Account maintanance, tune ups, and hot rodding,

The cat paradox.

Why does a cat piss on the carpet? Nobody likes it when the cat does this and the cat knows it but does it anyway. The cat has its reasons and so do I. Investment maintenance.

General tips.

Most investors drastically under perform the S&P 500. Your goal is to get as close as possible to market returns. How do you get market returns?

1. Do not get scared or greedy, if you do do not act on these emotions.
2 Avoid timing the market. The market is random. Embrace this.

3. Try to pay as little in fees and cut taxes

4. A good investment has high returns and low volatility. Remember this when thinking about investing in something other than a well diversified index fund (either stock or bond market)

Below is high hanging fruit, which means we are close to the end! If none of the ideas in the previous post have been new to you, prepare to be "dazzled" while being put to sleep at the same time. High hanging fruit isn't as easy to get as low hanging fruit, and neither are the below ideas.

There is a difference in tax treatment between interest and capital gains. Interest is taxed same as income. Capital gains is taxed at 15%. If you own corporate bonds these are taxed as normal income which for most of us is higher than capital gains rate of 15%. Consider putting interest generating corporate bonds in a tax advantaged account (traditional pre tax IRA might be optimal if you have one laying around as it will be taxed as income anyway)

If you own a index fund (say s&p) in a individual account and it is doing well, don't touch it to defer capital gains as long as possible. This is a free gov loan at 0% interest. Move your money around as little as possible is a good practice anyway, as it usually cost you fees and taxes.


If you have an asset that you think will grow real fast (either stock index fund or see small cap value below) try to put these in a post tax Roth account as it is not taxes.

If you own a fund in and individual account and you are loosing your shirt (say a 15-20% loss on it), time for tax loss harvesting. Sell the looser to take a capital loss on it, and buy something slightly different(be sure to check the rules on this, selling a vanguard s&p fund and buying a fidelity s&p fund is not slightly different) This was a fun pastime of mine in 2008-2009. This is a great way to later generate a tax free loan on the loss (defer taxes). It also helps lower your taxes. If you don't use all your capital loss it rolls over forever and you can write a certain amount off your income each year ($3000 ish) which is usually a better deal than subtracting the capital loss from your capital gains.

Also if you own bonds, consider this. If on one hand you are loaning money out and getting 5% back (corporate bond individual account) and on the other hand getting a loan on your house for 6%, you can see why this is silly There may be good reasons to do this, you like in an earthquake area, cash flow, etc but you are paying a premium. Treat the amount of cash in your house to be % allocation that you have in a bond.

The opposite scenario is worth thinking about. If I could borrow at 1% I would borrow all I could get. but leverage can kill. On leverage Buffet says" a stupid person should never use it and a smart person doesn't need it" or something similar. If you got cash in your house and can borrow on it at a great rate, and can use that money to max out say a Roth, and your rate of return is good(say s&p500 investment) it may make sense to do this. On a personal note I have proved Buffet right in 2008 by borrowing at 0% for 12 months (put kitchen on Lowe's credit card) turning a $15,000 kitchen into a $20,000 kitchen. On average this cute plan should have worked great but it ended up being a jam toast carpet scenario.

Dollar cost averaging. (401ks make this easy) try to invest a continuous stream of money over time. Also Try to avoid reallocating large chunks of money all at once. Instead do it very slowly. This helps avoid market timing mistakes.

Avoid cash drag (money not invested)

Re balance your allocations to where you want them. (once a year or so) Remember what you decided for stock bond allocation? keep it going, adjust for age and other factors that may effect how much risk you are willing to take (Dow Jones number is not a consideration)

Take another look at HSAs. HSAs as you recall are never taxed if you spend the money on health related expense or health insurance. If you are worried about not being able to spend all the money on health costs don't be. If you pull money out of an HSAs in retirement for non health expenses the money is taxed as income (just like an IRA) If you go to the hospital a lot this may not work for you.

Take another look at Roths. IRAs (401k pretax) are not as great as most people think. Roths (or 401k post tax) are most likely better.

IF you are well payed now, start saving now to pay tax bill in 2010 when you smartly roll over your IRA into a Roth.

Once in retirement, the plan will be to pull money out in roughly the following order, all the while keeping an eye on your tax bracket and adjust accordingly.

Individual accounts (pay capital gains) when doing this sell small gains first, big gains last to defer taxes and keep The free gov loan going.

IRa's (Will be taxed as normal income) Watch out for mandatory withdrawls in your early 70's

and finally Roths (no taxes!)

Hot Rods

The previous entries are pretty solid. Usually hot rods are less reliable than other cars, but if you are willing to take more risk and want to hot rod your portfolio, here are some thoughts. I am getting onto thinner ice here.

1 Best way is to move your portfolio to 100% stock allocation (index total market low cost) do this first.

2. There is historic data that shows small cap value index funds returns are higher but more volatile. You get compensated for taking on risk with historic average returns of a Little over 12 %. IF you are willing to accept more volatility, You could buy this index. Roth is a great place to buy this one, due to the tax free growth.

3. Some books mention adding a international total market fund. There is not a lot of long term data on this. May or may not prove to be a good idea. There have been some studies that show it does create a portfolio with less volatility(1%). no more than 30% is a good number to shoot for if you subscribe to this theory this is one hot rod add on that is OK to think about even if you do have bonds. If you think that international companies in general will grow their earnings the same or faster than U.S. companies, than this may be a good option if you end up being right. The flip side of this diversification move is that if you own US stocks, you already have some international exposure.

5. Emerging markets. Quite a bit of volatility or speculation, but this is a hot rod. use sparingly. small caps perform very similarly with less risk so may not be a good idea.

Back to the cat paradox. Why did I write this? Like the pissing cat, I know people don't like talking about this stuff. I too have my reasons. I hate seeing money wasted (mine or others) Life has changed much since the days of our parents. Most had pensions. They didn't have to worry too much about this stuff. Our generation is one of the first with no pension. We gotta handle our own. This seems like a crisis but could prove to be an opportunity. I hope you save/make some money off this advice and have found some interesting and creative ways to spell words. Like 50 cent says "get rich or die tryin" Good luck!