Trends in personal finances

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The blog went over 20,000 hits last week– thanks! It took over six months to get the first 10,000 hits, and only three months to do it again. This month is on track to set yet another new high, and if the trend continues then 30,000 hits will happen in September.

I’ve read a number of interesting financial and retirement articles lately.

First, the Dividend Growth Investor blog is still a favorite. I’ve tried nearly all styles of investing and this one holds my interest. Unfortunately the rest of the investor herd is beginning to appreciate dividend investing too, so that may start driving up the sector’s prices (and driving down the dividends).

In a recent article, they point out that even dividend investing is risky when you’re not properly diversified. If you’re interested in this strategy, too, then keep it to a fraction of your total portfolio and rebalance when it gets too far out of proportion. You may decide to invest in a dividend mutual fund or an ETF (like the Dow Dividend ETF, DVY) with as much as 25% of your portfolio. If you’re choosing individual dividend-paying stocks, though, it’s probably wiser to hold that allocation down below 20% and to strive to spread it among 30-40 stocks.

Blogs like Dividend Growth Investor can appeal to active investors who also make the time for their education & analysis. (Of course others may see this as a terrible way to spend a life.  I’m inclined to agree.)  However, the last few years have also seen a backlash against investing, especially when many investors watched their “diversified” portfolios go down across all sectors. (It can happen to the most diversified of us.) More than two years after the market lows, some are still paralyzed by the recession’s trauma. They have yet to face the seemingly impossible tasks of choosing an asset allocation and putting their savings into it.

Next, two startup companies are hoping to capitalize on that paranoia and fear. Betterment and Flat-Fee Portfolios were recently profiled in a New York Times article describing their approach to investors who want to keep it simple but who want help getting started.

Betterment has dumbed down simplified asset allocation to its lowest common denominator with a two-step process:

  1. “How much risk do you want to take?”
  2. “OK, thanks, here’s your asset allocation!”

They implement your risk profile with exchange-traded funds, and you don’t have to be bothered with the details.

Flat-Fee Portfolios offers three portfolio choices for one price. Their options include actively managed funds and an attempt to sidestep market whiplash, but they earn all their fees from their investors. There are no kickbacks “soft-dollar partnerships” with other fund companies and no conflicts of interest. Give them your money, pay their fees, and they’ll keep you informed.

Unfortunately “simple” and “helpful” are not the same as “cheap”, and you pay a price for blissful ignorance. Betterment doesn’t require minimum balances (as many large firms do) but a small investor will pay a whopping 0.9%/year for their services.  (That’s on top of the trading commissions and expenses of the funds they invest in.)  Flat-Fee Portfolios charges $199/month, which only approaches parity with the rest of the financial industry’s fees if your portfolio is at least $200K.  However, a do-it-yourself tax-efficient investor could easily have a portfolio over $1.5M before their monthly fund expenses reached $199.

How can a busy servicemember invest without paying those fees? First, max out your Thrift Savings Plan contributions. If you’re hesitant what asset allocation to use then pick a lifestyle (“L”) fund closest to the date when you see yourself retiring. Next, max out your Roth IRA contributions with a similar low-cost index target fund from one of the big firms like Vanguard, Fidelity, or USAA.  (You can even move before-tax money from a conventional IRA into the TSP, and in 2012 you’ll be able to contribute to the Roth version of the TSP.) Finally, max out your savings in taxable accounts with more low-cost target funds or index funds. Small investors may have to start with higher expense ratios or annual fees in their IRAs and taxable accounts, but putting the bulk of your savings in the low-cost TSP will more than make up for that. After a few years of Roth IRA contributions those charges will stop. Among these choices, it’s possible for an investor’s total portfolio expenses to drop below 0.2%/year.

Personally I’d never become a customer of Betterment or Flat-Fee Portfolios, but they serve a need. (One marketing axiom is “Never underestimate the busyness or ignorance of the American consumer.”) I’m not sure their revenue model will find enough of those customers to make them profitable, yet they’re certainly tapping into powerful emotions of investor psychology that affect our savings & portfolio decisions.

Finally, is there a better way to overcome the fear of analysis paralysis? Sure, just like training for combat deployments: focus on the aspects that you can control and minimize the risks of everything else. This Market Watch article points out that most investors spend too much time worrying about macroscopic factors which we “little guys” have little control over: the world economy, government programs, the markets, and random lightning strikes. Instead of waiting for those problems to “go away”, work on the things you can take charge of: setting a budget, paying off debt, saving as much as you possibly can, controlling asset allocation and diversification risk, and minimizing investment expenses. Once you’ve done the best you can with what you have, then go live your life.

In the next post we’ll cover a few more technical and social trends of retirement.

Related articles:
So where should I invest my money now?!?
Saving base pay and promotion raises
Where to put your savings while you’re in the military
Simple ways to start saving
Start saving early

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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