Debt, Credit Card & Consolidation Current News Digest

Don’t just sign up with the first mortgage broker you come across. Make sure that the mortgage advice you get is coming from a reputable firm working in your best interest. Use the following checklist to compare mortgage brokers.

—Ask people you know and trust for recommendations about mortgage brokers they have used. If you are still having trouble getting help, check with the National Association of Mortgage Brokers to find someone in your area.

—Ask mortgage brokers how many mortgage lenders they work with. If a mortgage broker only works with a couple of lenders, you may want to keep looking.

—Find out how mortgage brokers get paid. Some mortgage brokers earn a flat fee while others earn a percentage of the amount of your mortgage loan. Watch out for excessive fees and interest rates, which could be padding the broker’s pocket. If you are trying to keep your out-of-pocket costs down, ask if the mortgage broker’s fee can be financed into your mortgage.

—Ask around in your community about any mortgage broker you are considering. Check with your state’s attorney general and the better business bureau for any complaints.

—Find out what kind of mortgage loan programs are offered through a mortgage broker. A broker should also be aware of programs through the government or local agencies that may help you purchase a home, such as first-time buyer programs.

—Be skeptical of a mortgage broker who claims you can get a mortgage even though you have bad credit or no down payment. Mortgage fraud is a serious problem so be an guard for people who make outrageous promises or ask you to lie on a mortgage application or make other false claims.

—See what kind of free mortgage advice is offered. A mortgage broker shouldn’t charge you just to explain their policies and procedures.  Avoid mortgage brokers who charge just to do a consultation.

—Does the mortgage broker spend time getting to know you and understand your situation? Avoid people who fail to listen to your needs and try to push cookie-cutter mortgage loan programs at you. Not all home buyers are the same so you should be given individualized attention.

Mortgage Brokers with Experience

Choosing a mortgage broker is an important step in the home buying process. Avoid going with the first nice guy or gal you meet. Look for someone who is experienced and truly understands your local housing market.

Can this interesting stock trading strategy help you beat the market? Let’s see what Stephen Jeske, an independent option trader, has to say. He’s come up with themeatballeffect, a complete swing trading option strategy. If you’ve gotten your diversified, core investments off the ground, have picked up some free investing tips and ideas from brokers like TradeKing and Scottrade, but would like to be a bit more adventurous, then you may be interested in learning how to manage trades for maximum profit potential.

Disclaimer: the following information is not for the weak-hearted. What’s ahead is a description of some pure stock market plays (and trades) that I’d consider only relevant to those who are highly interested in active investing and trading (e.g. this may not be for the average long term equity investor).

Think of your favorite stock. Surely, there must be a price at which you would be willing to buy more. Conversely, there must be a price at which you would gladly sell your existing shares. Today, we’ll show you how to buy that stock at a discount and sell it at a premium each and every month. The goal is to do this consistently enough so that you increase your portfolio returns while reducing its volatility. This technique can also be a wonderful complement to a mutual fund investment portfolio or a basic stock portfolio.

Regular readers of The Digerati Life may already have read about using options to buy stocks at the prices you want. But it’s the combination of both techniques, buying at a discount and selling at a premium, that really makes the difference.

Getting Started With My Stock Trading Strategy

The best way to learn this technique is by discussing an example (but I’ll change the names). The only thing I will leave out is the commission and taxes. We won’t use any margin here either. So let’s check our favorite stock The Digerati Life (symbol TDL).

As I’m writing this, my discount broker account shows that TDL is currently trading at $127.47. Let’s buy 100 shares for a total cost of $12,747. I’m willing to sell my 100 shares of TDL for $135 if it hits that price over the next several weeks (e.g. 58 days).

So I sell 1 MAY 135 Call for $62. (100 shares equals 1 option contract).

I’m also happy to buy 100 more shares of TDL for $120 if it hits that price over the next several weeks. I have an extra $12,000 cash sitting in my online broker account, ready to buy those shares.

So I sell 1 MAY 120 Put for $107. (100 shares = 1 option contract).

Now whatever happens, I get to keep the $169 ($62 + $107) option premium that I sold. Let’s look at the possible outcomes:

1. Scenario 1: TDL reaches $135 or more at the end of 58 days. My stocks get called away. By selling that call option, I agreed to sell my stocks at $135. So I’m selling at a premium because I also collected $0.62 + $1.07 per share from the call and put I sold. I’ve made a profit on the stock, I’ve made a profit on the call option I sold, and I’ve made a profit on the put option I sold. Altogether it works out to a 26% annualized return.
2. Scenario 2: TDL reaches $120 or less at the end of 58 days. I have to buy 100 more shares of TDL at $120. That’s the agreement I made when I sold the put. (I’m buying at a discount but I’m also collecting $0.62 + $1.07 per share from the call and put that I sold). I’ll have a paper loss on my shares, but I will also have an extra $169 cash in my account. That’s from the put and call that I sold.
3. Scenario 3: TDL remains in between $120 and $135. Both the put and the call expire worthless. I will still have 100 shares of TDL and $169 in cash from the call and put that I sold. I’ve reduced the cost basis of my shares by $1.69 per share.

But what do we do in the next cycle?

