Bogle's 12 Pillars

This morning I was doing a little reading on the fantastic Bogleheads forum and came across something I had not read in years -- Jack Bogle's 12 Pillars of Wisdom (as it applies to investing). This was written in 2001, but certainly this system has been the mantra of "Bogleheads" for the last few decades. What is amazing is that despite its simplicity and its incredible effectiveness, very few investors follow these 12 rules. For the complete list and commentary, visit Vanguard's site here: http://www.vanguard.com/bogle_site/april272001.html

Pillar 1. Investing Is Not Nearly as Difficult as It Looks.
Pillar 2. When All Else Fails, Fall Back on Simplicity.
Pillar 3. Time Marches On. (Compoud Interest)
Pillar 4. Nothing Ventured, Nothing Gained.
Pillar 5. Diversify, Diversify, Diversify.
Pillar 6. The Eternal Triangle. (Risk, Return, and Cost)
Pillar 7. The Powerful Magnetism of the Mean
Pillar 8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds.
Pillar 9. You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both.
Pillar 10. Beware of "Fighting the Last War." (Making decisions based on recent history.)
Pillar 11. You Rarely, If Ever, Know Something The Market Does Not.
Pillar 12. Think Long-Term.

Similarly, the Bogleheads Wiki has boiled down the essential beliefs into 5 brief statements:
1. Save a lot
2. Asset Allocation (Holding Bonds) Is Essential
3. Buy Low Cost Index Funds Covering the Whole Stock Market
4. Tax Efficiency Matters
5. Stay the Course

Do you need an Umbrella Policy?

I've been thinking recently about Personal Umbrella Policies (also known as PUPs). A PUP is an insurance policy that protects you against the potentially catastrophic impact of a liability suit. "What are the odds of that?" you may ask. Well, they are a long shot for sure. But that is precisely why the policies are so affordable.

Remember that when you assess a risk, you should ask yourself two questions. First, try to determine the likelihood that the incident occurs. Second, ask yourself the financial impact if that incident were to occur.

For example: the likelihood of my DVD player breaking is reasonably high. I'm sure it will probably happen within a few years. However, the impact is low -- less than $50. So I'm likely not going to buy insurance on my DVD player (although somehow BestBuy convinces millions of people they should....but that's another rant).

On the other hand, the possibility of you being sued for some sort of liability claim is relatively low, but the consequences could ruin you financially. And remember, we aren't just talking about the money you already have. Law suits can impact your wages for the future.

This is where a personal umbrella policy comes in. For likely less than $200/yr. (my GEICO policy is $144/yr.) you can buy $1 million worth of coverage. The coverage in an PUP is usually very broad and may even cover potential liabilities that your homeowners or auto policies do not. If the incident is covered by both policies, the PUP coverage is in addition to the coverage provided by your primary policy.

So is it worth it? Obviously there is no right or wrong answer because no one can see the future. But for less than $200/yr. -- it surely does let me sleep better at night knowing that if I'm at fault in a catastrophic car accident, I won't lose everything I've ever earned (or earn in the future).

Can a managed fund produce alpha?

That question has provided plenty of room for debate over the last decade is whether or not a managed fund can really produce alpha for an investor. Of course, up until about 10 years ago, there wasn't much of an alternative to managed funds, but nowadays there are enough low-cost index funds and low-cost ETFs to make your head spin. So given the choice for a low-cost index fund or a managed fund, which direction should you go?

First of all, I do think it is possible to beat the market. Just look at the numbers. Plenty of fund managers cream the market every year -- especially in years like 2008 and 2009. But as I was thinking about this today, I kept coming back to 3 basic reasons I still gravitate toward the low costs index funds.

Challenge #1: Pre-identifying the Manager
Sure, everyone can look at Warren Buffet now and say, "If only I had put $1000 with him in the 60's!" But would you have? There are plenty of smart, young money managers just getting started that would love to take your money now. But it is impossible to know which 1 out of 10,000 is going to be the next Buffet.

