Another big reason why you should have Stock in a 401(k)

For the Tax advantage!

If you thought, like I did, that everything in your 401k from bonds to equities to mutual funds would be exposed to the same awful ordinary income tax rate at withdrawal – check out this seldom discussed or written about 401(k) maneuver that could save a lot in taxes.

Retirees who withdraw their employer's stock, rather than rolling the shares into an Individual Retirement Account will enjoy a tax break.

Upon withdrawal, the retiree will pay taxes on the average cost of the shares when they were bought in the plan.

When shares are sold, the gain (the difference between the current value and cost in the plan) is taxed at long-term capital gains rates.

Given the difference between the top ordinary income tax rate (35 percent) and long-term capital gains rate (15 percent), this tax break can be significant.

For an example, let’s assume you own 1,000 shares in your 401(k) plan that are worth $100 a share, or $100,000, and that these shares were acquired in the plan at an average cost of $20 per share. Roll the shares to an IRA and pay no tax now. Later on, you can take all 1,000 shares out of the IRA, and if you're in the top 35 percent income tax bracket, you'll pay $35,000 in ordinary income taxes on the entire $100,000.

Instead, Do Not Roll the shares into an IRA. Take them out of the plan now and pay ordinary income taxes on the cost of $20,000. In a 35 percent tax bracket, that's $7,000 in taxes now. Later, sell the shares and pay capital gains taxes at 15 percent on $80,000. This works out to be another $12,000 in taxes. Total taxes paid: $19,000 versus $35,000 in taxes if rolling over the shares to an IRA and the shares out later.

One other key point to consider is that If you never sell and left the assets to your heirs, the cost basis on the shares will be stepped up to their value on the date of your death. Your heirs could then sell the shares and never be taxed on any gains!

This gives me one more reason to hang on to my company stock. I had considered selling the stock simply because it has grown to over 10% of my portfolio. I have been struggling with that since its fundamentals are still excellent and its a great stock to hold in recession or bear markets.

Make this Frugal activity part of your Life

Need a New Year's resolution that you can keep? How about walking? Walking is one of the most frugal activities you will ever find. It's free and the benefits to your health are priceless. No special clothes or gear are required. It's convenient and can be done just about anywhere. Best of all walking can be done at your own pace.

I walk everyday. I don’t consider it a work out, just a walk. It feels right. The human body was designed for walking. The natural locomotion puts me at ease, slows down the world and releases stress. Walking is a great time to put your problems at the back of your mind and let it churn on them for awhile, subconsciously. Many times, while walking, I have thought of new ways to tackle a problem.

When walking, you can’t help but become more aware of your surroundings: fresh air, scenery, neighbor interaction, the changing sky, the weather, the wind in the trees. I prefer to walk with my dog and he appreciates these things even more than I. It's rewarding just to see him have the time of his life, raising his nose to catch a scent, investigating a clump of grass and taking note of everything in his path. It’s like a kid in a candy store and really amazing how much energy he generates just walking. It’s his lifeblood.

I usually walk in the evening after work. I use that time to reflect on the day and try to think of a few things that happened during day that were good or that I can be thankful for. It’s easy to take our lives for granted. We are very fortunate compared to most people on this planet and its important to recognize these things on a regular basis. By doing this little exercise, you will quickly realize how many good things that you have in your life.

Some days I am thankful for the nice cup of coffee that I had that morning, or a conversation that I shared with someone, or the enthusiastic greeting that my dog delivered when I arrived home. These are small things that I have learned to appreciate and many times that’s all it takes to make a day better.

Are we UNDER estimating Social Security Benefits?

It seems a lot of us complain about paying into SS. We don’t have much choice and its frustrating to know that we probably can’t count on it. I have always assumed that I would probably pay more into the system than I would ever get out. But, I had never run the numbers and now seems like a great time.

I used the SSA calculator provided on-line to estimate my SS benefits for a couple of different scenarios.
1) I assumed a retirement date of Jan 2010. So as of that date, no more funds would be contributed to my SS total earnings.
2) I assumed a retirement date of now, Jan 2008.
3) I assumed a conventional retirement at age 62. This means I would continue to contribute to my SS total earnings for an additional 15 years.

The difference in the estimated monthly benefit amount, (which would begin at age 62) was 3.5% between retiring today or delaying until Jan 2010. So, working an extra 2 years adds another 3.5%.

In the final comparison, between scenarios 1 and 3, I found that by retiring early in Jan 2010 my SS benefit would be reduced by 14%. That’s not a bad trade off. I am very willing to retire 15 years early and take a 14% benefit cut.

For the next part of this analysis, I referred to the pamphlet that the SSA sends each year to every taxpayer that explains their SS benefit. It details the amounts already paid into the system and projects what your payout will be in the future. My earnings from age 16 to present were provided in the SSA pamphlet.

I added up all of my SS earnings and multiplied by 12.4%. That is the amount that my employer(s) and I have paid into the SS system on my behalf. This number was less than I expected. I then divided that amount by the projected yearly SS benefit, assuming early retirement at Jan 2010, to arrive at the number of years required to collect benefits equal to my pay in. (I estimated my salary for 2008 through 2010 and added it in to the calculation as well)

To my surprise, it appears that with the current system, I could actually get every penny back and more! All I have to do is live 9.5 years beyond my 62nd birthday to collect every penny I ever paid in to SS. It is very likely that I will live to the age of 71 and maybe even several years beyond that.

One last note, for all of these calculations, I used today’s dollars. SS benefits will actually be adjusted for inflation, so the payout will be increased based on the inflation rate. This is a significant adjustment that will improve these numbers even more. By converting to inflated (future) dollars, the time required for me to collect the amount that I paid in to the SS system is reduced to 5.6 years.

Free Portfolio Analysis by Vanguard

Vanguard offers a portfolio evaluation tool called Portfolio Watch, as part of its Voyager select services. The analysis compares your stock and mutual fund investments with overall market weightings in terms of capitalization, style, and industry sector. The concept is that the more your holdings vary from the market bench marks, the greater the probability that your returns will differ, higher or lower, from the market.

The exam included an evaluation of overall market risk, mutual fund costs, tax efficiency and concluded with steps or recommendations to update and fine tune my investment strategy.

Before we get to the analysis, let’s take a look at my portfolio asset allocation. I call it the CoffeeHouse Portfolio with a Double Espresso Shot. The allocations for each holding are shown in the following table. The dollar amount of the asset is divided by the total dollar amount of the portfolio to arrive at the “weighting” for each fund or stock in the portfolio.