1. In the first scenario, I could buy 100 shares again, then sell 1 call and 1 put.
2. In the second scenario, I could sell 1 or 2 calls, since I now own 200 shares. I could also sell a put, if I were comfortable with yet again owning more shares.
3. In the third scenario, I can sell 1 call and 1 put, since I own 100 shares.

Using Options to Enhance Returns: The Key To Making This Work

This strategy works best on the more stable stocks — definitely avoid dealing with the cheap stocks. Also, any companies in wacky industries will just cause you too much grief: sure, you can collect a lot from selling the options of volatile stocks, but that’s because these stocks move around a lot… in fact, too much in most cases.

You also need to acknowledge the fact that you can’t predict prices. You can’t be greedy nor resentful; you need to focus on your own success. Use this technique consistently and you won’t have to worry about stock market timing.

If the stock shoots way up and it’s called away, you can’t be too upset. You made a good profit, be happy. If the stock drops to the strike price of the put ($120 in our example) you have to be comfortable buying it. You can’t be second guessing yourself and constantly changing course mid-stream.

In order for this to work well, you need to be consistent, systematic, disciplined and capable of following a plan. But aren’t those the hallmarks of a successful investor anyway?

My Stock Trading Strategy: Using Options to Enhance Returns

If you own mutual funds, it’s quite possible that you are paying more than you need to in mutual fund fees. This is according to Lipper, Inc. a large mutual fund research company. But by understanding what the various fees are that are associated with mutual fund investing, you’ll be able to compare mutual funds, fund companies and online stock brokers and make the right decisions for your investment money.

A Quick Look at Mutual Fund Fees

Note that when you buy a mutual fund, you may be subject to several types of fees:

• Ongoing maintenance fees that are charged on an annual basis (e.g. Annual Fund Operating Expenses). These operating expenses include management fees, distribution (12b-1) fees, and some other miscellaneous fees.
• Transaction fees are charged when you purchase, redeem or exchange your fund shares. These fees are known as loads (e.g. Shareholder Fees). Shareholder Fees cover sales loads, redemption fees, exchange fees, account fees or purchase fees. There are front, back and “constant” loads as well (the latter is charged on a regular basis).

There are a variety of fees that apply to the promotion and management of mutual funds. Some fees go to pay the fund’s management and other fees pay the broker through which the funds are being offered. You’ll want to check your prospectus carefully and study the costs associated with a new fund before you open an account.

Below, we offer a short list of places where you can find resources on mutual funds, ETFs and stocks. You can find solid mutual funds and index funds at the following top investment brokers. Any fees we list are brokerage transaction fees only. For specific mutual fund fees, you’ll need to check the prospectus of any fund you are considering.

Top Investment Brokers For Mutual Fund Investing

Discount Brokerage Mutual Fund Fees per Transaction TradeKing $4.95 per ETF trade; $14.95 per No Load trade; $0 for Load Funds but there may be specific fund charges Zecco $4.50 per ETF trade; $10 per mutual fund trade Scottrade $7 per ETF trade; $0 for No Load/No Transaction Funds (NTF); $17 per trade for No Load Funds (not in NTF program); $0 to Buy, $17 to Sell / Exchange for Load Funds OptionsHouse $2.95 per ETF trade; $14.95 per mutual fund trade (Load Funds may have additional fees) optionsXpress $9.95 to $14.95 per ETF trade; $14.95 per mutual fund trade (plus additional loads or fees, if any) E*Trade $7.99 to $9.99 per ETF trade; $0 for No Load/No Transaction Funds (NTF); $19.99 per trade for Transaction Fee Funds; check prospectus for Load Funds TradeMonster $7.50 per ETF trade; $15 per mutual fund purchase, $0 per mutual fund sale ShareBuilder $4 per trade for ETFs, with other various pricing programs; $0 for NTF funds; $19.95 per mutual fund trade for other funds Charles Schwab $5 to $13.95 per ETF trade; $0 for Schwab OneSource Funds; $49.95 per trade for Transaction Fee Funds

Case Study: Scottrade’s Mutual Fund Commissions

To get some idea on how fund and brokerage fees are charged, I’ll go through an example discussing how Scottrade sets its commissions and pricing. When you consider a particular fund through Scottrade, here are the considerations you’ll have to make:

• Find out if the fund is a Load Fund or a No Load Fund. You’ll need to know if the fund has a front load (where you pay a percentage of your purchase when you buy shares) or a back load (where you pay a percentage when you sell your shares). For more information, you should check the fund’s prospectus.
• Find out if the Fund belongs to the broker’s No Transaction Fee Fund (NTF) program. A transaction fee is the commission you are charged by the broker (in this case, Scottrade), which is associated with certain mutual funds at the discretion of the broker. A fund may belong to the broker’s NTF program depending on their arrangement with the broker. If you buy into an NTF fund, you typically don’t pay a brokerage commission.
• For management fees and expense ratios, you’ll need to check the fund’s prospectus for the details.

Parting Thoughts

The aforementioned financial institutions and sites also hold a wealth of information on investing. For those who are long term investors, I would suggest checking out discount brokers like Scottrade, E*Trade, Sharebuilder or Charles Schwab. For these online brokerages, you’ll need to watch out for fees on broker-assisted trades, which can be ridiculously high. But note that those brokers with flat fees tend to be much more reasonable on this front.

