I might just be a moron

As I go through life, I continue to find more evidence that I am simply not as smart as I think I am. Or, at least not as smart as I used to be. The latest example:

This post was going to have a more benign title of something like "benefits enrollment" since I didn't really have anything more creative to use in an analysis of our employer healthcare options. But I'll go ahead and do that post before getting my possible idiocy.

Actually, I'm not sure that's possible, since the premise of that analysis is based entirely on the aforementioned lack of intelligence.

This is the deal: We've always used Joanne's health coverage from Motorola/Freescale rather than what I could get from ASU. This was largely based on the direct cost of the plan to us--the monthly premium was cheaper on her plan for the two of us, than it was for each of us individually on our own plans. Or at least that's what I recall to be the case.

We sat down tonight to explore shifting from a no deductible/no copay coverage to a high deductible/small copay coverage, or something in the middle. This is the pricing of Freescale's options (this isn't quite comprehensive--I deleted options I knew we wouldn't consider):


Last year we had essentially the max coverage. I considered for a brief time reducing that, but in the calculation tools, child birth made it a moot point. I also pondered shifting it after Owen was born as I though the middle deductible plan was a sweet spot, but wasn't sure how a new deductible would work, so I stuck with the plan (0 deductible/90%/no copays), with the intention of doing a better analysis for 2009, which would be made easier with better knowledge/expectations of the medical needs of a child.

So I tested various expected service needs: primary visits, specialist visits, immunizations, lab work, general checkups, ER visits, out patient surgery, the Hale family plan, etc. In most scenarios, the high deductible plan was the winner. When it lost, it was because of extended stay hospital visits, but even then it wasn't that much. The main reason was because with the copay option, that covered all general office visits, so the deductible did not apply. But with a 0 deductible/no copay option, it goes straight to coinsurance, which isn't always cheaper than the copay.

We settled on the $1500 deductible/80% coinsurance/$10-$50 copay plan since it seemed to offer the highest liklihood of being the cheapest, not only for monthly deductions ($15/month!) but for overall annual medical expenses. In most of the models we tested, we never did max out the deductible, since so much ended up being covered by the copay. We also found that the lower coinsurance was likely to be better, since we'd have to have nearly $4000 in bills beyond the deductible to have it cost more. Admittedly, that is certainly possible--one extended stay in the hospital would be enough. But much like our other insurance policies, we can afford a certain amount of risk because we have the resources to self insure to an extent. The likelihood is that we are more likely to save $300 than spend an extra $500, and if the latter happens, well, we can deal with that.

After we got the medical portion done, we started looking at vision and dental and whether it was time to add Owen to both. That's when I got out my ASU benefits booklet for a point of comparison to the family costs of Freescale's vision/dental benefits. I then looked at the costs of the medical coverage. Or more specifically the coverages of the available plans.

ASU/State of Arizona offers an HMO plan, 2 EPO plans and a PPO plan. The PPO plan is a lot more than Freescale's (also a PPO) best coverage. The HMO is 30% more. The EPO plans are about the same. But the coverages! Everything is covered! There's a small copay ($10-20), but outside of that, nada!

No deductible, no coinsurance, no nothing.

I'm looking at it and thinking to myself "wait, this isn't what I remember". I recall the plan all costing significantly more than Freescale's options. In that regard, the PPO held true, but the EPO? That seems like a good deal at $150/month for a family, with a token amount out of pocket on top of that. The only thing I can think of is that I rejected the EPO option long ago because there is no out-of-network benefit. But don't you think it would have been smart to look into the extensiveness of the network? Or way the liklihood of needing to go outside of the network? I did a brief search this evening and our pediatrician, Joanne's OB/GYN and Banner Desert and Chandler Regional are all in network.

As the subject says, I might just be a moron.

The only other point in my defense is that ASU's enrollment period is 6 weeks before Freescale's, so a direct comarison isn't possible. But you'd think with 4 years of practice/having to make these elections, I would have noticed that ASU's benefits deserved much more scrutiny than I ever game them.

On a tangetial point: If we had family coverage through ASU, that would be an $1100/month benefit Im not receving. Just at the individual level, it is $461/month. It'd be nice if there was some way to get that $5000-$13,00 that ASU/State of Arizona is willing to spend on me to, you know, just give it to me.

