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  • Archive for November, 2006

    The case for silver

    Posted by ML on 18th November 2006

    Frugal has written about Reasons for Investing in Gold & Silver Market where he presented a compelling case for investing in gold and touched upon the case for silver. It’s a case I want to further develop here.

    Silver supply/demand
    The structural deficit in silver makes it a compelling investment. This situation is illustrated by the figures from The Silver Institute (the first on supply, the second demand). For years running, mine production and scrap (recycle) have not kept pace with demand and the gap has been met by sales of above ground stock.


    The natural follow-up question at this point would be: “what is the remaining above ground stock?” An even better question is, “what is the amount of market accessible silver at $X?” Unfortunately, I’m not sure if anyone knows the answer. There are some estimates, for example, here’s one on how much silver remained in 1992:

    Total Silver that remains above-ground (all forms): 19.06 billion ounces
    Total Silver contained in silverware and art forms: 16.48 billion ounces
    Total Silver contained in bullion form: 1.40 billion ounces
    Total Silver contained in coin and medallion form: 1.18 billion ounces

    ROHS and silver
    Silver is often called the poor man’s gold, but unlike gold which is primarily a monetary metal, it has many industrial. Silver is a known bactericide. Some humidifier currently on the market uses silver rods to kill bacteria. Silver is also a well known conductor of heat and electricity.

    As a investor, I’m always on the lookout for new incremental demand of silver. ROHS (Restriction Of Hazardous Substances) presents such a situation. It’s an EU directive banning certain harmful substances from consumer products. One material affected is lead solder in electronic products. The main lead-free alternative is an alloy of tin, silver and copper. My back-of-the-envelop calculation says that to replace all leaded solder requires roughly 50 Moz of silver each year.

    The current annual silver consumption is about 900 Moz. To put an extra 50 Moz/year into perspective, note that in the crude market six month ago, all the spare capacity in the world was an extra 1 Mbbl/day from the Saudis, while world consumption was 80+ Mbbl/day. We all know what happed to oil prices then. ROHS was implemented this July and California will likely follow suit. If this trend takes hold, it will be an additional drain on an already tight supply/demand relationship.

    Gold/silver ratio
    So how does silver compare with the other precious metal, gold? The chart below shows 600 yrs of price history and the corresponding gold/silver ratio. The real silver price peaked around the time of Medici and has been heading down every since. Even the corner by the Hunt brothers that sent the price to $50/oz only brought the real price to the level of the 1880′s. The gold/silver ratio remained near 16:1 for centuries before rocketing up. Today it stands at 621.8/12.73=48.8.


    Click to enlarge

    The historic ratio of 16:1 is not far from the ratio of silver to gold in earth’s crust which is 17.5:1 (see ref 3 here). On the other hand, silver analyst Ted Butler has claimed that silver is more rare than gold when comparing accessible stock piles in bullion form. A more complete study of the existing above ground supply by David Zurbuchen found the silver/gold ratio to be 5.88:1. No matter how you cut it, any reversion to the lower ratios would imply that silver will appreciate much faster than gold in this bull market.

    Silver plays
    There are may ways to invest in silver:

    I’ll end this article by addressing two common refrains from investing in silver:

    1. Print photography is being replaced by digital photography, hence the demand for silver is going down.
    2. Silver is an industrial metal, as the economy slows down, silver demand will go down, too.

    Rebuttal:

    1. From the latest World Silver Survey, 2005 photography use was 164.8 Moz down from 181 Moz in 2004. However, this is only one side of the coin. A large part of the scrap supply comes from recycling photographic films and solutions. If 70% of the 2005 scrap supply (187.3 Moz) came from photography, net photography use was only 33.7 Moz, to be further off-set by the silver went into digital cameras and printers. The truth is that silver demand has been climbing even though print photography is rapidly going out of fashion.
    2. Using 2005 as an example, only 29% of the mined silver came from primary silver mines. Fully 59% were byproducts of zinc, lead and copper mining. Since base metals are more economically sensitive, silver supply is expected to reduce during hard times, cushioning the impact of lower demand.