For more active and adventurous traders, sites like TradeKing, OptionsHouse, optionsXpress and tradeMonster may be more your cup of tea. You can also purchase mutual funds at fund companies, such as Vanguard and Fidelity. These companies also have brokerage arms that can suit your requirements.

The bottom line is that you should know your goals before you start investing so that when you open a brokerage account, it will be with the right entity that should be able to serve you best.

Top Investment Brokers For Mutual Fund Investing

When I learned about E*Trade selling their banking business to Discover, I knew my days with them were numbered (I later learned that only bank accounts with no brokerage relationships were moving… but alas the ball was already rolling). Brokers are finding it increasingly difficult to differentiate themselves and when you can get good customer service at a cheaper cost elsewhere, even the pioneers are going to find their businesses suffering. Those who have been reading for a while may remember me mentioning my investments at E*Trade and how I’ve been doing any new investing with TradeKing. My original approach was to leave my assets at E*Trade until I sell them, but a recent offer changed my mind.

TradeKing has a promotion where they will reimburse new accounts, defined as opened in the last thirty days, up to $150 in transfer fees. My account is far older than that but I asked a CSR if they’d be willing to extend that offer to me and they agreed! (had they not agreed, I wouldn’t have transferred…) E*Trade has a $60 full account transfer fee, much less than the $150 reimbursement limit, that is paid using account assets. I’m not sure what would happen if I had $0 cash, but the simple solution was to transfer $60 into the account prior to initiating the transfer. If you plan on doing this, be sure you have the amount of the fee in cash or you might not like what the brokerage does on your behalf!

ACATS

The process, surprisingly, was painless. Anytime you want to transfer your assets, you need to fill out a form with the receiving brokerage because they are the ones that initiate the transfer. For a full account transfer, TradeKing has a short ACATS form you must send along with your most recent account statement. When you want to transfer assets from one brokerage to another, you need to keep one acronym in mind – ACATS. ACATS stands for Automated Customer Account Transfer Service and that’s a system setup by the National Securities Clearing Corporation (NSCC) to automatically transfer assets from one trading account to another.

Historical Transaction Data

The only tricky part of the transaction has to do with historical data. When I transfer my account assets from E*Trade to TradeKing, the historical data isn’t included. I will need to go into my TradeKing account and manually enter the historical transaction data for those shares. I’m not sure how this will play out whenever I do my taxes but I’ve kept electronic copies of trade confirmations so I can prove, if the IRS requests it, when the shares were acquired. Since I’ll be closing my E*Trade account, I suspect they won’t be retaining those records.

Why am I transferring my assets? Simplification. I have a few holdings in E*Trade (shares of Apple, Southwest, M&T Bank, and Costco) and when I closed my E*Trade bank account, I was considered closing my brokerage account so I would have one less account to deal with. Obviously that’s a terrible reason to sell stocks, so the alternative was to transfer it to my main brokerage, TradeKing (#1 reason for them being #1 is price, $4.95 per trade). There’s nothing wrong with E*Trade, I’ve always been satisfied with them, it’s just a matter of another broker being slightly better.

One more account scratched off the list! (it’s looking pretty slim now)

Transferring Brokerage Assets from E*Trade to TradeKing from personal finance blog Bargaineering.com.

More stock investing tips on the subject of hedging.

Once you’ve opened an online broker account and consider yourself a stock investor, there are a few basic things you’ll need to think about when dealing with your investments: you’ll want to grow your portfolio but you’ll also want to protect any gains that you do make with that portfolio. If possible, you’ll also want to avoid experiencing any losses. That’s where the term “hedging” comes into the picture. When I was first starting out as an investor, I heard this term used all the time but didn’t exactly know what it meant. If I understood what it meant back then, I probably would have lost less money as a first time investor and beginning stock picker.

Hedging Your Stock Investments: Some Basics

The other day, I covered the topic of options trading and offered a simple explanation of how it works. This time around, I’d like to discuss the more general topic of hedging — a topic or investment principle under which options trading usually falls under.

So what does “hedging” entail? How about this analogy: the simplest way to think of it is that it’s a form of insurance. Hedging is simply insurance. If you’d like to make sure that you protect your investments (and particularly your gains) to some degree, you can do so by applying a hedging strategy.

While I’m thankful that I can insure just about anything from my home to my cat, as a young player in the stock market years ago, I became doubly excited when I discovered that I could also insure my portfolio. Even better, insurance for your investments comes free (unlike other forms of insurance out there).

There is far more to this than one article can tell you, but allow me to share with you one basic hedging strategy that I’ve used successfully. Here’s a real world example which I’ve used: buy stocks or options in pairs. So how does it work?

When I feel that I can afford to take a little more risk with the money I have in my discount broker account, I dabble with leveraged ETF investing and buy one of the well-known leveraged etfs. One of my favorites is the Proshares Ultra Dow fund (DDM). This fund tracks and achieves 2x (twice) the performance of the Dow Jones Industrial Average. When the Dow goes up 1%, this stock goes up 2%. So as you can imagine, this is a very volatile asset and if you’re not careful, you can certainly stand to lose some major money.

