretionary spending and is an expensive way to allocate funds, since the value of cash will be eroded by inflation over time. Other assets include 5% private equity and hedge funds, 3% specific retirement assets and 2% in mortgages and notes.

A Reasonable Portfolio

Although, this is no single individual’s portfolio, but an average, it constitutes a reasonable portfolio. The majority weighting towards stock-like investments makes sense and real estate and bonds balance out the risk of economic scenarios that would hurt stocks. The significant holding of cash appears inefficient. In addition, we can’t dig in to the stock investments to look for low fee investments and international investments, but overall it appears the wealthy are following academic research with their investment strategy. Perhaps that accounts for the source of their wealth in the first place.

 

Research Shows Overtrading Undermines Returns

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In 2000, Brad M. Barber and Terrance Odean, both of the Graduate School of Management at UC Davis, published what would become a reference work in all future studies on overtrading. The gist of their research is this:

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.

One of the advantages of investing in index funds, as FutureAdvisor recommends, is that you’re choosing to make fewer choices, with full knowledge that many of those choices, on average, would have been wrong.

Barber later led a different team of researchers to study retail investors in Taiwan. Since most Taiwanese investors buy more individual stocks and sell them more often, the results of the 2006 study were even clearer. Trading will lose you money.

We document that individual investor trading results in systematic and, more importantly, economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent to 2.2 percent of Taiwan’s GDP or 2.8 percent of total personal income – nearly as much as the total private expenditure on clothing and footwear in Taiwan. Using orders underlying trade, we document that virtually all of individual trading losses can be traced to their aggressive orders; passive orders placed by individuals are profitable at short horizons and suffer modest losses at longer horizons. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points (after commissions and taxes, but before other costs). Both the aggressive and passive trades of institutions are profitable.

Photo – Ahmad Nawawi

 

How American Spend Their Money: BLS Data

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Last month, the US Bureau of Labor Statistics released important data about how Americans, rich and poor, spend their income.

While the two top items for both the top and bottom quintiles were housing and transportation, differences emerged from the third line item on down. The poor spend a much higher percentage of their income on eating in and keeping the lights on, while the rich direct a greater share of funds toward education and entertainment.

The crucial point, in our view, is education, since the top quintile is very consciously diverting funds away from consumption in order invest in their future, by introducing their children to ways of thinking and groups of people that are likely to benefit their lives and careers.

We regret to report that a comparison between 2012 and 1984 reveals less spending on books among both groups.

What they didn’t compare, of course, was how much Americans spent on investment advice then and now. With online investment advisors, that expense is also on the decline.

Photo – 401(k) 2012

Our Performance – March 2014

For March 2014, our returns averaged +1.7% outperforming the S&P 500, which returned +0.8%. We benefited from our investment tenet of international diversification since both emerging market stocks and international bonds did better than their US equivalents.

Value stocks did well domestically, smallcaps lagged

Domestic stocks were helped by our bias towards value with all our domestic value funds outperforming the S&P 500 and growing over 1%. Small caps generally underperformed slightly, declining 0.2% on average.

Emerging markets boosted growth, while other non-US markets lagged

Developed markets outside the US underperformed the US by 0.5% on average. However, in the case of emerging markets, all funds returned over 3.5% for the month. Domestic bond funds and TIPS generally declined less than 1%, but international bonds rose slightly.

In summary, our performance was helped particularly by our bias towards emerging market stocks and US value stocks. Developed markets outside the US and small caps were generally weaker across the board.

Baseball And Your Investments

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With the start of the baseball season upon us, we take a look at the similarities between baseball and investing.

Just imagine that three guys grew up together with a common dream: to be a baseball pro. Guy number one started training all day, ditched school and planned to make his whole life into one long baseball training session. Guy number two made a plan that would mix his baseball training with his schoolwork and guy number three decided to start training after graduating from college. Which of the three is most likely to be a pro in future? We’ll get back to that later. How does becoming a baseball pro factor into investing in retirement? The same principles apply to a large extent.

Start Early

First of all, for both retirement and baseball, the earlier you start preparing for it, the better. You really have to think long-term. Just by saving 6% of your earnings every year means that your investment can double in 12 years. That’s right, compounding has that much of an effect on investments. Waiting until you get that special job or start earning high wages can leave you with not enough time to really get the full benefits of your investments through compounding. The sooner you start saving up for retirement, the more you’ll have when it comes.

Details Matter

Secondly, small details matter. An eye has to be kept permanently on the lookout for taxes and fees. Just a single percent more in fees each year can take as much as a 20% chunk out of your retirement earnings. Again there are similarities to baseball where the differences in slugging or on base percentages can be relatively small but make a major difference to player and team performance over the course of a season. Watch out for any avoidable fees and be smart about your taxes. Every percent saved builds up interest. Simply saving without tracking the details won’t cut it.

Keep the above principles in mind and you’ll most likely achieve your goal, whether it’s about becoming a baseball pro or ensuring you have enough to live on after retirement. And just in case you hadn’t figured out who’s more likely become the baseball pro: guy number two.

Bitcoin Is Property Not Currency

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The value of Bitcoin has been nothing if not volatile. However, though the value of a Bitcoin moves up and down, media interest continues to rise steadily.

Now the IRS has weighed in determining that virtual currencies, including Bitcoin, should be treated as property. This ruling helps reinforce that payments of wages made in bitcoin are taxable, clearly a topic the IRS is interested in. However, the notice also reinforces that Bitcoin does not have “legal tender status”.

The property determination makes bitcoin transactions more complex because gains and losses must be reported for tax purposes on any holdings of Bitcoins used in transitions. For example, if you buy a sandwich with bitcoin for $5, you must calculate the difference in the trading price of bitcoin between when you purchased your Bitcoins and when you used them to buy the sandwich. At some point the cost of the reporting, in addition to the presence of a tax on any gain, exceeds the benefit of using Bitcoin for the transaction. Doubtless, just as bitcoin is essentially electronic, some of this tracking could also be achieved digitally and automatically, but even so, this reporting burden could diminish the potential use of Bitcoin in everyday transactions.

Those viewing Bitcoin as an investment or a vehicle for larger transactions may be comfortable with the additional reporting burden. Bitcoin’s value is at close to $500 at the time of writing, compared to a high of over $1,000 late last year after a steep rise from trading around $100 for much of 2013. This general rise in the currency, despite occasional and steep declines has also served to heighten interest.

Though Bitcoin and virtual currencies in general are an interesting experiment that we watch with interest, we don’t currently recommend them for long-term investors. This is because fundamentally we believe investing should be based on intrinsic value of an asset, whether earnings and dividends for stocks; coupon payments for bond or rental yields for property. In the case of Bitcoin and currency equivalents generally, there is no underlying income which makes determining value riskier, and the presumption of long-term growth less certain.

Additionally, we also look for long-term track records, often going back over a century or more, in determining the true risk and return profile from an asset class, the fact that bitcoin is relatively new without this track record increases its risk.

Despite the fact that we don’t recommend bitcoin, there’s no doubt that it’s evolution is interesting to watch. We’ll leave you with a quote from technology entrepreneur Wences Casares.

“Right now bitcoin feels like the Internet before the browser.”