Gen Y - Retire Rich!

Q&A #22 - Get multiple credit cards to improve your credit score?

Q: Should you get multiple credit cards to improve your credit score?

A: Post 33 talks about credit cards in detail.  I hope I did a good job scaring you.  Recently, I was discussing credit cards with a bunch of people.  They told me that they use a few credit cards to make sure they have a higher credit score.  Having a good credit score is important.  It could affect whether or not you qualify for a mortgage loan.  One landlord that I know even said that he won’t rent an apartment to anybody with a low credit score. 

Here’s a good article that explains credit scores.

Credit Scores - What You Need to Know

And another article that gives six reasons for owning multiple credit cards.

6 good reasons for multiple credit cards

One of the six reasons listed is that multiple cards will improve your credit score (provided you use them responsibly).

So if you only have one credit card, and you are paying the balances every month, go ahead and open up another credit line or two.  Make sure you do it well in advance of applying for a mortgage.  Apparently, it hurts your score to have newer credit lines.  As the credit lines age, it helps your score.

But don’t start spending more money just because you have more credit.  Keep saving and investing.  If your average credit card bill is $1,200 a month with one card, make sure that when you get three cards, your average balance combined is still $1,200 per month.  And keep paying the outstanding balances completely.  It won’t hurt the credit score, and you will avoid those nasty fees and finance charges.

If you have a bad credit score, here’s another article to read:

How to Improve Your Credit Score

I’m in a different position from you guys.  I don’t need any more credit, so I froze mine.  This prevents anyone from taking out a loan or credit card in my name, including me.  It’s the best way to prevent identity theft.  If I need more credit down the road, I can lift the freeze temporarily.  But it’s a hassle to do so.

The rest of you better review your credit reports to make sure nobody’s playing games with your credit history.  Since there are three credit agencies, you can work it so you get a free one from each of them once a year.  Stagger it so that each free report you get is four months from the last report.  That way, every four months, you have free access to your credit report.

Post #97 - Sector Fund Investing (Bad Advice)

Post #97

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

Sector Fund Investing – Bad Advice
Sector funds (and ETFs) own stocks in one specific industry, or sector.  Buying a sector fund means you are betting that this specific industry will do better than the market as a whole.

I recommend that you own the Vanguard REIT fund, which invests in the commercial real estate sector.  Not because I think real estate will outperform the rest of the market.  Own it because commercial real estate does not move up or down in lock step with other equity asset classes.  Modern Portfolio Theory tells us that this will decrease the overall volatility of your portfolio, which means it reduces risk.  That’s why I want you to own the Vanguard REIT Index Fund.  REITs should be 10% of your portfolio.

Admittedly, owning real estate during the last year and a half has been a very painful experience.  What can you do?  Take your lumps and keep your positions.

You must own the REIT fund for as long as you own your other funds.  You are not speculating in commercial real estate.  You are long term investing in commercial real estate.  There’s a big difference.

Do You Need a Sector Fund?

Are there any sectors besides real estate that you might want to own for the next forty years?  I don’t think so.  But who says I’m the smartest guy in the world?  Some experts will tell you that commodities are an important sector to own.  “Commodities” is a general term that includes gold, silver, wheat, rice, crude oil, things like that.  I have no problem if you commit 5% of your portfolio to commodities.  It will be difficult to find one fund that invests in both agricultural and non-agricultural commodities.  You may need to own two funds. 

I don’t think you need to own commodities, but if you do your own research and decide you want them, go ahead.  As I said, I’m not the smartest guy in the world.  And I don’t think that it will hurt you a lot to own them.

Most people screw up when they invest in sector funds.  They decide that energy will be hot for the next year or two.  They buy the energy sector fund.  Then they decide that health care will be hot.  So they switch from energy into health care.  Then they decide real estate is the next big thing, and they make another switch.  This is absolutely the worst thing to do, unless you can predict the future.

So, buy commodities if you are convinced that the sector will give your portfolio diversity without increasing the risk.  Hold the commodities as long as you hold your other Vanguard funds. 

You are a long term investor.  Not someone who guesses which sector will be hot next year.

Q&A #21 - Will the world go down in flames?

Q: Will the world go down in flames?  Will the market ever recover to where we were a few years ago?
A: I’ve had some email discussions with a few readers and they have asked me these questions in various ways.  

Remember that the one big assumption we made at the beginning of this blog is that the world is getting better, and will continue to get better.  That is an assumption, not a guarantee.  If you do not think the world will continue to be a better place to live, then you should not invest in equities.

Can I prove that the world will continue to get better?  No.

There are big problems in the world.  Will one of these problems get so big that it makes the world regress?  I don’t think so, but I can’t prove it.  You need to make your own evaluations.

Sorry I can’t offer you any comfort in this area.

Let’s go forward under the premise that our one big assumption is correct.  So, when will the market recover?

Here’s a good read: Download JGLetter_1Q09

Try to read the whole newsletter.  I found it a little difficult to understand some of the things he was saying.  But the last page gives a good summary of Grantham’s views.  He gives us an 85% chance to get to a new high in 20 years and a 15% chance to do it sooner.  In other words, he is 100% certain that in 20 years or sooner, the market will be at an all time high.

Here’s another good read: Stocks still face deflationary collapse

This article paints a bleak picture for the short term, but makes no predictions beyond 2016.  I believe that his advice is meant for people who may be retiring in the next seven years.  They probably shouldn’t invest any more money in the stock market, if they believe his predictions.  And maybe they should cut their losses now and cash out now! 