When I buy this fund, I always hedge in order to insure my investment. For instance, if I buy 200 shares of DDM, I also buy 50 shares of ProShares UltraShort Dow30 (DXD). DXD does the same thing as DDM except it’s a short ETF, which means that when the Dow goes down 1%, DXD goes up 2%. So owning DXD has helped minimize losses in my portfolio.

Of course it also minimizes gains to some degree, but if my biggest problem is that I lost 25% of what I could have made, then that’s fine with me. I take my other 75% and invest it and make more. I believe that it’s better to make a little less rather than lose a little more.

You may also say that why don’t I just own a stock index fund outright — one that tracks the market exactly? Wouldn’t it result in the same thing as purchasing DDM and DXD, which may tend to cancel each other out? The difference is that I can fine tune how much hedging I do in order to get results that I have a little more control over. With the combination of DDM and DXD that I purchase, I can control the amount of gains and losses I end up receiving, based on how my funds track the market.

Other Hedging Strategies

You may be interested to know that diversification strategies provide ways to hedge your portfolio as well. We’ve written about using different asset classes to help with diversification before, and in particular, the products introduced in our EverBank review may be effective for this purpose. If you’re open to investing in foreign currencies as a form of “hedge”, then check out:

You can also hedge in other ways but they don’t always work. Gold has always been regarded as a safe haven for investors in down markets. You will often notice that when the stock market goes down, the price of gold tends to go up, which makes buying the shares of a gold ETF (such as GLD) pretty enticing. GLD may offer some protection here.

But (and there’s a but!) the problem is that gold is a commodity and commodities aren’t always as reliable as we would like. Sometimes gold follows the market. So you may not want to put all of your hedging dollars into gold.

These are only a few examples of how hedging works. This is one of those subjects where reading a book about hedging may well be worth your time. Protecting your money is always worth it!

Here are a few articles you can read on the subject:

• How To Hedge Your Bets
• How To Hedge Your Stock Positions Using Collars

 
Contributing Writer: Tim Parker

Hedging Your Stock Investments: The Basics

This is a guest post from Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the advisor for The Motley Fool’s Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks.

Let’s say it’s 8 p.m. on a weekday. Or 2 p.m. on a Saturday. Or maybe 3 a.m. in the middle of a night when you can’t sleep. Whatever time it is, assume it’s a time when you have an hour or two free — you can do whatever you want. What would you do?

If you’re like me, you don’t always do what you should do — something that would move your life forward, or at least relieve some stress, rather than something that just provides a temporary squirt of pleasure. I may read yet another book about World War II rather than work on an article that’s due. I’ll let myself get sucked down the email rabbit hole instead of transferring that IRA to a better broker. I’ll turn on ESPN and watch other people exercise instead of doing it myself.

Why is this? Why do we not do things we know would improve our lives?

When it comes to personal finances, we all know how less-than-optimal ways we spend our time can end up costing us money, or at least peace of mind. There’s late fees, a reluctance to tackle snowballing debt, putting off saving for retirement, missed opportunities to enhance our careers and human capital, not getting a will and other important documents — the list goes on until the break of dawn.

I’m fascinated by this, both as a guy who writes about personal finances as well as someone who doesn’t always do what makes the most sense. I don’t have a definitive answer yet, but here are some things I’ve run across recently that might provide some clues.

Blame it on the brain
In his article “Human Decision-Making: A Scary Thing,” Dr. Jim Phelps says that humans are wired to look for short-term risks and rewards:

Research by psychologists shows that we pay most attention to the risks that are right in front of us. Risks that won’t appear until later, even if they are huge, just don’t get to us the way a risk we face right now does…

People will start a heart exercise program after their heart attack, when the risk of having another attack is now very clear to them. Those people knew about the value of exercise before the heart attack. They aren’t stupid or foolish, they’re human…

Worse yet, solutions with immediate strong benefits strike us as much more attractive than solutions with less immediate results — even if those benefits will be many times greater later! Buy a new TV now instead of investing and letting that money compound interest…

Our minds evolved to handle immediate problems. Is there a saber-tooth tiger out there? Where are we going to find food today? Who can I trust in my social band? Does Joe still owe me a favor? That’s what we “grew up” thinking about.

We’re too tired
You just got home after a long day at the office, but your work isn’t done. You still have to cook the kids, wash the dinner, and put the dishes to bed — or something like that. And then you’re going to analyze that last year’s spending to find ways to save money? Not likely.

Of course, for many of us, nighttime isn’t the only tired time. And when you’re tired, it’s much more difficult to make the choice to do something that doesn’t have immediate rewards.

This is one of the main lessons of The Power of Full Engagement by Jim Loeher and Tony Schwartz. As they write:

Every one of our thoughts, emotions, and behaviors has an energy consequence, for better or for worse. The ultimate measure of our lives is not how much time we spend on the planet, but rather how much energy we invest in the time that we have. The premise of this book — and of the training we do each year with thousands of clients — is simple enough: Performance, health, and happiness are grounded in the skillful management of energy.

To manage energy, Loeher and Schwartz suggest four principles:

• Principle 1: Full engagement requires drawing on four separate but related sources of energy: physical, emotional, mental and spiritual.
• Principle 2: Because energy diminishes both with overuse and with underuse, we must balance energy expenditure with intermittent energy renewal.
• Principle 3: To build capacity we must push beyond our normal limits, training in the same systematic way that elite athletes do.
• Principle 4: Positive energy rituals—highly specific routines for managing energy—are the key to full engagement and sustained high performance.

