I love credit cards.

I do, they allow me to postpone my payments for an extra month and earn a modest return on the cash in my bank account before I have to pay the bill. Over time the little bits of interest will compound to make me wealthier. On top of that, I make 1% back towards Amazon purchases!

Then why are credit cards so widely despised? I had a friend ask me why I used a credit card instead of a debit card.

I replied, "I don't understand."
"Well, with a debit card you can only spend as much as you have."
I replied, "That's all I spend with a credit card."
To which she said, "Oh."
"What?"
"Well, I couldn't do that. I'd spend more." She conceded.

Therein lies the problem; consumer perception of the credit card allowing us to spend more than we have. When you do this, you incur debt, and instead of getting paid interest, you're paying interest to someone else. Compounding works both ways, and when you go into debt and are unable to pay it off, that debt increases exponentially. If you are the kind of person who cannot avoid eating food when it is on the table, credit cards may not be right for you.

Never spend more than you earn. The only -ONLY- exceptions to avoiding debt are: taking on a mortgage and student loans (and those are also to be avoided at all costs). Otherwise, never spend more than you have. You will never have problems with this strategy. You will always have money left over. Everyone is happy.



To use a credit card you must treat it as cash in the bank. You might also consider it a loan from the school bully who expects his money back tomorrow. Or pretend someone is following you around watching everything you do until you pay it back (because they are). The important thing is to change your perception of a credit card from "credit card" to "cash card". If you would withdraw $50 from the ATM, mentally put $50 on your card. If your account is empty, leave the card at home.

Never abuse the card. The interest YOU PAY on credit card debt is three to four times that you might earn on the most aggressive investments in high yield bonds or leveraged stocks.

If you respect the card, it is a useful tool to get a little bit of extra interest on your cash deposits.

Personally I don't care what a film is rated, as I don't go to the theaters anyway. Everything is through Netflix, and I'll continue to rent those movies that pique my interest regardless of what the MPAA approves or disapproves of.

In general, ratings agencies hurt more than they help. Ratings agencies create an artificial form of censorship, and censorship in society can breed ignorance and squash creativity. However, there is some genuine content that is inappropriate for young people of various age groups, and the rating boards – be they MPAA or ESRB – are the only broadly acknowledged boards that perform this function (whether we like it or not).

Movie ratings do not make sense in many circumstances. However, the G and PG ratings are generally reliable guidelines for parents to determine whether their children should view a particular movie. I know people who use the MPAA ratings for their young children, and there have been only minor complaints.

This Film Is Not Yet Rated (TFINYR) director Kirby Dick argues that films containing graphic sexual content are punished – as measured by their rating – more than films portraying graphic violence, even when that intimacy is shown in an artistic, tasteful, or natural manner. There has been evidence documenting that viewing sexual acts (at least pornographic) does have an impact on the viewer's behavior (link NSFW). However, there is also evidence linking violence portrayed both onscreen and in-game to real-life behavior. Dick is correct, violence should be penalized more harshly in film than it is currently.



So why is it not it given a harsher rating? We are by nature a violent creature. Contest, conflict, and competition are bred into our psyche from infancy with sports and play. As such, people are more accustomed and accepting of violence. In the film industry this translates to more lenient ratings. In the U.S., sex and sexuality are less accepted by the mainstream public as something that can be discussed at the dinner table (unless you're Alfred Kinsey). I agree, sex should be something that people are more comfortable with, particularly since proper education about its benefits and consequences is so important in the age of AIDS, syphilis, gonorrhea, and (unfortunately) many other diseases, but giving more lenient ratings to films that may portray casual or deviant sex is not a way to accomplish that education.



Why don't the filmmakers create their own transparent board of film reviewers and have them rate their movies? I understand that the movies are restricted from distribution unless they have an MPAA rating, but all it takes is enough filmmakers to approve a new system and/or discredit the old system to validate a new system. I'm sure that nothing has changed at the MPAA due to TFINYR because they have no incentive to do so. However, complaining about the system - even via documentary - does nothing to solve what Dick considers a problem.

