Shameless Self-Promotion

Big Fat Liar

August 11, 2010

Shown up by a man sporting a European shoulder bag. The horror

The title of the post doesn’t refer to the man in the photo, but rather to the author.

Someone found the one inaccuracy* in Control Your Cash: Making Money Make Sense, the only financial primer you need to buy for the fiscally inattentive person in your life. Thanks to Matthew Amster-Burton (pictured above), author of Hungry Monkey: A Food-Loving Father’s Quest to Raise an Adventurous Eater, for entering my life a few months too late to give any input for the book’s first edition.

Class, turn to page 128 in your books and follow along:

Let’s look at a typical fund, the Legg Mason Value Trust Fund. Like the 47 components that comprise it, the fund itself trades on a stock exchange (in this case NASDAQ, under the symbol LMVTX). That makes it an example of an exchange-traded fund.

Folklore, all of that. Amster-Burton, who evidently knows more about this than me AND who’s had a book distributed by a major publisher on a completely different topic AND who socializes over sweetbreads with Anthony Bourdain AND who transcribes guitar tablature in his spare time, explains it (edited to make me look slightly less retarded):

LMVTX is not an ETF; it’s a mutual fund. However, it has a NASDAQ ticker symbol because like most mutual funds, it uses NASDAQ’s Mutual Fund Quotation Service. You can tell LMVTX isn’t an ETF because it prices once a day at close. ETFs price in real-time like stocks. Also, mutual funds usually have 5-letter ticker symbols while ETFs have 3- or 4-.
Mutual funds still vastly outnumber ETFs, although ETFs are growing faster. There are about 7500 mutual funds in the US (according to ICI**) and about 1000 ETFs.

Hopefully, you’re so bombarded with jargon that I can come in and sound intelligent as I reattempt to explain the difference between exchange-traded and mutual funds.

A mutual fund is a basket of stocks – a few million dollars’ worth of Corning stock, a few million more of Office Depot, some Qwest, some Sirius XM, etc. The mutual fund company purchases the stocks, assembles them into a whole, then sells pieces to shareholders. Your 401(k) or IRA likely consists of a piece of a mutual fund.

There are a few dozen companies that sell mutual funds in the United States, of varying notoriety (State Farm, American Century, BB&T, Franklin Templeton etc.) Each company sells around 10-30 funds, each of those with varying degrees of risk and potential to appreciate. The funds themselves each consist of – well, in the case of the Legg Mason Value Trust Fund, the stocks of 47 companies. The funds are all pretty diffuse, too. An unscientific study shows that it’s the rare company that comprises even as much as 10% of any particular fund.

(Seriously, buy the book for a more detailed explanation of this. We’re trying to keep this post short enough that you can inhale it in one sitting.)

If you own part of a mutual fund, find out what’s in it. For all you know, your fund is heavily invested in Fannie Mae and Freddie Mac. This is easy to research, even if you already forgot the name of the fund you’re in. You receive a monthly statement, either online, in the mail or at work. Find the name of the fund company (e.g., Baron Funds), enter the name of the particular fund (e.g. Asset Fund), then click on “portfolio holdings” or something similar. Don’t click on “top holdings”, which could leave as much as 80% of your fund holdings unaccounted for.

As Amster-Burton indicates, you can track a mutual fund’s performance daily (there are several sites where you can do this; we still think Yahoo! Finance is easiest to read and navigate.) But don’t ever check your investments daily, it’ll drive you insane. Monthly is good.

The Control Your Cash definition of an exchange-traded fund is still valid, if bloodied by Amster-Burton’s necessary assault. His point above accentuates the major difference between ETFs and mutual funds, the difference that’s outlined in ETFs’ very name: you can buy them on whichever exchange they trade on. Not only that, but they don’t necessarily sell for the price of the underlying stocks divided by the number of shares (the Net Asset Value.)

If enough people want to buy a particular ETF, it’ll sell at a premium. If you’re connected, motivated, savvy and fast enough, you could conceivably buy shares of the ETF’s component stocks and then immediately sell equivalent shares of the ETF. Or vice versa, if the ETF is selling at a discount. This is arbitrage, the definition of a market inefficiency and not for the rookie investor. Or even the intermediate investor. It’s basically panning for astatine.

Most, but not all ETFs are index funds (again, read your book. It means the fund contains enough constituents to track an entire stock market index.) Watch enough Sunday football and you’ll see the ads for SPDRs, pronounced like the arachnid. That stands for Standard and Poor’s Depositary Receipts, the first and largest family of ETFs. The namesake SPDR, which is also the biggest in the cluster, corresponds to the S&P 500 Index – the Dow’s more comprehensive sister.

There are ETFs that specialize in precious metals, in commodities, even in bonds or currencies. For the last couple of years, ETFs have also included a handful of actively managed funds – meaning ones whose components are chosen by a professional manager whose job, or aspiration, is to beat the market. Only about 25 of these exist, issued by a total of six companies, and few people deal in such ETFs. The ability to trade before the market closes at 4 p.m. every day doesn’t seem to be enough of a selling point for these exotic securities.

*There’s also a superfluous pair of parentheses somewhere in the book. I’d draw it to your attention but I’m thinking of doing a contest around it.

**The Investment Company Institute. ICI.org.

Filed Under: Book Promotion Tagged With: Investing, Shameless Self-Promotion

Manifesto

July 26, 2010

It's not a PC thing, either. Lame sites appear on Macs, too.

There are at least hundreds and possibly thousands of active personal finance sites, depending on your definition of “active”. So what makes Control Your Cash so special, so worthy of your attention when you could be reading someone else’s site?

Apparently it’s industry SOP to write blog posts in numerical point form, so let’s incorporate that method to answer the question, just to illustrate a point:

1. We assume you can breathe through your nose.

The content that fills most personal finance sites, including plenty that are more popular than this one, is largely useless. It’s tough to point out examples without sounding whiny. We even hesitate to use verbatim quotes, because it’s easy to Google them and identify the “writers” who are dispensing said useless content. But we promise that never will Control Your Cash waste your time. Here’s a recent post on a high-traffic blog. The post’s headline lists the ways the author thinks retail workers ought to behave, and continues:

“Everyone gets coughs and colds but try not to emphasize that to customers, especially when handling their food products.”

This is just one example, and not even a particularly egregious one by the standards set for these things. We’re unsure what inherent value there is in reminding people not to sneeze while handling customers’ “food products”, or food. Anyone who got smarter by reading that post – in other words, anyone who thought it was OK to blow their nose into someone’s soup and now understands that it isn’t – isn’t the kind of person we want reading Control Your Cash anyway. Try here instead.

There are worse examples than that, too. For instance, one wag tells you you need:

-“a properly diversified portfolio holds stocks of all types, sizes, nationalities, and flavors”

Literally, all sizes? All nationalities? So I should include some Nauruan mid-caps along with my good old Canadian penny stocks?

That second example is worse because it’s trying to educate you on something that isn’t obvious – and only giving half the story.

We understand that people are reading our blog and others for value. If you’re here, presumably you want to get something meaningful out of the few minutes you spend with us. Therefore it’s on us, the Control Your Cash team, to quantify and clarify. Like:

“You need a diverse portfolio: one that isn’t beholden to just one (or even two) market segments. And don’t feel that you’re obligated to invest exclusively in American companies, either. