New numbers, same story: diversification works!

For most time periods, stocks have a higher return than bonds. But occasionally there are time windows, even long ones, when bonds outperform stocks. Notice that you have to carefully pick your time window to get this conclusion. Add a few years at the front end, or take them off the back end, of your sample and the conclusion is overturned.

The investment strategy that comes from this new information is old indeed — simple diversification. If you diversify your portfolio as recommended in my book, you get the benefit of having bonds in your portfolio. You have less in bonds when you’re young and more when you’re old. And you avoid “flavor-of-the-month” investing in which you change strategy to follow the latest hot asset.

If you had followed the “Dow 36,000” strategy when it was hot, you’d have missed the excellent returns on bonds that are now being reported. And if you now concentrate on bonds to the exclusion of stocks, you’re setting yourself up for a big disappointment. My best advice: get diversified, and stay diversified.

Short-term market timing: run, don’t walk

You have heard it’s useless to try to “time the market” in the short term — that is, to try to get out of the market before a sudden drop or get back in when things are low. Well, believe it! The markets just aren’t very predictable over short periods of time. Below is a two-week period that illustrates, using a chart from the excellent MSN money:

The chart above reflects what happened right after the big U.S. debt downgrade. That downgrade had been rumored for weeks and months — so when it hit on August 5, the smart money was not surprised, even a little. What if you sold your stocks after that first panicked day of selling? You would have lost a bunch of money for no good reason. Continue reading →

The end of free checking?


The traditional free checking account looks increasingly endangered. Many of us will start paying $48 to $132 per year for checking accounts that had been “free.”

Of course, we all know that “free” checking really isn’t free. But the traditional free checking account promised no monthly service charges, no per-check fees, and no debit card swipe fees if you would maintain a modest minimum balance. That’s the kind of account that is now endangered.

Why is it endangered? It seems to be an unintended side effect of regulation. I heard from a banking industry guy that it costs his bank $6 a month just to keep a checking account open. The bank would receive fees from a merchant every time the customer swiped a debit card. The revenue from this and other fees averaged way over $6 a month per account, so “free” checking was profitable for the bank.

Enter the Dodd-Frank financial reform law. It authorized reductions in various bank fees — but especially in debit card swipe fees. The bank will make less on those fees, but still incurs those costs for maintaining your account.

Banks are responding in different ways. Some are preparing to impose new monthly maintenance fees, generally between $4 and $11 per month. Others will charge for statements or impose new per-swipe fees on debit cards. Here are some suggestions for keeping your bank charges low:

  • Combine accounts where possible. If you have an extra checking account you rarely use, go ahead and close it. Sometimes you’re legally required to have funds in a separate account. And sometimes extra accounts are a good idea for couples. But a small-balance checking account will, under the new rules, lose value because of maintenance fees every month.
  • Opt for electronic statements. Many banks are beginning to charge for mailed statements. You can still print and save your electronic monthly statement — but be aware that some banks will charge you even for generating an electronic statement with pictures of the checks.
  • Seek out a bank that offers a better deal. This will often be a smaller or newer bank in your community. Here’s a bank, for example, that has no monthly service charge. It charges 50 cents per debit card swipe but waives the fee if you choose “credit card” at the checkout and sign your name. At many retail terminals, you have to swipe the card and hit “cancel” when it asks for your PIN to do this. And, whenever your swipe runs as “debit,” that’s 50 cents more coming out of your checking account.
  • Check mailings from your bank closely, even the back of the statement if you still get a paper one. The banks are implementing their fees under cheerful slogans such as “Bright Banking” or “Bank Your Way.” (What’s “bright” about more fees? Why is paying a new fee “my way”?) All the required disclosures are there, but you may miss them if you don’t pay attention.(That’s the practical advice. I have a few more points after the break.)

Continue reading →

Amazing smartphone strategy

There’s a lot to like about a smartphone — voice and text, together with Internet access and email and apps. But the service is so expensive every month. Is there any way around it?

Yes, there is. Here is how I have smartphone service for under $10 per month: I bought a new, unlocked LG Optimus T for $185 from a well-regarded eBay vendor. I got AT&T prepaid GoPhone service, put $100 on that, and bought 100MB of data for $19.99.

Now, here’s the key: I use as much data as I want without charge wherever there’s free wifi (including my office, my home, and my favorite restaurant). When I’m out of range I use data for any reasonable purpose — but don’t stream any music or videos. The result: 100MB of data lasts a long time. To keep my data current, I roll it over once a month for $4.99. Text + data + voice runs less than $10 a month, on average.

This is not for everyone. If you want instant access to Internet, music and video anywhere — or if you spend a lot of time talking and texting — you’re better off with an unlimited plan.

Finally, for those who think $185 is a lot to pay for a phone and get one “free” with an unlimited plan for only $60 a month: That adds up to $1440 over two years. My approximate expense for those two years is about $240 for service plus $185 for the phone, or $425.

For more on this strategy, here’s a thread with full details that gave me the idea.