Challenge #2: Performance Net of Fees
The next challenge is once you have found a manager that you believe can beat the market over time, you must then deduct fees. (If you check annualized numbers in a prospectus, they should already be net of fees.) If a manager can beat the market by 1-2% every year, but charges a total expense ratio of 1.5%, you really aren't getting ahead.

Challenge #3: Keeping Up Peformance, When the Money Rolls In
The third challenge is the kicker. Let's say that you accomplish numbers 1 and 2 and believe you have found a solid manager with reasonable fees who can beat the market over time. Chances are you aren't the only one who feels that way. For example, his fund may get a 5-star Morningstar rating which sends the cash pouring in. In a closed-fund environment, managers don't have to deal with the constant cash flows in and out of the fund. This means they have to constantly be pouring money into new investments, or if they have the patience to wait for a deal in the market, then their overall portfolio numbers may suffer because of an increased percentage of cash sitting on the sidelines. The flip-side of this coin is also true. When the market goes through a rough patch, and millions of investors panic and pull their money out of the fund, the manager may be forced to sell even if he doesn't want to. In both of these scenarios, the manager who may otherwise have stellar performance, sees his performance take a beating.

There are (at least) two potential answers to this problem.
The first is that you, the investor, become the money manager. Investing in the education, the technology, and time that it takes to be a solid money manager. For most people this is not doable -- as the time and education needed for this FAR outweighs any potential gains.

The second is that you can roll with the market. By building a diversified portfolio that covers both stocks and bonds, domestic and international, you can build a portfolio that suits your needs. If you don't feel comfortable doing this (as you probably shouldn't), finding a fee-only financial planner (check Napfa.org for a fee-only planner near you) who works on a per hour basis is well worth the money. A few hundred or a thousand dollars now for unbiased advice will save you stomach ulcers for years to come.

Thoughts? Leave feedback below.

Best Credit Card Deal? PenFed All The Way!

A friend emailed me today and asked what credit card I would recommend for her. Of course, that depends, I told her -- on what she was looking for. Oddly enough, however, my pick for the best cash back card as well as my pick for the the best long term balance transfer card is the Pentagon Federal "Platinum Visa Cashback" card.

It offers 5% back on gas, 2% back on groceries, and 1.25% back on everything else. (And that's cash back, not some crazy points system.)

If you are looking to transfer a balance, there are several 0% deals out there for short periods. But if you are looking for a longer term transfer, the PenFed card currently offers a really good "2.99% for the life of the balance" promotion. Just don't use the same card for your daily purchases that you use for a balance transfer -- that is a recipe for disaster.

Here's an added bonus that we recently discovered when using our PenFed card overseas. PenFed only charges a 1% surcharge for international purchases -- and yes, you still earn rewards. So even on international purchases you still come out at least .25% ahead!

Kudos to PenFed for offering this card!!!

Swoopo: Bargain or Rip-off?

I recently came across a site called Swoopo.com. At first glance, this site leads you to believe that items are selling on auction for a small fraction of retail. So what's the catch? Knowing that things that sound to good to be true, usually are, I dug a little deeper.

Here's the scoop. They charge you to bid -- $0.75 per bid. That doesn't sound too bad until you realize that bids are only in increments of $0.15 and done automatically by their system! That means that both the bidders who win the auction and those who do not are paying just for bidding. And before you ask -- no, you don't get your bid money back if you don't win the item!

This model is different, that's for sure. I'm not sure whether to be impressed by their ingenuity or disgusted by the fact that they are obviously getting (i.e. tricking) people to pay mountains of money either for products they "win" -- or even worse -- paying money for the right to bid on products that they don't win. Of course none of this is spelled out clearly. Only after reading through a few pages of the "terms and conditions" would a user be aware of this.

Let's create an example, let's say they put a laptop up for auction that sells for $499 at a normal store. They start the bidding at $.01.

After the first 6 bids, the bid stands at $.91 and the site has collected $4.50 (6x$.75) in bid fees. After 100 bids, the bid stands at $15.01 and the site has collected $75.00 in bid fees.
After 2000 bids, the bid stands at $300 (a seemingly good deal for this laptop), but users have paid the site $1500 for the privilege of bidding on the laptop!