    Like gold, silver is extremely volatile, so please make sure it is for you and observe strict allocation and stop-loss rules. Please do you due diligence before making any financial decisions.

    Posted in Gold/Silver, Investing | 9 Comments »

    Foreclosures from Yahoo! Real Estate

    Posted by ML on 17th November 2006

    I just discovered that you can search for foreclosures in addition to regular MLS listings on Yahoo! Real Estate. It was completely new to me.

    For example, in my zip code, when searching for a 3+/2+ single house, I got 44 MLS listings between $350k and $450k. Checking for foreclosures, I got 6 entries, all entered on Oct. 11-12. Half of the entries had auction dates prior to October so I suspect the foreclosure feature wasn’t available till then or it wouldn’t be very useful. Looking at other zip codes, I found houses in all stages of the foreclosure process, from “notice of default” to “foreclosure sale”.

    Each of the 6 foreclosures has an associated price that varies wildly from $129k to $423k. Further investigation indicates they are merely “estimated bid amounts”. The “More information” button leads to RealtyTrac which offers a 7-day free trial. The membership gets you the standard property information plus detailed loan information including the default amount, the last payment and the name of the owner (see the screen shot below).

    Not knowing much about the foreclosure process I’m not sure if the average home buyer can really take advantage of this information (Would someone at the NOD stage be a “motivated” seller? More likely they are in default in the first place because they are “under water” on the mortgage.) On the other hand, the number of foreclosures is an indication of the health of the local housing market (e.g. 305 listings in Sarasota, FL).

    If you know more about foreclosures or how to take advantage of this information please leave a comment. TIA.

    Posted in Real Estate | 10 Comments »

    Not so golden

    Posted by ML on 16th November 2006

    Another day, another record in the Dow. By now you are probably aware that the previously lagging Nasdaq and Russel 2000 have joined their bigger brethren in making new highs for the year. There is just no stopping this money train! I still believe the underpinnings of the US economy is weak, but as Henry To of MarketThoughts.com put it, “many of the major hedge funds out there are underinvested and underexposed to U.S. equities in general“. There is no use fighting the trend! I managed to exit my housing related shorts this week with small profits and is counting my blessings.

    Gold and oil stocks are conspicuous by their absence in this feeding frenzy. Since I suggested taking a partial position via GDX here, I want to follow up today. The weakness in the gold stocks relative to the metal in recent days was not encouraging, so although the HUI is still above my “line in the sand” of 315, I trimmed down the weaker names that amount to about 25% of all my PM stocks. FWIW, what I decided to keep were AUY, AEM, SSRI, SLW and others.

    As I cautioned before, the gold sector can be extremely volatile even though I’m a long term believer. If you have any doubt, live to fight another day.

    The above is not investment advice. Please do your due diligence before making any financial decisions!

    Posted in Gold/Silver, Investing, Market Pulses | Comments Off

    Asset allocation: Rebalancing

    Posted by ML on 16th November 2006

    This installment in the series on asset allocation deals with rebalancing.

    Basic premise
    The basic premise of is simple. After setting in motion a particular allocation plan, the asset classes would have appreciated/depreciated at different rates, such that the resulting allocation may deviate far from the original. Rebalancing is simply the process by which the original weighting is reclaimed. When the on-going contribution is large in relation to the portfolio, it can be most easily done by overweighting the contribution towards the “laggards”. Otherwise, it may be necessary to sell the overweighted asset classes to purchase the underweighted ones.

    The best guideline on when to rebalance that I’ve seen is from the Radical Guides.

    … the correct question may not be “How often should I rebalance?”, but rather “How far should I allow my asset classes to stray from their target allocations before I rebalance?”. Rebalancing only when an asset class reaches 150% of the target allocation, for example, will perhaps result in a more tax efficient and more profitable portfolio.

    Consider also this gem:

    Here’s one intriguing rebalancing variation to consider. If an asset-class allocation reaches 150% of your original allocation, don’t just cut it back to the target allocation. Instead, cut it back to below the target allocation – say 75% of your target allocation. If that asset class then falls to 50% of your original allocation, restore it to 150% of the original allocation.

