Leverage Consulting

What makes a mutual fund sexy...LevOn...Mutual Funds

There are certain things that I look for in a mutual fund:

1)  Low expenses.  First, only use no-load mutual funds.  Then try to keep the expenses below 1%, preferably even lower.  Expenses are the single most important factor to increasing long-term growth.  Remember from an earlier LevOn article, 4 of every 5 mutual funds do not outperform the market (S&P 500).  So if you are justifying high fees for superior management, you are mistaken 80% of the time.   

2)  5 and 10-year returns.  Never chase last years winners.  Always look for long-term sustainable returns; 1 and 3-year returns just don't provide any long-term picture of how a fund is doing.  If a fund has outperformed the market (on average) for the last 10 years, it's safe to say they are doing something right. 

3)  Tenure of the fund manager.  If a fund has a new manager it could mean a new investing prospective and therefore you may not be able to look at the past performance as a realistic judge of the future.  Don't worry about the manager if it's an index fund.

4)  Index funds.  Blat out, they are sexy.  Super low expenses (.19 for Vanguard 500) and remember:  4 of 5 mutual funds don't outperform the market.

5)  Minimum investments.  They matter.  I can think a fund is great (Fidelity 500 Index Fund - .10% expenses - but, $10K minimum initial investment) but if it has a high minimum, I will probably never invest in it.  One exception is a 401K rollover to a self-managed account (even in that case you should probably use ETFs)

So now you have my criteria.  Tomorrow I will make it even easier.  I will tell you what mutual funds I own and why.

LevOn...Invest in order

Many people wonder where they should focus their investments and in what order.  So, I am going to provide a ranking of what order you should invest in. 

1.  Max out your 401k to the company match.  This is free money.  If your company matches 1 for 1 up to X%, you are automatically gaining a 100% return.  Don't wait even one more day if you are not fully utilizing your company match.

2.  Establish your emergency fund...some people would say to do this first, and I agree that it is very important; but, I would suggest that you don't miss out on the free money from your 401k.

3.  Max out your Roth IRA.  Please refer to my 'LevOn...Roth IRA' posting with any questions.

4.  Head back to your 401k.  You can personally save $15,500 in your 401k.  This is your total and does not include company contributions. 

5.  If you are lucky enough to have fully contributed to both your 401k and Roth IRA ($19,500/year---$1625/month), then head to a taxable account.  You can set one up at the same place you have your IRA or I suggest Vanguard.com.  Reason for Vanguard:  you should keep 'tax-friendly' mutual funds in your taxable account.  For example, index funds are tax friendly; Vanguard has very low cost mutual funds with low minimums and no fees when you purchase them through Vanguard.com  Always try to keep it simple.

The most important tip:  Always try to make all your investments automatically come out of your paycheck/checking.  You will always save more this way.

Who wants to be a Millionaire? LevOn...Roth IRA

Everyone wants to be a millionaire, right?  Many people think that it is out of their reach...and depending on your age and your current investments, you may be right.  But for most it's only a matter of time, with time being the key word.

"The most powerful force in the universe is compound interest"   -Albert Einstein

With that statement in mind, I want to discuss possibly the easiest way for you to leverage compound interest to become a millionaire.  Here it is:  the Roth IRA. 

The Roth IRA is an investment vehicle that features non-deductible contributions and tax-free growth.  This means that you take your after-tax income and put it in a Roth IRA and it grows tax free.  You are allowed by the gov't to make annual contributions, the gov't limit is $4000 in 2007 and $5000 in 2008 and every year thereafter.  Again, you won't ever pay taxes on this money (you already paid taxes, since you invested after-tax dollars).  There are other qualifications:  if you are single and earn more than $95,000 annually or married and make more than $160,000 annually you cannot participate in the Roth IRA, however you can still use a traditional IRA.  And to make it easy: if you qualify for the Roth, it is the better option. 

So here are some examples of the power of compound interest and how you can become a millionaire.

If you are 20 years old...

