Up Your 401k Contribution in 2011

If you are not maxing out on your 401k, you have an opportunity to easily put in an additional 2% in 2011 because of the cut in the payroll tax. This advice comes from "Getting Your Financial Ducks in a Row." If you are maxing out on your 401k contribution, then you should consider putting it into a Roth or even a taxable account, Jim Blankenship says.

Polls show that the biggest financial regret seniors have is that they didn't save enough.

Have a HAPPY NEW YEAR!!!!!!!!!!

Trading Foreign Exchange

A couple of weeks ago I got an inquiry from a group of guys (DIYers) who wanted some guidance on trading foreign exchange. My response:

There are a number of online trading sites for FX that provide educational materials and practice accounts. I would suggest you guys open up a practice account and see how you do. As you know FX trading, as almost everything in investments, is trickier than it looks.

For fun you might want to learn about the purchasing power parity theory of the long term influence on exchange rates as expressed by the "Big Mac" Index. See this video

http://www.youtube.com/watch?v=6F9xIj1YDxo

This comes from the Economist magazine which is a good resource for currency traders, especially if you are going to use a fundamental (as opposed to chartist) approach.

Some links you may find interesting:

http://www.forextrading.com/education

http://www.golearnforex.net/

http://www.ac-markets.com/?utm_source=3&utm_term=forex+trader&gclid=CO7Tke7h-6UCFcNM4Aod6iWanw&utm_medium=banner

Good luck guys. I wish I could be more helpful but I have enough on my plate guiding investors through the world of low cost ETFs (actually you may want to start with ETFs).

I would also add that I follow the dollar at www.bloomberg.com. Type dxy:ind in the quote box and get:


This is a quick take on how the dollar has traded versus the currencies of its major trading partners on a weighted basis over the past year.

Another useful link is:

currency etfs


This is Bloomberg's link for "top currency ETFs." This might be the best way to start for those who want to dabble in foreign currencies.

Finally, consider an old edition of Mankiw's "Principles of Macroeconomics" text available at used texts . The latter half of the book has some basics on currencies and international economics that are nicely presented and very useful.

Good luck!

DIY Newbie - Portfolio Analytics - Part 5

The DIY investor typically has at his or her fingertips powerful technology. This technology is easy to use, is indispensable in setting up and tracking a portfolio, and saves a lot of time in monitoring the portfolio. The way to learn it is to get your hands dirty and play around with it. Spending a bit of time now will pay huge time-saving dividends in the future.

Those of a certain vintage will recall days of keeping much of the data by hand. Today the novice has available much more than the institutional investor of even 15 years ago. The trick is to learn to use it.

I tend to use Schwab, so I'll illustrate it here; but similar tools are available at most major brokerage firms. But again, I find that people tend to approach brokerage inline sites like the old VHS systems where we learned how to play a tape and that was about it. We were ignorant of its other functions.

It is easy to get on Schwab, consolidate your accounts, and select a model portfolio. The model portfolio, in turn, will specify targets for various classes of assets. For example, it will specify a target for small cap stocks. Then one of the important tools is the asset allocation pie chart and table which shows you how far off target you are for each asset class both in dollar terms and percentage terms. In other words, it shows you where you have to take action and by how much to get closer to target. It simplifies the whole process of rebalancing.

Suppose you want to go one step further and drill down to see a listing of assets by account and sector? Click "Schwab Portfolio Checkup," "View Holdings," and "Asset Class Details." You get this table for each asset class.

CLICK TO ENLARGE Notice the information provided. Here we have "Large Cap Funds." You get the "gross expense ratio," the "asset class," "% of portfolio" etc. Also the account numbers, which have been erased here, are provided.
Notice the "multi-class" funds. These are allocated to appropriate sectors on the basis of Morningstar breakdowns.

Learning to use this technology simplifies portfolio management and is worth the time investment.

5-Year Treasury Note Auction "A Stinker"

Bill Gross, founder and co-chief investment officer, of bond fund giant PIMCO called today's auction of 5-year Treasury notes "a stinker"." And that it was. Bloomberg's report:

Highlights
A huge five-basis-point tail mars December's $35 billion 5-year note auction. The high yield of 2.149 percent compares with a 2.102 percent when-issued yield at the 1:00 bidding deadline. Non-dealer participation wasn't quite as soft as yesterday's 2-year auction with the group awarded 42 percent vs a 45 percent average. This week's Treasury's auctions are definitely showing the effects of thin holiday conditions. The Treasury auctions $29 billion of 7-year notes tomorrow.

