April 28, 2008


Three key components are often mentioned when discussing the accumulation of wealth: savings consistency, time horizon, and cost control. For young savers, the rate of return (what most people focus on) is much less important than developing a consistent savings plan. Investing regularly in a prudent selection of mutual funds will build wealth faster than any other strategy. With time on your side, you can afford to make some mistakes without much long-term damage. The biggest mistake made early on [which you can't afford to make] is simply not to save.

Behavioral finance is the academic field studying how psychology influences an investor's decision-making process. Some interesting findings have surfaced ...

- People tend to be more optimistic about stocks after the market goes up and more pessimistic after it goes down (opposite the fear/greed sentiment Warren Buffett and others suggest).

- Investors give too much weight to recent information and too little weight to long-term fundamentals.

- People tend to chase recent performance (over 80% of new mutual fund purchases go into the funds that have the best one-year return); consistently shown to be a faulty approach.

- Investors typically consider the loss of $1 twice as painful as the pleasure from a $1 gain.

- People are reluctant to admit mistakes in judgment. For some, this means hanging on to stocks or funds that should be sold; for others, it leads to paying high commissions and fees to brokers and advisors so they have someone else to blame.

- Women tend to have a longer term view of the markets than men. They maintain an investment plan longer, and as a result they generally perform better.

Ultimately, the key to building wealth is making rational decisions and having the discipline to maintain those decisions. Unfortunately, we tend to become quite irrational when it comes to financial decisions. Successful investors understand the limitations of the markets as well as their own personal limitations and develop a plan that accommodates both.

A plethora of behavioral finance information and studies can be found at: http://www.behaviouralfinance.net.

April 21, 2008


If you were unimpressed by the failing grade posted for the financial literacy scores measured in a 2006 National Survey of High School Seniors (52%), you're not likely to be inspired by the most recent report released this month detailing the 2008 results ...

In the Jump$tart Coalition biennial survey, students correctly answered only 48% of the questions. The overall conclusion isn't much of a reach. "Graduating high school seniors continue to struggle with financial literacy basics." This year did mark the first time college students were involved with the survey. While college students did better overall, 62%, results are still miserable. Not surprisingly, scores improved [albeit slightly] with rank in school:

Freshmen - 59%
Sophomore - 61%
Junior - 62%
Senior - 65%

While you can download the detailed results of the survey at http://www.jumpstart.org, some scary findings were summarized:

- 55% of students were unaware they could lose their health insurance if their parents became unemployed.

- Only 17% correctly answered that stocks would most likely yield higher returns than savings bonds, savings accounts, and checking accounts over the next 18 years.

- Only 48% knew that a credit card holder that paid only the minimum due on their balance would pay more in annual finance charges than a cardholder that pays the balance in full monthly.

FRIGHTENING! We've definitely got a long way to go!

April 11, 2008


Following up on the ‘Economic Stimulus Package’ tip I wrote on 3/16 (see - http://financialtip.blogspot.com), I wanted to pass along information this past week from the IRS that shares when you can expect to receive [if applicable] your stimulus check. The exact date you receive your money will depend primarily on the last two digits of your Social Security number.

Payments will be sent out starting May 2, on a staggered schedule based on the last two digits of Social Security numbers. On jointly filed returns, the mailing schedule will be based on the first Social Security number listed. For taxpayers who file by April 15 (IRS says returns must be “processed” by this date, not merely “filed”) and get their tax refund deposited directly into a bank or other financial account, the IRS will send stimulus payments between May 2 and May 16. For taxpayers who file by April 15 but don't choose direct deposit, the IRS will mail checks from May 16 through July 11 (see schedule below).

* If you expect a tax refund and elected to direct-deposit it into multiple accounts, the IRS will send your stimulus check in the mail.

* If you owe taxes and are sending a payment to the IRS, you can still have your stimulus payment deposited directly into a bank or other account, the IRS said. Simply fill out the appropriate section on your return related to direct deposit, detailing your account information

* If you do owe taxes, be sure to fill out your return and send payment. Don't try deducting your expected stimulus payment from your tax bill.

* Go to the Financial Tip blog (link above) if you are wondering if you will receive the payment. The 3/16 tip outlines eligibility criteria.

FOR DIRECT DEPOSIT (last two digits of SSN ... payment date):
00 - 20 ... May 2
21 - 75 ... May 9
76 - 99 ... May 16

FOR CHECK PAYMENTS (last two digits of SSN ... mail date):
00 - 09 ... May 16
10 - 18 ... May 23
19 - 25 ... May 30
26 - 38 ... June 6
39 - 51 ... June 13
52 - 63 ... June 20
64 - 75 ... June 27
76 - 87 ... July 4
88 - 99 ... July 11

The IRS also announced a new online calculator that taxpayers can use to figure how much their stimulus payment will be. You'll need to have a completed 2007 tax return on hand to use the calculator (http://www.irs.gov/app/espc/).

April 04, 2008


Last week I shared some insight into an investment philosophy often referred to as passive or index investing. This approach to managing investments started very slowly (people actually mocked the idea initially - after all, what investor wants "average" returns?!) and in recent years has swelled in popularity like a tidal wave. There is much helpful, independent research available to individuals considering the merits of an index approach ... I promised to share a couple of these resources.

(1) STANDARD & POORS (http://www.standardandpoors.com). S&P posts five-year trailing results of active funds relative to their indexes in their quarterly "S&P Indices Versus Active Funds Scorecard" (sample - http://www2.standardandpoors.com/spf/pdf/index/SPIVA_2007_q1.pdf). Their reports are available at no cost. Two helpful added elements to the S&P report are (1) a % breakdown of funds that have "drifted out of style" (funds that were initially value funds that are now growth funds; or mid-cap funds that are now large-cap funds, etc.); and (2) the % of discontinued funds (funds that are no longer in business, have merged with another fund, etc.).

(2) MORNINGSTAR (http://www.morningstar.com). Each year, Morningstar publishes the "Morningstar Indexes Yearbook" featuring three-year track records of active funds relative to indexes. They also provide a "Market Commentary" on a quarterly basis. Both reports are available for free at: http://indexes.morningstar.com. Much of the "other" research and resources on their website are 'for fee' services. Your local library will have subscriptions to many of their publications that you can peruse for free ...

Here is some summary information taken from a S&P report (use specific link provided above) - dated 4/25/07 (there is A LOT of additional information available in this free report; it's worth a look) ...

*Over the prior three years (and five years), ending 3/31/07:
- The S&P 500 beat 65.7% (72.2%) of large-cap funds
- The S&P MidCap 400 beat 68.6% (77.4%) of mid-cap funds
- The S&P SmallCap 600 beat 80.2% (77.7%) of small-cap funds

*Surprisingly, over the past five years, more than one in four (29.3%) U.S. stock funds have merged or were liquidated!

The bottom line? Over time, low cost index funds (and ETFs) deliver higher returns than most mutual funds but never "the best" returns. You have to decide for yourself whether the reliability of an index fund suits you or if you feel more comfortable taking your chances finding a better performing mutual fund.