Financial Ramblings Tue, 29 Jul 2014 15:17:22 +0000 en-US hourly 1 Automated Investing With Lending Club Wed, 11 Jun 2014 18:09:30 +0000

Lending Club Logo

I’ve been investing with Lending Club for awhile now. While I can’t complain about the returns, I’ve always felt that the entire process has the potential to be a bit of a time suck.

Yes, I’ve been able to minimize the time commitment by using a well-refined filter, but I still have to log on regularly to run the filter and buy notes.

Sure, their “PRIME” program offered automation, but at a cost. For starters, PRIME had a $25k minimum balance requirement and they tacked on an extra 0.8% fee to convert existing balances or to add new money.

For a new account, that 0.8% fee on $25k added up to $200. And you’d get nicked for the extra 0.8% on any future contributions. No thanks.

But now? Well, as of last month, they’ve changed the name of PRIME to “Automated Investing.” And they’ve also done away with the fees and reduced the account minimum for participation to $2,500. Nice.

Exploring automation

Intrigued, I decided to investigate further. My main question was whether or not I’d still be able to filter things as carefully as I’ve done when investing manually.

The short answer is: yes. While it’s possible to just check some boxes for your desired mix of loan grades, you can also limit based on term (36 vs. 60 month) and apply an existing filter.

Even with filters, you still have to set up a target mix of loan grades, so I specific 1/3 each of grades C, D, and E. From there, I gave them “special instructions” to apply my preferred filter when making selections.

And that’s it.

And now we wait…

Since setting this up a few weeks ago, I’ve just let the system pick my loans. It’s had no trouble keeping up with reinvestments but I’m still not sure how long it will take to deploy my monthly $1k investments.

Time will tell how useful this system is for investing larger amount, but I’m hopeful that it will greatly reduce the time required for portfolio management.

If you’re interested in trying it out, you can get started here.

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Investment Management Fees and the Growth of the Finance Industry Wed, 04 Jun 2014 17:40:48 +0000

Image of Financial Growth

I recently ran across an interesting article by Burton Malkiel in The Journal of Economic Perspectives. In it, he examined the growth of the financial services industry since 1980.

Care to guess what he learned?

Well, for starters… As a fraction of the GDP, the size of the financial services sector increased by ca. 70% (from 4.9% of GDP to 8.3% of GDP). Not only that, but this growth has been driven in part by a substantial increase in asset management fees.

The cost of management

Looking at the data, expense ratios rose from 66.0 basis points (bp), or 0.66%, to 69.2 bp in 2010. That doesn’t sound too bad, does it? Well, consider that during that same period there has been an overall shift toward low-cost index funds.

Back in 1980, the share of equity funds under active management stood at 99.7%. In 2010, that number had declined to 70.9%. Since index funds tend to have very low expense ratios, this shift is masking a dramatic increase in the cost of active mutual fund management.

If we exclude index funds and ETFs and recalculate expense ratios, the numbers look very different. Indeed, the costs associated with active management back in 1980 stood at 66.1 bp. In 2010, the average cost of active management was 37% higher at 90.9 bp.

Thus, during a time when more Americans were investing and financial managers should have been able to realize economies of scale, thereby driving prices down, the opposite happened in the world of active management.

Getting what you pay for?

That’s no big deal, though. Right? After all, investors are likely to be getting better performance in return for their higher fees. Right?!?!?

As it turns out, there’s no evidence that this is true. According to Malkiel:

“The data consistently provide overwhelming support for low-cost indexing as an optimal strategy for individual investors.


Over longer periods of time, about two-thirds of active managers are outperformed by the benchmark indexes, and the one-third that might outperform the passive index in one period are generally not the same in the next period.”

In fact, in an earlier study, Malkiel showed that what little persistence there is in mutual fund returns reflects the fact that costly funds exhibit somewhat consistent underperformance of the relevant benchmarks.

