International Investing Teaches Us a Portfolio Diversification Lesson
You know things aren’t good financially when you stop measuring which investment has made the most money and you start looking for the ones that have lost the least. A recent article in Forbes called “Is Global Investing Dead” touts the DOw & S&P 500 as having “better” losses than major international indexes:
“The blue chip Dow Jones Industrial Average and the large-cap Standard & Poor’s 500 both have lost much less than their major European and Asian counterparts of late, suggesting that the five- or six-year run in which foreign bourses routinely thrashed the S&P and the Dow has ended”
I definitely understand what he’s talking about, our international funds, Dodge & Cox International, American Century International Growth, Oakmark International, have all dropped significantly since last year, down 16 – 32% since early December as you can see in the image of Oakmark International below
However, I think the important lesson from the article isn’t “be wary of international stocks” but rather to remember that all hot investing trends end sooner or later. I increased our exposure to international stocks probably halfway through the run up in global investments partially because they were doing so well but also to further diversify our portfolio across geographic regions and markets.
Although the US is still the major player in the financial world today, I think the huge gains in international markets were a sign it’s becoming more of a global economy and that there are many places outside of the US that have massive potential for the future.
That being said, I’m glad I didn’t move half our portfolio into international stock funds just because they were on a tear. I increased our global investments by 5% but I know some speculators that piled a ton of money into foreign funds and are probably kicking themselves now. Some people at work moved most of their 401k into international funds and were gleeful with 22% returns but then saw all that appreciation wiped out last December.
The lesson I learned from the rise and drop of international stocks over the last 6 years is that you should diversify your investments across industries, market capitalization, investment approaches, and markets but don’t get carried away by big growth in any of these areas. No growth spurt lasts forever so don’t chase them.
The Falling US Dollar and Foreign Exchange Rates – My Walk Down Memory Lane
As a kid growing up my family traveled to Europe several times in my younger years. I was already interested in money back then, finding the currency changing booths and turning our dollars into English Pounds, German Marks, or French Francs was pretty neat.
Foreign Currency is Cool
I was fascinated by all the different types of coins but my favorite conversions were always the ones where our dollar bought the most of the other currency. It was cool when you could convert your 1 dollar into 4 marks, and then pay 1.5 marks for a big jug of Coke, it was like Coke was always on sale!
Army Brat Lives the High Life
I thought I had it made then, little did I know I’d really clean up several years down the road. We packed up and moved to Germany during my high school years. Although, the Deutsche Mark to US Dollar conversion rate wasn’t as good as it had been, there were other, far better, currency opportunities awaiting us. On countless number of weekends we’d load up our mini-van and travel to various destinations in Central or Eastern Europe.
The Iron Curtain had come down and economies in Poland, the Czech Republic, and Slovakia were getting their first taste of capitalism. Their currencies were so cheap my sister and I could spend our measly teenage incomes like kings in Prague or Bratislava. Although we weren’t always happy about leaving our friends for the weekend to travel to another European city, going shopping there always made you feel like you had a ton of money.
The Summer of Eurail
The allure of Europe and it’s diverse cultures drew me back again for an entire summer during college. My girlfriend (now my wife) and I traveled the continent by train and I showed her the ropes. The Euro had just been introduced , I remember buying food at a grocery store in Nice, France and the reciept showed the price in both Francs and Euros.
Exchange rates weren’t as good as they had been but we were poor college students so of course everything seemed expensive. A taxi from the train station to the leaning tower of Pisa was going to cost way too many lira so we hoofed it instead (big mistake, should’ve spent the money).
The Falling Dollar
I haven’t been back to Europe since but would love to return. I’m afraid my next trip will be a rude awakening as the US dollar continues to fall. The trips to the currency exchange booth will no longer be an exciting adventure, but rather a depressing reminder of our weakened purchasing power.
In hindsight, if I’d have been smart enough to see the continuing trend and started dabbling in Forex trading in college I could have made a pretty penny simply by buying and holding Euros. I do have a few in mint condition that I bought as collectors items during our trip but I’ll probably hold onto those for the memories. They’ll remind me not only of the fun we had on our travels but also of the buying power the US dollar used to carry.
Financial Markets in Trouble – Who’s to Blame?
The markets are dragging down the economy …. Giant institutions are, to use the technical term, scared to death.
I wish it was an April Fools joke but unfortunately it’s all too real. Alan Sloan from Fortune magazine has a good overview of how the current financial mess came about and what the impacts might be on you and I.