Notice that there is a 7-year note auction tomorrow. Today's market pushed the benchmark 10-year Treasury yield up almost 15 basis points to 3.48%.

Previous post: how to follow Treasury Auctions.

For Financially Illiterate Professionals

Next month, more than 10,000 boomers/day turn 65 (your day is coming) and they are not ready for retirement. Why? They didn't save and invest enough.

How can a young couple learn to save and invest? They can get an expensive financial advisor. Or, they can listen to the 28-year-old that their 401k provider sends as a counselor. Or, they can read Ramit Sethi.

On the left is a chart from "I Will Teach You To Be Rich" by Ramit Sethi ( p. 72).

In my opinion, Sethi's book is one of the best that a young professional can read. It would also make a great gift for a young married couple (hint: great use for that Border's gift card). It teaches in a way that young people relate to.

If you don't have a gift card, get a library card.

Here is a link to a YouTube video by Sethi detailing how to automate your accounts - an important step in setting up a saving program.

In the book, Sethi covers all the bases from credit cards to investing with a huge dose of inspiration and an appreciation of how busy young professionals are. This is a no -excuses, 5week program.

Good to Know

Market Backdrop

• China increased short-term rates 25 basis points in a general tightening of monetary policy in reaction to inflationary pressures.
• China is world's 2nd largest car market.
• $ down slightly
  
• oil down at $91.04/bbl., copper up slightly
• Europeans made well in excess of 20% buying U.S. stocks in 2010 as Euro dropped in reaction to Europe's credit problems.
• S&P 500 company profits up 42% in 3rd quarter, 79% of cos. beat estimates.
• Most analysts expect $ to continue to appreciate versus Euro.
• Oil consumption up by more than 1 million bbls./day, total exceeding 20 million bbls./day.
• Actively managed fund managers not having a good year.
  

A Profitable Read

My gift comes via Investing Guy and a piece he posted by Michael Lewis. The piece, "The Evolution of an Investor," is long but is written by one of my favorite writers, Michael Lewis. It is worth copying and giving to friends. It is worth reading slowly and more than once.

It will test the beliefs of many investors. I recommend it especially to many of the younger investors/bloggers out there who feel they can beat the market. I believe it is always important to challenge one's beliefs. This article will do that for many.

Happy Holidays!

Meeting With an Investment Advisor

The focus of my practice is to offer advice and management services for people to get their investments on track. How does this work?

For many people, it is a matter of two meetings. The first meeting we'll have is to gather information and get to know each other. I'm interested in getting the big picture. We fill out a questionnaire. I'm interested in where you are on the path to retirement. Ages, types of assets owned, number of years to desired retirement, etc. are all obviously important. I am interested in whether you seek to finance college educations, your insurance situation, whether your job is secure, etc. I am interested in your saving habits.

In the first meeting, in addition to the basic questionnaire, I have a couple complete a simple risk-tolerance type of questionnaire. I ask questions about your past investment experience. Many times, by understanding reactions to the 2008 debacle, I can get valuable insights into risk tolerance.

I typically spend about 15 minutes discussing my investment philosophy. If you aren't sure if you are interested in my services, I usually cover my philosophy in the first 15 minutes. This is the part where there is no obligation. If there is no interest in the low-cost, low turnover, indexed approach then we'll shake hands, I'll wish you luck, and we'll part ways.

I gather your most recent statements and the list of assets available for investing.

Once I sit down with this information, I begin by ordering accounts starting with the taxable accounts, then the qualified accounts (401ks, 403bs, IRAs, government TSP etc.), then the Roths. Next, I see if it makes sense to reorder investments. Some clients have interest-paying assets predominantly in their taxable accounts. A simple reordering of investments to exploit low-dividend/cap gains tax rates can save big bucks.

Next, I analyze asset allocation. Given your risk-tolerance questionnaire (I pray a couple is somewhat compatible) and other information I've gathered, I come up with a recommended allocation of percentage invested in stocks, bonds, and cash. I like to frame it in terms of the seven models offered by Schwab, ranging from most aggressive to least aggressive. I next look at all investments and figure out actual allocation.