Interestingly, while many active managers argue that they are able to exploit inefficiencies associated with emerging markets and smaller domestic companies, it was precisely these sorts of funds that were the most consistent under performers.

Why pay more?

This all begs the question of why these price increases have been tolerated. Malkiel offers some suggestions. They include the possibility that:

  • investors may be judging the quality of the advice they’re receiving by the size of the price tag attached to it;
  • advertising campaigns may have convinced people that they need help managing their money and, by extension, that active management is the best approach; and
  • investors tend to be overconfident in their ability to choose winning stocks, and this may extend to the selection of “winning” managers.

Whatever the explanation, my personal view is that investors are (on average) doing themselves a huge disservice when opting for active over passive management.

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Money Roundup: Simple Economics Edition Wed, 04 Jun 2014 02:46:00 +0000

In case you haven’t heard, Mike Piper from Oblivious Investor has released another book. This time around, he and co-author Austin Frakt tackled the topic of microeconomics.

And guess what? For a limited time (through tomorrow, June 4th) you can get the Kindle version for just $0.99 — here’s the direct link.

While hard copies are available, they’ll set you back $13-ish. But keep in mind that Kindle e-books can be read right on your Mac or PC, so pretty much anyone can take advantage of the Kindle deal.

And now… Here are some articles that caught my eye this past week:

Also, in case you missed it, the Seattle city council has raised their minimum wage to $15/hour. That’s it. Hope you’re having a great week.

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Inside My (Free) Experian Credit Report Tue, 20 May 2014 14:37:37 +0000

Good Credit Sign

Back in January, I checked my Equifax credit report as part of my diy credit monitoring system. This system involves checking one of you three free credit reports every four months.

The hard part, of course, is remembering to pull your credit reports on a regular basis.

To combat this problem, I ended up putting together an automated e-mail reminder system to keep me on track, and I also made it available (for free) to readers like you.

Well, I recently got my reminder so I knew it was time to act. I’ve found that it’s easiest to do them in alphabetical order so, this time around, I pulled my Experian credit report. Care to guess what I found? Well…

Dissecting my credit report

As was the case last time around, there was nothing out of the ordinary on my credit report. Just a boring rundown of legitimate credit activity. But hey, like I’ve said in the past, when it comes to credit reports, boring is good.

My report shows 20 accounts in good standing, though many of these have long since been closed and will eventually drop off my report. My oldest accounts (both of which are still active!) were opened in June of 1997. And there are a number that were opened to grab a signup bonus and closed a few months later.

I can also see a number of credit inquiries, including one “hard” inquiry from when I applied for a new card last summer, as well as a bunch of “soft” inquiries related to periodic reviews by existing creditors.

The only small oddity that I could find was that our oldest son’s name is now associated with my credit report down in the “Personal Information” section. I suspect that’s because we added him as an authorized user on our Barclaycard account. But since we have the same initials, I’ll have to keep an eye on that to avoid possible confusion and/or erroneous entries on my report.

Correcting errors on your credit report

I’m hoping that your credit report will be nice and boring, just like mine. If you do run across any errors, you’ll need to correct them. Each bureau has their own process for reporting errors but, for the most part, you’ll need to notify them by phone or mail, or using an online contact form.

Related: Credit Bureau Contact Information

Based on past experience, most discrepancies are fairly innocuous. For example, closed accounts might still be listed as being open. No big deal, but you might as well get it corrected.

But if you see a bigger issue, such as a creditor mistakenly having reported you as delinquent, you’ll definitely want to get it fixed. And if you see an account you don’t recognize? Investigate. Immediately.

Related: Tips for Dealing With Identity Theft

In addition to filing a dispute, if you see suspicious activity, you should consider putting a fraud alert on your account. Depending on what’s going on, you might even escalate this to an all-out credit freeze, which should prevent any further activity.

Get free reminders

Okay, if you’re interested in getting free reminders to check your credit report, you can signup below. This system will shoot you a quick e-mail every four months telling that it’s time to request your next report.