*Edit 06-12-07* This content is not original, but I am not sure what site I lifted it from, either.

At age 4...success is...not peeing in your pants.
At age 10...success is...making your own meals.
At age 12...success is...having friends.
At age 16...success is...having a drivers license.
At age 20...success is...having sex.
At age 35...success is...having money.
At age 50...success is...having money.
At age 60...success is...having sex.
At age 70...success is...having a drivers license.
At age 75...success is...having friends.
At age 80...success is...making your own meals.
At age 85...success is...not peeing in your pants.

Dollar-cost averaging (DCA) is a fancy term for buying investments on a regular basis, regardless of what's going on in the marketplace. Dollar-cost averaging is good, and everyone should do it with few exceptions. Getting in at the wrong time makes investors feel like they've incurred gambling losses, and may discourage investors from continuing to make deposits.

When to DCA
Whenever you receive regular payments, such as a check for work, you should invest a percentage. A 401(k) makes this process easy. If you are already maximizing your 401(k) or do not have access to a 401(k), make sure that you set aside a percentage of your check to invest in something that will grow in value. Ignore the fact that the stock market may have crashed or gone therough the roof, the important thing is to invest that money immediately, regularly, and in constant or increasing amounts.

This eliminates the desire and need to "time the market", or get in and out at the top and bottom. The mantra "buy low, sell high" is correct, but because nobody can forecast the marketplace, it is impossible and ultimately futile for all but the most sophisticated investors. It is more easy to invest regularly and mitigate the risk of getting in at the wrong time than it is to put all your money in at one time or invest irregularly and regret missing out on a market gain or chasing returns (investing in an asset that recently increased in value). Make sure that your regular investments are diversified among multiple assets such as stocks, bonds, mutual funds, and CDs.

Dollar-cost averaging may be easier to visualize (see chart). Picture the ebbs and flows of the value of the stock market, then picture your regular investments at various values. The average of those values will be between the high price (where you would ideally want to sell) and low price (where you would ideally like to buy). In this way DCA is a compromise to maximize your returns while mitigating risk.



When not to DCA
If you inherit a lump sum of money through work, accident, family, lottery, or other means you should invest all of it immediately. Money devalues over time, and you want to make sure that you capture all possible gains as soon as possible to gain the benefits of compounding (the more money you make, the more interest you earn, compounding the effect). As long as you diversify the investment over multiple types of products according to your risk tolerance - such as equity funds, bond funds, and international funds - the risk of investing at the wrong time is somewhat mitigated. The risk of your principal (your original investable total) depreciating is much greater than the risk of it devaluing across multiple investments. If you're concerned, consider a balanced or target-date fund as a one-stop shopping investment and plug the entire investment in.

Inaction is the worst possible decision
Investors often get caught in the headlights deciding among the millions of investments out there and knowing that their investment may lose value. However, not investing guarantees that your assets will either depreciate in value by sitting under your mattress or fail to keep pace with inflation in a bank account. Bank accounts almost never outpace inflation, and you need to invest. If you are still scared, speak with a financial advisor.



Next issue: Selecting an investment service and/or financial advisor

There should be mandatory classes in Personal Finance taught to every high school student as part of their core curriculum.

If you are old enough to work, you should have a modicum understanding of what to do with the money you're earning other than spending it on consumables (such as gas, food, electronics, bowling, booze). Basic finance is more valuable than history, science, art, music, gym, english or social studies. Everyone uses money in order to purchase the necessities to survive every day, and not having mandatory courses in its basic uses and management is a shame.