We’re hungry, scared, selfish, and horny
Like Dr. Phelps, marketing guru Seth Godin blames our difficulties on the primitive parts in our head, what Godin calls our “lizard brain” (and scientists would call the limbic system). In a speech (that you can watch here), he explained it thusly:

The idea of the lizard brain is this: It is hungry, it is scared, it is selfish, and it is horny. That’s its job. And that’s all it does. All it thinks about is, “How am I going to survive? How am I going to have kids? Get me out of here!”…

Every single time we get close to shipping [that is, completing and delivering a project], every single time the manuscript is ready to send to the publisher, the lizard brain speaks up. The lizard brain says, “They’re gonna laugh at me.” The lizard brain says, “I’m gonna get in trouble.” The lizard brain is screaming at the top of its lungs. So what happens is, we don’t do it. We sabotage it. We hold back. We have another meeting. You don’t need to be more creative. All of you are actually too creative. What you need is a quieter lizard brain.

It seems to me that the lizard brain comes into play when the things we know we should do involve a certain amount of personal risk (real or perceived), and where the stakes are potentially big. This isn’t why we don’t take out the garbage as much as it is about why we don’t take chances to do what we really want to do with our lives.

Steven Pressfield, author of The War of Art [J.D.'s review], calls this “Resistance.” Here’s a bit from an interview Pressfield did with Godin that I found simple but all too true:

Pressfield: Do you experience Resistance (meaning self-sabotage, procrastination, self-doubt, etc.)? In what form does Resistance present itself?

Godin: Until you wrote about it in The War of Art, I didn’t know what to call it. For me, the resistance disguises itself as important, even urgent work that could and should be put aside. The resistance most often looks like checking my email. Email is the perfect distraction for me, because it’s fresh, new, and bite-sized. When I turn off email, even for an hour, my productivity triples.

One answer
Which brings us to the solutions portion of our show. I don’t have all the answers (yet), but Leo Babauta over at Zen Habits has a suggestion that I’ve been trying to implement: Identify, and focus on, your most important tasks (MITs):

It’s very simple: your MIT is the task you most want or need to get done today. In my case, I’ve tweaked it a bit so that I have three MITs — the three things I must accomplish today. Do I get a lot more done than three things? Of course. But the idea is that no matter what else I do today, these are the things I want to be sure of doing. So, the MIT is the first thing I do each day, right after I have a glass of water to wake me up. And here’s the key to the MITs for me: at least one of the MITs should be related to one of my goals. While the other two can be work stuff (and usually are), one must be a goal next-action. This ensures that I am doing something to move my goals forward that day.

As Babauta concedes, he didn’t come up with the idea, and he links to a post on Lifehacker that picks up on Godin’s advice:

Author of Never Check Email in the Morning Julie Morgenstern suggests spending the first hour of your workday email-free. Choose one task — even a small one — and tackle it first thing. Accomplishing something out of the gate sets the tone for the rest of your day and guarantees that no matter how many fires you’re tasked with putting out the minute you open your email client, you still can say that you got something done.

That’s just one idea, and may not help with all our sub-optimal behaviors. But this post is long enough. Plus, “The Simpsons” are on, and, well, I’m pretty tired.

—
Related Articles at Get Rich Slowly:

• Ask the Readers: Escaping from an Upside-Down Loan?
• Tomorrow I Will Blog for 24 Hours Straight
• Check Your Local Library for Summer Reading Activities
• Burn After Reading: The $22 Movie
• Blogathon Status: 21 Pledges for $466

Most long term investment and savings goals boil down to achieving a comfortable retirement or reaching financial freedom. Many of us have shorter term financial objectives such as buying a new car or house, maybe saving up for a vacation or investing for our children’s 529 college savings plans. But why not admit it — our minds often toy around with what may seem like more distant goals. Don’t we all want to have financial freedom from the daily toils of the 9 to 5 lifestyle? How does enjoying a lifestyle and doing work independently of having a job sound?

Is Your Retirement Investment Portfolio Tax Efficient?

It’s not just “here’s the watch; have a nice life” anymore. The fact is that these days, we expect to have longer lifespans, and therefore, possibly more time spent in the retirement phase. It is not uncommon for some people to spend 30 years in retirement. For these reasons, it not only makes sense to have a very good savings and investment plan in place, but also to do it in the most tax efficient way possible. Why? Because taxes, like costs, can take a big bite out of our returns and ultimately our nest eggs. Take a peek at your online broker account and realize that not all of what you see there is yours to keep — a portion of that is going to the tax man!

So who likes to pay more taxes than they have to? To that end, it behooves younger savers and retirees alike to think about how they should manage their retirement funds in a tax efficient manner.

What we are talking about is not tax evasion, mind you. Instead, we’re talking about handling our investments in such a way as to minimize our tax obligations so that we can keep more of our money to better support our retirement.

So how can we accomplish this?

There are three critical factors to retirement fund success: asset location, tax diversification, and spending philosophy.