Sometimes people are pretty much all in cash. They may have been spooked by 2008 for example. In any event, we discuss the recommended allocation. I explain that this is a long-term process, that we are moving into choppy waters, and the idea is to get comfortable with a plan and stick with it. For those contributing to their 401ks, etc., I explain that it is beneficial for markets to drop because then assets are cheaper.

Once I've drilled down to the asset level, I am looking for index funds with low-management fees rather than high turnover, actively managed funds with high expense ratios. I am interested in broad market participation in domestic markets as well as international markets. In the bond area, in today's markets, I am recommending shorter-term funds, some high-yield exposure as well as international bond funds. With rates so low, it is risky just to buy the broad bond market.

The second and, typically, last meeting goes over the recommendations in detail. I am looking to see whether you can carry out the investment plan. If I feel you can't, or don't want to, I'll offer to manage your investments at a rate of 0.4% of market value. As part of the meeting, we talk about monitoring the portfolio and rebalancing. I typically rebalance if a sector is 5% out of balance. We talk about the resources you have available at your broker/401k provider. For example, Schwab has portfolio analytics available to clients that makes the process very simple. In fact, they are currently testing a portfolio performance system that will soon be available.

In the second meeting, I also make recommendations in other areas in your financial planning you may lack. For example, you may need umbrella insurance, a will, or tax work. As a fee-only registered investment advisor, I am compensated by my clients--I receive no referral fees. If I receive referrals from someone I refer you to, I disclose it.

If you are several years away from retiring, it is very useful to begin thinking about where your income will be coming from and how much you will need in retirement. If in retirement, it is critical to think through when to take Social Security and how you will manage your assets to ensure you don't run out of money.

I'll leave you with recommended readings and blogs to follow. From time-to-time, I'll check up on you.

Generally, it's a pretty pain-free process. Not at all like going to the dentist!

Portfolio Tracker - A Resource

For DIY investors who are looking for a portfolio tracker, this is worth checking out. It hooks in directly to your brokerage account. I personally do not use it because I find everything I need at the brokerage account I use.

But if you are using the Yahoo portfolio system or something similar where you have to manually put in each trade etc., this may be a good tool for you.

In any event, it is mentioned here as a potential resource.

Zen, Investing, and the Maintenance Guy

What I like about Zen philosophy is that it has these wise sayings expressed in the simplest terms; they just make you think duh! and really change the way you look at things. For example, Zen philosophy tells you to be happy for things you don't have. Not feeling happy? Take a deep breath (deep breathing is really important in Zen philosophy) and tell yourself you can be happy because you don't have a toothache! Now you know why monks walk around smiling all the time.

Of course, your grandmother said the same thing but in a different way. She liked to remind you that there is always someone worse off than you. Somehow this didn't make you feel as good. I guess it's all in how it's put.

Another Zen saying I like has to do with the idea that people can search the world for something and yet it can be right under their nose. This has to do with peace and harmony, of course. Against my best judgment, I'm going to use the word I swore I'd avoid - Nirvana (a state of being, not the band). Now this is where Zen philosophy goes off the deep edge, in my opinion, and gets frustrating; in fact, it starts to negate the other sayings. As you become familiar with the philosophy, you come to understand that Nirvana is the ultimate goal. But the only way to achieve Nirvana is to try to not achieve it. I know. I'm going to stop right there.

Let's go in a different direction. Zen philosophy also says that, when you are ready for a teacher, the teacher will appear. I like this one. It makes you want to get into a flowing robe, make some exotic tea, and burn some incense. Since we are not always in school, it implies that teaching happens outside of school. This is good. This is a revelation for many people. In fact, Zen philosophy teaches us, if we get far enough into it, that teachers can be inanimate objects (the wind, rocks, trees, etc); but again I'm starting to get lost.

Let me present an example to hammer home this "teachers are everywhere" idea. Many, many years ago, in graduate housing at the University of Maryland, we had a problem with our dining room light. One of the benefits of graduate housing (not appreciated until I became a homeowner) was that when things went wrong, you called up maintenance. Sure enough, they sent up a guy who looked the part--ladder and all--although he really didn't need the ladder. We moved a couple of cinder blocks from a bookcase for him to stand on.

Anyways, he whipped out his screwdriver from his back pocket and started taking the receptacle down, as I observed. He chatted away about all the things he fixed in the last 24 hours, and thankfully he quickly spotted the problem - a loose wire - and proclaimed he would tighten it up and it would be good to go. I asked him if he didn't think it wise to turn off the electricity, and he scoffed at me. He assured me that he worked with electricity all the time and it was no problem.

