"We" or "They"

Sorry for the lack of posts--I got so stuck in the morass of the personal finance stuff that it was hard to get out. I thought about posting some thoughts on the Giants game last week (against the Cowboys), but didn't have any great depth of thought--I was just relieved they didn't blow the game.

And that's a common theme for me, even in ultimate or anything really, relief at not losing and/or failing, rather than the joy of winning/succeeding. I guess the flailings of most of the teams i root for over the past dozen years or so has created a certain emotional detachment from the results. But the ultimate is also a factor here--being directly involved in the winning/losing aspect, made me less attached to a uniform worn by a bunch of guys I don't know. Yeah, I still am interested in the result and a homerun by Yadier Molina or a meltdown like January 5, 2003 hurts for a bit, but I get over it. But it's conditioned me to expect the worst and not appreciate the success.

So that brings us to yesterday. I was playing beach ultimate during the first half of the Giant-Packer game, but caught the second half and watched it with a group that was predominately Packer fans, who were much more invested in their team than I am with mine. Hence the subject. They referred to the Packers as "we" and "us". I don't even refer to ASU sports (where I've spend most of the last 12 years as a student or employee) that way, let alone the Giants or other professional sports teams. After the game, when Lawrence Tynes finally ended it, two of the people congratulated me, and I'm thinking to myself "you know, i don't recall making any tackles or throwing a block," but just said "thanks" and moved on (we had to hit the road).

What causes that level of devotion? Is it good, to have that depth of passion? Is it bad to care about something so much that you have absolutely no control over? I mean, after all, it's just football right?

Or is it more than that?:

Unreal what decades of Giants football does to people.

My Dad passed away in May 2005. He instilled this disease in me and my brother. Dad bled Giants' blue since the early 1930s. Met Mom around 1960 and since then, Mom suffered through hundreds of game-day Sundays.

Funny how she'd always complain about the way we'd behave during games, me, Dad and my brother. For years, we lived and died, more or less, depending on the game's magnitude, through many years. And Mom complained.

We enjoyed '86 and '90 together and suffered through 2000 in the same room. Tonight, as Tynes' 47-yarder sailed through the uprights, putting my brother and I into a mild state of shock, the phone rang right away. It was Mom. She was alone in her living room just a few miles away, watching these Giants win ... the same team she'd cursed for decades.

This team, she used to say, upset her family so much. So for that, she hated them. She just couldn't understand, she had said. She despised these Giants for all that pain they caused her men.

But in May 2005 it was the '86 Super Bowl video that played on a TV in the lobby of a funeral home as literally hundreds of folks lined up to pay their respects to Dad. Just a few of them understood. They smiled and nodded.

Tonight Tynes' 47-yarder was true and the phone rang.

"Look at that ball go," was all Mom kept saying into the phone. "Look at it ... look at it," she said, while she cried on the other end, watching the endless replays just afterward. "I'm bawling my head off over here," she said. "This is ridiculous."

I don't know what else could possibly show that this isn't just a game, or just a football team. The Giants are so much more, to so many more.

I know you understand. This is so great. So great.

I had been planning on hosting a Super Bowl party, since we/I like to do that sort of thing ever since we became the Plasminalls. But a big gathering just doesn't feel right.

I'm watching it with my dad.

18 Bridges

A little random, I know, but here are 18 Stunning Bridges. I only post it, rather that adding it to "On Topic", since I seem to recall a recent comment someone made (conversationally) about bridges. I could be making that up though. Anywho, some of the bridges are indeed stunning. At least two don't even exist yet. It's worth the 5-8 minutes of non-work that you are not going to do anyway.

More CR anger

Exciting! More personal finance (which I hope to move on from soon because Joanne is getting sick of both hearing it and reading it)!

The February issue of Consumer Reports has an article entitled “12 Money Mistakes That Can Cost You $1,000,000.” Interesting. Let's take a look...

1. Investing too conservatively during retirement

Conventional wisdom has long suggested that as retirees age, they should shift money out of stocks and into more stable investments, such as bonds. But the problem with bonds is that their annual returns may barely keep pace with inflation, while stocks, over time, typically provide returns significantly above inflation. And inflation can be a retiree's worst enemy.

[We] analyzed how well a range of stock-and-bond portfolios would have performed, using data from 1940 through 2006. We assumed that our hypothetical investor retired at 65 with $500,000 in savings to invest. We also assumed withdrawals at 3 percent each year during retirement and adjusted returns for inflation.