    The rationale is as follows. If one asset class is appreciating much faster than the others in your portfolio, you want to ride the momentum to 150% of your target allocation. But when you are ready to trim back the asset class, it’s probably become overvalued relative to your other assets. So sell more of it than would be required to return to your “normal” asset allocation. Similarly, if the asset class then depreciates significantly, it has probably become cheap relative to other asset classes, in which case you can overweight it.

    The rest of the guide on asset allocation is sure worth a read as well.

    Rebalancing runs counter to one of the most cherished trading rules, “let the winners run.” Instead, the winner is (partially) cut short to feed the laggards. Philosophically, there are two assumptions here that are the quintessential of passive investing:

    1. Leadership in asset classes rotate, in other words, trees don’t grow to the sky.
    2. It is not possible to consistently predict which asset class will be leading at any one time. Alternatively, you may say the passive investor does not attempt to predict which asset class will be leading.

    Rotating leadership
    One perfect example of the rotating leadership is seen in the 10 year performance map from US Global Funds (I own their UNWPX and PSPFX). The funds are color-coded and arranged in order of returns in each year. There is no discernible pattern in this map so the annual performances appear random. Therefore, a passive investor who maintains a fixed exposure to each sector year in and year out. A good analogy is: an allocation plan + rebalancing is to individual sectors as an index fund is to individual stocks — and you know how actively managed mutual funds compare with index funds.


    Click to enlarge

    Small vs. large cap stocks
    The second example I want to discuss is the craze of small cap stocks in the past five years. If you had small cap stocks in your portfolio in the past five to six years, you must be quite happy with how they have lifted your returns. However, now is a good time to rebalance the portfolio if you haven’t done so recently. The over performance of small cap stocks has been mentioned in previous installments of this series, especially in the discussion on asset mix and the Fama-French three factor model.

    However, small cap stocks have NOT always outperformed larger ones as seen in the multi year ratio chart of Russell 2000/S&P 500 below. Indeed, prior to 1999 there was a 5 year period of things leaning the opposite way. Small cap stocks do outperform if one goes further back in history, a la Fama-French and may continue to do so in the future given enough time. But the question of how well the long term averages derived from 70-100 years of market history applies to a limited investment time horizon is a real and crucial one. 5-years may be a significant time with respect to many investors’ time horizon. In an environment of rising interest rates and input (read commodity and labor) prices, small cap stocks may not do well compared with larger cap, dividend paying stocks for some time going forward.

    John Hussman, manager the Hussman Strategic Growth fund (HSGFX, a hedged mutual fund which I own), is one of the more brilliant financial minds today. In one of his recent missives, he outlined the change in P/E of the 500 stocks in the S&P relative to their capitalization from 2000 to 2006, and concluded that the smaller cap stocks have experienced greater P/E multiple expansion:

    Median Price/Earnings Ratios for S&P 500 Stocks

    Market Cap March 2000 March 2006
    Top 50 35.6 17.3
    Top 100 30.8 18.1
    Top 250 22.9 18.3
    Bottom 250 12.9 18.8
    Bottom 100 11.5 19.8
    Bottom 50 10.1 20.3

    This data strongly suggests that valuation rather than pure performance was behind the gains made by the smaller cap stocks. Since valuation is cyclical, as the cycle turns smaller cap stocks will fall relative to larger ones. Indeed, small and mid caps have not managed to surpass their May highs whereas the Dow and S&P have done so convincingly.

    This is not a call to eliminate small cap stocks in your asset allocation, just as it was problematic to jump full-force into small cap stocks after 5-6 years of over performance. This is not even a call to reduce the allocation to small cap stocks going forward. Rather, if you’ve had some small cap stocks for some time chances are they have made large relative gains, and now would be a good time to pare back some if you missed the opportunity before May.

    As always, this is not investment advice, please do your own due diligence before making any financial decisions.

    Posted in Investing | Comments Off

    Earn Airline Travel Vouchers

    Posted by 2million on 15th November 2006

    As a guest writer, 2million blogs his personal finance from 2millionblog.com, and is recording his journey to financial freedom. Please check him out at his site for more goodies.
    ——————————-

    This week I am on a business trip for work and have already earned a $250 AA travel voucher and a $10 meal voucher from American Airlines. All I had to do was volunteer to get “bumped” off the flight to my destination and catch the next flight that was 2hrs 7min later. In effect I earned over $100/hr by sitting around and eating $10 in free food. I am hoping I might be able to pick up one more travel voucher on my return flight to Raleigh.