If you are 30 years old...

If you are 40 years old...

As you can see, a 40-year-old will not be a millionaire through their Roth IRA alone, but a 20-year-old will be a millionaire at age 52...and don't stop there; because of compound interest the 20-year-old will be a millionaire 4 times over if they keep it up till the age of 65.  And if you're 30, you have just enough time to become a millionaire from your Roth IRA alone.

Some other considerations:  You can withdrawl the amount you have deposited at any time...without penalty.  But when it comes to your earnings...you will pay a 10% penalty and regular income tax if the withdrawl on your earnings takes place before you turn 59.5 years old. 

However, one of the great assets of a Roth IRA is the fact that you don't ever have to withdrawl the money...you can pass it down to your children and it can continue to grow tax free.  Let's hope we all are lucky enough to not need the money in our Roth IRA before we kick-it.

Again, this is one of the easiest ways to help be prepared for retirement.  And as you can tell from the links above...you truly can't afford to waste another year not maxing out your Roth IRA.  If you are 30 and you do decide to waste another year...it will cost you $122,000 at retirement; 20-year olds, hold-your-breath, it will cost you $326,000! 

So bluntly speaking, get your ass in gear this year!

LevOn...Insurance

Insurance is for protection, not for investment.  Always keep this statement in mind when confronted with the option to purchase various types of insurance.

The average investor will only need to worry about 3 types of life insurance:  Term-Life, Disability, and Long-term Insurance.

I will briefly discuss these 3 types of insurance, but first I want to run-through the types of insurance you don't need.  Just listen or look for these key words, if they are in the title of the insurance, then avoid it:  annuity, variable, universal, whole, universal variable, universal whole, etc.  You will always be better with an IRA or 401k or 403b investment, than an investment in insurance.  Remember:  insurance is for protection.

Term-life insurance is a basic form of insurance that provides a death benefit.  To determine the coverage you need, you need to first determine who would be affected financially by your death.  Then determine the degree they would be affected.  For example, the sole-income provider for a family of 5 will need more coverage than someone who is single with no children. 

Term-life usually runs about $10-$30 per month and has a wide range of coverage; usually in $100K increments.  Sometimes your employer will offer group coverage with the option for additional coverage or even the option to add coverage for your spouse. 

Everyone should have some term-life coverage.  Burial expenses alone can cost $10K and someone has to pay for them!

Disability Insurance is a great form of protection.  Disability is usually provided by your employer, but not always.  It provides replacement income based on your current income if you become disabled and are unable to work.  And as important as term-life insurance is, keep in mind that you are dead with term-life...you are still here and possibly suffering financially with disability, so don't skimp on this insurance.  As with term-life insurance, you need to base your individual needs on your individual situation. 

Long-Term Insurance, as the name implies, is protection over the long-term or later in life.  Nursing homes and health problems can dwindle away your life's savings and turn a fortune into nothing in a short period of time.  This insurance provides coverage against those expenses and will help preserve what you have worked your whole life to save.  I would suggest to obtain this coverage somewhere between the ages of 55-59.  After 60, this coverage gets expensive for obvious reasons.   

If your employer does not provide any/all of these coverages, find a local insurance agent to obtain coverage and double-check with Google to make sure your rates are competitive.  And always remember:  Insurance is for protection, not for investment. 

LevOn...Why you don't need a broker

My goal is for you to invest for yourself and be your own financial advisor.  This may not be feasible for everyone; if that is the case, you should only utilize a 'fee-only' financial advisor.  Your goal is to receive objective advice, something nearly impossible when you work with a salesperson paid by commissions.

Would you ask a fox to guard the henhouse?

There is clear bias anytime someone is giving advice AND selling a product.  This is exactly what a commission-based or fee-based financial advisor does.  Most only get paid for transactions fees or from mutual funds with 'front-end loads' or 'back-end loads'.  You will rarely hear them suggest a 'no-load' mutual fund.