I consider myself a fairly observant guy and noticed that he had two fingers missing at their joints on his left hand and a scar on his neck that would have done Frankenstein proud. After his job was completed, I asked him about these deformities (I dared not ask him while he was working!) and, sure enough, they were all the results of mishaps of one sort or another with electricity.

I learned a lot from that maintenance guy. I would guess that he taught a lot to a lot of people.

Everyday in the investment arena, I talk with people who continually make the same mistakes over and over. I see their scars in their portfolios. I notice and point out that failure to diversify is what hurt them, knowing that the message is only temporarily understood. I point out that they are continually selling at the bottom and buying near the top. I point them to teachers such as Malkiel, Ellis, Buffett, etc. that they can learn from. For some it is more basic and requires an introduction to "The Millionaire Next Door". In fact, I've even been known to mention "The Miracle of Mindfulness" by Thich Nhat Thahn.

Risk

Managing risk is the tricky part of investing. The first thing taught about investing is that there is a trade-off between risk and reward. To get the big payoff, you need to take risk. The trick is managing the risk. And, having to think about managing risk is something just about everybody has to think about these days because we've been handed the responsibility of managing our own assets.

There are a lot of different ways to think about risk. Formal financial theory quantifies risk in terms of standard deviation, a mathematical expression that conveniently lends itself to producing all kinds of portfolio statistics that, in turn, depends on a particular probability distribution - the Gaussian Normal distribution.

There is a minor problem with this, in that investment returns aren't normally distributed. They have what is called a "fat tail." In everyday language, this means that we get extreme events more often than predicted by a normal distribution. Nassim Taleb has made a career as a hedge fund manager, positioning assets in conformance with extreme events, and as author of the best-seller "The Black Swan" describing extreme events.

As an aside for the non-academic reader, it should be mentioned that many academics have difficulty thinking in non-mathematical, non-model terms. If you can't express a concept mathematically, you'll lose many of them. Unfortunately, risk may be one of those concepts that doesn't lend itself 100% to a mathematical expression. Risk has many facets and means different things to people.

Some people look at risk from the perspective of the layman: risk is the possibility of losing money. This takes us down a different investment path and is mathematically awkward. In turn, the investment perspective changes. Instead of relative performance, proponents of this view tend to have absolute performance as a goal. They may give up return on the upside but, in turn, mitigate down-side performance. This approach understandably has gained adherents since the debacle of 2008 and early 2009.

Risk and the Efficient Market Hypothesis

How you view and manage risk depends on whether you believe markets are efficient. If you believe markets are efficient and that all publicly available information is reflected in stock prices before it can be exploited for abnormal gains, then there are straight-forward ways to diversify and eliminate all firm specific risk. The only risk that will remain is market risk which, by its very nature, many observers believe cannot be reduced. It is then up to the portfolio manager to choose the appropriate market risk to take, and this will depend on investor specifics such as age, tolerance for volatility, investment horizon, etc.

But what if you don't believe the market is efficient? Then how do you reduce risk? This isn't often discussed in a formal sense, but there are hints when investors describe their respective approaches.

These thoughts came to mind in reading "The Snowball Warren Buffett and the Business of Life" by Alice Schroeder. Reading between the lines, Buffett's approach to risk is interesting. My take is that he is extremely risk averse (at least in investing) and that he believes risk is reduced by obtaining information. It is well known that Buffett was severely criticized for not participating in the spectacular internet bubble of the late '90s. His reasoning was simple: he didn't understand the technology and, therefore, the companies. In fact, getting him to even own a computer was like pulling teeth; and he only used it to play bridge. To me, this is like being in the middle of a gold rush and refusing to participate because you know nothing about it. How many could resist? You'd have to be extremely risk averse.

In the book, we learn that it is only after medical complications and at an advanced age that Buffet has a colonoscopy, despite a known genetic predisposition to colon problems. This gave me pause. And yet, given the lifestyle he chooses compared to what he could choose, the money is not that important! To me these are puzzling contradictions.

But back to Buffet's risk reduction in investment markets. It appears that his main thrust is to reduce risk by obtaining information. He wants information on the business and on the character of those running the business. He does this in a way that few investors can - he gets people on the board and he replaces managers where necessary. He knows that few investors are in this position, and it is why he recommends that individual investors should invest in index funds. It is his way of warning about the hazards of investing, i.e. the risk of investing in the absence of information.