The Fixed Income asset type is a money market account. The 40% allocation to Large CAP stocks has been broken down into three subcategories: Health care fund, defense contractor stocks and technology stocks. So, health care is actually 28% (0.7*40) of my holdings, defense is 10% and technology 2%.


















Cautions
Throughout the analysis VG provided advice, tips and made note of a few cautions. VG states that these cautions are areas where my portfolio differs from the broad market target. I have listed each of the four cautions below. I have also summarized my assessment and what my plan of action is concerning these cautions.

Bond allocation is low
I have never been comfortable settling for the significantly lower returns of bonds. In Bogle’s book, Bogle on Mutual Funds, he talks of bonds returning 7% and equities 8%. This was back in the 90’s - I would like to find a quality bond at that rate, today. Bonds are not risk free and have much less upside than stocks.

Certainly as one moves into retirement it is prudent to add more fixed income assets to reduce risk and smooth out the market ride. I have been accumulating cash in a Money Market account as MMs have outperformed bonds in the last few years with minimal additional risk. I plan to direct that cash towards the purchase of TIPS and Municipal bonds in the near-term future.

Hold Less than 5% in company stock
VG recommends not holding over 5% in any one stock. This is sensible advice given the volatility of individual stocks. I have not made this change because the stock that I hold at 10% is a non-cyclical, defensive stock that should do well in volatile markets and recessions. I am well aware of the Enron debacle, but I think every situation needs to be evaluated in it's own light.

Increase Emerging market holdings
Given the capital and liquidity issues that are occurring in the US (see financial mortgage meltdown), I am hesitant to invest in new developing countries that may require extensive amounts of capital for business development. I prefer to invest in developed international markets which have less risk. Additionally, Emerging markets have had a significant run-up in performance lately and are not a good value buy at this time, anyway. This is a sector that I have researched, but never felt compelled to pull the trigger.

Hold Growth and Value stocks in similar proportions
VG recommends a portfolio with equal weight in growth funds and value funds. This is an area that I have been working on to get to at least a 2:1 ratio (Growth equals 2 X Value). I will continue to add new funds to the value side of this as I move into retirement phase. In addition, I am interested in increasing my holdings in Berkshire Hathaway stock – which I consider to be a large cap value stock.

Overall take
The analysis and charts are organized and informative. The advice is straightforward and easy to understand. I especially liked the “xray” ability that VG used to dissect some of my fund holdings. For instance, one fund has a 15/85 split between international and domestic holdings. The tool actually split the fund by the appropriate amount into each of the two sectors, so that my total portfolio allocation reflected this split.

The analysis confirmed my suspicions about some of the shortcomings of my asset allocation strategy. The second opinion was helpful and motivational. After reading through the analysis a couple of times, I have been encouraged to make some changes to my bond and value fund allocations.

Misguided Wealth Correlations

I have stumbled upon a few articles lately that attempt to correlate wealth with other human traits/factors. Any time generalizations like these are made, there should be some data to back it up. If I ever find some I will post it! In the following, I examine a couple of the findings.

The Marriage Correlation
Many folks seem to be convinced that wealth and marriage are closely related. That’s interesting, since the majority of marriages end and the root cause cited most often is money. If they were better off married, with more money than when they were single, why is money the reason for divorce?

As for economy of scale, I think it's possible for two people to live together more economically than single, but in reality that does not happen. People tend to do more things together, go out more, entertain more, buy more, buy bigger houses, more cars, boats, compete with the Jones’ etc. when they are a couple.

James of the DINKS even goes so far as to say that single people are losers, so they have less money. Note, that James himself is recently married, so evidently he was a loser last year, but not this year!

In reality, most people tend to gravitate towards others that have similar social and educational backgrounds. Nobody wants to settle for a loser, but then most can’t stand the thought of being single, so losers do get married. And they usually get married to other losers. Staying single in this society is not by default, it is a choice to not settle.

The Intelligence Non-Correlation
Another article concerning wealth entitled “Brains no requirement for wealth” was authored by Jay Zagorsky, a research scientist at Ohio State University 's Center for Human Resource Research. In the article, he makes several bold statements that there is no correlation between intelligence and wealth. He is quoted as saying “Your IQ has really no relationship to your wealth.”

Its tough not to be skeptical. How many geniuses are lined up at the soup kitchens? Unless the money was inherited or won, people with money seem to be pretty good about keeping their money and making more.

Even when someone with a low IQ wins money, it doesn’t take long for him to lose it – lotteries are a good example. There are numerous stories about lottery winners losing it all within a year or two. If wealth and IQ are not related, these folks should have a better track record for maintaining their wealth.

But the real kicker was the way Zagorsky measures wealth. Zagorsky said you only have to look in the parking lots of the nation's universities to see that intelligence and wealth are not necessarily linked.

“Professors tend to be very smart people,” he said. “But if you look at university parking lots, you don't see a lot of Rolls Royces, Porsches or other very expensive cars. Instead you see a lot of old, low-value vehicles.”

In my opinion, any conclusions that Zagorsky states need to be evaluated closely, given that he is looking in parking lots to determine wealth!!!!

Intelligent people do not always drive Rolls Royces. In fact, that would be extremely rare. The wealthiest people that I know, drive conservative, high mileage, low value vehicles because they are smart enough to know that vehicles depreciate quickly and are not a good investment.

That’s just basic financial sense that does not require a research grant to validate.

The Benefits of Paying off a Mortgage are Priceless!

Mortgage prepayment can be a hot topic, for some. The debate can get emotional fast with lots of facts and figures being thrown around. But, sometimes the most important factors can not be measured. We all know that these factors are important, but they just can not be quantified easily. As a result, we analyze only those things that are readily available for analysis. And then we overweigh our decisions based on that available data. These are common mistakes that lead to human misjudgments.

Don’t overlook the unquantifiable, but key, critical factors. For instance, below are a few benefits to paying off a home mortgage, some can be measured while others are priceless!

1. Asset Allocation. Most Financial planners will advise you to diversify your portfolio. Many recommend allocating 10% to a Real Estate Investment Trust (REIT). Why not invest in your own real estate – your home. The gains are sheltered from taxes and the home does not distribute any taxable dividends.
   
