March 28, 2008


While working out this morning, I was reading a book addressing a commonly debated issue in the world of investing - is it better to take the boring, 'average' returns of the market (i.e., index investing) or should one take the much more exciting route of attempting to beat the market (active investing). The Peter Lynch and Warren Buffetts of the world make the argument for active investing very compelling (because you would have done much better having your money invested with them as opposed to the general returns the stock market would have yielded). In the book "The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on With Your Life," author Bill Schultheis describes a game called "Outfox the Box" in which a Howie Mandel-type "Deal or No Deal" question is asked. The author makes an interesting argument for index investing. The game goes like this:

You visit a local investment firm and ask them to invest $10,000 for your benefit and give them full discretion to make investment decisions on your behalf [which they do]. Ten years later, you go back and ask for the money. You are led into a room and shown 10 boxes arranged on a table. Each box has money inside. You are given a list showing the amount of money contained in each box. The list looks like this: #1 - $16,000, #2 - $17,000, #3 - $18,000, #4 - $20,000, #5 - $22,000, #6 - $23,000, #7 - $24,000, #8 - $25,000, #9 - $26,000, #10 - $30,000. You are then asked to leave the room. After about five minutes, you are allowed to come back in the room. The ten boxes are still on the table, but this time only box 8 (with $25,000) is open. The other nine boxes are closed, and the box numbers are all covered [the order of boxes on the table has also been changed]. The representative from the firm tells you that none of the money in the boxes has been touched and goes on to ask, 'without opening or touching the boxes, you may choose one box as your investment return, including box #8 ($25,000). Which box do you choose?'

Interesting quandry ... do you take the $25,000? Or do you forfeit the known quantity for an unknown with the chances of more ($26,000 or $30,000)? This 'attempt' to do better is what active investing is all about. Answering the question mathematically would probably provide some clarity ... Ultimately you have a 2 in 9 chance of bettering yourself by picking the box with more money. The average amount in those boxes is $28,000. That is a 22% probability of gaining an extra $3,000. Conversely, there is a 7 in 9 chance of picking a box with less money in it. The average amount in those boxes is only $20,000. That is a 78% probability of earning $5,000 less than the guaranteed $25,000.

If you had been faced with this decision, what would you choose? If you picked the $25,000 box, you are a perfect candidate for the world of index investing ... it's not exciting, you'll never wind up with above average returns. History has shown, however, that the odds of beating "the market" on a consistent basis is not stacked in your favor. I'll share some more resources next week about this ...

March 16, 2008


Several people have asked questions recently about the tax package that has been in the news a lot (The Economic Stimulus Act of 2008). Much of the mud has cleared, so I wanted to pass along some of that information ...

Congress and President Bush have signed the stimulus package into law, providing payments to an estimated 130 million American households. Under the new law, you may be entitled to a payment of up to $600 per individual ($1,200 if filing a joint return), plus an additional amount of $300 for each child qualifying for the child tax credit. This one-time payment will begin being sent in May.

To receive a payment in 2008, individuals who qualify won't have to do anything more than file a 2007 tax return. The IRS will determine eligibility, calculate the amount of the refund, and send the payment. [This should not be confused with any tax refund you may be due this year - any tax refund for your 2007 return will be made separate from this payment].

For individuals who normally do not have to file a tax return [most college students will fall into this category], this new law provides for payments to people who have a total of $3,000 or more in earned income, Social Security benefits, and/or certain veterans' payments. Those individuals should file a tax return for 2007 in order to receive this payment in 2008. Individuals that qualify may receive as much as $600 ($1,200 for joint return). Even if no income tax is owed/paid, as long as there is $3,000 or more in earned income, you may receive a payment of $300 ($600 if married filing jointly). The payment will be reduced or phased out for taxpayers with adjusted gross income of more than $75,000 (or more than $150,000 if married filing jointly).

--> $3,000+ in earned income in 2007
--> File a 2007 tax return [even if no taxes were owed]
--> Must have a valid Social Security number
--> Must NOT be claimed as a dependent of another taxpayers

Everyone receiving payments will receive a notice and additional information shortly before the payment is made in May. In the meantime, you can get more information at the IRS website (

March 07, 2008


It was only a month ago that I posted about the turbulent beginning to the 2008 year in the stock market - since then, the roller coaster of volatility hasn't let up. The more you see and hear in the news each day, the more obviously critical proper diversification and asset allocation become. The real challenge is actually doing it. It's definitely easier said than done. One of the best tools I've come across to aid an individual investor in this effort is a free Morningstar resource called 'Portfolio X-Ray' ... located at:

To use the X-Ray tool, simply enter your holding(s) (stocks, mutual funds, ETFs, etc.), their current value(s), and click to "Show instant x-ray" ... the results are nicely organized and straightforward allowing you to see how your money is "spread out" among sectors, asset classes, foreign vs. domestic, stock vs. bond, etc. In addition to getting a more clear picture of how you are "actually" allocated [rather than perceived], it also allows you to see any "overlap" in your holdings. Overlap is an issue that occurs commonly in investing; it is when an individual has investments with different objectives in mind, but the reality is that the investments do much of the same thing (how similar will define exactly the degree of overlap). Performing an "X-Ray" on your portfolio will help you to avoid the common problem of overlap.