Asset Management: A Special Report by The Economist

There is a great special report in The Economist about asset management. It talks a lot about the questionable value of high-expense funds and their managers versus passive investing. It's a fairly lengthy report but quite interesting. I recommend it for anyone, especially new investors like myself.

$25 Bonus - Revolution Money Exchange

Last week I opened an account with Revolution Money Exchange through a referral and got a $25 bonus just for opening my account. I withdrew the money as soon as it was available (about 2-3 days after bank account verification). That's $25 in absolutely free money! The service looks cool (similar to PayPal) but it's a no-brainer to get a referral from me and earn a free $25. Email me at Impecunious.Investor@gmail.com for a referral. I would be happy to help you and me out (I get $10 per referral). Remember that you don't get the bonus unless I refer you.

Money as Debt

What is money? Where does it come from? The government prints it, right? Wrong - the government prints physical currency, but nearly all the money in existence is created by banks, quite literally out of nothing. In this excellent 47-minute animated video by Paul Grignon, our monetary system is explored in depth. This movie will completely change your views of money. All money in circulation is essentially debt, and with this debt accruing interest beyond the total amount of money in circulation, it is necessary to create more money (debt) to pay off this ever-increasing debt. It is a vicious, exponential curve. Our system is fundamentally flawed. Take some time to check out this video; it is truly eye-opening.

$100 from TD Ameritrade!

I just signed up for this great offer. Suze Orman has a deal with TD Ameritrade: If you open up an account with them before March 31 using the code on that page and set up an automatic deposit of at least $50/month for 12 months, they will give you $100 within 4 weeks of the final deposit! No need to get involved with the actual trading aspects of TD Ameritrade, either. Your cash is put into a money market deposit account which earns 2.78% APY. That isn't the best rate out there, but still decent, and it's impossible to beat the return on that total $600 invested over 12 months. (It works out to about 32% compound interest at $50/mo.) This one's a no-brainer; everyone should be able to spare $50/mo. And after a year you'll have $700 that you can withdraw and put toward whatever you like. Click here to check it out!

For me this is a great way to lock in another $50/mo. toward my target asset goal for 2008. It will be easy for me to "forget" about this extra cash until the time comes to withdraw, and then I'll have a nice chunk to put toward my savings goals, IRA or whatever.

I found out about this over at My Money Blog, which has a lot of great tips on making extra cash, bank rates, rewards credit cards, and more.

Fidelity - Excellent Customer Service

Another customer service experience to report, but this time a fantastic one: Fidelity Investments. I opened up a Roth IRA with them in January ($2,500 minimum for the account but that's waived if you set up automatic payments of at least $200/mo. to your IRA). The benefit of an IRA is enormous. With Roth IRAs you don't have to pay taxes on money you withdraw in retirement. However, IRAs have annual contribution limits. $4000 in 2007 and $5000 in 2008. But you are able to contribute to the 2007 year all the way up until April 15th of 2008. Because I got such a late start on 2007 I want to contribute as much as possible for that year in the hope that I can max out or come close to maxing out my 2008 contribution.

So I was a bit dismayed to see that my automatic payment for February was coded as a 2008 payment! This makes sense, but unfortunately there's no way to change it. I was at work at the time and wanted answers quickly. Fidelity has an instant messaging application in which you can ask questions and a Fidelity service rep will message you directly. I was able to get my questions answered within 5 or 10 minutes. The rep was able to code my recent deposit for 2007 and said that I could just skip my automatic payments for the next couple months and deposit manually. Because my account was already open I wouldn't have any problems. Fantastic! So now I will try to contribute as much as I can for 2007. The more I pack away now, the better off I'll be 40 years down the line.

I haven't even purchased a fund yet (the money in my Core Account is sitting in Fidelity's Cash Reserves, a money market fund) but so far I'm delighted with the service from Fidelity. I'm going to have to spend some time investigating possible funds - or perhaps take the recommendation of a colleague.