“We’re suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. “
Hedge funds and investment banks broke one of the vital rules of investing; don’t put your money into an investment unless you understand how it works. According to Sloan, “ they created, bought, and sold, for huge profits, securities that almost no one understood”. These institutions were repackaging and reselling debt multiple times over which made it difficult to understand how much risk there really was.
I remember reading a book several years ago, How to Profit from the Coming Real Estate Bust, that described how investment banks would buy a bunch of questionable auto loans, bundle them up, slap a quality credit rating on them and sell them as AA debt. Of course, I’m simplifying the process but that’s what it amounted to. The author of the book, John Rubino, stressed the danger of the practice and foretold a huge financial mess. Sounds like he was right.
Sloan then goes on to talk about the government’s role in bailing out these banks, why they’re doing it, and who will pay for it.
“Say the Fed extends $500 billion of emergency loans to firms in need of short-term money. They’re paying around 2.5% interest to Uncle Ben (or Uncle Sam, if you prefer). That rate is way below what they’d pay to borrow in the open market, if they could borrow. The difference between the open-market price and 2.5% is a gift from us, the taxpayers.”
He thinks the markets will eventually stabilize but the costs of the financial mess will be long lasting and far reaching:
- income on our Treasury bills, money market funds, and CDs has dropped sharply
- our wealth has eroded relative to foreign currencies and commodities
- a loss of faith in the dollar by our foreign creditors
- run up the price of commodities that are priced in dollars
- our financial institutions will emerge from this episode weakened
The bottom line is that this economic mess is not going away any time soon and those of us that have been responsible with our own personal finances are going to suffer for it.
“It’s going to take years to work out our country’s excess borrowings, with lenders and borrowers – and quite likely American taxpayers all bearing the cost.”
Doesn’t it make you feel great about paying your taxes here in the next few weeks? Too bad we can’t earmark our income tax payments as “not to be used to bail out the rich, irresponsible investment bankers”.
Opportunity Costs of High Fuel Prices – Personal Finance Review
I spent the weekend making money for the oil companies. We drove about 800 miles on the way to and from a family get together. Although we drive a rather fuel efficient Honda we still ended up paying over $100 in gas for the trip.
As fuel prices continue to climb I can easily see the effect it can have on consumers and our economy. This is an annual trip that we won’t cancel due to expensive gas but the money we spend on fuel does take away from other things we could have spent the money on.
When you stop for gas and lunch, if the fuel pump charges you over $40, you might choose to just snack on the food you brought along rather than eating at a sandwhich shop. If you didn’t bring anything along to eat you might go easy on the order or share a meal to make up for the money you just dropped on gas.
I guess in order to help save the $100 we spent I’ll just have to look for some money tips from around the web. Here are some personal finance articles I liked from last week.
-Perfect timing, here is a post about gas rewards cards from the Suns Financial Diary.
–Gen X Finance asks if Generation X is to blame for the mortgage problems and Clever Dude wants to know who YOU blame for your financial troubles.
-My Dollar Plan offers some insight into her investing club and Five Cent Nickel has some coverage of Middle Class Millionaires.
-Lazy Man & Money ponders the future of peer to peer lending and Million Dollar Journey has some tips on watching out for your housing costs.
–Brip Blap gives us 15 ways to make our 9–5 jobs more bearable and The Mighty Bargain Hunter suggests 11 ways to ease our commute.
-The Digerati Life talks about the obstacles money creates in our lives and No Credit Needed looks at how healthy living can effect your wallet.
-Free Money Finance reminds us our stock brokers may be broke themselves and Blueprint for Financial Prosperity mentions wrapping your credit cards in foil to prevent theft of credit card data (read the comments).
Free TaxCut Online Premium Software for the Most Creative Tax Deductions
If you haven’t done your taxes yet, the clock is ticking. According to the “Countdown to Tax Day” calendar there are 17 days left until your returns have to be filed.
You may actually have benefitted from procrastinating this time. I’m giving away access to H&R Block TaxCut Online Premium + efile to two readers of this site.
All you have to do to win is leave a message about the most creative tax deduction you’ve ever taken in the comments below. If you’ve never gotten creative with your taxes you can just comment on how much you dislike paying taxes and all the things you could be spending the money on instead.
I’ll pick two winners from the comments at random, each person will be emailed a code that will give them free access to TaxCut Online Premium, provided courtesy of H&R Block.
The deadline it to be determined, I won’t keep it open for too long since tax day is quickly approaching. So enter your comment today and I’ll let you know once the comment entries are closed and we have two winners!