It is interesting that, to get to the point where he could get on boards etc., he took huge risks by investing a large percentage of his investable assets in a few companies--something he recommends strongly against. But, again, in these instances he had a lot of first-hand information.

This in no way is meant to play down the knowledge Buffett and his partner Munger extract from analyzing company financials. Few are as talented at gleaning information from a company's publicly available statements.

Thinking about information brought to mind the approach of Andrew Hallam who is building an enviable long-term record. Hallam reads the last 5 company annual reports before he invests, with a special focus on the footnotes and fine print where the real information on a company is found. This again is all about, from a formal stand point, risk reduction--information reduces risk.

Social Security Tax Cut

Social Security taking in less than it is spending? No problem - cut the payroll tax, run up the debt. After all, China and Russia et al. are still (as of this writing at least)willing to lend to us. Now we can go back to wondering and debating why interest rates are rising.

For Treasury Secretary Geithner et al. here's some news: the economy doesn't respond to temporary measures. Those whose spending we need are scared and will save the 2% break on the payroll tax. For those who aren't scared, it won't make a hill of beans in their overall spending. Stop scratching your heads and wondering why the "cash for clunkers" program was a bust and why the temporary tax breaks didn't resuscitate the real estate market. Businesses understand better than our legislators the folly of hiring on the basis of temporary measures.

We can come up with reasons to support our agendas no matter what the circumstance. We can cut taxes because we have massive "surpluses as far as the eye can see" and we need to give people back "their money" or we can cut taxes because the "Great Recession" is the worst economic downturn since the 1930s. It doesn't matter, either way - Goldman's bonuses are intact.

Let our children worry about the sinkhole. As yields rise and the interest on the national debt climbs, the slice of the pie going to other countries will grow.

Food for thought: next year, this bill's social security tax cut will expire. Will we be able to let it expire? After all, it will be a tax increase at that point; and with high unemployment, who wants to raise taxes?

Much, much better to borrow. And please do me a favor - save the pontifical speech making when we hit up against the debt ceiling.

Why Do They Take Food and Energy Out of the CPI?

When the Bureau of Labor Statistics reports the monthly consumer price index (CPI), two numbers are the main focus - the overall CPI and CPI ex Food & Energy. For example, this morning's report showed that, overall, the CPI was up 0.2% (implying roughly a 2.4% annual inflation rate) and ex Food and Energy was up 0.1% (or at roughly a 1.2% annual rate ). The ex Food and Energy annual rate of 1.2% is below the Fed target for inflation of 2% annual rate, whereas the overall number at 2.4% is above the annual target.

Why do they even take out food and energy? After all, we need to eat and we use energy in everything we do. The party line is that food prices are volatile because of the weather and energy prices are heavily influenced by world oil producers as well as the weather. Thus, monetary policy actions by the Federal Reserve won't necessarily counteract those price pressures. Thus, to assess whether inflation is on the right track or not, according to the Bureau of Labor Statistics, it makes sense to pull out food and energy. One thing for sure - if you take out a number of things, you'll eventually arrive at a number you like.

This takes on even more importance today because the Fed's stated goal is to increase inflation. They believe that inflating the economy will lead to job creation.

Are You Over 70 and 1/2?

If you are over 70 and 1/2 or have inherited an IRA you need to take a required minimum distribution (RMD) before year end.

A calculator is at

http://apps.finra.org/Calcs/1/RMD

The RMD rules apply to all employer sponsored retirement plans, including
profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive. (Source: IRS)

Failure to take the RMD before year-end will result in a 50% tax.

QE2 a Success?

The nation's biggest bond managers weighed in today on the Fed's QE 2 program - the buying of longer-term Treasuries to inflate inflation expectations. That it has, in fact, pushed up inflationary expectations was noted and in the process the yield on the 10-year Treasury note has also spiked 90 basis points. The sharp push-up in yield bothers Steve Liesman (CNBC chief economist) not to mention Rick Santelli the excitable on-the-exchange floor CNBC reporter.

The bond managers (Gross of PIMCO and Volpert of Vanguard) deemed QE 2 a success. CNBC was aghast, given the sharp rise in yield and the fact that today's FOMC (Federal Open Market Committee) meeting statement didn't even mention the rise in yield. It also interests me that the stock market, which has risen sharply in anticipation of improving business conditions, was not mentioned. Committees have the habit of selectively choosing evidence to support their view. They are lawyerly in nature.