2. Guaranteed rate of return in the neighborhood of 6% (varies with mortgage interest rate)
   
3. Security is priceless. Miss a couple of mortgage payments and see how long before you are kicked out of “your” home.
   
4. No Fear of the future. When times get tough during economic downturns or when you are facing uncertainty with your job, you can rest assured knowing that you are financially stable and you can face the future with courage.
   
5. Enables you to operate from a position of power. This factor can impact your entire life and how you make decisions. You WILL gain confidence from paying off your house. It is a huge accomplishment.


6. Ownership. Pride in ownership is another immeasurable benefit.


7. Control your own escrow and pay your property taxes on your own schedule. This will allow you to pay two years worth of property tax in one year to maximize your tax deductions.

If you are still on the fence trying to decide whether paying off a mortgage is the right thing to do consider the following question.

Are your investments diversified? Paying off a mortgage, while not having any other investments or an emergency fund is not a good asset allocation plan. A better choice may be to split the money three ways: add a little extra to the mortgage payment each month, save a little to an emergency cash fund and invest a little in equities.

Behavioral Finance – Psychological Denial

This is the second in a series of posts about common human misjudgments. The series is based on a Charlie Munger speech at the Harvard Law School in 1995.

2. Psychological Denial
When reality is too painful, people will distort it.

Charlie Munger gives the example of how some mothers appear to have unwavering support for their sons that have been convicted of crimes. Even in the face of overwhelming evidence and hard facts, some mothers will continue to think that their sons are innocent of any crime or wrong doing. That's simple psychological denial. The denial results from the fact that reality is too painful to bear, so they distort it until it is bearable.

In the case of personal finance, it is very common for people to deny that they have a financial problem. The thought of owning up to our expensive credit card habits makes us very, very uncomfortable. So we deny that we have a problem at all. One survey found that 58 percent of respondents claimed to pay off their credit cards in full every month. This is in contrast to studies that show that number closer to 40 percent. But remarkably, only 3 percent of respondents believe that most other people pay off their cards in full.

Not only are people denying the fact that they are not paying their cards off, but they are refusing to believe any body else is paying off their cards.

We all do this denial to some extent as it is a common psychological misjudgment.

So what can we do about it?
Remember the first step to improving a weakness or solving any problem is to recognize it. Now that you are aware of this common psychological misjudgment, look within yourself to find anything that you are in denial about.

There has got to be something. Let’s just stick with personal finance, for now. Perhaps you are outspending your earnings? In this case, you may avoid looking at the facts. For instance, do you pay the minimum amount due on your billing statements and then toss them with barely a glance at the total amount owed? Do you know what your credit card interest rate is? Are you trying to deny the situation by ignoring it?

Or maybe you are not saving enough for retirement. Do you avoid thinking or planning for your long term future? You may feel that you do not have the income to fund your retirement without impacting your lifestyle, so you choose not to think about. Reality can be tough. But, the reality is that you must save a part of every paycheck, even if it’s just a few dollars, to fund your retirement. Pay your future self first by putting aside a small amount for your retirement from every paycheck.

Cross Over Point - Net Worth to Total Earnings

One of my financial cross over points is approaching.

What is a Cross Over Point?
Simply put, a cross over occurs when one entity exceeds another.

There are several different types of financial cross over points. One popular cross over concerns passive income as compared to expenses. For instance, once your passive income (non-wage income) crosses or exceeds your expenses, you are now making more money from your investments than you need to live. Ahhh, a signal of financial independence!

Another cross over point that I find interesting compares net worth to total earnings. Do you have any idea how much money you have earned in your life? Its probably more than you think. What if you had been able to save every penny that you ever earned? You would probably have a large sum. Obviously, we can’t do that as we must spend some to live. However, we can invest the money we save and it will grow to eventually catch up to our total earnings value.

Net Worth / Total Earnings Ratio
Out of curiosity, I decided to calculate the ratio of my net worth to total accumulated social security earnings. For my earnings, I used the official data provided to me by the Social Security Administration. Every year, the SSA sends each taxpayer a pamphlet that explains their SS benefit. It details the amounts already paid into the system and projects what your payout will be in the future. I added up my earnings from age 16 to present that were provided in the SSA pamphlet. For my net worth, I used the most current data that I had calculated for last month, November.

The ratio of my Net Worth to Total Earnings is 0.98. The cross over point is very close. In fact, it’s possible with a little Santa Claus rally that by the end of this year the crossing will occur for my final net worth calculation.

What does it mean?
As a comparison, some of my co-workers have worked just as long and earned just as much or more than I, yet their ratios are in the area of 0.2. Have they really spent that much more money than me? Not exactly. You have probably heard that a penny saved is a penny earned. Well, it goes even farther than that. When you make a purchase, not only are you spending that dollar, but also all of the future earnings from that dollar. So, when you trade away money it can no longer work for you. This underscores the importance of starting a nest egg, no matter how small, you have got to start the seed. The money I have saved, has been invested and has been working for me for a long time. And now its almost to the point where it will surpass my total lifetime earnings.

Improving your Home’s Energy Efficiency

Lawrence Berkeley National Laboratory has done extensive studies of standby power since 1996 for the Department of Energy. They have found that for inefficient appliances, standby power use can be as high as 20 watts.

“For a single appliance, this may not seem like much,” the laboratory’s Web site says, “but when we add up the power use of the billions of appliances in the U.S., the power consumption of appliances that are not being used is substantial.”

The site provides an estimate for common appliances. This chart gives the minimum, average and maximum power used by appliances that cannot be switched off completely without being unplugged. For television sets, the laboratory estimates a minimum power use of zero watts, an average of 5 watts and a maximum of 21.6 watts!

Take a look at the chart to brainstorm on what you can do to reduce some of this power drain. We can get the most bang for our effort by going after the biggest power sinks. Notice that the most significant power hogs are TVs, PC monitors and audio equipment. For large systems like this, its time to investigate the use of power strips for shutting off whole consoles of equipment.

For instance, a power strip would allow you to shut down a TV, VCR, DVD, cable box/satellite system, and audio system with one switch. Another common console could be the PC, monitor, printer, fax, scanner, cable convertor, speakers and router. Wow, those peripherals start adding up, don’t they? Some of these items have an “always on” LED or an active remote control circuit that is the root cause of standby power drain.

I already have power strips for both of these systems, I just can’t get to the switches easily. So, I rearranged the setups, organized the power cords and mounted one strip on the back of my stereo speaker. I placed the PC system switch on the lowest shelf in my desk. Now, both switches are more accessible.