A better plan

Since we've been in the house, we've been on SRP's Time of Use plan, which has higher rates during peak periods (weekdays only: 1-8 pm during the summer; 5-9 am & pm in the winter) and lower rates at all other times. During the summer, by timeshifting our power, we've save $10-30/month. With winter, there's little change--I've always had some intention of canceling TOU during the winter for the convenience factor, but have never actually done so.

SRP has also started to roll out "smart meters" which allows one to see their daily electric use. For June, you can see what the heat wave started, and on our particular bill, you can see where we adusted the thermostat up one degree, then when we finally added the blinds to the front windows, and the day after that when we turned the thermostat back down because it was too high for Grandma K:


In perusing the site, I came across a new plan, the EZ-3. Its peak period is only 3-6 pm during summer weekdays, and it uses the regular winter price planning (no time of use). But both its peak and off-peak rates are higher than time of use. But does the reduction of peak use make up for the increased cost of off peak? Let's run the numbers using the June bill:



THe assumption here is that our total peak usage will decrease by more than half--after all its only 3 hours versus 7, and we can make sure we are very thrifty with any electrical use between 3-6. Even if it's only a wash financially, it looks to be a much more convenient plan without having to deal with a change of plans in the winter, or waiting until after 8 pm to turn down the thermostat, or make dinner (this rarely happens), or do a load of laundry.

So, dear, I made the switch. Sorry I didn't let you know first.

Made up numbers

In previous finance posts I've mentioned how Joanne & I are currently maxing out our 401k plans and Roth contributions. With employer match, that's a nice chunk of change. It occurred to me back in January that perhaps we were overdoing it--our savings was approximately 40% of our gross salary. Not that that is bad, as our flexibility to do so was possibly nearing an end, and we weren't going without to do so. Still, the argument that investment house calculators were on the extreme side to get investors to stash more money in accounts did make me wonder--was our savings rate a function of need or fear?

To check, I created a quick and dirty spreadsheet of my own, very simplistic, but capturing the major elements of a 60 year plan. I didn't keep that one in no small part because it wasn't postable, but then last week I realized/remembered about the existence of google docs, so another one was born. Just as simple, even if not fully explained.

So what does this capture?

First, there's some initial data/assumptions:

• Age - self explanatory. I didn't include a retirement age, rather letting the spreadsheet do (most of) the work to determine when the savings target was hit
  
• current savings - another easy one. how much we have now. I do fudge on this a bit, since i count all liquid assets, which would include the "emergency fund" and Owen's 529 (we went with West Virginia)
  
• planned contributions/savings - a little trickier, but I kept a rather high baseline, with a small increase in a couple of years (still less than inflation)
  
• expected return - I left this one open ended, in which i could input a random assortment of returns. I got bored with that, but it's still an option.
  
• expected inflation - somewhere between 3-3.5%
  
• withdrawal rate - standard practice is 4%. that is, you withdraw 4% of the portfolio in year 1 of retirement and increase that by 3-4% each year (inflation). growth is supposed to maintain portfolio size to mitigate the erosion of value from inflation, giving a high probability of the portfolio lasting 30 years. an alternate approach is to withdraw a fixed percentage of the portfolio, so retirement income may vary depending on return.
• current standard of living/desired standard of living in retirement in 2008 dollars. this would be the most important non-assumption input in this, as it dictates contributions. Pre-Owen, Joanne and I managed to spend $50-55K per year. Debt payments (ie mortgage) is about $13K. So we'll call that $40K/year would be necessary in retirement to match our current SOL. The general rule of thumb is that 80% of this would be necessary in retirement. However, this does not take into account taxes, or an increased SOL because of travel and other things to keep busy with no job. Income taxes are not included in the spending total, and since 401k/non-Roth IRAs are taxable income need to be included, that requires some adjustment to the standard 80%. So I left it at 100%--the mortgage payment budget line simply becomes a tax payment line.

The last three provide the size of the necessary nest egg: standard of living times expected inflation to the number of years to retirement power all divided by withdrawal rate (S*IpR)/W. Based on that, our target nest egg is $3.5 million. No problem!

Even leaving our contributions largely flat (only increasing when Owen prospectively is done with college) and getting an average return that is hopefully not too optimistic (7%, falling to 5% closer to retirement), we'll get there with some room to spare. However, this assumes the flexibility to maintain those contributions, a willingness to stick the the investment plan, no catastrophic decline in markets, particularly as retirement gets closer, etc.