For example:  The most common load fund is a 'front-end' load fund.  This type of fund charges a percentage when you make deposits/investments.  For example, some mutual funds charge as much as 5.75% for their front-end load funds.  Now let's say you max out your ROTH IRA ($4000 contribution annually).  That means you are giving $230 (4000*.0575) for your 'advice'.  Knowing that let's suggest your get a 10% return on that investment.  Instead of a total of $4400 (4000*1.10) at the end of the year, you would only have $4147 ((4000-230)*1.10).  Worse yet, let's say you only earn a 6% return instead of 10%; that would bring your year-end total to $3996.20 ((4000-230)*1.06), a negative return for the year.  Think about that, you earned a 6% return and you are still not back to your original investment of $4000.  This does not even take into consideration the huge compound interest implications of these costs over a 20-30 year period.

I am not suggesting that financial advisors should not get paid; just that when they do there is no question that your best interests are their number one priority. 

I want to be clear:  My 'guess' (with near certainty) is that most individuals, families, etc., do not have enough money to invest beyond tax-sheltered accounts.  These include the Roth IRA ($4000/year) and the 401k or 403b ($15,500/year).  This means a married couple can invest $39,000 annually before moving to a 'taxable' account.  That's over $3000 per month (please refer to 'guess').  And with so many 'free' or 'no-fee' accounts available online for these options, it's just too simple to give away money in fees for biased advice.  Again, if you must use an advisor--use a 'fee-only' advisor. 

Other thoughts:  "But I am paying for advice so I can beat the market".  Some funds do beat the market, but not nearly as many as you probably think.  In fact, only 1 in 5 mutual funds beat the market average (S&P 500) over the long-term.  To look at it from a different angle:  would you hire an employee if you knew for a fact that they would perform 'below average' 80% of the time--of course not!!  By simply picking a no-load, low-expense ratio, S&P 500 Index fund, you can guarantee that you will out-perform 80% of all mutual funds.

"But I have a relationship with my advisor".  It would not make sense if you didn't, they are in sales!  Don't take your finances lightly because of a relationship.  The reason you are educated to whatever level you have chosen, is to not only ensure a greater life purpose, but a greater income level.  You worked hard to get where you are, don't forget where you are going. 

At Leverage Consulting, the goal is to change the way you think and execute.  Do more with less!

LevOn...Books

So you want to learn more about personal finances? 

Here are a few books I suggest reading:

The Only Investment Guide You Will Ever Need - Andrew Tobias

Purchase It Here!

The Boglehead's Guide to Investing - 3 authors

Purchase It Here!

And if you want to dig a little deeper...

Common Sense on Mutual Funds - John Bogle

Purchase It Here!

The Four Pillars of Investing - William Bernstein

Purchase It Here!

Let me know if you have any questions!  jw@leverage-consulting.com

LevOn...Emergency Fund

The goal of the 'LevOn...' (Leverage On...) series is to provide individual investors with a basic foundation of what they need to do and in what order, when it comes to their personal finances.

The first task is to establish an emergency fund.

The surface answer to establishing an emergency fund is to keep 3-6 months of expenses in a savings account.  But if you dig a little deeper there are considerations that make every situation unique.  For example, you should have 3 months of expenses saved even if you are single, no kids, no mortgage.  Add in the kids and a mortgage and that increases the necessary amount to at least 6 months.

Tip:  Most 'financial advisors' will tell you the absolute minimum as a suggestion; this is not always the best advice.  Keep in mind:  they don't like to see large amounts of money sitting in accounts where they are not able to profit. 

LevOn Advice:  7 months.  That is seven months of true, realistic expenses.  If your 'bills' are $1500 a month, but you spend $2500 a month, then use the latter to configure your emergency fund.  In the example, the amount would be $17,000.  Sounds like a lot of money (and it is), but if you find yourself unemployed for even a few months, you will be glad you have it.  Even if you firmly believe it will not happen to you...remember:  it happens every single day to unsuspecting people like you. 