    This is a really easy way to save money on airline tickets regardless of how often you fly. Airlines regularly offer travel vouchers for those passengers they can shuffle off flights that the airline has overbooked. For those that know the system, this can be a lucrative way to get big savings for little time or effort.

    Let me start by saying I am not an expert on earning these travel vouchers and encourage everyone to add other tips in the comments below.

    Rules of Thumb for Getting Travel Vouchers
    You have to schedule your trip to create opportunities to get bumped by the airline. This means:

    1) When you are planning a trip I try not to tightly plan things close to arrival/departure times. Its a good practice anyway what traveling at the mercy of the weather and various airport delays, but its even more important if you want to try and earn travel vouchers.

    2) Don’t catch the last flight of the day if you can help it. I always try and book the second to last flight of the day. This way if they ask for volunteers to “bump” off the flight, there is still a flight to my destination that same evening and it won’t inconvenience me more than a couple of hours.

    3) Book on flights that are already almost full or during typical busy times. For instance, there are alot of Friday or Thursday late afternoon, early evening flights that are booked from business travelers headed home for the weekend.

    4) Try and keep your hops to a minimum. There are exceptions, but the more “hopping” you do the harder it will be to take advantage of getting bumped from any flight other than your final destination flight. For example, if your flight is Atlanta->Chicago->St Louis->San Jose then really the only hop you would probably want to get bumped from is your St Louis->San Jose flight. If you got bumped from any of the others, it would be very hard to arrive at your destination in reasonable proximity to your planned arrival.

    5) The fewer in your traveling party the more opportunities you can take advantage of. The airline is typically looking for 1-3 people to get bumped depending on their overbooked situation, so the less people in your group usually means you will have better chances. However, the more people in your party, the more travel vouchers you can earn per bump. If you were traveling with 2 other people, you could earn $750 in vouchers compared to $250 for just yourself.

    6) It doesn’t work every time, but for every trip you take you basically have 2 opportunities, the flight to your destination and the return flight to your origin. Create your travel plans around these flights to maximize your opportunities.

    How does it work?
    Typically the airline attendant will just announce 15-30min before the scheduled boarding time that they are looking for volunteers to get “bumped” and what they are offering in terms of compensation (aka travel vouchers, meal vouchers, extra miles, etc). Then you just go up to the station and tell them you are willing to get bumped.

    Other Tips:
    -I try and make sure I am at the gate as early as possible so I can hear if they need volunteers.
    -I’m too lazy to do this, but I have seen people just approach the flight attendants and ask them if they are going to need anyone to get bumped so they won’t miss the opportunity.
    -Get familiar with the flight schedules before your actual trip so you know in advance your booked flight times and the flight times of later flights. This way you won’t need to think about the impact and whether you want to get bumped if they need someone.
    -Make sure they can give you a confirmed seat on the next flight out; otherwise they could leave you hanging around alot longer than you thought.
    -Ask for more. I don’t know if it works, but if they desperately need someone, I would bet an airline might give you more then they announced such as extra airline miles, larger travel voucher, meal voucher, etc.
    -Keep in mind the travel vouchers are typically good for 1 yr after issue. If you or someone you know isn’t taking another trip in the next year, this could be a waste of your time.

    Additional Info:
    Info on bumping and travel vouchers.
    FAQs on getting bumped.

    Posted in Frugal Ways | 2 Comments »

    Net Commercials And False Breakdowns

    Posted by James on 14th November 2006

    false-bd.gif

    Broad Markets

    Russell 2000 [ http://www.buythebottom.com/rut.html ]
    Net-commercial position increased by 290 contracts.

    S&P 500 [ http://www.buythebottom.com/spx.html ]
    Net-commercial position decreased by 3 164 contracts.