Is it or was it a success? I disagree with the bond managers and have to side with CNBC on this one. For one thing, I have to ask if the rise in rates is good for a housing market that is still struggling to get its bearings. Continuing to push longer term rates higher raises the risk of short circuiting a nascent recovery. The Austrian school of economics preaches that the economy on its own will recover from a down turn if given time. A lot can be learned from this body of knowledge. The Fed should swallow its arrogance and back off, IMHO.

A Few Minutes Can be Worth Big Bucks

Ed Slott is the #1 expert on IRAs. He is on public television whenever they are in their fund-raising period and has written several excellent books on retirement issues of interest to DIY Investors. If you know someone who has just turned 70, inherited an IRA, is trying to lower the value of their estate, or even wondering about their beneficiary designations, this year-end check list is valuable.

I suggest that, if some of these issues are applicable, you may want to consult a professional. For example, retitling an inherited IRA is tricky and even many bankers get it wrong and, thereby, end up generating a big tax bill.

Ed Slott Year End Checklist

Disclosure: I am not associated with Ed Slott and receive no compensation for any recommendations on this page. Post is solely for informational purposes.

Prepaid Credit/Debit Card for Teens - The Right Way

As an investment person, I tend to focus on a small but essential portion of the financial literacy spectrum.

Still, I am often asked about financially literacy in general and, in particular, about financial literacy for young people. As a result, I am constantly on the outlook for tips, books, and good posts in this area.

This is one of the best I've come across in a long time:

TEACHING TEENS ABOUT MONEY

The best thing I like is that it is hands on. For many teens, financial literacy taught in a class room doesn't work. Simply, balancing a hypothetical checkbook is boring compared to one's own checkbook. Also, I find it interesting that the post recommends USAA. I constantly hear about their superior customer service.

If you have a teen at home or know of someone who does, I would recommend this approach. It can go a long way towards building financial literacy as well as self-esteem. Help your teen learn the basics, and it will pay tremendous dividends down the road.

As an aside, if you can point out the ridiculousness of the Kardashian offer, it even increases their knowledge of what they will come up against as they enter the adult world and the kinds of offers that get people in financial difficulty.

Bernanke Printing Money? Jon Stewart's Take

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
The Big Bank Theory
www.thedailyshow.com
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The Investment Policy Statement - a Resource

As an investment manager of institutional funds, I came to appreciate the value of an investment policy statement(IPS). The IPS typically specifies investment philosophy, permitted investments, rebalancing parameters, meeting dates, etc. In other words, it keeps everything in the investment process on track. It also provides a readily available history on how the fund was managed and is especially useful for transition purposes. The first thing a professional asks for when taking over a fund is typically the IPS.

DIY investors can profitably use this tool as well and can thereby change an ad-hoc investment approach into one that has some structure. The Bogleheads' Guide to Retirement Planning by Taylor Larimore et.al. has two examples starting on page 137 of their book. Both examples are less than a page in length.

Both examples have a "How Much to Invest" section. For "Captain Susan Saver" (I'm not sure how they come up with these names) she states,

I am currently investing $500 a month, which is about 10 percent of my pay. I will maintain the same percentage every year as I get a pay increase and invest half my raise when I receive a longevity increase or get promoted.

Putting the process in writing in this manner in itself creates a discipline to the investment process. Do you use individual stocks? What percent of total assets will be in bonds? What is the percent deviation you will allow asset classes before you rebalance? What is the maximum amount you will invest in individual names? All of these should be addressed in the IPS.

The IPS is also a good place to put down goals, etc. in terms of desired retirement, funding education needs, and so forth. The bottom line is that another person could pick it up and carry out your investment approach.

Developing or reviewing the IPS is a good way for the DIY Investor to start the new year.

Bernanke Interview

Here's the Bernanke 60 Minutes interview. He says he is not printing money. What does he think it is when you take a blank check book and you start buying Treasuries? Let me help him. The seller of those Treasuries takes the check and deposits it into the bank. It then is a deposit. M1 by definition is the sum of currency, demand deposits, other checkable deposits, and Travelers checks. Here's a graph of m1 -- you decide if the Fed is printing money.

