Archive for the 'Investing' Category


Miscellany – Memorial Day Weekend Edition

Life has been SO much fun for us lately, we’ve neglected ol’ Nelly here.  Seriously, we’re putting in landscaping and all the digging is being done by hand.  Combine that with evil travel for work and we have some very exhausted individuals.  Perhaps our BMI will improve…But, we’ll be back to regular posting next week with one caveat…we’ll post on Tuesday instead of Monday, since it is a holiday here in the US of A.

In other news…

Who’s LOVING bookface?  We mean facebook.  If you got in at $42 like a lot of schmuck’s did, you’re only down 24%.  If you got in at the IPO price, what’s a 16% loss?  Still, at a ~75 P/E today and EPS under a dollar/share, have at it.  And of course, let us spike the football and tell you we told you so.  Well, we sort of correct, we thought at least the institutional investors would have made some money.  But everyone who bet for FB, has lost.  Time will tell if you get to dance a jig in our face.  But for now, we shall gloat.

We’ve also figured out how to save over 20% on ALL purchases at home depot.  Remember, we’re doing landscaping, you didn’t think we’d get reemed by the man did you?  Before we give the big reveal, a few words are needed.  We’ve always maintained that we are not out to monetize this blüg.  And that is still true.  But, the links in the paragraph do benefit us.  If both people who actually read this blüg know about our little secret, we face additional competition for saving money.  So, if you like our blüg, or if you read it here first, we are appreciative if you use OUR links if you find what we are about to say is cool.  If you want to bust our balls about this, we can remove this paragraph and life can go back to normal.  So…how to save 20% off of everything at home depot or lowe’s.  First, we sign up at plastic jungle’s website. Then we cruise over to, sign up, type “plastic jungle” in the search box and click on the appropriate box to save 4.5%.  You can then peruse all the discounted gift cards at plastic jungle.  Home Depot and Lowe’s are discounted 7%.  So, if you make a $100 purchase, you only pay $93.  Of course, you paid $93 for $100 worth of spend, so you take off 4.5% of $93 you earned at  This leaves you with ~$89, or over 11% savings just doing these two things.  If you have a good cash back credit card (and everyone who can keep their spending in check should), you make another 1% off of $93, bumping the savings up to 12%.  And, if you are smrt, you have found a 10% off coupon somewhere (Lowe’s and Home depot honor competitor’s coupons) or you are a Vet (thanks for your service) you ALWAYS save 10% off at both Lowe’s and Home Depot.  So your original purchase was $100, you effectively paid ~$79.52, or 20.5% savings.  A little work, but we’ll take it!

Vanguard has closed it’s high yield bond fund to new investors.  We’re not big fangürls of high yield funds, but it seems people are flocking to them.  This isn’t the first time Vanguard has closed its fund, so don’t worry, they’re just trying to smooth everything out for long term investors.

And NPR’s Planet Money is barking up the College Tuition tree.  We recently wrote low interest rates on student loans boost tuition price, but PM is saying going to college is like buying a car.

Have a safe weekend.  Tuttles.



Buying into the Facebook “IPO” is stoopid

We interrupt our normal coverage of our Protecting Income series to bring you part 2 of our Dose of Reality series.  If you missed part 1 or it isn’t fresh in your mind, hop on over to learn why comparing yourself to Warren Buffet is not a good idea.  Here in part 2, we’ll explain why investing in the highly anticipated “IPO” of instabook is a bad idea.

Continue reading ‘Buying into the Facebook “IPO” is stoopid’


IRA to IRA to IRA Rollover in one year?

Why surfing the interwebz, we’ve run into some potentially misleading information.  Well, it most definitely can be interpreted as being misleading, but the intent of the individuals is unknown.  Of course, the point of this blüg is to make sure people don’t use this misleading information.  So, regardless of what someone’s intention is, we hope people walk away with more knowledge than they did before they invested a few minutes in what we have written.

Over at Retire by 40’s blüg, “Ray” gave some advice in the comments that certainly deserves an asterisk.  And, we put that asterisk in the comment section.  But, here is what “Ray” said which could be misleading.

What people don’t understand is you can roll it over to say Vanguard and if you don’t like them, then roll it over to Etrade and if you don’t like them, roll it over to Schwab etc.

Usually from start to finish it’s no more than 7-10 business days if you do it right…

The implication here is that you can just rollover whenever you please.  Which is true, but not without consequences.

Continue reading ‘IRA to IRA to IRA Rollover in one year?’