    NASDAQ 100 [ http://www.buythebottom.com/ndx.html ]
    Net-commercial position increased by 11 168 contracts. This increase was largely off-set by a net-commercial decrease on the Nasdaq-MINI.

    Dow Jones [ http://www.buythebottom.com/indu.html ]
    Net-commercial position increased by 629 contracts.

    I continue to remain neutral on the stock-market. The trend continues to point up; meanwhile I don’t see a clear signal from the commercial players. Until then, I will continue to pay close attention to these markets to try and gage their future direction as soon as a clearer picture develops.

    Commodities

    Crude Oil [ http://www.buythebottom.com/wtic.html ]
    Net-commercial position increased by 1 197 contracts. When a market is setup from a commercial standpoint to move in a particular direction, but instead moves in the opposite direction, there is a good chance that a reversal will take place. For example, while crude oil is setup for a rally, there is opportunity in trading false breakdowns.

    In the following USO (oil ETF) chart – two examples of false breakdowns are presented. Before we continue, let’s first define a false breakdown. For me personally, a false breakdown is a move to lower lows followed by a reversal and a rally above the breakdown point. When a market makes a lower low, it naturally attracts new sellers who anticipate the trend to continue even lower. If the market reverses, these sellers will most probably cover their short positions and fuel a counter-trend rally in the opposite direction of the original breakdown.

    The first example of a false breakdown occurred on October 23rd, when USO broke a short-term support level at 52.5. Within the next two days USO rallied back to its resistance trend-line, gaining roughly 2.5 points or 4.8% in the process. The second example of a false breakdown occurred on October 31st, when USO posted a lower low relative to the reaction-low set previously on October 23rd. (The reaction-low on October 23rd was 51.71). In this case, USO rallied within the next seven days, gaining roughly 3 points or 5.8%.

    But what about the bigger picture: did the second false breakdown mark a potential intermediate-term bottom for crude? In my opinion, the 2nd false breakdown did mark a potential bottom. However, the market is still making lower lows and lower highs. I would like to see the USO break above the resistance trend-line, in the 54.5 – 55 dollar range, to mark the official turning point in this market. Until then, your guess is as good as mine.

    Gold [ http://www.buythebottom.com/gold.html ]
    Net-commercial position decreased by 11 387 contracts. Since October’s reaction-low, gold rallied well over 50 points or 8.7%. During this rally, commercials were sellers of strength, which is typical of their behavior. The key is to watch future COT data reports to gage if commercials are aggressive sellers. If they are, then, and only then would that raise a yellow flag in regards to gold’s recent rally. Until then, the setup remains to the upside.

    Currencies

    US Dollar [ http://www.buythebottom.com/usd.html ]
    Net-commercial position increased by 12 250 contracts. It seems like commercials are in a knee-jerk reaction mode in terms of their outlook on the US dollar. They were big sellers a few weeks ago, and since then the dollar declined and it seems like commercials are out in full force on a buying spree. From their action over the last two weeks, I have to assume that if the US dollar declines further, commercials are going to support it. The way it looks right now, if we go down to the $84 reaction low…by that time this market may very well be setup for a rally.

    Posted in Investing | Comments Off

    My investing advice if you have $100K to 1 Million

    Posted by Frugal on 13th November 2006

    When you have 100K investable asset, some doors are beginning to open for you (although where these doors lead to may not be necessarily better). For example at both Bank of America and UBS, you can buy into some of their managed asset accounts using mutual funds as the vehicle starting at the minimum of $100K. In fact, some smaller financial advisors are willing to take an account starting at $50K. But to get into a slightly more specialized institutions such as Puplava Securities, often you will need $250K. At $250K, many doors in the brokerage world are open to you. If you’re willing to go to $500K, pretty much everyone is willing to do business with you. There are some extremely selective institutions that will only take account for not less than 1 million, such as Pring Turner management, but those are rare birds. Certainly, if they are able to sustain and expand their business with a minimum opening balance of 1 million dollar, it most likely means that they are not bad at all.