Let’s go through each of these factors in more detail:

Asset Location

When we talk about asset location (no, that’s not a typo…), we are referring to the ability to maximize our overall portfolio’s expected, after-tax return by positioning assets between taxable and tax-advantaged accounts. This is sometimes also referred to as “preferred domain”. This approach can be most beneficial for people who have a mix of taxable and tax-advantaged accounts and who have a long enough time horizon. To accomplish the optimal mix, you need to place your least tax efficient investments (bonds, high turnover stock funds, etc.) into tax-deferred accounts, and your tax efficient investments (municipal bonds, index funds, etc.) into taxable accounts.

Tax Diversification

It’s not uncommon for people to be in a higher tax bracket during retirement as compared to when they are working. Tax rates are dynamic and future rates are fundamentally unpredictable. You are doing yourself, and your portfolio, a disservice by assuming you will be in a lower tax bracket when you stop working. So, just as it is prudent to diversify between stocks and bonds, you shouldn’t really put your entire nest egg into one tax bracket. That is — don’t bet 100% on one tax bracket since you can’t really predict what the future will bring, in terms of your tax situation. To accomplish this, it makes good sense to hold after-tax, investment accounts and Roth IRAs to complement the pre-tax accounts you may have (i.e. Traditional IRA’s, SEPs, 401(k)s, 403(b)s, etc.).

Spending Philosophy

Most retirees favor “income” and are typically looking for assets that have the best yield. But this approach generally produces ordinary income (taxable bonds, high-yield bonds, cash/cash equivalents such as online savings accounts, bank cds or high yield checking accounts) and tends to focus on dividends rather than long-term gains (which can have favorable tax treatment). Also, many try to minimize taxes by investing in municipal bonds, even when their tax bracket does not warrant them, which produces a lower yield than taxable bonds.

So, what’s an alternative? You may want to consider a “total return” spending approach. Instead of focusing on yield alone, you would spend from income and principal. In this way, you would be reducing ordinary income (and, therefore, taxes) and favoring long-term gains in your overall portfolio; it would steer your portfolio allocation away from an “income tilt” thus allowing a better alignment with risk tolerance and other investment considerations.

Thus when we spend, we would not be drawing yield necessarily, but the amount we need from the appropriate accounts. In doing so, our spending order would be as follows:

• First, taxable assets;
• Second, non-qualified annuities;
• Third, qualified retirement plans and Traditional IRAs;
• and finally, Roth IRA’s, Roth 401(k)s/403(b)s.

Accomplishing a tax-efficient portfolio and ultimately, a retirement nest egg, may take a little forethought. It may also require looking at things a bit differently from a spending perspective. But all this is worth it if you are paying less taxes over the duration of your retirement, which can make a big difference in maintaining your lifestyle and possibly passing assets onto your heirs.

 
Contributing Writer: Todd Smith, CFP

Is Your Retirement Investment Portfolio Tax Efficient?

For being such a dollars and cents type of issue, personal finance sure has a lot of psychology involved, doesn’t it? If it weren’t for psychology, ideas like Dave Ramsey’s debt snowball method would be dead on arrival. The debt snowball works because it taps into human psychology, not mathematics. Paying off your smallest debt first isn’t mathematically optimal. It works because after you pay off the smallest debt, you get a sense of accomplishment, a boost of morale, and you are more likely to continue the project. You apply your smallest payment to the next smallest debt and continue until you’re debt free. You pay a little more in interest but you are rewarded with actually finishing because the snowball motivates you to keep at it.

That led me to wonder what other bits of personal finance advice tap into human psychology for success?

Using Cash Only

There’s a reason why casinos use chips to represent money, it’s because chips don’t look like real money. When you swipe your credit card, it doesn’t feel like you’re spending money. When you pull a ten dollar bill out of your pocket, it feels very real. This psychological difference is the reason why so many people experience success spending less when they spend only in cash.

Cash forces you to plan ahead because you can’t spend more than the money in your pocket. Cash forces you to pay for 100% of your purchase right this moment, not 0% now and 5% each month for the next ten years because of interest. Cash forces you to make that tradeoff immediately – do I want the money for later or do I really want to buy this?

Create Barriers to Spending

The best example of how to create a barrier to spending is freezing your credit card in a block ice. People who have gone to cash only usually apply this technique to their credit card because they want to force a delay in spending. If you want to buy something with a credit card, you’ll have to wait until the ice thaws and you can get to your card. It’s a clever idea because it adds two important barriers to the spending process:

• Time
• Headache

If you make it harder to spend money, you’re less likely to do it. There’s a reason why so many online stores want to store your credit card information for later use. They tell you it’s a good idea because then you won’t have to fish for your credit card next time, which is very true. However, it removes one of the biggest barriers to the buying process – paying! If you had to wait a few hours (for the ice to melt) before every purchase, chances are you would spend less and that’s what I’m driving at. Create barriers to spending and you will spend less!

Buying Generic

Companies spend millions of dollars a year on branding and people seem to enjoy the “better” brands because of it. Back in college, we used to fill our one glass bottle of Skyy Vodka with Vladimir, which came in a plastic jug. Why? Branding. The stuff out of the bottle of Vladimir tasted awful, but somehow when it was poured out of the dark blue bottle it was magically delicious. So why not buy one box of the brand named stuff and simply refill it with generic whenever you’re finished with it?