Why you should use 5 year CD’s for your emergency fund

We have advised not to reach for yield by doing things like investing in P2P lending or beyond your risk profile.  This is especially true for one’s emergency fund, where it should be desired to have the money liquid with no risk of loosing principal.  These two characteristics of an emergency fund leave us with a few, unexciting options.  Unfortunately, today’s options don’t provide much inflation protection. Continue reading ‘Why you should use 5 year CD’s for your emergency fund’


You are not Buffet

What’s interesting around the interwebz and personal finance blüg-o-sphere are the individuals who think they can beat the market.  While not impossible to do so, we can’t help but ask ourselves, is this from luck? or is this because of skill?

Many point to the “Oracle of Omaha” as the poster child of being able to analyze a company, pick the winners and reap the benefits with your feet kicked up as the cabana girl/pool boy bring you fruity drinks with those little umbrellas.  But another question we would like to delve into is, “Is how Warren Buffet invests the same way we invest?”

We (the working stiffs of the world) are retail investors.  We pay a premium to invest.  And when we do invest, we are given the scraps and leftovers that those higher in the pecking order have left us.  No one calls us about investing in oil wells in North Dakota, no one calls us with great business deals needing capital without the opportunities first being picked over.

When we buy a security, we don’t get invited to the board meetings.  We don’t get a say in what the company does, when it does something or how it does something.  We pay a premium for the privilege of investing in a company and we are asked to stand on the street with all the other working stiffs.

When debt becomes due, we may be the first to line up to get paid.  But we are quickly shuffled to the back of the line.

When Warren Buffet invests in a company, he is usually issued preferred shares of a company, often times reaping unheard of dividends.  He is invited to the board meetings and very much has a say in how business is conducted.  This contrasts from how we working stiffs get to invest.  So, on that level, it’s not fair to think Warren Buffet is the poster child of all retail investors.

This is not to say where Buffet is today wasn’t from the bottom and without hard work.  He certainly wasn’t fed with a silver spoon and truly started by delivering newspapers.  And maybe that is why so many people aspire to be like him, where he came from is the same as the majority of us and we desire to be known as an Oracle.  And surely, someone will eventually rise to his level if they haven’t already.  And some will pick some winners and profit handsomely.  But, we shouldn’t be fooled into thinking we can follow in their footsteps.  More than likely, a stock picker’s success is in luck, although they may think it is skill.  And if it truly is skill, why would you tell everyone about it, as that will most likely ruin your success?

In conclusion, we’ll leave you with Warren Buffet’s own advice to the working stiff, retail investor like ourselves.  In Berkshire Hathaway’s 1996 annual report, the following was said in the Chairman’s Letter:

Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

misconception about roth IRA first time home buyer distribution

Well, with April here, spring in the air, flowers blooming and tax time looming, we thought we would dispel a misconception about the Roth IRA first time home buyer’s reduction in earnings while taxes are fresh in the mind of half the population.

We’ve seen this lately being mentioned as an advantage of a Roth IRA here, here and here.  And, we’ve attempted to alert some of them to the complexity of this acrobatic maneuver they suggest.  Some willing to learn, but mostly with us being shrugged off.  So, we thought we would move it to a stage where we can fully (at least attempt to) explain this complex tax move.

First, we should point out, that we think using an IRA for anything else other than retirement is a mistake.  GASP!  A blanket statement.  They are powerful tools which help people to retire.  In an indirect way, yes, buying a home does help one to retire, or paying for a child’s college education (if that is an expense you decide to bear) does help you to retire.  But, there are other ways to help you save for those things.  Look at it this way, you only get $5000/yr (under current rules) to contribute.  Maxing this out year after year will barely get you into retirement, if ever.  Use a wrench to turn nuts & bolts, and a hammer to pound nails.  So, even if you read through what we are about to say and still think saving for a home in a Roth IRA is a good idea, you certainly don’t have our endorsement.  But, our opinion is worth what you paid for it (should we set up a paypal link for some luv?).

The origin of the Roth IRA first time home buyer’s earnings distribution misconception is the interwebz.  It is undoubtedly true that you can withdraw from a Roth IRA, an amount up to $10,000 for the purchase of a primary residence to be your “first” home (usually if you haven’t owned a home in two years, you are a born again “first” time home buyer).  We would certainly hope everyone would due their do diligence (why do we feel like we messed something up there?).  And, if you want a great summary of why most people think this is an easy peasy tax move, read Publication 590, page 62, bottom right of the page.  It is right there, plain as day under big bold words that say, “What are Qualified Distributions”:

One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

And if you’re looking at the Pub 590 document that we link to, page 62 and you click on the hyperlink of “first home,” then it takes you to the part where it defines who you can buy a home for, what defines a “first” home and even points out that you and your spouse can both do this for the same home!