Note: This form (above) might not work outside the website, so RSS and e-mail subscribers may need to click through to access it. Once you submit, keep an eye out for the confirmation e-mail. Open it, click the link, and you’re done.

Please keep in mind that this service is separate from regular e-mail subscriptions (for article updates) so you’ll need to sign up for it separately. Unfortunately, I don’t have an easy way of changing the message timing so the e-mail schedule will necessarily be based on when you sign up. But hey, it’s free.

Checking your credit score

Finally… While the credit bureaus are legally mandated to give you free access to your credit report each year, the same is not true of credit scores. Thus, if you want to check your credit score you’ll have to get a bit more creative.

While there are services out there that offer free access to your credit score on an ongoing basis, these are typically what has been referred to as FAKO scores as opposed to your real FICO credit score.

If you’d like to gain access to your FICO credit score, you can do so (once, anyway) by signing up for a free trial of MyFICO’s ScoreWatch. Just be sure to cancel within 10 days if you don’t want to pay for the service.

Alternatively, as I’ve noted in the past, you could apply for something like the Barclaycard Arrival credit card, which provides you with free access to your real FICO score on an ongoing basis.

P.S. If you’ve been a victim of credit card fraud or identity theft and wouldn’t mind sharing your experiences, please let me know. I’d love to hear your story, and I’m sure others would, too.

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Money Roundup: Making Wealth Last Edition Mon, 19 May 2014 16:03:24 +0000

Did you know that 90% families with at least $5M in investable assets will exhaust that wealth within three generations? Well, it’s true.

The problem, of course, is unreasonably high withdrawal rates. On top of this, the money ends up getting spread pretty thin as the family grows across generations.

And now… Here are some articles that caught my eye this past week:

That’s it. I hope you have a great week.

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How Do Credit Cards Define "Travel"? Thu, 15 May 2014 16:50:08 +0000

Photo of a Man on a Suitcase

In response to my recent post about the Barclaycard Arrival 5k point promo, a reader named Paul wrote in to ask:

“Regarding the Barclaycard Arrival credit card, which hotels, motels, airlines, tour operators, car rental agencies, etc. are affiliated with this card?”

The short answer is: it depends.

This card is not specifically affiliated with any particular travel provider. The same is true of many other credit cards that offer travel-related rewards. In such cases, it all depends on how the merchants code their transactions when processing them.

As I’ve noted in the past, purchase categories are defined based on something called the Merchant Category Code (MCC), and it’s up to merchants to categorize their own transactions. If it’s coded wrong, you’re out of luck.

According to the Barclaycard FAQs, travel-related transactions include:

“…airlines, hotels, motels, timeshares, campgrounds, car rental agencies, cruise lines, travel agencies, tourist attractions, discount travel sites, trains, buses, taxis, limousines, and ferries as defined by the merchant category code.

(bold emphasis added)

Any transactions outside of these categories, or which are mis-categorized, do not qualify. They also explicitly state that some transportation and travel-related merchants do not qualify. These include:

“…real estate agents, websites, or owners that rent properties, in-flight goods and services, merchants within airports, and merchants that rent trailers, trucks, and other vehicles for the purpose of hauling.”

Interestingly, they actually expanded their definition of “travel” when they re-branded this as the “Arrival Plus” card. It didn’t previously include: timeshares, campgrounds, tourist attractions, trains, buses, taxis, limousines, and ferries

So… Like I said, it depends.

If a merchant reports the transaction using a qualifying MCC, it qualifies. If they don’t, it doesn’t. But my own experience has been that pretty much anything that should qualify does qualify. This includes transactions with multiple hotels, airlines, car rental agencies, and even travel aggregators like Hotwire and Priceline.

As always, if you’re interested in getting this card and the associated 40k point bonus (worth up to $444 cash), you can apply by clicking this link.