Clean Up Your Finances Four Times a Year
Did you realize that every March 31st, you’re 25% of the way towards the end of the year? By the end of June you’re half-way through the year.
I’m very aware of this since I work in an industry where the end of each quarter means a lot of work for us. It seems like the first quarter will have just finished when we’re already approaching the end of 2nd quarter, time to do it all over again.
The fact that there are four quarter ends in a year can offer great opportunity for your finances. At the end of every three months it’s a good habit to look back over your income, expenses, and investments for the past quarter and give them a review.
Not only is 3 months a simple milestone to remember it’s also when many financial companies send out balance and performance statements. When you see them show up in the mail take some time to sit down and go over how your personal finances have done over the previous 3 months.
Another good thing about a 3 month span is that it’s a short enough time so that if money leaks develop, you can discover and plug them before too much damage is done.
Corporations use each quarter end to summarize thier activities and report their financial status. If huge billion dollar businesses can find the time to review their balance sheets and cash flows every three months don’t you think your household could do the same?
Economic Stimulus Rebate Check Frequently Asked Questions
JKLasser, the company that puts out an annual tax guide, sent me the following information about the rebate checks that will be going out to some people. From the looks of things, we should get back $1500. It will be a nice little boost for our vacation fund but I’m sure it won’t help the federal deficit any. Anyhow, below are some answers to frequently asked questions about the rebates.
What Do You Have to Do to Get a Check?
-To get a rebate check, you must file a tax return; either a form 1040, 1040A or 1040-EZ federal tax return for tax year 2007. You can file for free with Tax Cut.
–Persons who do not normally file tax returns, like retirees, will have to file a 2007 tax return in order to get a rebate check.
When Will the Checks be Mailed?
–The IRS will begin mailing the rebate checks starting on May 2. The Treasury estimates that it should take about 10 weeks for all the checks to be mailed.
-Persons who fail to file their 2007 tax returns by April 15, 2008 and request a filing extension may not receive rebate checks until as late as December.
Who Will Get Tax Rebate Checks? How Much Will You Get?
–Single tax filers with adjusted gross income (AGI) less than $75,000 and couples filing jointly with AGIs less that $150,000 will qualify for full rebates.
–Qualifying single filers (AGI less than $75,000) will get rebates of up to $600. Qualifying couples (AGI less than $150,000) will get rebates of up to $1,200, plus $300 per dependent child, with no maximum on the number of eligible children.
–Persons who owe no income taxes, but earned at least $3,000 in wages, Social Security benefits or veterans disability benefits will get rebate checks of $300 for individuals and $600 for couples.
What if You Made More than the Maximum Income?
You will still get a check, but it will be reduced by 5-percent of the amount you earned above the AGI income caps of $75,000 for single filers and $150,000 for couples. At some income point above the AGI income caps, the rebate checks will phase out completely.
–For Singles, the phaseout levels begin at $75k and end at $87k, at a reduction of 5% per $1,000 over the lower limit. If you earn above $87k, you’re over and thus get nothing.
–For couples, the phaseout levels begin at $150k and end at $174, at a reduction of 5% per $1,000 over the lower limit. If you earned above $174k, you’re over and also get nothing.
Some people won’t get a stimulus payment. How do you know if you’re one of them?
You won’t get a stimulus payment in 2008, if any of the following apply to you:
–Your net income tax liability is zero and your qualifying income is less than $3,000. To determine your qualifying income, add together your wages, net self-employment income, nontaxable combat pay, Social Security benefits, certain Railroad Retirement benefits and certain veterans’ payments.
–You can be claimed as a dependent on someone else’s return. For example, this would include a child or student who can be claimed on a parent’s return.
–You do not have a valid Social Security Number.
–You are a nonresident alien.
Watch Out for these Tax Scams, Frauds, Schemes, & Abuses
Every year the Internal Revenue Service provides a list of “tax schemes and scams” that they’re on the lookout for, the list for this year was just released two weeks ago. Here are a few of the items to watch out for.
Phishing for Financial Information
Most of you probably already know that phishing is the practice of sending forged emails that appear to come from a trusted source, with the intention of tricking the recipient into revealing information such as account logins, personal data, or financial information. The IRS explains how this data is then used:
“These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names.”
A key point to this scam is that the IRS never uses e-mail to contact taxpayers about their tax issues so if you get an email saying it’s from the IRS don’t click any links inside the email and report it.