On average, over a variety of 20- and 35-year periods from 1940 through 2006, an all-stock portfolio provided our investor with $750,000 more than an all-bond one. If we had started with less money, $250,000, the advantage of all stocks over all bonds was about $360,000.

What you can do. Weight your asset mix as heavily toward stocks as your comfort level allows. If all-stock gives you the willies, consider, for example, an 80/20 or 70/30 stock/bond mix.

Actually, I'm not going to go any further than that. This is just plain dumb. At first I though/hoped the writers were just referring to people in their working years. But it's for retirees! For a "respectable" consumer magazine to say being in bonds in retirement is (basically) a bad idea is scary.

Among my problems with this:

1. Standard draw down models are based on a 4% withdrawal rate, not 3%. This lower rate amounts to a $5000 difference ($15k to $20k in the first year). Using a smaller number gives a greater advantage to the long term returns of stocks since it depletes them slower, yielding more compounding and less detrimental effects in down markets.
   
2. What is the point of comparing all stocks to all bonds? That is a ridiculous comparison that shows no understanding for the benefits of diversification! How about comparing 70/30 to 30/70? Or providing actual data on which rolling periods had advantages. How did the retirees in 1973 fare for the next 20 years? And don't forget, the 20 or 35 year data for new retirees in 2000 isn't included. And I'd be willing to bet the difference between 100% stocks versus 80/20 or even 60/40 is very minimal, and that's because of diversification, which allows one to buy low and sell high.
3. It makes the highest returns the goal, rather than the lowest risk to meet one's goals. Heck, if one was interested in the highest return, find the asset class with the highest returns and put everything in that. No diversification--just ride out the dips!

This is very irresponsible of CR IMO. I originally found out about the piece from a personal finance blog in which somebody commented on the bonds statement. The comment made it sound like the advice centered on not having bonds in tax advantaged accounts (401k's and Roths) because that's where you wanted your growth. What I found is much worse. But I'd still like to address that point--placement of bonds in a portfolio--since it came up at the investing meeting I had last March.

The intuitive thought is that high return investments (stocks) should go in tax advantaged accounts and low return investments (bonds) in taxable accounts, which is largely because of the capital gains bogeyman I think. However, it's probably better to look at investments at how they are taxed and place them that way:

• Bonds: most of the returns are based on dividend income taxed at ordinary income tax rates
• Stocks/stock mutual funds: most of the returns are based on an increase in the price. they are not taxed until sold.

A $10,000 bond investment in a taxable account returns 5% a year. Over 10 years, that return is actually only 3.75% (assuming a 25% marginal tax rate). The total after 10 years is $14450

That same investment in a stock fund happens to return 7% and has no dividends. The total after 10 years is $19672. Ah, but capital gains! We're in a good period of capital gains, 15%, so that results in a tax of $1450, leaving a total of $18,222

Flip the investments into a 401k that gets is withdrawals taxed as ordinary income, the 10k in bonds accrues to $16289, which after taxes is $12217. For the stock fund, still $19,762, but taxes reduce it to $14,821.

the 50/50 mix with bonds in taxable totals $29,271. the 50/50 with stocks in taxable is over $30,439. $120/year isn't *that* huge, but then again a $20,000 portfolio is pretty small.

This demonstrates if you have low return, taxable investments, they belong in tax deferred accounts because taxes erode their annual returns. the gains from stocks, however, are tax deferred, so you get a greater benefit from compounding since taxes have been delayed.

In terms of tax planning, this also demonstrates that while it's great to contribute to a 401k, since everything is taxed at ordinary rates on withdrawals and the government requires withdrawals, there are benefits to making it "safer" while the real growth happens in other accounts.

A stolen joke

Last night Joanne and I were sitting, watching TV and I mentioned to her, ‘I never want to live in a vegetative state, dependent on some machine and fluids from a bottle to keep me alive. That would be no quality of life at all. If that ever happens, just pull the plug.’

So she got up, unplugged the computer, and threw out my Mountain Dew.

I guess she's an enabler no more.

411 on 529

So this won't be as in depth as a good blog would be.

First, what is a 529 plan? It is a savings vehicle for college. Structured like a Roth IRA, contributions are made with after tax dollars (though most states offer some kind of credit/deduction), and proceeds can be used for college expenses with no capital gains incurred. The accounts are in the name of parents/grandparents etc with a named beneficiary, and the beneficiary can be changed if junior either finds college isn't for him/her or not all the money is used.