It was pretty simple to do this, yet the payback was rewarding. I really like knowing that I am becoming more efficient and at least making an effort to reduce my footprint on the worlds energy landscape. And maybe I will save a few dollars, in the process.

Behavioral Finance – Under estimating the Power of Incentives

This is the first in a series of posts about common human misjudgments. The series is based on a Charlie Munger speech at the Harvard Law School in 1995.

1. Under estimating the Power of Incentives
When given the right incentives, people will get things done. This is one of the key driving forces behind almost all human activity.

If something is not getting done like you want, then re-evaluate the incentives. Charlie Munger gives the example of FedEx as one of his favorite cases about the power of incentives.

Its critical to the FedEx system to get packages shifted rapidly in one central location each night. That was not happening and the whole system was breaking down. FedEx then realized that the incentive was wrong – they were paying the night shift by the hour and that maybe if they paid them by the shift, the system would work better. Problem solved.

It was the difference between paying someone by the hour or paying them by the job. When paying by the job, the amount of work is quantified and as soon as the work is complete the worker is done and collects his pay. Whereas, pay by the hour, means the worker is there for a set amount of time regardless of how hard or fast he/she works. They have no incentive to get the job done quickly. In fact, their incentive is to drag it out to collect more hourly wages.

How can we use this information?
If you want something done, the first thing you should do is specify exactly what it is, quantify it, and then form an incentive that will provide motivation to reach that target. When everybody on your team has the same ultimate goal, you are more likely to achieve success.

How does this human misjudgment relate to personal finance?
If you have an investment advisor that works on commission, he/she will advise you to invest in such a way to capture the largest fee possible for him/her. Their incentive is to have you buy and sell a lot of assets. If you have a fee only advisor, he/she will charge you for advice, but not charge anything for transactions. You want good advice and they want to give you good advice, because that will equal good returns and you will pay for more of their good advice in the future.

Now your goals have been aligned, you both want the same thing and
you are both more likely to achieve it.

What the Financial Planners will Never tell you

I have had an interest in Financial Planning for over 20 years and have read a lot of investment books, talked with Financial Planners, and more recently read a lot of Personal Finance blogs. If you have done this too, you probably realize that after awhile, they all seem to issue the same mantra about maxing out tax sheltered accounts like your 401(k) and/or IRA.

This is good advice, if you plan to retire at age 59 ½ or later. But, it falls short for those of us who would like to retire in our 40’s or even early 50’s. To retire early, you must invest in assets that are held in taxable accounts. Only in taxable accounts, can you access the money at any age without penalty.

When I started my career, I had very little knowledge about investing, but I knew I wanted to plan for my retirement. I followed the advice of the mainstream FP community to max out my 401(k) and to start a traditional IRA. At that time, I had no idea if it was possible to retire early or what it would take. Fortunately, I am a natural saver, so I accumulated a small starter nest egg in a taxable account. As I learned more about investing, I moved the cash out of a low interest savings account and into Vanguard funds.

Today, I have a much better handle on where I am going and what I need to get there. I plan to retire in my early 40’s. Now, that’s early retirement, not 55 or 59. I plan to live off my passive income (capital gains and dividends) only. I will have a pension that kicks in at 55, so my taxable accounts will need to provide the income “bridge” from now until 55. Of course, today, I know that had I directed more money into my taxable accounts as opposed to my 401(k), I would have been able to retire at 40. sigh.

But there’s even more unpleasant news. Not only is the 401(k) money trapped until age 59 ½ , but what is even worse is that we are forced to take Required Minimum Distributions (RMD) at 70 ½. Whether you need the income or not you must take RMD. RMD is calculated by dividing the value of your 401k by your remaining life span (in years) based on your life expectancy. Because, I have an overfunded 401(k), my projected RMD exceeds my current salary. So with RMD, Social Security, my pension and dividend income, I will be thrust into the highest tax bracket of my life for the last remaining, non-working years of my life. How weird is that?

The good news is that investing options have changed considerably over the years. Now, we can invest in a tax sheltered account like a Roth IRA and after 5 years access the money penalty free. In addition, this next year, many employers are offering a Roth 401(k). This is another investment alternative that can eventually be rolled over to a Roth IRA and accessed at any age without penalty. Both of these options provide tax free growth with free access to the money after 5 years and no RMD. Check them out – especially if you are interested in retiring early.;)

Rounding up Tax Deductions and Tax Credits

I have put together a short list of the tax deductions that I will be taking this year.

I am no longer able to deduct mortgage interest because I have paid off my home, but I do double up on the property tax. I pay two years worth of property tax in one year. This allows me to claim a larger deduction in the double year and then just the standard deduction the next.

My list of Deductions include such items as:
Double property tax
Monetary donation to alma mater
Clothing and household donations
PC and monitor donation
Gift of 30 T-shirts to co-workers
Monetary Gift to charity

What’s better than a Tax Deduction?
A tax credit, of course. This year, I plan on taking tax credits for a couple of energy-efficient home improvements. I had to replace a gas furnace, that will net a $150 tax credit. I also replaced some exterior windows. Unfortunately, that credit is only 10% of the cost not to exceed a maximum of $200.

Click HERE for more information about Federal tax credits for energy efficiency.

Behavioral Finance – Getting a Grip on Patterned Irrationality

I am an admirer of the investor Warren Buffet and his partner at Berkshire Hathaway, Charlie Munger. There is no denying their success and commitment to value investing. They seem to be unique in the way they make decisions and are often requested to expound on their investment philosophies.

One of the more interesting speeches concerning behavioral finance was given by Charlie at the Harvard Law School in 1995. Using the framework of Charlie Munger’s speech on the psychology of human misjudgment, I have created a blog series. The series includes an examination of several of the causes of human misjudgment and how they play a role in the decisions we make in life and of course, finances.

Why study human behavior in relation to finances?
Recognizing and understanding why people do the things they do, what drives them, and what are innately human tendencies is the first step in overcoming your own self and making sound decisions! We want to make rational, logical decisions concerning financial investments but emotions and irrational tendencies sometimes get in the way.

These behaviors are not all bad, many are good in some way - that is why they survived. In fact, these behaviors served a purpose that helped extend life at some time in the evolutionary process.