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Barclaycard Arrival+ Adds EMV Chip for Travel Thu, 15 May 2014 13:38:48 +0000

Barclaycard Arrival World MasterCard

Remember when I was hunting around for a credit card with an EMV chip for use in Europe? At the time, such cards were relatively hard to come by in the American market.

As a reminder, Europe has largely transitioned to so-called “chip-and-PIN” credit cards in hopes of reducing credit card fraud. These cards contain a special chip that makes them hard to clone, and the PIN requirement means that a stolen card can’t easily be used.

Card issuers in the United States, on the other hand, have lagged behind and mostly stuck with chip-less cards with the old school magnetic stripe on the back. This is true even for cards that are explicitly targeted at travelers. Weird, huh?

Barclaycard adds EMV chip

Well, when I logged in this morning to check our Barclaycard Arrival account, I was greeted with a surprise. The card image at the top of the page had changed and our card was now being referred to as a Barclaycard Arrival Plus card.

So what gives? Well, it seems that Barclaycard has decided to re-brand their flagship Arrival card. The main change is that they’re adding an EMV chip to the card, and will eventually be sending new cards to all cardholders.

Chip-and-PIN vs. signature

This is apparently a chip-and-signature card by default, but with PIN capability. In case you’re not aware, chip-and-signature is an intermediate solution that includes the hard-to-clone chip, but doesn’t require PIN entry. It’s likely to be more widely accepted when traveling abroad, but falls short of chip-and-PIN in terms of security since it only requires a signature for use.

BUT… If you want the ability to use your Arrival card in PIN-only credit transactions, you’re in luck. You have the option of setting a PIN and using the card where chip-and-PIN cards are required. According to their FAQs:

“Please note that you must sign for your first transaction abroad at a location with a cashier or attendant. After your first transaction has gone through, your PIN will be activated and you’ll be able to use your card at unattended terminals where a PIN is required.”

Apparently the new cards, including the EMV chip, will be sent to existing cardholders by mid-June. But if you apply for a new card, I would imagine that you’ll get the chipped version straightaway.

Same great features — including the bonus!

The other big change is that they’ve lengthened the period for redeeming travel rewards from 90 to 120 days. Pretty much everything else remains the same, including no foreign transaction fees and free access to your credit score.

And yes, the $444 signup bonus is still available.

I hate to sound like a Barclaycard fanboy, but this card really does keep getting better. If you have one, keep an eye on your mailboc. If you want to get one, you can do so by clicking this link or the button below.

Apply Now Button
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If You Can... You Should. So Get Started. Tue, 13 May 2014 13:16:27 +0000

I’ve long been a fan of the writings of Bill Bernstein. In fact, “The Four Pillars of Investing” stands as (probably) the best investing book that I’ve ever read. It’s both informative and accessible. I recommend it to all.

I was thus intrigued when I saw that Bernstein had published a short e-booklet called “If You Can: How Millenials Can Get Rich Slowly” (see below for access). In it, he provides a simple (but not necessarily easy) strategy for building wealth.

The short version is that you should save 15% of your salary and invest it using a three fund portfolio. But he delves much deeper, breaking the problem into five main chunks, including:

  • our tendency not to save;
  • our ignorance of financial theory;
  • our unawareness of financial history;
  • our dysfunctional psychology; and
  • the rapacity of the financial industry.

Bernstein suggests reading the booklet straight through the first time (it shouldn’t take long, the text of the pdf spans 14 pages) and then re-reading it as you plow your way through the “homework” assignments. These assignments comprise a series of books that drive home the each of the points above. They include:

These books are an excellent complement to Bernstein’s concise and insightful summaries and (imho) well worth reading.

So… How do you get your hands on Bernstein’s booklet? Well, you can download it for free in a variety of formats, including pdf, mobi, and Kindle. Or you can download it directly to your device for $0.99 via the Kindle store.