If you are a long term investor, which I hope you are, then this second article really doesn’t help you.  You shouldn’t care what happens in the next seven years.  You should be saying to him, “What about in 40 years?  Read your technical analysis tea leaves and charts and astrology signs and tell us what will happen then, Obi-wan”.

Here’s the bottom line.  Both of theses guys could be wrong.  There is no way of knowing what’s really going to happen.

But, if the second guy is right, you shouldn’t stop investing for the next seven years because things will be choppy.  The best time to be saving and investing is when the market is hurting, not when its at an all time high.

So keep saving and investing, provided you believe our assumption that the world will continue to be a better place.  You see how we’re back to our one, big, unprovable assumption? 

In the end, everything hinges on your belief in the world!  Which is a big reason why so many people to not invest their money in equities.  It takes a leap of faith!   

Q&A #20 - Does the Sierra Club offer mutual funds?

Q: Does the Sierra Club offer mutual funds?
A: OK, I submitted this question myself.  I hate those little Sierra Club whiners who come around asking for money and trying to make me feel guilty about the world.  Did I ever knock on their parents’ doors and try to guilt them into buying whole life insurance so their kids wouldn’t have to pay taxes on their inheritance?  No I didn’t.

Sure, they’re against nuclear power now.  Wait until their lights go out or their monthly electric bill consumes 40% of their gross income.  They’ll change their tune.

It’s even better when the holy rollers come around asking if I’ve found Jesus.  First, I explain that I was an altar boy in grade school and am still in therapy from the trauma that the priests and nuns put us through in the name of Jesus.  And I’m not even talking about anything sexual.  Then I point to the mezuzah on the doorjamb and explain that my wife is a radical Zionist who helped settle Palestine (which would make her like 100 years old, but they can’t count).  I tell them they’ve got ten seconds to scoot before I sic my crazed blind and half deaf pointer on them.  Then I laugh insanely as they run across my lawn, tripping over the various rakes and other gardening implements I never seem to put back into the garage.  

The Sierra Club???  You would think that they are investing “responsibly”.  Go ahead, type in www.sierraclubfunds.com on the old homepage.  You will be directed to a website for Forward Funds.  The large cap fund they offer was started in October 2006, so we really can’t measure past performance against any benchmarks.  The fund is too young.  But when you buy the fund, you pay a commission of 5.75% (outrageous).  And the ongoing annual fee the fund charges you is 1.49% (as opposed to 0.18% for the Vanguard Total Stock Market fund).   

OK, maybe these extra costs are the price you pay for a fund that is associated with the Sierra Club.  This fund should be more environmentally friendly, no?  Here are the top ten holdings of the fund as of March 31, 2009:

• Johnson and Johnson
• IBM
• Coca Cola
• Nvidia Corp
• Bristol Myers Squibb
• Oracle
• Exxon
• Walmart
• McDonald’s
• First Energy

What about the Forward Small Cap Fund?  Maybe their top ten holdings have some crunchy sounding names.

• Aecom Tech
• Corrections Corp of America
• URS
• Neutral Tandem
• Chipotle Mexican Grill
• Family Dollar Stores
• Factset Research Systems
• Salesforce.com
• Amedisys, Inc.
• Investment Technology Group

I’ve heard of a few of these but not the others.  However, they don’t smell crunchy to me.  And you have to pay a 5.57% commission, as well as a 1.77% annual expense ratio, for the privilege of investing in this Sierra Club Recommended fund.  

In fairness, as I mentioned in the last post, no mutual fund will last long if it doesn’t deliver decent returns compared to its peers.  So the fund managers really have no choice.  They have to buy companies that make money, not companies that do nice things.  I’m sure they have some sort of filter to make sure they don’t own any sweatshops or napalm producing companies.  But my point with Socially Responsible Investing is that the fund managers will continually be compromising the fund’s investment goals in order to make sure the fund generates good enough returns to stay in business.

And as you can see from the costs of owning these funds, the fund managers need to pay for their three houses and Mercedes Benz sportscars too.

Q&A #19 - Profit from environmental companies?

Question & Answer #19

Q: I think that climate change is the big problem for our generation, and under those circumstances, the companies with an environmental mission should be able to profit from the problem.  Is this logic flawed?

A: It’s not flawed.  But not every company that gets involved in climate change will be a winner.  Some will profit.  Many others will not.  So don’t buy individual stocks.  Find a mutual fund that specializes in this area, to spread your risk and reduce your expenses.  And use your mad money (5% of your portfolio) for this investment.  Because over time, most of your equity money should be invested in the other funds I recommend, which are designed to give you market average returns at minimum risk. 

There are a couple of web sites related to social investing.  They claim that there are more than 260 funds specializing in this field.  You will need to focus on the funds that specifically invest in climate related companies.  There are probably a handful.  When you research these funds, you will probably notice that the annual expense ratio is much higher than the Vanguard Index Funds I have recommended.  That’s a price you pay for taking a chance on environmental companies.  Also, before you invest, take a look at the fund’s holdings.  You might be surprised to find out that the holdings don’t exactly meet your own standards.  This is another problem with Socially Responsible Investing.  The fund managers need to show a reasonable return, and are forced to compromise their standards.  Wait until you see the next post about Sierra Club Funds!

President Obama’s main fund holding is Vanguard FTSE Social Index Fund.  It has a low expense ratio of 0.24% and $254 million in assets.  But it does not invest a lot of money in climate change.  The top three industry holdings are financials, tech, and consumer goods.  If you are tempted to buy this fund, to salve your conscience, I advise against it.  Put your money into the Total Stock Market Index Fund and the Total International Fund instead.  You owe it to yourself to make sure you have a comfortable retirement.

I talked about socially responsible investing in Q&A #5.  Please re-read that post for the details.