Some of the topics that might be covered in my suggested curriculum:

1 - Balancing a checkbook (don't laugh, most people cannot do this)
2 - Defining Interest and Yield
3 - How the money system works (velocity of money, printing, etc.)
4 - Credit Cards (yes, you could devote an entire course to this)
5 - Lending and Borrowing, e.g. debt
6 - Investments
7 - Bank services (i.e. what is FDIC protection and the differences between CDs and Savings Accounts)
8 - College savings, borrowing, and options available to students
9 - Financial aid programs for students, entrepreneurs, and homebuyers
10 - The time value of money



When I have a child I will do everything in my power to see that they get an excellent education in proper money and debt management. However, every parent is not capable of educating their child on fiscal responsibility. Personal finance is worth more than a couple seminars, it should be a core course and required as much as any art or music course because it enriches their lives. Not only that, but proper money management and savings should reduce crime, given that the majority of non-violent crime stems from the desire for the need for money. In fact, many violent crimes are related to money, too! Who knew?

Money management should lower the personal debt rate and result in increased spending. Increased spending? Of course, when you have more money, you have more money to spend. Also, when institutions have more money from investors and savers, they have more to lend to businesses, who in turn generate value, enriching the economy.

How is knowing the number of planets in our solar system - of which we can only visit one and haven't done so in decades - more useful than knowing that check-cashing places are ripping off workers? Or that the interest on credit cards is more than quintuple what the consumer can make with any certainty on their bank savings? When a student graduates high school only to go on to become so heavily indebted they will never have any chance of leaving their station in life, what good does a diploma do? Nothing. But they can tell you the atomic mass of Hydrogen (hopefully).

I will be looking into seeing if there is anything that might be done to add such a course to our public schools in Boston as time permits.

From the Associated Press today:

College students are more narcissistic and self-centered than their predecessors, claims a study by five psychologists who examined the responses of 16,475 college students nationwide from 1982 and 2006.

“We need to stop endlessly repeating ‘You’re special’ and having children repeat that back,” said the study’s lead author, Professor Jean Twenge of San Diego State University. “Kids are self-centered enough already.”

In conclusion, you are not special. Everyone is a sheep in a massive flock of 6 billion, and you need to get over yourself. You will not grow up to be President. You will not make a great living as an artist. You will not be the winner of American Idol.

Get a job, get married, support your kids, produce something valuable for society, and try to make as many people (including yourself) happy along the way.



"You are not special. Your are not a beautiful or unique snowflake. You are the same decaying organic matter as everything else."
-Chuck Palahnuik

I am lucky enough to be quoted on a regular basis in the media such as the Wall Street Journal, Investment News, Reuters, SmartMoney, and other financial publications concerning the 529 savings plan marketplace. Most recently I was quoted in SmartMoney discussing the increasingly beneficial aspects of using 529 plans to save for college. However, on page 97 of the print edition they show the Blackburn Family with their son. He's standing in front of a $400 Power Wheels Jeep Hurricane.

This kind of spending makes me sick. The kid is 3 years old, he'll outgrow the toy in as many years (if not fewer). The article is about saving for college; wouldn't that $400 have been better spent on college savings? The family only put $8,000 into the account, why not make it $8,400 and forget the toy? Or take that $400 and put it into clothes, books, supplies, better food, their 401(k), or at least a toy that will last him some time and bring the family together, like a Wii or an entire library of books. How about a LeapPad?

This type of logic does not make sense to me. I understand that a kid needs toys, but this is excessive spending on destructive plastics and electronics that encourage American consumerism. This type of toy has no positive benefits for the family or the child, with the possible exception of 20 minutes of entertainment a couple times a week. And it takes up space in the house.

How to construct a portfolio of funds

Why construct a portfolio? Consider this: you own one mutual fund with a large allocation of stock - say 10% of the portfolio – in stock of Marvel (NYSE: MVL). Then they release Ghost Rider. After Fantastic Four, Daredevil, and Punisher, investors realize that there may not be in for profits in the near future. After all, how many more Spider-Man and X-Men movies can they make? The stock plummets and you’re out 10% of you investment. To prevent this, investment professionals recommend a portfolio of mutual funds that use difference investment types to achieve returns. If you held 50% in one other mutual fund that didn’t own Marvel stock, you would only have lost 5% of your investment.