Not an island reality show: “Survivorship”

Many of us have seen the reality TV show, “Survivor.” People compete not to be thrown off the island.

But survivorship is something totally different. It’s a source of bias in mutual fund returns. Here’s how it works. Say a mutual fund company starts five different funds, each trying a different strategy. Three do well and two fail miserably. Those two funds get closed.

Now, the three remaining funds look good — even above average! And that will be true, even if the five funds, taken together, had mediocre statistics or worse.

The lesson: Beware of mutual fund companies that imply they can “beat the market.”

For more on survivorship bias, see http://www.indexfunds.com/articles/20010413_survivorship_com_act_LS.htm

Lots of jollies per dollar: Pandora Internet radio

Here’s an idea with lots of jollies per dollar: Pandora Internet radio. The idea is pretty much like a radio station: music plays with only a few commercials. Where Pandora excels is in figuring out, automatically, what you’d like to hear. You start by giving it the name of a favorite artist or song, with some basic information about yourself. Pandora then picks music you would like. You can vote to “like” a song, in which case Pandora will play additional similar songs for you. Or you can vote to “unlike” a song and Pandora will move on to another one. As you vote on more songs, Pandora gets even better at figuring out what you like. Try it out at www.pandora.com . Oh, did I mention  it’s free?

Perspective from history

Economic Episodes in American History
Investors would do well at times like these to consider the lessons of American history. There have been booms and busts — but the investors who do the best are those who stay the course and don’t get trapped by speculative schemes. Although my new book with Mark Schug is not about investing, it has many lessons for investors. Economic Episodes in American History is designed as a supplement for high school history classes. Find out more about it here. Then, do smart things: save, live below your means and “buy and hold” for the long haul.

“It’s not vulnerable to wild rides”

Reasons just keep mounting up to follow a simple stock market strategy of buying and holding index funds. There was a one-day “wild ride” on the major stock exchanges May 6, 2010. Stocks lost hundreds of points in minutes and then regained most of the loss in minutes. None of this caused distress for long-term buy-and-holders. Day-to-day fluctuations don’t matter much when you’re in the market for the long term. In fact, by making some investors more afraid of stock risk, these short-term swings can increase the overall return to holding stocks. The long-term return to holding stocks is so high that it’s referred to by researchers as the “equity premium puzzle.” The implication for the average investor? Buy and hold!

“It’s not a synthetic CDO”

Much has been made of transactions involving Goldman Sachs and big-dollar investors who lost big-time.

That has very little to do with the individual investor. Those were all big players taking big risks — and, unfortunately, it seems many of them didn’t know what they were doing.

This site’s recommended strategy, “buy and hold index funds,” has the great advantage of being understandable. You’re holding a little bit of every major stock in the economy. You’re not betting on one sector to grow or collapse. If the economy does well, you do well. Add this to the list of reasons for index funds: They’re not a synthetic CDO, whatever that is.

Two inexpensive smartphone options

Note to readers: Events have overtaken this post, as inexpensive smartphones have become increasingly available. Remember, you need to look at the overall cost of having a phone for its service life. If you get a “free” phone with a required $60 per month service plan, that will cost you $1440 over two years. Paying a couple of hundred dollars for a phone, and then getting a far better deal with prepaid service, can save you a lot of money.

I continue to use my Nokia 5800 with AT&T GoPhone and T-Mobile Prepaid, with excellent results. If I were looking for a new phone today, I’d go with a T-Mobile Comet.

Finally, just for your interest, below is the original text of my post — from a time when it was very difficult to get a prepaid smartphone.

Continuing the quest to save money on a wireless smartphone, two approaches:

1. First: Here’s something that really works nicely: Get an unlocked smartphone (I like the Nokia 5800) and sign up for AT&T prepaid GoPhone service. Put about $100 on the prepaid account, or less if you want to test reception first. Then as an option to your GoPhone account, buy the Feature Package that gives you 100MB of data for $19.99. Now, do this:

  • Use free WiFi service for Internet wherever you can — at your local coffee shop, or your home if you have a wireless router, for example.
  • When you’re away from WiFi, use your AT&T GoPhone internet service.

Then, check on your data usage. If you’re like me, you won’t be using the AT&T Internet all that much. Finally — this is important — before your unused data expires in 30 days, buy another 1MB of data for $4.99. This rolls your unused data from the 100MB plan over for another month. Continue renewing for $4.99 a month until you need more MB of data.

For more on this plan, see what Hook has to say.

2. Second: And, for something really inexpensive, take that same unlocked smartphone and get T-Mobile Prepaid. Use free WiFi whenever you can. When you’re out of range of free WiFi, try this very inexpensive substitute for having Internet service:

Use Google SMS. Example: I was headed toward Roanoke, Va., on the Interstate but concerned about the weather, so I texted weather roanoke to 466453 (“GOOGLE”) and got back the weather summary via return text message. You’d be surprised how much information you can get that way (restaurant search, movies, air travel updates and more) — see http://www.google.com/mobile/default/sms.html for details.

For more on this approach, see my earlier post.