The numbers don't really indicate we're saving too much like I'd hoped. They did the first time I did this exercise--I think I used some combination of a slightly lower inflation rate, a higher rate of return and/or increasing contributions. Either that, or I messed up a calculation. I remember finding we'd have a SOL more than twice as good as we currently do, which is a bit much.

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.

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.
  

Stock tip

In my inbox (past the spam folder)this morning from the Motley Fool...

You've heard the slogan "Intel Inside." We all have. But did you ever consider how it came about and just how revolutionary it was when you first heard it?

It's a microprocessor, for Pete's sake... a tiny wafer we can't even see, touch, or hear -- yet so powerful we dig deep and pay up for one computer and turn up our nose at another.

Before Intel, nobody dreamed a market leader like Dell would feature another company's logo front and center on its top-of-the-line computers. But you see how it worked for them!

"Intel Inside" conveyed "speed, quality, reliability, even prestige."

That's the sort of "brand mystique" that makes investors fortunes... and why thousands of otherwise ordinary Intel investors banked their first million long ago.

Ok, but can you really make that kind of money today? Well, read on because here's your opportunity...

The "new" LOGO top manufacturers display proudly on their products, packaging, and marketing:

• This new "Brand-Inside-a-Brand's" cutting-edge technology helps drive a multi-billion dollar industry -- in this case, audio electronics and entertainment media.
• Serious consumers and professionals actively seek out this brand wherever and whenever they listen to music, buy expensive audio-visual equipment, or even go to the movies.
• This name is synonymous with top-end, premium quality and performance. In fact, it's not only the industry standard... it's the GOLD standard.

But unlike Intel, this company has its biggest gains ahead. In a moment, I'll tell you more about this amazing company, its patented technologies, and phenomenal upside potential. Plus, exactly what you need to do to get your share of the profits.

Well, I can tell you. Buy Dolby Laboratories. That saves the trouble of clicking through and getting the spiel for the $70 newsletter that only mentions the hits and none of the misses.

Dolby may go Intel, but it generates 74% of its revenues from licensing rather than hardware, which I would think is makes a rather significant difference, but I have a lot to learn about business models, revenue potential, inventory and what not. Plus it's already in everything of everything that people buy (AV Receivers, DVD Players, etc), so that's a little different that the explosion of home computing, which drove Intel production.

Still, this will be the new AJU "what if?" or discussion stock, replacing any further discussions of MOT, since it combines finance with home theater. It's a natural fit!

Actually, if one was to become a shareholder, would one still be allowed to listen to the DTS track on DVDs?

Charitable Diversity

Steven E. Landsburg in an old Slate column makes the argument to only give to one charity, as once you anoint a cause as worthy, every dollar you add to your giving helps the problem, but no matter how much you have, the problem won't go away:

When it comes to managing your personal portfolio, economists will tell you to diversify. When it comes to handling the rest of your life, we give you exactly the same advice.

So why is charity different? Here's the reason: An investment in Microsoft can make a serious dent in the problem of adding some high-tech stocks to your portfolio; now it's time to move on to other investment goals. Two hours on the golf course makes a serious dent in the problem of getting some exercise; maybe it's time to see what else in life is worthy of attention. But no matter how much you give to CARE, you will never make a serious dent in the problem of starving children. The problem is just too big; behind every starving child is another equally deserving child.

So once you decide the worthiest cause, you are best to dedicate your resources to that cause. Contributions elsewhere are vanity.

I think the argument is too black and white, but it does bring up questions on how to decide what charities are worthwhile and what goes into that decision process.

As our income has increased, our projected giving has increased, but I've struggled to make that leap from giving $100 to a charity to giving them $500 (or more). Couple of reasons for that. First, I/we are not so committed to a cause that it feels "right" to write a large check. Indeed, it feels almost more philanthropic to write a lot of little checks--helping all those "good" causes. But apparently that's a bad idea--little checks mean lots of extra mail. The costs of following up with small donors is great, and those are the names/addresses that get sold. Large donors are too valuable and their information gets protected so that they don't get wooed away by some other charity.

The information at Charity Navigator helps, but it has limitations, since some of their scores do not intuitively follow from the data provided. Still, the transparency in fundraising expenses is a key data point. One positive I recall is finding out that a collection of health charities based in Clarksburg, MD exist to be a charity (ie fundraise), not to address a problem.