Conversely, if you owned only Marvel and its price doubled, you would double your money. However, this is called gambling, and I do not endorse it.

In school one of the first things they teach you is about the efficient frontier. The efficient frontier is a curve that looks like a hill, and represents that for each level of risk there is a corresponding portfolio composition that maximizes expected returns. If you are not on the curve, you are taking on either too much or too little risk for a given level of expected return.



The optimal portfolios plotted along the curve have the highest expected return possible for the given amount of risk. However, the curve changes depending on the investments available and the market conditions. So, how much do you invest in a given type of investment?

First, you need to determine your risk tolerance. Risk tolerance is the degree of uncertainty that an investor can handle in regards to a negative change in the value of their portfolio. Calculators vary widely such as the following one from fincalc.com. However, nobody wants to compute your risk tolerance for you and give you an optimal asset allocation (such as 40% stock, 40% bonds, 10% international, 10% cash) because doing so is a liability. This is why full-service brokers and advisors charge a fee. If you can determine your own asset allocation and understand basic investments, you can avoid fees by using a discount broker. I advise you to avoid the fees by doing a little homework.

1: Visit a website that will help you determine your risk tolerance. Just Google it.
2: Buy asset types in accordance with the risk tolerance, i.e. higher risk (equities) for a higher risk tolerance and more bonds for a lower risk tolerance. The easy way around constructing your own asset allocation, is to simply buy a fund-of-funds with your risk tolerance in mind, or to use them as an example. I use a proprietary asset allocation model from a prior employer (so I cannot share it), but you can construct a portfolio based on a balanced fund, such as Vanguard Wellesley (VWINX), which is conservative with 60% bonds and 40% stocks. You could also just buy a conservative fund if you happen to have a conservative risk tolerance (if you're under 40, you should not buy a conservative fund; you should at least purchase a moderate if not aggressive fund).
3: An alternative: buy a target date fund. It's like a heat-seeking missile, you fire and forget. Retiring in 2050? Buy a 2050 fund like the Principal fund (PZASX). Invest regularly and you never have to worry about investment mix or adjusting your portfolio, that's what a manager's for!

Whatever you buy, particularly if you're new at it, it will take time to become comfortable investing in an asset that may lose value. Even after you've made a profit, seeing the value decline on certain days or months takes stomach. So give it time.

Next Issue: Dollar-cost averaging
Next next issue: Selecting a financial service

What is the best investment: mutual funds, ETFs, or some other vehicle?

Either is fine. If you're very wealthy, you'll want to consider Separately-Managed Accounts (SMAs) or hedge fund products. However, some clarification is necessary. In general, about 80% of actively managed funds underperform their respective index each year. Open-end mutual funds are always actively managed, even those that track an index. However, the underperformance is not always caused by management, often it is due to the higher fees associated with open-end funds versus ETFs or their index.

I recommend constructing your investment portfolio from index funds, either ETF or open-end funds depending on your situation.

Why open-end funds are sometimes better
Many investors who have a brokerage account have access to a mutual fund trading platform, which is commonly referred to as a "fund supermarket". Some funds in the supermarket charge you a trading commission, while others pay the fee for you. When the fund pays the trading cost it is called a NTF fund, or "No-Transaction Fee". This is good. Unlike ETFs that trade like stocks, NTF mutual funds will not charge you to trade shares, and may be cheaper if you are dollar-cost-averaging (placing regular investments over a period of time). Also, many open-end index funds are ridiculously cheap, even compared to ETF funds.

For example, the Fidelity Spartan US Equity Index (FUSEX) charges a mere 10 basis points (basis points are hundredths of a percent, so 10 bps would be 0.10%). The ETF S&P 500 Spider (NYSE: SPY) charges exactly the same, 10bps. So in some cases, it does not matter.