    Despite the availability of these money managers to you at such money level, you should ask many questions about the money managers before you give them your money for management. I have an article Money Manager: Things You Should Know & Ask, if you don’t know how to select your managers. Besides all those questions, you should ask yourself two things before rushing into this newfound world:

    1. How many money managers are you going to use? It may be simply too risky to put all of your money into a single big account. One obvious risk is certainly the possibility of fraud at smaller firms. You want to make sure that they are properly registered at NASD, and SIPC account protection against theft of your money. The other risk is related to performance. If this particular firm or money manager screws up, then you are screwed up too. Often it is better not to put all of your eggs in one basket. If you employ more than one money manager, you can observe their performance and continuously evolve your allocation between managers in time.
    2. Is it worth the fee or commission to let others managing the money for you?
      If the money manager is not adding any additional values, but simply doing asset allocation and portfolio rebalancing based on some preset percentage, I think you probably could consider doing it yourself. Following asset allocation is not that complicated. My partner ML has an asset allocation series, which should be very helpful. If the money manager has a good track record either beating index and/or have the same performance but with less volatility, I think it should be worthwhile what you are paying. There are also specialized portfolio managers only concentrating in certain trading strategies which you could consider.

    Certainly, you don’t need to all DIY or all managed by other people. I would advise to have your core portfolio managed by your own asset allocation model, while having 2 or more money managers to manage some 20% to 40% of your money. Some exposure to money managers should be good since you will have some Wallstreet insiders to keep you up-to-day on how markets are doing. But your liquid asset probably needs to be at closer to $1 million if not more for you to do that.

    If your liquid asset is less than $500K, you could still follow my previous advice for $10K to $100K portfolio, and continue to work on your asset allocation faithfully. One improvement upon your previous allocation that you could make is that with a bigger portfolio, now you can afford easily to have some smaller percentile positions in various kinds of assets such as foreign bonds, commodity funds, precious metals, etc. Or you can start to experiment with some professional money management services that have a lower minimum of some $100K. Personally, I think if you have $500K, opening an account of $250K with one single manager probably is a little bit risky in terms of concentration. Unless you are quite sure about the manager and the company, I wouldn’t advise you to give up control of half of your money to a single person or a single company. I will probably only try one or at most two managers with $100K each, if I have $500K.

    Posted in Investing | 5 Comments »

    My Bet on NovaGold

    Posted by Frugal on 11th November 2006

    After selling out NG at $15.50 right after acquisition bid of $14.50, I went back in to pick up my original stake at a higher price of $15.77 about almost 2 weeks ago. I usually update my portfolio pretty faithfully, but since this was a purely gambling bet, I held off of updating my portfolio.

    Why NovaGold? For those who are not familiar with any gold junior companies, Novagold is probably the top three in the juniors that have a very substantial gold reserve base, and is probably the one of the closest to production, starting in 2007. According to my available data, only NAK has a reserve base (42 million ounces) significantly exceeding NG, while the other ones are either very close or below NG’s reserve at 29 million ounces (KRY has 22, IVN has 21, and KGI.TO has 19 million ounces). While there are many reasons for different valuation on these different ounces, due to geography, quality of recoverable reserves, etc. the bottom line is that these are very significant gold reserves. As an example, comparing to a high quality intermediate size production company AUY (recommended by Cramer by the way), it is trading at about 3.45 billion market cap, with about 10 million recoverable ounces.

    I’m betting that the value in NG is far from being fully realized by “restocking” all of my shares. By some measurement at ResourceInvestor.com, NG could be valued at $73 a share. While I don’t expect to fetch this kind of value, I’m guessing that $20 or somewhere close to it should be a reachable goal. Friday’s announcement by ABX to waive the minimum tender condition is another proof of its undervalued bid at $16 cash for NG. And certainly that has caused NG to again trade above the acquisition bid price. ABX is one sneaky fox that has outbidded NG’s on Pioneer Metal by going sideway acquiring related interests, and attempting to circumvent to get to Donlin Creek project. And let’s not talk about the 3 to 4 billion dollar loss on ABX’s gold-hedging book that has few people paying notice, plus rumors (or fact?) on serious land claim issues at 25 million ounces Pascua Lama project.

    Please do your due diligence before buying any stocks, especially in this very volatile PM sector plus in a smaller junior company.