Note that the $0.99 price for the direct Kindle Store download is a byproduct of Amazon’s pricing policies as opposed to Bernstein’s desire to charge for this booklet. But he makes it available for free there as often as possible.

Happy reading!

P.S. For beginners, I would add Mike Piper’s excellent “Investing Made Simple” to the list above. Maybe slot it in right after “The Millionaire Next Door.”

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Money Roundup: Blackberry Edition Mon, 12 May 2014 13:39:21 +0000

No, the title above isn’t alluding to the decreasingly popular BlackBerry smartphone. Rather, it’s referring to this story from a long-time blogging pal of mine. I couldn’t help but smile as I read it. I’m hoping that it has the effect on you.

And now… Here are some articles that caught my eye this past week:

That’s it. I hope your week is off to a great start. :-)

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Insuring a Vacant Home Thu, 08 May 2014 14:23:42 +0000

Photo of No Vacancy Sign

I’ve noted in the past that my parents are getting older and have experienced some health problems. Unfortunately, this has resulted in them having to move out of their house (my childhood home) and into assisted living.

And guess what? Insurance companies don’t like empty houses. Sure, we’ve kept the utilities on, we have a lawn service maintaining the yard, we’ve notified trusted neighbors (as well as the local police), and we check in on it from time to time. But that doesn’t make them more comfortable.

Vacant (or unoccupied) houses are at increased risk of loss due to leaky pipes, fire, vandalism, squatters, theft of copper pipes, etc. Not surprisingly, insurers are thus reticent to maintain coverage without special arrangements.

This usually involves the addition a vacancy endorsement (or rider) or even a separate policy. In other words, you have to pay more to offset the increased risk. As with all insurance-related topics, the details will vary by insurer and state, so be sure check with your own agent or insurance company.

What follows are some generalities based on our recent experiences.

Vacant? Or unoccupied?

For starters, you need to define your terms and clarify your insurance company’s policies. For example, some insurance companies follow a dictionary definition of “vacant” whereas others look at whether or not it’s occupied.

va•cant: having no fixtures, furniture, or inhabitants; empty.

un•oc•cu•pied: not inhabited.

See the difference? A vacant home is an empty home — devoid of both furnishings and residents. An unoccupied home may be furnished and livable, but has nobody living there. Some insurers worry about totally empty houses, while others worry about houses without residents.

In our case, the insurance company is concerned about occupancy (or lack thereof) as opposed to vacancy. In other words, if my parents are not able to “take care and custody” of their home for an extended period (30 days in this case), then their standard homeowners coverage no longer applies.

If their pipes burst or their house burns down, any insurance claim would likely be denied. Not good. So how do we rectify the situation? Here again, the answer likely depends on your insurance company and your state of residence.

Maintaining insurance coverage

In our case, we can pay a one-time fee to add a “vacancy endorsement” — but with a caveat. The endorsement only lasts until the end of the current policy term, at which time we’ll need to convert it to a more costly “rental dwelling” policy (which treats it like an unoccupied rental unit) or they’ll cancel our coverage.

Fortunately, their have an annual policy and it’s due for renewal this month. We’ll thus add the endorsement and be good to go for the next year. But if we don’t get it cleared out and sold between now and then, we’ll have to change the coverage.

What about their belongings?

Something I hadn’t really considered is the coverage of their belongings while they’re in assisted living. With the vacancy endorsement in place, their homeowners coverage will remain in full force and the house and its contents will be insured.

But what about the stuff they have with them? As it turns out, as long as their homeowners coverage is in place, their belongings are insured even if they’re physically located at the assisted living facility.

But once we sell the house (or convert it to a rental dwelling policy) their homeowners coverage will stop and they’ll need a renter’s insurance policy to protect their belongings. Makes sense.

P.S. Yes, we previously went to the trouble of creating a life estate deed for the house (for Medicaid planning purposes), but we’re re-considering and thinking of selling to simplify things. More on this in the future…

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