As a result, you will need to determine through your broker what funds are available to you in order to reduce the cost. The share type is also critical, so compare shares before buying. Some funds are TF (transaction fee) but have a reduced expense ratio while the NTF share will have a higher expense ratio. Example: American Century Ultra Investor (TWCUX) versus advisor (TWUAX). A-shares, B-shares, and C-shares are broker shares and charge a load. Never pay a load. If you must use an advisor, use a fee-based advisor that will not charge you a commission on your investments.



Investment type determines investment vehicle
Investment type, which I will discuss later, also impact the fund selection decision. It is difficult to manage a portfolio of large-cap funds and outperform the index, so many people instead aim to match the index with funds like those managed above. However, it is easier to outperform small-cap indicies and particularly international indices, where a managed open-end fund is valued. International funds are difficult to manage because of currency issues. Some funds are tied to local currency fluctuations, which makes the fund more risky. Expert management is more valuable (and you'll typically pay upwards of 100bps for a quality international fund like Julius Baer (BJBIX) or Billy Blair (WBIGX).

My recommendations:
Large Cap - Index
Mid Cap - Index
Small Cap - Combination
International - Actively Managed
Fixed Income - Actively Managed

What is a mutual fund, anyway?
A mutual fund is an investment. Multiple investors pool their money to buy stocks, bonds, or other securities. If you have $2,000 to invest, but either cannot afford or do not want to take on the risk that comes with purchasing stock, a mutual fund offers immediate diversification as it invests in multiple securities. Mutual funds are generally the primary component of retirement accounts such as 401(k)s. They typically offer better returns than bank products such as CDs or savings accounts, but may decrease in value, meaning they are more risky.



Types of Mutual Funds
Open-end funds: These funds have tickers with five letters that end in X. For example, the Fidelity Low-Priced Stock Fund has the symbol FLPSX. You use the ticker to look up information about the fund, such as pricing. Open-end funds issue shares continuously, and redeem shares to provide liquidity (which means access to your money). There are open-end funds for a variety of investments and investment strategies, such as large-company stocks like General Electric Stock, or fixed income products that invest in debt issuance, otherwise known as bonds. Open-end funds are the most common type of mutual fund. All open-end funds have a management team, even if they only track an index. Open-end funds sell at the price at the end of the day. Fees vary widely.

Exchange-traded funds (ETFs): ETFs track an index such as the S&P500. They are passively managed and their price reflects their tracked market. ETFs trade throughout the day on an exchange, like a stock. They are well-known for their low expenses, though some exotic options may be more expensive. Because they trade like a stock, there may be trading fees involved with their purchase.

Closed-end funds: CEFs trade like ETFs, but trade a fixed number of shares issued once at offering to investors. These are typically only appropriate for investors in particular situations, and should be avoided by the average investor because their price often does not reflect the underlying investments.

How to Select a Fund
1) Know what you're looking for - You typically want to create a portfolio to diversify your risk exposure, which means buying a combination of large-cap, small-cap, international, and fixed-income products.
2) Low fees - Try to find funds that have low expenses, no load (front or back), and trade with NTF (No Transaction Fee). Different funds offer NTF depending on the platform. For example, Fidelity funds are typically NTF on the Fidelity platform. So are some Dreyfus and American Century funds, depending on the share type.
3) Manager tenure - Is the fund a breeding ground for new management, or do they know what they're doing? 3 years is minimum, but 5 years is best
4) Standard deviation - This is a measure of risk. The higher the standard deviation, the more volatile returns have been. This is particularly important for older investors that need to protect their principal.
5) Performance - Not as important, but if the fund has been a serious underperformer relative to its benchmark, consider another fund. Historical returns do not reflect future returns, but extended underperformance may show incompetence or high fees on the part of management.
6) Avoid gimmicks - Stick with basic funds that meet your investment needs. Fund that use advanced investment strategies such as hedging, or that have niche investment options like the Sin Fund (yes, that type of sin), carry either higher expenses or are not created based on logic, which is kind of important.

If you want more detailed information on specific mutual funds, try Morningstar.

Next issue - How to construct a portfolio of funds