To allow a thorough discussion, each post in the series will examine one or two of the 21 following behaviors that Charlie covered in his speech:

Underestimating the Power of Incentives
Psychological Denial
Incentive-cause Bias
Consistency and Commitment Tendency
Pavlovian Association
Reciprocation Tendency Bias
Over-influence by Social Proof Bias
Available Tool Bias
Contrast-caused Distortions of sensation, perception and cognition
Over-influence by Authority Bias
Deprival Super-reaction Syndrome Bias
Envy/Jealousy Bias
Chemical Dependency Bias
Mis-gambling Compulsion Bias
Distortion by Likes and Dislikes
Tendency to Overweigh conveniently available Information
Over-influence by Extra-vivid Evidence
Mental confusion caused by information not arrayed in the mind
Stress-induced mental changes
Tendency to lose ability through Disuse and Common mental declines
Development and Organizational Confusion from Say-something Syndrome

Understanding Total Returns for Bonds

As part of my 2008 Finanical Goal, I plan to evaluate various types of bond investments, post about them and then select one for purchase. First, I want to examine how individual bonds provide returns.

Understanding stock returns is pretty straight forward - market price plus dividend, but Bond returns are a little more complex. In talking with friends and co-workers I realized that very few people are comfortable with how bonds work. In the book, Bogle on Mutual Funds, there is a very good explanation that I bookmarked for future reference. I have summarized Bogle’s description and added a few of my own comments, of course.

Bond returns are comprised of three items:

• Initial yield
• Reinvestment rate
• Impact of Rate change on market price

The primary factor by far is the initial yield – it is the major determinate of the future return on a bond.

One might assume that a bond with an 8% coupon would achieve a return of 8%, if held to maturity. This is not always correct, because of the reinvestment factor. US Govt bonds pay a semiannual interest coupon that is reinvested at the current rate (not the initial rate). If the new rate is less than 8% the return will also be lower and conversely if the reinvestment rate is higher the corresponding total return will also be higher. The following table illustrates the importance of the reinvestment factor for a 20 year Govt bond (8% coupon, $10,000 investment).

The third item, rate change, impacts the bonds market price and is only a factor if the bond is not held to maturity. An increase in rates will reduce the market value of a bond. Many have trouble with this concept. Here’s my explanation. If rates are increasing and you are holding a bond at a lower rate it is no longer as desirable (valuable) because better rates can now be had. You are locked in to your initial rate, but of course the semiannual coupon is being reinvested at this new higher rate. So not all is bad with raising rates – just don’t sell into that environment.

The table is somewhat misleading because rates rarely stay the same for 1 year let alone 20. For a 20 yr bond there will be 40 semiannual reinvestment dates. That will result in a lot of averaging of the overall reinvestment rate. The effect of averaging over a long time period explains why the impact of reinvestment rates is not the primary force in bond returns.

When Taxes exceed living expenses!

My total federal tax bill is frightening. I don’t hear anybody else complaining about their tax bill, anymore. They must have lots of deductions. In fact, the only worry I hear is that they might get hit with AMT! AMT was designed to snag those folks that have lots of deductions. Its kind of mysterious – nobody can tell you what trips the AMT hammer. And none of my co-workers have ever paid AMT or know anyone that has! But, thanks to the media, everyone is talking about it. The fact is only 3% of taxpayers actually fall into the AMT crosshairs.

As I said my tax bill is appalling. Not only is it the single largest expense that I have, it exceeds all of my other living expenses combined.
Think about that…..

How is this Possible?
No 1. I own my own home, so I have no mortgage payments. This reduces my expenses significantly.

No 2. I am definitely frugal – I hate to spend money. Not only do I hate to use money, but I hate to waste things. Things like water, gas, food, you name it - I try to conserve it. I am not suffering. I live in a very comfortable, nice home with a large yard. I have two vehicles and several recreational toys – all are older models and paid off. I could afford much more, but its not necessary and I would not want the associated extra expense and waste that would go along with bigger, fancier places and things.

Calculating my Tax to Expense ratio
Anyway back to the taxes. I pulled up my last 2006 tax return and fired up MS money to get my total expenses for 2006. Dividing my federal tax paid by total expenses equates to a ratio of 1.21. So, my taxes are 121% of my expenses. Just wonderful. It won’t be long before I will be calculating my 2007 tax to expense ratio. From the preliminary data, I expect to set a new personal best (PB) for excess taxation. I can hope and wish for a fair tax or a consumption tax someday, but the reality is none of our politicians have the guts to completely overhaul the tax system. As bad as the tax system is today, I fully expect it to get worse.

On the Bright side - We are in a Tax Holiday
For now, we should all enjoy our tax holiday, because someday soon we are going to pay for the lack of this governments fiscal management. The country has a budget, just like a household and when expenses exceed income then we either have to cut those expenses or make more income. Pretty simple. The country gets its income from you in taxes. So, since the US has already bought the Iraq war and SS and Medicare are untouchable expenses, its clear we will have to pay for these things with higher federal taxes.

Testing an Asset allocation in Bull and Bear markets

Ever wonder how your portfolio would hold up in a prolonged down or Bear market? How about evaluating the upside during a Bull market? With so many different asset allocations (Couch Potato, Intelligent Asset Allocator, Coffeehouse, Bogleheads, etc ) how do you know if you have the right mix?

One way to better understand your asset plan is to take it back in time to Bull and Bear markets. This can prepare you for what might happen in the future and help you evaluate how much risk you are willing to take. If the returns projected for a Bear market make you uncomfortable then you can use that information to adjust your holdings.

Note that there are many types of bear markets. Some hit the financial sector hard, while others hit technology stocks and so on. But in general, for a market to be considered a true bear market it will weigh down almost all types of stocks, just in different degrees.

Asset Allocation
As part of my personal financial plan, I have set up an asset allocation for my holdings. I call it the CoffeeHouse Portfolio with a Double Espresso Shot. The allocations for each holding are shown in the following table. The dollar amount of the asset is divided by the total dollar amount of the portfolio to arrive at the “weighting” for each fund or stock in the portfolio.

Now for more explanation on the allocations. The Fixed Income asset type is actually a money market account. The 40% allocation to Large CAP stocks has been broken down into three subcategories: Health care fund, defense contractor stocks and technology stocks. So, health care is actually 28% (0.7*40) of my holdings, defense is 10% and technology 2%. I broke these out because their performances vary drastically.

Market Returns
Now that we have the weightings, we need the returns for each market. The return data is based on stock or fund price data with the exception of the Fixed Income (Money Market fund). Because MM funds maintain a constant $1 price, the yield data was averaged across each time span. The stock and fund price data that was used in this table does reflect distributions as the price is adjusted when capital gains and or dividends are distributed. All of the price data was gathered using historical data from Yahoo finance.