Still we struggle with how much to give to Mercy Corps versus the American Diabetes Association versus United Food Bank versus 6 or 7 others that we've given money to in the past. So the Landsburg thesis is an interesting perspective, but it doesn't solve the problem then of how to pick just one. Maybe three?

More finance stuff

A column in Financial Advisor Magazine advises money managers to:

Simply stated, the more heavily armed you are with statistical demonstrations of your essential theses, and the more reliant on those “proofs” you are in your interactions with prospects and clients, the less likely I believe you are to forge lasting relationships built on trust. And, failing to found your relationships on trust rather than on “evidence,” the more your practice is built on sand, and the less likely it is to endure and prosper."

So how do you build trust/confidence in making money (or anything) without quantitative proof of what your selling. Actually, I think this shyster's point is that if you show someone the numbers, they will realize they don't really need a manager/advisor. The biggest role they can play (not that all do) is the focus on sticking to a play and helping to reduce panic.

Of course commission compensated agents play some role in the 7% gap referenced in the column by churning clients from "underperforming funds" to the "hot funds", which, curiously, often become the underperformers.

The Four Pillars of Investing has a chapter called "the Broker is not your Buddy". Very apt.

Who's money is it?

Americans love their tax refunds:

"when asked if they'd prefer to owe taxes, get a refund or break even, none said 'owe,' according to the USA TODAY-Gallup Poll. Fifty percent hope they break even, and 45 percent hope they get a 'bigger' refund this year than last. They're in luck: The average tax refund is up 3.2 percent from 2006, according to the IRS."

Ugh. No one wants to owe? Well, I guess to be honest, I'd rather be closer to breaking even, but that's more because Joanne & I have occasionally been close to being penalized for underpayment, as I didn't make a point of structuring our withholding to estimate what we'd owe. The IRS, though, does have a calculator to estimate the proper withholding, which is handy. Actually, on second thought, I would rather owe the fed (but not too much) because the way our withholding has worked out for Arizona, we always (i think) get a refund there. So it balances out.

But going back to the poll, not quite sure where the missing 5% is, but 45% want more of a refund? Joanne & I are fortunate with our jobs and spending habits that we don't live paycheck to paycheck, but you'd think the notion of have more money in each paycheck would appeal to taxpayers, rather than a lump sump. But maybe that lump (say $1000) in the future is better than a bump ($40 every two weeks). At the very least, though, it's a good way to practice forced savings to pay for those "big ticket" items that refunds get directed to as well as stopping the practice of giving a free loan to someone (Uncle Sam). Or does he deserve it?

The other implication of that poll is that the knowledge/understanding of finances is fairly low. When I interned at the Goldwater Institute, we had a post work happy hour where a handful of the analysts and staff were talking about the finances and debt and the comments of a couple shocked me in their lack of understanding (example, the failure to realize that credit card debt is very bad) of what I thought were simple issues. And these were, whatever you think of the Institute ideologically, intelligent people.

The question is the best way to increase the level of personal financial literacy. The largest audience is in the high schools. But can you nationally require a course that includes this kind of content? Or maybe it already exists--a week or two slice of high school economics that I may even have received but don't recall. But that opens up a broader issue of education in the schools and if it offers enough life skills.

I think I've gone tangentially far enough. Are you accustomed to the refund, or do you like holding on to you money as long as possible? If you like the refund, what do you end up doing with it?

The Best Deal in Investing

For now, and assuming you have 25K, that is...

A couple of weeks ago to compete with Bank of America (as well as offerings from regular investment firms) Wells Fargo upped the ante in the commission battle. It began providing 100 free trades through its WellsTrade brokerage account when linked with a portfolio management account if you meet the minimum balance (the aforementioned $25,000).

Unlike BofA, which requires 25K in a low yield savings account specifically, you just need $25,000 in assets at Wells Fargo. Checking, savings, brokerage, even 10% of outstanding loans qualify.

With 100 free trades you can get any stock, and even better, any mutual fund or ETF at no cost. Most brokerages have a selection of 'no transaction fee' funds, but they aren't always the best. With the Wells Trade account, you can get Dodge & Cox, Bridgeway or Vanguard funds (or almost any of your choosing) without having to set up an separate account with each fund (or pay transaction fees if at a broker).

Granted, the 100 free trades probably won't be a long term offer, but it's a great deal if you're looking to reorganize your investments or want to consolidate and simplify accounts. Unfortunately Joanne & I already did the consolidation thing with Fidelity in December, so we can't take advantage of this right at the moment.