In this case the winning bidder would be in for $300 + all of his bid costs (likely several hundred dollars). The losing bidders would have nothing to show for there efforts except empty pockets.

Are there deals to be found on this site? Maybe, but it is a gamble if there ever was one. In my estimation, you are much more likely to come out ahead in Vegas than on Swoopo.

Eating Healthy on a Budget

Coupons are an interesting animal. On one hand, they are a great tool for saving money at the grocery store. But on the other hand, they are tools used my manufacturers to induce you into trying their latest packaged goods. Too often, these packaged goods are highly processed and far from being healthy. In fact, there have been many times my wife and I have decided not to use coupons that would have gotten items like free pizza rolls, just because we didn't want to eat that kind of food.

But thankfully, there are still ways you can save money with your grocery coupons, while managing to eat healthily.

1. Take advantage of sales, even without coupons - While it is true, you rarely see a coupon for fruit, berries, fresh veggies, or meat, deals can still be found plentifully. Remember to put your freezer to use when you spot "Buy One Get One Free" deals on meat, berries, and freezable fruit.

2. Look for coupons and other incentives on frozen veggies - While fresh vegetables may rarely be targeted by coupons, frozen vegetables are featured quite regularly. Just last week, a sale combined with a coupon on frozen Green Giant veggies, got us 20 boxes at only $0.30 per box. Not bad for healthy frozen vegetables.

3. Shop at farmer's markets - This is my favorite way to find fresh, local fruits and vegetables. You can buy just a few, or buy entire cases of vegetables you love and trade with others. (Trading 1/2 and 1/4 cases is a constant practice at my local farmer's market.)

4. Use coupons for household items - Saving money on these items likes cleaners, paper towels, toothpaste and others gives you some flexibility on your other purchases while still coming in under budget. During the last "Triple Coupons" weekend here in Raleigh, I scored 5 different brand name cleaners (Windex, 409, Fantastik, etc) for about $.25 each. All of these were on sale and had $.50 or $.75 coupons which were tripled.

In the end, the key with eating healthy on a budget is the similar to finding deals on many other things. Watch for sales (especially if you can combine with coupons) and make smart purchases. Remember to not buy more than you can eat (or freeze), and save money in other places to allow yourself a little extra money for healthy food. Remember, "You are what you eat!"

It's not the credit cards, It's the consumers!

I recently saw a clip on Good Morning America (link to clip) about a family who they challenged to go without credit cards for one month. This family came back raving about how much money they had saved by not having credit cards. I think this is completely ludicrous!

In my opinion, these sort of stories (and there are plenty of them) completely miss the boat. What these stories glaze over is that it is not the credit cards, but rather the consumer behavior attached to those credit cards that gets people in trouble. I would bet money on the fact that I can save more by using credit cards than by using cash. Here's why:

1. With credit cards, you know where your money goes
It is astounding to me that this doesn't get mentioned more often. With credit cards, you have a monthly statement, and you can even get a yearly statement online. You can import your purchases into programs like Quicken, or add them to a spreadsheet. This allows you to dissect your expenditures, tweak your budget, and be accountable to yourself during and at the end of the month.

2. I can shop for things online and find a bargain without ever leaving my desk. That means I'm not burning gas and wasting time going from store to store, I have full information on product reviews, and can compare apples to apples identical products. By using "user ratings" on sites like Amazon, it is easy to find the truly better products, and not just the prettier boxes.

3. I get cash back on my charges. I know that some of you may roll your eyes, but if you have the right card (such as Pentagon Federal's Visa Platinum) you can earn real cash (not "points") that gets credited to your bill each month. For example, the Pentagon Federal card earns 5% on gas, 3% at the grocery store, and 1.25% on all other purchases. That means if I charge $1500 in a month, I'm getting roughly $20 back -- $240 per year. Not bad for doing nothing.

Of course all of this assumes you have the discipline to pay off your credit cards at the end of the month and not spend more than you have available. If you can't do that, then maybe you are better off with cash or debit.