For the Bull market example, I used the recent run from January 2006 to December 2006. The Bear market returns are from the couple of years following the irrational exuberance of the 90’s. I used prices beginning on 8/25/2000 and ending 10/7/2002 to calculate the total return during this Bear market. The next step is to multiply the asset weighting times the Bear or Bull returns for each asset class. For instance, the 5% fixed income allocation times the 3.8% bear return equates to a performance weighting of 0.19%. Each performance weighting is calculated and then added up to arrive at the total performance for the portfolio.

Bear and Bull Performance
This is how my portfolio would have performed in a Bull and a Bear market. For the Bear market, the portfolio would have returned 2.01%. It’s a small amount but at least its positive. Most people during this time frame lost a lot of money. For the Bull market, the total return was 21.98%.


If we look a little deeper into the mix, its apparent that Gold and Defense stocks were huge positive factors during both of these runs. Real Estate (REIT) was also a bright spot. One might be tempted to overweight in these sectors, but that could make this portfolio vulnerable to other types of bear markets.

When I first started this exercise, I wasn’t sure what to expect. But, I am pleasantly surprised. From this data, it appears that the portfolio has a good mix of assets that includes sectors that have low correlation to one another. This is a key to any asset allocation. However, I would like more data points. I plan to take this portfolio back in time again to several other Bear markets and post about it within the next month.

Smart Choices made easier with on-line product reviews

One of the best things about on-line shopping is the product reviews. They can be very helpful in narrowing down a large selection of similar items. For instance, how do you choose between the hundreds of different types of bar soap? I would prefer to buy the better quality soap, but how would you know without trying each type or finding a Consumer Report on everything you buy. So I am left with such discriminating factors as: Price, “what mom always bought” and catchy advertisements.

Now, with internet shopping those days of shopping blind are gone. If you are willing to try new products based on the reviews of others you may be surprised at how many great products are out there that just don’t have the shiny advertising to bring them to the front.

For example, I learned a valuable lesson about advertising and quality way back in high school chemistry class. I was truly amazed, at the time, that the most prolific, well-known brand of antacid did not perform nearly as well at neutralizing acid in a lab beaker as a much lesser known product. I wondered “How are we to know the best products without testing and reviews?” Now, I know of at least one way.

Just for fun I have listed some other benefits of internet shopping:

• Shopping from home in my PJ’s
• Comparison shopping across hundreds of stores
• Variety, there’s an abundance of similar products to choose from
• Free shipping offers with minimum purchase
• On-line coupons are easy to search for and find
• No taxes applied, if out of state
• No hassle from sales associates
• No waiting in line at the checkout
• Shopping lists are remembered at the on-line site
• Its delivered to my door

Any others?

Value Investing - seldom popular, always prudent

The first PF books that I ever read advocated a form of value investing. For instance, Peter Lynch’s Beating the Street, and the Beardstown Ladies common-sense investment guide expounded on the importance of due diligence. Doing your homework to find undervalued stocks and then buying and holding until everyone else got wise and bid up the price to a more reasonable valuation. Sounds easy. And if you have patience and courage, it is easy. It takes courage to buy a stock that no one else wants. It takes patience to wait for the market to figure out that stock XYZ is undervalued. Since I was new to investing, I thought this was the way everyone did it. LOL.

First Stock Purchase
I followed the advice and did my research. I had some brands that I liked and that I thought had some potential. From there I actually went to the library and checked out the Value Line. The Value Line’s Investment Survey provides an analysis of the company’s annual report giving an assessment of a company’s health and future prospects. Value line provided all of the ratios and financial data that I needed. I looked for such things as industry ranking, debt to asset ratio, price to earnings, management quality, etc. Finally, I had narrowed my stocks down to one – Apple computer. Apple was not in favor in the early 90’s, in fact, it was in distress. The perfect value play. I bought shares and held.

Value in Index Funds
I also looked for value plays in Mutual funds. I wanted low cost, broad based market funds. Since, I abhor fees and “no value added” expenses, I bought Index funds. My first selection was Vanguard’s S&P 500 Index followed by a couple more Small Cap Indexes and a Real Estate Investment Trust index.

The Dot Com Disaster
It was truly amazing. I got pulled in to fast and easy money. Why do all that work (due diligence) and then wait and wait? Instead, buy on momentum, jump on a stock when it's on it's way up, technical analysis is the mantra now. Yes, I made money, lots of money. Those were heady times – everybody was getting great returns – we had become stock picking genius’s and Warren Buffet and value investing was washed up. I was drawn into the crowd that kept saying that this was the “new economy”. All of that previous stock market history was meaningless. The favorite topic at the water cooler was the next hot stock………. And then I gave back a lot of money. For some reason, I am not sure, maybe it was sentimental, or just simple inertia, but I still held my Apple stock. My value play kept on.

Full Circle
The pain still lingers. That’s a good thing. I don’t want to ever forget the lessons from the dot com era. I cleaned out my stock portfolio. I sold off losers to offset capital gains from my Index funds. Then started reading value investment guides again, like The Intelligent Investor and Bogle on Mutual Funds. I have come back, full circle to value investing. I was fortunate, I only dabbled in dot com madness while maintaining my core index funds and of course my favorite value play: Apple. I am aware of a few co-workers and friends that poured everything they had into the skyrocketing market. And when it dropped, many assumed it was just a dip and used options to buy even more with borrowed money. That is a very painful lesson.

It will happen again and again
Don’t be fooled. After the 2000-2002 market dive, most of us were fearful of the market. We didn’t trust it with new investment dollars. So instead of buying into the market when it was cheaper, the crowd looked for a “new” type of investment. And the housing market took off…

CoffeeHouse Portfolio with a Double Espresso Shot

I came across the Coffeehouse portfolio one day several years ago while evaluating various ‘couch potato” investing approaches. The first thing I noticed was that the Coffeehouse is based on low expense Vanguard index funds and then I noticed that it was comprised of a lot of the same funds that I already owned. Wow, I was in the Coffeehouse and didn’t even know it. I agreed wholeheartedly with the simple low cost approach and with diversification across a broad spectrum of the market. I decided to adjust my plan percentages to align more closely….. with one major exception that I will explain later.