That first bit was a little tongue and cheek but I think the spirit of the idea is very true. In the last year or two, with the recession, a lot of people have gone to buying generic versions of products because they were cheaper. As the economy recovers, people are sticking with those choices because they’ve learned that the generic versions are just as good. I don’t think anyone would believe Vladimir was the same as Skyy (unless they were stupid college kids who just didn’t care), but how different is a generic pasta sauce vs. a branded one? Probably not as much as the price difference.

Here’s one actual secret – it’s not uncommon for a brand name company to produce the generic product in the first place. So you could be buying the same, or similar, product for much less.

This idea is most powerful whenever you’re talking about over-the-counter brand name drugs. The active ingredient in most drugs can be purchased in a generic form. Loratadine is the active ingredient in Claritin and you can it for a fraction of the cost of brand name Claritin.

Set Up Automatic Savings

Set it and forget it. This idea is the main thrust behind David Bach’s Automatic Millionaire and it’s a powerful idea. By putting your savings on autopilot, you will likely accumulate more savings than if you tried to remember each month. It’s less about psychology and more a testament of how busy we keep ourselves but the idea still holds true. Contact your employer’s HR department to set up an automatic 401(k) contribution, set up an automatic deduction from your checking account to a high yield savings account or a broker.

By making your savings automatic, you let your forgetfulness work to you advantage. You’d probably rather forget and be saving than forget and not be saving.

Visualize or Photograph Your Goals

Ever wonder why there are an inordinate number of beer and pizza commercials during football games? Or how about restaurant ads right before dinner? It’s because the advertisers understand the idea of priming. Priming is when earlier stimulus influences our response to later stimulus. In the case of beer commercials during football games, Budweiser and Miller want you to think of them the next time you are thinking about football. Papa Johns wants you to savor better ingredients, better pizza… perhaps at half time.

If you have any financial goals, rather than have them be reflected in just a number – such as the savings account balance for your down payment, take a photo of your dream house and out it somewhere prominent. Put it on your credit cards. Write it on your checkbook. Set it as your computer background. If you’re saving for your kid’s college education, put a picture of that little critter’s face on your credit card so you’re reminded of that goal every single time it matters.

Are there other psychological money tricks that work to help you save more, spend less, and otherwise get closer to your financial goals?

(Photo: epac_island)

Five Psychological Money Tricks That Work from personal finance blog Bargaineering.com.

Now that the stock market has dipped a little, it may be time to consider opening that account with one of the best online brokers around (at least, in my opinion). TradeKing is one of the brokers we often mention and actively promote here: I particularly like their flat commission rates at $4.95 per stock trade (option trades go for $4.95 + 0.65 per contract). They’ve also got great investment tools, a full resource library and an active community of investors and traders on their site.

So if you’re thinking about making a switch or getting started with a new broker, then here’s your chance to pad your pockets with a nice cash bonus from TradeKing. Here’s their latest promotion: if you happen to be a current account holder with them, and you refer new customers to TradeKing, then you’re eligible to receive a $100 cash bonus for each referral. This refer a friend bonus is double the usual amount ($50) that TradeKing gives away for referrals, so for a limited period, you can rake in the cash if you have a good number of friends who are able to set up and qualify for an account with this discount broker.

How To Get a $100 Cash Bonus From TradeKing (Per Referral)

In summary, here are the steps you can take to partake of the cash bonus offer from TradeKing:

1. You must have a regular (non-retirement) account with TradeKing in order to be eligible.

2. Refer new accounts to TradeKing by using the “Refer A Friend” feature on your account dashboard: all you have to do is provide TK with the email addresses of your friends. TradeKing won’t be using these addresses other than for contacting your friends about your referral.

3. Each new account holder you’ve referred will need to fund their account with a minimum of $1,000. The new customer must also execute at least one trade in order to count as a valid referral.

4. For each eligible account referred, you’ll receive $100, which will be deposited into your brokerage account.

5. There are NO limits to the number of friends you can refer. You’ll be able to track your referrals online.

6. Your account with TradeKing needs to be in good standing for at least 6 months.

7. This special promotion will only be valid until February 11, 2010. After this date, the bonus will revert to its original amount, which is $50 per successful referral (or “friend you refer”).

Perhaps one way to persuade someone you know to open an account is to have them split the bonus with you. As far as I know, there’s no rule that says you can’t share your proceeds with anyone else. Why not share the $100 bounty and give away half to the friend you referred (or maybe treat them to dinner)?

$100 Cash Bonus: Refer A Friend To TradeKing

This article is by staff writer Adam Baker. Baker recently outlined his ambitious 2010 goals for his blogging, business, and life.

When I was 23, I bought an eight-unit apartment building with no money down. And I walked away with $1,000 cash at closing! Sounds pretty fancy, right? Wrong.

It was one of the dumbest (and riskiest) moves I’ve made in my young life.

I escaped without a scratch, but it was due to an over-sized dose of sweat, tears, and luck. None of it was due to savvy investing skills.

The sound and the fury
I was 23 years old and had just earned my real-estate license the previous year. My first couple of months were spent buying and selling a few upper-end units for individual homeowners. The commissions were decent, but as a new Realtor my split with my company was high. To complicate the problem, I had financed my association, training, and union fees to get started. (This was before I had decided to cancel my credit cards.)