Economic Stimulus Payment Scam
Who hasn’t heard of the economic stimulus package by now? Criminals are taking advantage of it’s publicity and people’s eagerness to get their money.
“some criminals posing as IRS representatives are trying to trick pose as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. For instance, a potential victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank account number (or similar information) to get the payment.”
The IRS reminds tax payers that “the only way to get a stimulus payment is to file a 2007 tax return“; and that they will not contact taxpayers by phone or e-mail about their stimulus payment. So if you get a call or email about the stimulus package don’t give out any information.
Fuel Tax Credit Scams
I don’t know much about the fuel tax credit but apparently some people are claiming it when they shouldn’t be. I’m sure we’d all like a fuel credit on our taxes since gas keeps getting more expensive but I wouldn’t recommend trying it. The IRS is warning people that they’re onto the scam:
“… some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.”
Abusive Retirement Plans
Most retirement plans have certain qualifications on who can participate and who cannot, some people are trying to get around those requirements:
“The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value.”
Basically people are playing a numbers game between the cost value of the investment and the fair market value and reporting the cost value instead since it’s usually lower.
Return Preparer Fraud
If it seems too good to be true then it probably is. Everyone would love a big tax refund every year but if you’re being promised large refunds just beware:
“Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds.”
Remember, you’re the one who signs your tax return, so make sure you find someone whose work you trust to sign off on.
Abuse of Charitable Organizations and Deductions
Every year we keep track of the things we donate for charity. We keep a list of the items, in one case there were so many it was easier to just take some pictures. Come tax season you can write off those donations, apparently some people are claiming more than they should.
“The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.”
Market Questions to Ask Before Starting Your Own Business
Do you know anyone who runs their own business and is always struggling to find new customers or make enough money? Wouldn’t it have been easier if they would have done more research about the competitiveness and viability of their business before launching it?
Mid Life Crisis
One of my co-workers is having a quarter life crisis and decided he wanted to start his own business in an industry totally unrelated to the one he and I are working in now. One of the main reasons he’s interested in his own venture is that he’s fed up with our current job. Although I feel his pain, I just hope he’s not jumping into it unprepared just to get away from his current job.
Research Your Idea
I subscribe to several small business newsletters, all free of course, and one of them offers the advice below to anyone looking at a new market. I’ll have to share these with my friend; the important thing is to answer them honestly. This can be tough if you already have an idea in mind that you’re really excited about but it’s most useful if you research and answer the questions realistically rather than putting down the answers you’d like to see.
Market Evaluation
Below are the questions you can use to investigate and confirm the need for your new business. For anyone not interested in running their own business but looking to switch careers and industries, some of the same questions still apply, they can help you decide whether it’s worth your time and energy to enter a market as an employee.
1. How big is the market – and is it growing?
2. How responsive is the market?
3. How reachable is the market?
4. Can I bring real value to this market?
5. Are there repeat sale opportunities?
6. What kind of infrastructure investment is required both ongoing and just to get started?
7. How long will the market be around?
8. What is the profit potential after I pay for the product, the marketing, the delivery, the customer service and the overhead to support the sale?
Is Investing in Office Sports Pools a Waste of Time & Money?
Several years ago, I filled out my first NCAA tournament bracket. It may be hard to believe but I had never completed one before that so I had no idea what I was doing.
Rather than making random picks based on mascots or team colors, I did some research. I took notes during the expert’s predictions on Selection Sunday and then scoured the internet to compile a spreadsheet with all the stats I could find on each team in the tournament.
I stayed up all night matching stat for stat and slowly advancing teams one at a time through the bracket. I wish I had kept that piece of paper because I picked every game correct from the Elite 8 on! When Uconn won the championship game I moved into first place and won the office pool of several hundred dollars. Wow, my first year and I had won. I couldn’t wait until March Madness rolled around again.
The next two years I followed the same formula, including even more stats, spending even more time analyzing the teams, and filling out multiple brackets to cover all my bases. Needless to say my picks were miserable failures and I probably spent $50 buying entries in various office pools.
After that second year, I decided to hang up my spreadsheet and watch the games for fun instead of profit. I was spending too much time and money pursuing another win and chances were I’d never replicate my initial success. It was fun while it lasted and the money helped pay our tax bill that year. I guess I should have just retired then and there and gone out on top!
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I'm Ben Edwards and I've been addicted to personal finance since I was 12 years old.
That passion for money has paid off for my family - so in 2006 I founded Money Smart Life to help you afford the life that you want. Read My Story...