First, here is a Coffeehouse investment portfolio that employs a simple philosophy of diversifying in different baskets and capturing the entire return of each basket. Note this portfolio can be constructed using a fund company other than Vanguard, but its hard to beat VG’s low expenses.

The performance results of a simulated Coffeehouse portfolio projected back in time is provided below in comparison to the annualized S&P 500 results. The performance is based on rebalancing the portfolio yearly to its original allocation. The simulation resulted in an annualized 16 year return of 11%.

This is a very stable portfolio with little downside risk. It is interesting to note the performance during the bull markets of the late 90’s and the bear markets that followed. The large swings that many experienced during those times have been smoothed out considerably using the Coffeehouse allocations.

The Double Shot
The biggest difference between my portfolio and the Coffeehouse is my allocation to Large Cap growth stocks at the expense of fixed income investments. As a young investor with a long investment timeframe, I have been willing to take considerably more risk. As a result, I have a much larger weighting in Large Cap Growth and much less in bonds and cash. I also favor international funds with a higher percentage (18%) and have an additional small exposure to Gold (2%).

Watering it down
As I transition to retirement, I am more interested in stability and steady growth. Consequently, I anticipate making incremental changes to my portfolio so that I will eventually arrive at the Coffeehouse allocations. The first change will be to convert a portion of my IRA holdings from equities to bonds. This strategy will also take advantage of the tax efficiencies of holding bonds in a tax sheltered account. For more on this see: Improving your Tax Efficiency.

Quote of the Week - The Will to Win is Worthless without the Will to Prepare

One of my all time favorite quotations. This maxim is applicable to so many aspects of everyday life. We all want to win, but the one who wants it the most will prepare. Whether its studying for an exam, practicing for a sporting event, preparing for a speech, or researching a new idea, the one who spends the time upfront will be the most likely to succeed. That individual may not be the most athletic or the most talented, but they will be ready to do their best.

Just saying that you want to win rings hollow, if you have not already practiced hard. Your team mates will see through this. While your own conscience will allow the self doubt to creep forward and erode your confidence. Before long even you will question whether you can succeed.

Similarly, in matters of personal finance, we all want stellar returns that beat the market. But who is willing to do the due diligence required for planning, researching, analyzing risk and maintaining their investments to improve their portfolio’s performance?

Define a value, a goal and the steps to get there

Yesterday, I posted about the importance of having long term goals. Today, I describe one of my goals and how I plan to achieve it.

One of the things that I value is my environment. Its very important that I am content where I am living, working and playing. I was raised in the country and took much of it for granted at the time. However, after living in a large metroplex, I know exactly how important my environment is to my happiness. For instance I place a high value on clean air, low traffic, easy lifestyle pace, elbow room, privacy and natural surroundings (no concrete for me). My long term goal is to live on a small acreage in the country.

Now, how do I plan on getting there? First, I define a short term goal. My short term goal (2-3 years) is to sell my current home in the city.

Breaking that down even more to a 1 year goal, I have listed things that I need to do before I can sell my home. For instance, I want to replace a couple of windows, paint the exterior fascia, replace a shower stall and learn about selling a home by owner. I list these specific tasks and the timeframe that I plan to accomplish them. Because I know that these tasks are directly related to my long term goal, I am more motivated to get them done. And it feels great to check them off one by one knowing that I am making progress towards my ultimate goal.

Life is a Journey

Anytime an incident like the recent one in Omaha occurs, it reminds me just how fragile our lives are. Tomorrow seems inevitable, but there is no guarantee that any of us will be here for it. We must plan for our future and have goals in mind, but do not forget to live today. Life is truly a journey.

One of my favorite quotes is from Martina Navratilova. She has experienced much success in her life as a result of hard work and perseverance. She once said that “The moment of victory is much too short to live for that and nothing else.”

It is important to balance living for today with planning for your future. Everyone should have a set of goals that encompasses all aspects of their life. What do you value? Where do you want to be in 20 years? What do you want to be doing?

My list of values includes:

• My environment – where do I want to call home?
• Financial Security – what do I need to feel secure?
• Education – what am I interested in learning? What areas do I want to improve upon?
• Health – what activities do I expect to be able to do 20 years from now? How do I want to feel?
• Career – what kind of work do I want to be doing?
• Family and friends – what will these relationships be like in 20 years?
  
  After you define your values, you should be able to link specific goals to a value and then identify the steps required today, next week and next year to reach these goals. Like any big project, some goals can seem overwhelming, but remember your life occurs one day at a time. So take a step each day towards that goal and eventually you will arrive. In my next post, I will break down one goal as an example.

What your Credit Report can Reveal

Yesterday, I received a reminder from my MS Outlook calendar to request a credit report this month. The three credit agencies: Experian, Transunion and Equifax will each provide a free report every year, so by alternating between agencies you can get a report every four months.

What is in the credit report?
The format of the reports vary with the agency, but the information is generally the same. As an example, the Experian report provides the status of each credit card, loan and/or mortgage in your name. Detailed account information such as high balance, recent balance, date open/closed, credit limit and a balance history that can span a couple of years is listed.

The next section of the report lists the requests of all who have viewed your credit and the date of the request. You may not have initiated these requests, so you may not recognize some of these outfits. They might include:

• other creditors who want to offer you pre-approved credit
• an employer who wishes to extend an offer of employment
• a potential investor in assessing the risk of a current obligation
• credit reporting agencies to process a report for you
• your existing creditors to monitor your credit activity

In addition, the report lists your personal information such as variations of your name, addresses going back ten or more years, types of residence, past and present employers, phone numbers, social security number and date of birth.

And finally, the last section of the Experian report includes a Summary of Your Rights under the Fair Credit Reporting Act.

Why pull your own credit?
You know your credit is good, you have never had a problem, so why check it?
It has become incredibly easy to get credit – very few questions are asked. Gone are the days when lenders actually reviewed your history and assessed your risk before handing you a blank check. And as a result, it has become increasingly easy for people to steal your credit.

Checking your report is the only way to verify your credit and to find a problem before it gets out of hand. Strange things can happen. Sure there is the typical Identity theft case, where someone uses your information to get a credit card. But there is also the possibility that someone grabs your SS# and uses it to qualify for a job. At first, you might think that is great since all of their SS earnings will correspond to your SS#, but it won’t be so great when the IRS wants you to pay taxes on their earnings! Imagine the bureaucratic nightmare trying to prove that you did not make this money, let alone pocket it.

Even if you have no reason to believe there is a problem, it is prudent to request a credit report just for the peace of mind. It doesn’t impact your credit rating and its free.