After several months, I began to work more in the booming foreclosure and short-sale markets that were plaguing central Indiana. Out-of-state lawyers, doctors, and other high-income earners (mostly from the West Coast) were swarming our local market.

They were buying up $30,000, $40,000, and $50,000 houses like they were toys — albeit over-priced, over-financed, and only half-functioning toys at best. With rents ranging from $400-$1000, they simply couldn’t resist what their spreadsheets were telling them the return would be. They bought many of the homes site unseen and used the first real-estate company that would sell to them.

We represented a lot of the banks that had no idea about the local market prices, nor the current condition of their properties (even after we told them several times). Well over half the deals fell through. Either the banks were too unrealistic to negotiate, or a closing would be interrupted by the discovery of a mystery lien, a second mortgage no one knew about, or some other problem with the title that we didn’t even know was possible!

It was harder work for lower commission, but there were hundreds upon hundreds of properties, which helped even out the paychecks from month to month.

Property management comes calling
After most of the out-of-town investors closed on their new rentals, they began searching for a company to manage/rent them. After several dozen requests for an affordable and trustworthy property management company (and no clear-cut option), we decided to start offering the service ourselves.

I joined forces with a broker who spent his time focusing on acquiring more leads for buying/selling. I set about figuring out how to actively manage and rent the vacant units (which almost always needed repairs first).

Since many of our clients were repeat customers already, they were ecstatic to have the option of having their properties managed by us in-house. Within just six months or so we had over 125 units under management.

I was working countless hours and answering the most bizarre phone calls you can imagine at all hours of the night. Overall, though, we were turning a profit and looking for ways to scale our system over the next couple of quarters.

A perfect storm
As part of our networking and lead-generation work, we regularly attended private meetings where local brokers would pitch each other their current clients wants and needs. In one particular meeting, another broker was pitching one of his own properties for sale. It was two side-by-side four-plexes (eight units total) with each unit being one bedroom. It was in a low-income part of town, but he was only asking $125,000 for both properties.

“$125,000 for eight units?”, I thought. “There has to be a catch.”

There was. Seven of the eight units had tenants, but only three had any history of paying on time. Even after kicking out any non-paying tenants, each unit would need a couple thousand dollars of work to get anything decent in rent. In addition, there were four furnaces in total all of which were probably made in the 40s or 50s.

In other words, it was a project by anyone’s terms. It would require some up-front repairs, several months of eviction filings, court visiting, and re-showing the units, but… “$125,000 for eight units!”

If only someone would loan me the money…
I dug deeper and deeper into the numbers. I was already managing property, coordinating repairs, negotiating prices on materials, and renting units for dozens of other clients. It made sense that if I could get a loan, I could plug a property right into this current system I was running.

That was a big glaring issue, though. Neither my partner nor I was credit-worthy in any sense of the word. The chance of me getting approved for a mortgage was zilch (let alone a non-owner occupied, low-income commercial loan). With regret, I pushed the property to the back of my mind and continued about the process of building the management business.

At our next networking meeting, though, we caught wind of some additional news on the properties. The broker who owned them was in serious trouble on about a dozen different pieces of real estate. He owed $76,000 on both the buildings, which were financed through a popular investor/hard-money lender.

The private lender was getting scared that the investor would soon default (giving the lender a property he wanted nothing to do with) and the owner was only looking to get out of the property, so he could focus his energy on his salvaging his other properties.

Without much thinking, we pulled the trigger.

A bold offer
We called up the private lender (an individual) who was currently financing the properties and pitched him the idea of us taking over the loan and purchasing the property from the current desperate owner. We offered to both sign onto the loan, giving the investor two names opposed to the one he currently had and showed how we would remedy the situation, evict all the tenants, and plug it into our management system.

Neither of us had a penny to our names, so we even had the guts to require that the private lender actually invest more money into the property. In order for us to take it over he’d have to loan us an additional $15,000 to replace the furnaces and repair two of the units after evictions.

It was a bold offer. We’d give nothing but a management plan and our signatures on a $91,000 private mortgage (at 12%) for eight units and a $16,000 cash loan. The lender must have known even more about the current owner’s dire circumstances then we did, because he took our offer. The current owner was happy to get out for what was owed, and within the week we sat down to close.

After the paperwork was signed on my first-ever real estate purchase I was handed a $1000 check (for prorated rents/deposits for the month). I gave nothing tangible, just my worthless signature, and walked to the bank to deposit the money.

“So this is how real estate works”, I gloated. “I could get used to this.”

I had no idea what was in store…

To be continued…

J.D.’s note: This is a glimpse into a world I’ve always wondered about. Though Kris keeps trying to dissuade me, I have a fascination with rental properties. I look forward to reading part two of this story. And although GRS is not about to be come a real-estate blog, this Sunday’s reader story is actually about how one of you folks decided to take the plunge by buying a rental property, so we’re going to have a mini-theme here for a week or so…

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Related Articles at Get Rich Slowly:

• Grocery Store Mysteries: Cheap Milk
• One Uncle’s Advice About Money
• Selling Your Existing Home While Buying a New One
• Buying Cheap Spices: Unit Pricing in Action
• Save More by Eating Less

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