As government is wont to do, something simple (like funding a roth) is made more complex by establishing 529s as state sponsored investment vehicles--states contract with a small number of vendors to provide plans that can have either self-directed investments (you get to pick) or age-based allocations (similar to target retirement funds). Some states provide incentives for their state plans, and may offer other perks for staying in-state, but for the most part, there's no real reason to stay in state. Arizona was lacking for a while in the incentives, but starting this year, there is a $1500 deduction (for joint filers) through 2012. The big advantage of the credit is that it is not tied to Arizona plans, which is not the norm.

The Arizona Fidelity plan is decent, but two other AZ plans made Morningstar's list of 10 worst plans: Arizona PF 529 College Savings Plan and Arizona SM&R Family College Savings Program (although they no longer seem to exist).

The consensus leaders (because of low costs) all have some association with Vanguard: Utah, Ohio and Illinois. Nevada and Iowa also get some love.
An interesting one, which I haven't looked too deeply into is West Virginia's SMART529 Select program, which uses Dimensional Fund Advisor (DFA) funds. DFA relies on the academic work of Fama and French to create their passively managed, not quite index funds (a comparison with Vanguard). There is a premium for the West Virginia Plan, but it's the easiest way to invest in DFA (they are limited to advisors, or individuals with over $1 million in assets). I should point out DFA strongly tilts small and value, so in the charts in the comparison, it has had an "advantage" over the past 5 years, in which those areas have out performed)

What about the negatives? Obviously, there's a problem if a child doesn't go to college, but the beneficiary can be changed. Scholarships can also be matched, so if a student has $5000 in scholarships to cover costs, $5000 can be withdrawn without penalty. But if it needs to be cashed out for some non-covered costs, earnings (capital gains) are taxed as ordinary income with a 10% penalty, and that can be hefty based on your marginal bracket.

Other points...

As Jot noted, there is an advantage to be gained from not having the account held by the parents, as it will count as assets when it comes time to calculate financial aid. The benefit is probably small though--an account with not a lot in it will suffer very little (parent assets are calculated at 5.6% currently), and a large account will likely be held by parents of students who don't qualify for a lot of financial aid. It is a feasible plan though, as anyone can contribute to it (there doesn't need to be separate ones held by parents, grandparents, etc.), and it is my understanding that the tax deductibility is not based on being the account holder (meaning, if either set of grandparents made a contribution to the account held by the parent, the grandparents would get a deduction, or vice versa). The other disadvantage/annoyance would be the parent not necessarily having control over the investment decisions, though that can also be an advantage.

What about a Coverdell plan? They are more flexible in terms of payout (pre-college, tutoring, supplies), have similar advantages in terms of tax avoidance, but it is limited to $2000/year of contributions. I don't think it's tax deductible, but I didn't look too hard. They also have lower fees and a wider range of investment options (since there's no layer of state sponsorship). Vanguard offers coverdell plans; but there may be fees in early years tied to account balance. If you don't mind the extra account, I have read recommendations to fund Coverdell first each year, and then a 529, if you plan on saving more than $2000/year to take advantage of its benefits (Much like how one "should" fund the 401k to get the full match, then fund roth, then increase 401k savings again).

Another consideration is future changes to the plans or the creation of new plans. Since Coverdells can be liquidated easier/earlier, there's more flexibility in terms of taking advantage of new options (ie, a new vehicle comes along, you can spend Coverdell on non-U expenses, not have a lot locked up in a 529, and then start using the better vehicle). I started off this post thinking 529 exclusively, but depending on how many contributors there are and how much you plan on savings, Coverdells should be strongly considered as well.

Two research/comparison sites:

• Saving for College
• Rank 529 plans (can compare any Vanguard plan to any two other plans)
• A comparison of AZ, WV, UT, IA, OH and IL programs. hopefully.
  

Something else tangentially related: Upromise, a rewards site for education that can sweep rewards into a 529. I've done no background, but thought I'd throw it out there...

Gin and Juice

Monday marked the end of the first full calendar year of Joanne and I considering our savings an actual investment "portfolio". Some thoughts:

• We socked away about 36% of our gross income into retirement accounts. I'm optimistic we can approach that in 2008 (the percentage can only go down though), but I wonder if we'll budget tight enough to max everything out with LBA, starting his 529 plan (a forthcoming topic!), home maintenance, etc unless one of us gets a raise.
  