2,633 Reasons Why Fees Are Bad

Over the first couple weeks of this year I took a look at some of my spending over the course of 2007. I was always struggling, living paycheck to paycheck. A big reason for this was overdraft fees on my checking account at Citizens Bank. My checking account would be down to $5.37 and I would inevitably take out $60 before the end of the month rolled around so that I could go out, buy food, booze, or whatever, and I would go into the negative. $38 overdraft fee. For a while I just thought "Eh, whatever. If they'll float me some money for a while that works out fine for me." It got to the point where I would routinely be $200 or more in the hole by the time my new paycheck was deposited. I was playing catch-up every two weeks, and it was a vicious circle. I would get my new paycheck, pay off $200+ in negative balance, have that much less to work with for the next two weeks, and then overdraw my account again. I knew what I was doing, and I knew it was crippling me financially, yet I kept doing it. The fees were ridiculous: $38 every time the account was overdrawn (whether it was by $1 or $100), then additional service fees if a negative balance was carried for more than five business days (which it was, quite often). I think the worst it got for me was when I was $400-500 in the hole, probably half of which were in fees.

So I went back through my bank statements over the last 12 months and tallied them up, every single charge:

$2,633.

Two thousand, six hundred and thirty-three dollars!

Typing this makes me physically ill. Do you realize how much money that is? I do not even want to tell you how much money that represents as a percentage of my annual income. What else could I have spent that money on? Let's see:

If I had opened an IRA in January 2007 I would have socked away 65.83% of my annual contribution limit.

$2,633 works out to about $219/mo. If I had put that in a savings account at 4% interest every month since 1/07 I would have had that plus an extra $53 right now.

It could have been about 87 dinners at my favorite restaurant.

It could have been about 19 1/2 months of student loan payments.

It could have paid off about 81% of my current credit card debt.

It could have paid for my airfare to Hawaii to attend my good friend's wedding last September, which I had to miss because I did not have the money. This kills me.

It could have been about 27.7% of the debt I currently owe to friends and family.

It could have been new clothes, shoes, movies, music, wine, fine liquor, cigars, dates, treating my friends, a new hard drive, travel expenses, bigger and better Xmas presents - in short, it could have been anything, whether a frivolous spend, debt reduction, or wise investment - and it would have been infinitely better than wasting that money on Citizens Bank.

Never again.

Money mistakes have emotional as well as financial costs. These can have a lasting impact. It was essential for me to take stock of my situation, realize what I had done, take responsibility for it, and plan how to avoid it in the future. I think this is necessary for anyone trying to improve his financial situation no matter what the particulars are.

(NB - While I do think that the overdraft fee system at Citizens Bank and other "brick and mortar" banks (Use online banks! No fees!) are obscene, predatory, and unethical (banks raked in over $19 billion in overdraft fees in 2007), I take full responsibility for my incurring all those fees. The irresponsibility was mine and mine alone.)

Active or Passive Investment?

Although I am just getting my feet wet in the ocean of saving and investing, I have been spending and plan to continue to devote much of my spare time to learning about all aspects of finance. I am currently laying the groundwork for future endeavors, but one issue that I've seen crop up a few times in my reading is active vs. passive investment management. I came across this excellent article in San Francisco magazine, by way of the invaluable Get Rich Slowly, describing the value of the index fund over traditional stock picking and managed mutual funds.

As I understand it (an admittedly rudimentary understanding), active stock management is when one invests in individual stocks and monitors the market daily, anticipating the optimal times to buy and sell stock for maximum returns. This active management also manifests itself in the form of mutual fund managers who observe the market on behalf of their clients - taking significant fees to do so. Everyone from stock brokers to financial advisors to investment house managers profits extraordinarily from this system.

However, the relatively recent (as of the early '70s) rise of the index fund is a direct assault on the classic system of stock investing. Index funds basically take a stock index like the Dow Jones or Standard and Poor's (S&P) 500 and buy stocks in the proportions in which they exist in that index, assuming that, for the most part, a given stock price is an accurate reflection of the value of a company. The fund follows the ebb and flow of the entire market, and rather than trying to select individual stocks to beat this natural expansion and contraction, it relies upon historical precedence that the stock market generally rises in value over time. This method is very passive - so much so that it can be managed by computer for a tiny fee, rather than a team of exorbitantly-paid financial services people. And with very rare exceptions, mutual funds do not outperform index funds. Considering the fees and expenses involved with some of these high-performing mutual funds, index funds seem like a wise investment indeed.

Read the entire article, it's fascinating.

Also, a great post at The Simple Dollar explaining how index funds work.