I think it's best to keep 1 month (of the 7) of expenses saved in your regular checking account.  This helps to avoid overdrafts and gives you some leeway if you go over budget.  The other 6 months should be in a high-interest savings account or CD (certificate of deposit).  For example, using the numbers from above, let's say you need $17,000 in your emergency fund:  the first $2500 goes to regular checking, the next $10,000 should be in a basic, high-interest savings account, and the next $4500 should be in a 6-month CD.

If the amount you need comes as a shock to you, don't freak out!  Simply figure out the amount you need and divide it over the next 12, 24, or 36 months.  Definitely don't over-concentrate on this task.  Keep paying down any credit card debt, keep contributing to any tax-sheltered retirement accounts (401k, IRA, 403b), and keep feeding your children.

So where should you put your emergency fund?  I suggest an ING Direct account.  You can link this account to your checking and transfer money back-and-forth in 2-3 days.  As of 1/10/07, the Orange Savings account is paying 4.5% interest, no min, no fees, no nothing.  It's a no-brainer!

Email me: jw@leverage-consulting.com to find out how you can make $25.00 by just opening your ING Direct Account. 

What's the frequency, Kenneth?

You may remember an incident involving Dan Rather back in 1986; he was punched from behind and repeatedly kicked by an assailant that kept asking him, "Kenneth, what's the frequency?".  R.E.M. used the incident as the basis for their song, "What's the frequency, Kenneth?".  Because of the media attention, the statement was commonly used as slang for describing an uninformed or confused person. 

I started this weblog to provide personal financial advice to those who find themselves 'confused' in regards to their finances.  There is no doubt that this subject is one of the most overlooked areas in education.  Ironically, we go to school to earn more money.  You may believe that statement seems shallow, but really think about it; you graduated (high school, college, etc.) to make a better living...hopefully the subjects you concentrated on were for 'less shallow' reasons; bringing us back full-circle to my point, the foundation of why you attended school was to make more money.  And yet the institutions we attend leave us hanging when it comes to managing our personal finances.   

All throughout your education you never have a class that concentrates completely on how to manage all of this great wealth you are working to achieve.  This deficit in vital information plays a great part in your daily lives.  Mortgages, vehicle loans, credit cards, 401(k)S, IRA's, cash savings, external investments, etc.  These are the subjects that we rely on the 'real world' to teach us. 

And the most important summation of these subjects deal with the grand-daddy term of all:  Retirement.  Supposedly we are all working towards it.  And as important as it seems to society, many people do not understand how to get there or that you can easily get there without the help of 'professionals'. 

Hopefully this blog can help to clear-up many 'confusing' subjects about personal finances.  Of course my opinions will undoubtedly bleed through in my posts, so feel free to post comments, ask questions, or suggest subjects.

What can I do for YOU?

Leverage Consulting offers fee-only personal financial advice. 

Fee-only advice is the only advice that is 100% objective and always puts your interests first. 

I have no connections with any financial institutions of any kind, i.e., my advice is 100% my advice.  There is good and bad with that; the good:  as mentioned above there is outside influence on my advice;  the bad:  I don't physically manage your money.  So, you still have to physically manage your accounts, but I can also help you with that. 

I have found that most individuals just need help with their IRAs, 401ks, or Rollovers.  These accounts are so easy to manage yourself if you know what to buy.  That is where Leverage Consulting comes in;  I will help you put together a portfolio of funds based on your individual needs.  You can either use my blog postings as your guide (and read a few books, etc.) or you can utilize my expertise to help.  Either way, when you take control of your finances my goal has been met.

My fees are based upon your needs and 100% individualistic to your situation.  Email me at:  jw@leverage-consulting.com for more information.

Leverage Consulting also offers small business consulting.

This is an area that is highly-undefined.  I can help you with everything from business plans to transitional strategy for existing businesses.  Every business has unique goals and one of my goals is to help you get to your goals.  Email me to discuss your situation and together we can decide where Leverage Consulting fits in.