• Our overall return lagged the market a bit, primarily due to still owning MOT. Excluding that, I think we beat the S&P 500 slightly. It would have been more, but we established value, small cap and real estate allocations a little too late into the game.
• Monday I engaged in my first 'tax loss harvesting'. Kind of small potatoes--it saves us less than $30. I considered harvesting more, which would have allowed us to move more of our small cap holdings into tax advantaged accounts, but again, the amounts would have been small and it would introduce more turnover than I'd like.
• When we established our allocation plan, I questioned whether it was too late to get into emerging markets (no) and real estate (yes), so that all canceled each other out. Each had a run up in the previous 3-4 years. One kept going. The other didn't.
  
• I'm just now engaging the thought of buying losers/underperformers for the first time. As part of our small cap allocation, I established a position in BRSIX, a micro cap fund, which seems to be living off of 1 great year (2003). Having some doubts about it, I stopped making planned contributions in 2007. That worked out, as it went down. But I didn't pull the trigger Monday to include it in the harvesting, as I go back and forth on whether it is worth keeping. But if we keep it, we should be willing to put more in it. A rule of thumb is that any holding under 5% won't affect your portfolio in any great way, and I wouldn't expect it to meet that level (max would be about 3%). But it is a historically non-correlated asset class and the fund is part of a firm, Bridgeway, that gets high marks for its operations and ethics. Based on what I just wrote, it looks like it should have been a goner.
  
• The other "loser" area is real estate, which brings up dealing with long time horizons. Having missed out on most of the bubble, it will likely be a while before real estate outperforms again. But part of developing an allocation plan is sticking with it, even if it doesn't seem "right". THat's not to say it can't be readjusted (an increasing percentage of fixed as years go by), but it should be based of an assessment of needs and risks, not market fluctuations. In theory.
  
  

Looking ahead to 2008:

• What asset class do you want to do well in 2008? Let me know and I can overweight it in Joanne's holdings. Everything in her name is gold. Mine? not so much. She got emerging markets and international growth. I got small caps and real estate. Good thing its community property!
  
• We're sticking with our allocation plan: 30% large cap; 15% mid/small cap; 30% international; 5% real estate; 20% fixed. Similar to 2007, MOT is not included in the allocation. The big change is a more legitimate holding for our fixed income (bonds). In 2007 we "cheated" a bit by using OAKBX, a balanced fund, as a large component of our fixed allocation. We got lucky with it--it had a good year, but with recent volatility, we deemed it better to actually to follow the plan.
• As I mentioned, I'm optimistic at maxing out our 401k's again. I'm not sure if we'll be able to fully fund our Roths on January 2, 2009 though. We'll see what happens.
• Most of the rebalancing math is done. Some of the execution remains, particularly in regards to deciding where to put the Roth dollars. My plan had been to switch real estate holdings from my 401k to one of the roths, by purchasing VNQ, but based on the difference in the current holding and the 2008 roth limit, Joanne would like a little more due diligence before buying up. In thinking more about it right now, though, the only additional risk is that difference. We're not reducing my 401k holding, so now (or soon) is as good of a time as any to make the switch.
  
• For the other Roth contribution, I'm considering a position in international small caps. My concern, though, is how sliced and diced does one need to be? The value of S&D is in the rebalancing. ETFs and commission trades make that more difficult, and location in the Roth doesn't help either. It will be in international something though, as other moves has opened up a spot for those $$.
• 2008 also provides some opportunity for capital gains harvesting--since there's 0% capital gains for those in the 15% bracket or lower, it's possible to raise the cost basis of some holdings with no tax effect. We're taking advantage of this to swap into a slightly better taxable account holding, going from an S&P500 fund to a total market fund with a lower expense ratio. The only (minor) disadvantage is restarting the clock on short-term and long term capital gains.
  
• One other change: I made the small mistake last year of putting a chunk into a municipal bond fund, as I didn't want the extra income. Its returns were OK, but we're in a low enough bracket (due to our 401k contributions) that the tax advantages of a muni fund didn't really benefit us. So we're integrating a strategy discussed by Jonathan Clements to take the best advantage of the tax structure that involves moving fixed income to tax advantaged accounts and having our "emergency funds" in more tax efficient holdings (index funds) in our taxable accounts. If an emergency pops up, sell the index funds and rebalance in the 401k's.
• S&P December 31, 2008 prediction (pulled directly out of my a$$): 1537, up 4.67% from 1468. I plan on taking no action that would indicate any prescience on my part.