How do I get my credit report?
The safest way to request a free report is to go to the Federal website (http://www.ftc.gov/freereports) and follow the link to the annual credit report site. The report is provided on line and can be saved to a folder on your PC’s hard drive for future reference. You can also request a report via snail mail, if you prefer.

'Tis the Season for Ten Frugal ways to Save Energy

A list of the Top Ten things that I have done this Fall to help reduce heating costs:

10. Installed programmable thermostat
9. Built attic insulation box for pull-down attic stairs
8. Blocked attic turbine vents
7. Placed draft blockers at threshold of exterior doors
6. Closed doors and heating vents to rooms not frequently used. This is only beneficial when there are no return air vents in the blocked off rooms. Otherwise the cold air in the room will be returning to the furnace causing it to work more to heat this colder air.
5. Added down comforter to bed and programmed thermostat to drop eight degrees lower at night
4. Placed space heater in computer room. If you spend most of your time in one room, it can be economical to use an electric space heater to increase the warmth in that room only instead of heating up the whole house.
3. Dress warmly, wear slippers, fleece, wool and/or poly-p which are excellent insulators
2. Take the dog for a walk. Even a short walk around the block will get the blood flowing to your extremities.
And finally the #1 way to feel warmer
1. Sip alcoholic beverages. Creates a sensation of warmth and well-being. Use at your own discretion.

Overspending – stop the spread of this demoralizing affliction

Stop for just one day. Delay unnecessary purchases for one day. Take charge of your spending. Yes, its addictive. Its cool to have a new gadget and sometimes that feeling lasts for days before the need to buy something else returns. Break the chain. Only you can do it.

Branding
Its amazing how much we identify with our brands – levi, gap, nike, etc. Not just any shoe will do its got to be a specific brand. We have many choices. But the selection rarely has anything to do with the quality of the item. Have you ever thought about how silly that is? Do you know where that attitude comes from? Its that same source that tells us everything we know about consumer products. Turn off the TV and Think for yourself.

The hidden costs
When you make a purchase, not only are you spending that dollar, but also all of the future earnings from that dollar. Its real simple, It takes money to make money. So, when you trade away money it can no longer work for you. That money will not earn any interest for you again. Its gone forever. Take notice - this is powerful information.

Who owns who?
All that Stuff requires maintenance. The more stuff you have the more time you must devote to maintaining it. Washing the car, painting the house, mowing the yard, washing the car, dusting the plasma TV, cleaning the bike, etc. The most valuable thing one can have is time and we give a lot of our time to stuff. All of that stuff owns you. When it gets to be too much – you know it. You get stressed out. People with less stuff and less choices have less stress.

Underlying issues
Why do we spend so much on stuff we don’t really need? Are Americans using shopping to soothe their pains and fill the voids in their lives? Is living an uncomplicated and simple life really that boring? Is shopping patriotic? There are lots of theories out there and its probably a combination of things that vary from one shopoholic to another. An interesting take on this was presented in the documentary “Freedom Fries”. Check it out - Its an instant watch movie on Netflix.

Improving your Tax Efficiency

The following list by Taylor Larimore over at diehards.org is often cited on the internet as the rule for tax efficient fund placement. The basic idea is to shelter tax-inefficient funds in tax advantaged accounts. Tax in-efficient funds are those that distribute dividends and/or have a lot of portfolio turnover resulting in capital gains distributions.

4-Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full..

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):

Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds

The underlying issue here is the disparity in tax rates. The IRS taxes dividends from bonds at your income rate and that rate is typically higher than the capital gains rate. For example, if you receive the same amount in dollars in capital gains from an equity mutual fund as dividends from a bond fund you would still pay more tax on the bond dividends. Consequently, it is possible to significantly reduce a tax bill by sheltering bonds in tax advantaged accounts.

Given the current marginal tax system, the tax bill for a single taxpayer earning $60,000 in dividend income would look like this:

10%*7825
+ 15%*(31850-7825)
+ 25%(60000-31850)
-------------------------------
= $11,423

Compared to the tax bill for $60,000 on long term (held 1 year or more) capital gains

15%*60000
= $9,000

That’s a savings of over 21%

I currently have very few bond holdings. As I near retirement, my goal is to gradually increase my bond allocation. In light of this tax information, I plan to convert approximately 20% of the funds that I hold in my Roth IRA to a bond fund. In the next few months, as part of my 2008 financial resolution, I will be evaluating several different bond options, posting about each and eventually making an investment within my Roth.

Personal Finance Quote of the Week

Quotes are great. They can be insightful and thought provoking. I am a long time subscriber to A.Word.A.Day. I look forward to learning a new word everyday, but my favorite part is the quote at the end of the message. Over the years, I have saved several quotations into a favorites document. Now, once a week I plan to share one of those quotes and relate it to PF, of course.

He will always be a slave who does not know how to live upon a little. -Horace, poet and satirist (65-8 BCE)

This is the cornerstone to successful PF. Living upon little and spending less than you earn. As long as you are overspending, you are in debt to others and you are in their servitude. Think about it. Could you quit your job tomorrow and pursue your dreams? Walk away and not worry about any bills or creditors coming for you? Probably not. We work to pay our debts. Some never pay off those debts, instead they accumulate more and more debt and remain bound and chained to unfulfilling jobs. True freedom is being a master of your own time – being financially able to walk away.

My 2008 Financial Resolution

It's never too early to get a jump start on your new years resolutions. Especially when Cash money life is offering a chance to win a 4GB iPod nano for writing out a financial goal for 2008.

My 2008 financial resolution is to learn and evaluate several bond options and make an investment.
Using the S.M.A.R.T goal format:
Specific - I want to increase my knowledge about investing in bonds to include mutual bond funds, US govt bonds, TIPS and municipal bonds.
Measurable -. I will evaluate each of these, make blog postings on each and make an investment in the bond instrument that best suits my financial plan.
Actionable - This is 100% possible. I have books that cover the subject, internet resources to mine and I can draw upon the experiences of individual friends and family that have invested in various types of bonds.
Realistic – I want to learn enough to feel confident in my bond investment. I do not expect to become an expert or become a bond trader.
Timely – I plan to start this month, evaluating a different bond instrument each month and then making an investment in April of 2008.

What is your financial resolution? The giveaway ends December 4th at 11:59 PM, Eastern Daylight Saving Time and the winners will be announced Thursday, December 6th.