Our Fed Chairman doesn't seem to know how this works. He doesn't seem to know that the graph of both currency and m1 are both on a moonshot. He says he is not printing money. What then explains the sharp push up in the money supply - we know it's not bank lending.

He says the Fed didn't understand what was happening with insurance companies (and Lehman Brothers, for that matter) because insurance companies fell outside the regulatory scope. The fact is that the garbage they were insuring (especially AIG) was held by the banking system off balance sheet. This huge build-up was never mentioned in FOMC meetings! The fact is that the Fed meets with the primary dealers daily, and Bernanke expects the American people to believe that they were unaware of the credit default swaps taking place? He is saying basically that the Fed, who is responsible for overseeing the health of the banking system, was unaware of the actions that came close to undermining the whole system.

The Federal Open Market Committee was perhaps more interested at the time in the heady process of fixing prices a la maestro Greenspan.

The American people need to impeach Bernanke. He is clueless, and now he is being disingenuous with the American people.

Don't Burn the House Down

Whether you are talking about an electrician or an investment advisor, professional services cost. And man's instinct is to avoid costs where possible. Woman's instinct is to raise her eyebrows. Eyebrows were raised as I set about to wire my family room. My thinking was that with a few weekends, a couple of six-packs, and the Reader's Digest Homeowners Guide I could save some bucks. I figured I would read a bit until I understood where the black wire goes, the white wire goes, and how to do the ground; and I would be on my way.

In the beginning, it was pretty easy. I got one of those drill bits that makes nice holes and drilled the holes to run the cable thru the 2x4s exactly as illustrated in the book. Going by the book - no problems. Hammered in the outlet boxes and put in the receptacles. Read up on how to strip the wire and, making sure the central power was off, started hooking stuff up, thinking all the time how I was beating the game.

Then my wife pointed out you could only turn the lamps off from one switch. She wanted to turn them off from two switches - entering and exiting the room. This was the next chapter - three way switches. No problem. This is where the chapter in statistics on permutations became real. I hooked up the switches according to the diagram on the 3-way switch package. ,Worked at one end, not the other.

Changed some of the wiring around after going to the Reader's Digest Book. Now it worked at the other end, etc. This is what you come to understand - with 3 wires and 3 places, they can be hooked up and two switches there are 17,653 different combinations. The permutations formula in statistics books is wrong.

Anyways, to make a long story short, a friend of a friend came over, looked at the situation, asked for my screw driver, changed a couple of wires and presto! - fixed the wiring inside of a minute. He didn't even look at the diagram. He could have at least pretended to look at the diagram.

All of this was no big deal - cost a couple of beers and some frustration. I learned that I could do simple wiring but the complex stuff should be left to the professional. At least that's apparently what part of my brain learned.

Time went by, my wiring experience receded to the reptilian part of my brain, and the Reader's Digest book went back on the shelf. Then the day came when the dryer needed to be moved. The amygdala stirred.

This is my advice - not appreciated at the time - don't try to wire a dryer. It is serious business. I changed wires around so much I ended up convinced that the dryer had to be broken. We must have broken it when we moved it. My wife pointed out it worked fine yesterday. , I appreciated that.

This time I called in a professional electrician and he looked at it and laughed. I provided his laugh of the day (that made me feel like I had accomplished something!). He looked at me with tears in his eyes and asked who had done the wiring. I guess he could tell by my expression it was me. As he walked out the door he muttered, loud enough for my wife to hear, "Lucky he didn't burn the house down."

That ended my career in wiring. The days came when the kids were upset that I wouldn't help them hook up the batteries for their science fair projects. They just didn't know.

For the DIY investors out there, think about bringing in a professional from time-to-time to discuss your investment program. You don't want to burn the house down.

Number 1 Top Tip for Financially Safe Retirement

In "Top Ten Tips for a Financially Safe Retirement," Tim Begany lists "An Immediate Fixed Annuity" as number 1.

This is interesting because it is how you convert today's 401(k)s/IRAs etc. into your father's pension plan. In other words, there is no need to sit around whining that we no longer have pension plans like in the past.

It is interesting also in that most people who use a financial planner will never have had the option presented to them - even by fee-only RIAs who puff themselves up proclaiming their fiduciary status. Why is that? It is simple - if you put the money into an immediate pay fixed annuity, the RIA won't have the funds to invest for you; and investing your money is where they make their money.