    Posted in My Portfolio | 1 Comment »

    Thank you, Gov. Rendell

    Posted by ML on 11th November 2006

    My wife and I are expecting our first child, a daughter, next February. Being the good father, I’ve already looked at various educational savings programs (this girl is going places, baby!). Perhaps one of the most popular options is the 529 savings plan. It has the following advantages:

    • The plan can be withdrawn to pay for many education related expenses at most institutions. The child is not locked into a certain school or even schools in a certain state.
    • The benefactor of the plan can be switched to an immediate family member.
    • The gains are exempt from federal taxes.
    • The amount of contribution is practically unlimited.
    • Some states offer tax deductions on contributions from state taxes.

    This last point is an important one. Although most states have a 529 savings plan, they are not created equal. Some has limited fund options while charging high management fees in addition to mutual fund expenses. While I reside in Pennsylvania, the two state plans that I like the most are from Nebraska and West Virginia.

    The Nebraska plan features a wide variety of funds from Vanguard, American Century, Fidelity, State Street, Goldman Sachs, and PIMCO. The program charges a management fee of 0.60%. With Vanguard in the mix you know the underlying fund expenses will be low: only 0.09-0.37% in age based portfolios.

    The Smart529 Select plan from West Virginia features funds from uber indexer Dimensional Fund Advisors that are normally accessible only through advisors. The plan changes a management fee of 0.55% with the underlying fund expenses from 0.20-0.50%.

    Back to the point on state income tax deductions: More than half of states provide deductions — generally ranging from $2,000 to $12,000 — on state income-tax returns for 529 contributions. However, previously they are only available when contributing to the 529 plans administered by the state of residency. This year, however, Pennsylvania, Maine and Kansas have approved tax deductions for contributing to other state’s 529 plans. Gov. Rendell of Pennsylvania won re-election handily with 60% of the vote. I’m sure this middle-class friendly tax break didn’t hurt.

    Given the flexibility of being able to switch plan beneficiaries and the ability to shop for the best plan, I’m considering starting a plan with myself as the beneficiary this year and switching to my daughter later. This way, I can take advantage of the tax break next April. In fact, this move is available to all the expecting parents out there. There is no free lunch of course, if the funds are not withdrawn for qualified education purposes, a 10% penalty is levied in addition to regular income tax on the gains. State income tax deductions may also have to be disgorged. So this is not an unlimited tax shelter. But still, even if having children is only a future possibility, if you have plans to go back to school, starting a 529 plan early is still a nice way to make tax-free gains now and jump-start college savings for your kids down the line.

    In the end, this move by Pennsylvania and others will not only benefit residents for those states, but also, by increasing competition, force all 529 plans to improve as well. So there, Gov. Rendell, well done!

    Resources
    I did most of my research at SavingForCollege.com.

    List of 5 best 529 plans from MSN Money.

    Posted in College, Investing | 3 Comments »

    California Prop 87 was voted down

    Posted by Frugal on 10th November 2006

    To tell you the truth, I thought that prop 87 will definitely pass without a doubt. Who doesn’t want to beat up the big guys, in this case, the Big Oil companies? But prop 87 to tax oil companies for raising additional 4 billion dollars for alternative energy was voted down with 45% yes, and 55% NO. I guess the recent price fall at the pump probably helps the understanding of the general public that oil price CAN fall as well as rise, according to the crude oil price.

    On the other hand, California has passed the measure for issuing transportatioin bonds on expanding freeways/etc. If you are a stauch peak oil believer, you probably would say that majority of those money is going to be wasted on the freeways. I don’t know for sure whether peak oil is real or not, but I do believe that the country desperately needs to build up the alternative energy sources. If prop 87 was better written and had the full accountability, I would have supported it.

    On the peak oil, I really hope that it’s not like the story about crying wolf. You cry once, and then twice, and then no one believes in you anymore. But then, the real wolf comes. Back in 70s oil crisis, it was quite real, but once it’s over, people quickly forgot about it.

    I think a good preparation is always better than nothing, and that’s also true for peak oil production.

    P.S. I’m “back” from my vacation just for 1 day for a quick post, in case you wonder, :) .

    Posted in World Politics | 9 Comments »