This is a qualified distribution, so the normal roth ordering rules don’t apply (rules which say when there is a non-qualified distribution that you first take out your contributions, then conversions-this has a few caveats-and then earnings).  Being a qualified distribution, you can take from the earnings.  If you think you can have your cake and eat it too by keeping your contributions as an emergency fund and reducing your earnings for the home purchase you are WRONG!  You will have to reduce your basis (or contributions) by the amount of earnings you withdrew the prior year for a first time home purchase, up to $10,000.

Sounds confusing, well it is.  Let’s look at some tax forms.  To do this, we must go back to 2010 so you can see how this works.  For our example we’ll assume you have $30,000 in a Roth IRA, $10K of earnings and $20k of contributions.  Let’s say you want to tap that $10k of earnings for a home in 2010.  First off, you must have a Roth IRA account at least 5 years old.  Withdrawing anything before that can trigger taxes and penalties.  But, what is so lucrative about using the earnings instead of the contributions?  The main reason is so in our example, you could take all $30k out for a home purchase, tax and penalty free.  But, if you aren’t going to completely wipe out the account, you are not gaining anything (and some would argue you are loosing things).

One of the hard sells of Roth IRA’s are their flexibility.  And they are the Gumby of retirement investment vehicles because contributions can be tapped, tax and penalty free.  If you like this about a Roth, here is why you need to be cautious with this first time home buyer deal.  Let’s assume you take the $10k of earnings in our example above in 2010 for the purchase of your first home.  You would fill out the 2010 form 8606 like so…

That’s it.  You can download this 2010 8606 form here.  The 2010 form is a little more complicated than other years because of being able to allocate taxes due on conversions over two years, but all that is in Part III.

So, in 2011 (or any year into the future), let’s say you want to take out the $20k of contributions, for whatever reason.  Let’s fill out your form 8606 in 2011.  This is what it would look like (oh, and you’ll need the instructions, linked here for your pleasure).

WHOA! What just happened?  How did you end up with taxable money in line 36?  Should line 22 be $10,000?!  OR $20,000?  As they say, the devil is in the details.  Let’s look at those instructions for the 2011 8606, line 22.

Figure the amount to enter on line 22 as follows.

  • If you did not take a Roth IRA distribution before 2011 (other than an amount rolled over or recharacterized or a returned contribution), enter on line 22 the total of all your regular contributions to Roth IRAs for 1998 through 2011 (excluding rollovers from other Roth IRAs and any contributions that you had returned to you), adjusted for any recharacterizations.
  • If you did take such a distribution before 2011, use the chart on page 9 to figure the amount to enter.

We hop to page 9 and find the following chart.

So, using this chart on page 9 of form 8606 instructions for 2011, if we took a distribution for a first time home buyer in a prior year, we must take that off of our Roth basis in the following year (2010 8606 line 29 less line 26).  Essentially, the Roth ordering rules are restored and the Roth basis (contributions) is reduced by the amount used for the home buyer’s distribution in any following year you take a distribution.  You can find the 2011 8606 form here.

If you were planning on having an emergency fund and use a home buyer distribution within your Roth accounts, it would be wise to treat the home buyer distribution as being from the basis.  In fact, it would be wise, if you aren’t wiping out the entire amount of Roth funds, to take from the basis and save yourself not only a headache, but your lifetime $10,000 home buyer  distribution from any IRA.  The wisest thing you could do, however, is not touch your retirement accounts until needed in retirement.

And you should check out our legalese page to know we are not professionals at anything, except maybe at barking.  H&R block won’t even hire us to prepare 1040EZ’s.  So, talk to them or a real tax professional.  


Risk & Reward

We all know the age old rule that the more risk we take, the higher the potential reward.  And we tend to think this relationship looks something like this:

We tend to think the relationship between risk and reward is linear.   In other words, for an additional amount of risk we take, we are compensated a proportional amount of reward, with no limit on the amount of reward we can reap.  This is common thinking when describing the Risk/Reward balance.

If we were whipping up charts to model our ideal Risk/Reward relationship, this is what we would want.

This way, we are compensated exponentially over the long term for taking more risk.  And, just as with the linear chart, there is no limit to the amount of reward one can reap.  Sadly, neither of these are the case when it comes to the stock market.

We are more likely to see diminishing returns for incremental risk that we take on.  Something like this:

Eventually we run into an asymptotic behavior, when we go out to infinity with our risk, the reward will seize rewarding for that additional risk.

So, when people say, “more risk = more reward,” stop a moment and think how you are being rewarded.  Is it in proportion to the amount of risk you are willing to take?  Will you be exponentially rewarded for your risks?  Will you take additional risk that barely return you more reward?

Food for thought.  What’s your risk/reward relationship?