Imagine people who retired in 2007, when yields were higher, and before the sharp downturn in the market. Instead of going through that traumatic experience with their retirement on the line, they could have locked in a lifetime income stream of payments greater than that available today. Shouldn't their financial planner have suggested this for at least a portion of their retirement assets?

The Free Market is Dead

Sometimes we need to go back to square 1. The first day in Econ 101, after the administrative stuff is taken care of and before students start dozing off, a definition of economics is written on the board. It has to do with the allocation of scarce resources. Subsequent classes discuss different ways this is done (capitalism, socialism, control and command economies, etc.) and emphasis is put on the marvels of the free market system.

Keynes eventually comes into the picture, and the class is introduced to the conflict between his policies - at least the way they have been interpreted and applied - and the free market ideology.

I rehash all of this because of its relevance with today's conflicted macro economic policy making. I recently read an interview in which Treasury Secretary Geithner was asked what surprised him when comparing what he learned in graduate school to the real world. He said it was the practical application of Keynesian policy to the economic problems the country is now facing. In other words, he wasn't enamored with Keynesian policies in graduate school. Today he is. That the U.S. , and the world for that matter, is 100% Keynesian despite protests from the peanut gallery is beyond dispute.

This scares me because the policy makers are learning on the job - on my dime and your dime so to speak. They learned one thing and are applying another. To show how that is scary, let's take a look at a chart I found on NPR's Money Planet:

CLICK TO ENLARGE
From late 2001 to the middle of 2003, the Federal Reserve saw its mission as pushing down the federal funds rate to stave off possible deflation. It pushed rates to historically low levels. At the same time, the administration was promoting the theme of home ownership as the American dream. Mortgage brokers went wild producing esoteric mortgages and playing fast and loose with long-standing standards in order to qualify anybody and anything that was breathing.

All of this today is common knowledge, although there is still a general confusion, in the minds of many, of who exactly screwed up and who exactly is to blame.

Now let's look at the chart and think back to the definition of economics. During the 2001 to 2003 period, resources were allocated artificially - not by the market. In effect, central planners (Greenspan and Bernanke at the controls of monetary policy in conjunction with the administration) directed resources to the housing sector. Jobs were plentiful to build houses, sell houses, broker mortgages, etc. Resources were allocated to these sectors by Fed policies, not the free market. But then, in mid-2004, the central planners found they had been too aggressive and reversed course - they pushed interest rates up sharply.

After carrying out a policy that got people to buy houses they couldn't afford and then use their houses as ATMs, the Fed turned on a dime and wiped out the equity in people's houses.

Today people are scratching their heads. Why won't companies hire? Again, look at the chart. Notice that today construction is struggling. Fed policies put millions of people into housing and related industries and caused a severe over-building. The over-building was so severe that today, when money is practically free, real estate is still struggling. But this is Econ 101 stuff. Maybe 8 years ago, some of the people who saw the modern day gold-rush in mortgage banking brought about by Bernanke and his cohorts would have gone into health care or where a free market would have led them.

Here's my question: Have we learned anything from this? If you ask Greenspan, Bernanke, Geithner and much of Congress, they will respond by pointing fingers at players on the fringe. They'll point to rating agencies, securitization practices, mortgage bankers, etc. And they will continue in their central planning ways.

May the free market RIP.

I Love Capitalism

Once again, Grouch has posted an awesome video that I just had to pass on.



I was once at a flea market where an elderly lady kept holding algebra videos in her hands and clearly was on the fence about whether she should buy them. As sometimes happens, I couldn't help commenting, "Thinking of brushing up on your Algebra?" "No, no"," she said, "I'm thinking of these for my grandson." She told me how her grandson was struggling with math and how possibly the videos might help. I agreed and then suggested that, maybe the next time he asked to go to a movie or to be taken to the mall, she could say that she would take him if he completed a lesson on the videos.

That was not the right thing to suggest. She let me know that would be bribery and that she would never bribe her grandson.

At this point, you're probably wondering what all this has to do with the video from Grouch's site. Actually, capitalism is a type of bribery economic system. It bribes you to get out of bed every morning (even in the cold and with a hangover) to go out and do something positive for society. The bribe is, of course, a piece of the pie that the society produces. Economists prefer the word "incentive."

Think about the role of capitalism - private ownership of the means of production - as you view the world 's wealth increasing in the video.

Anyways, enjoy the video. I've often wondered how that grandson turned out and maybe if today he wished his grandmother had bribed him.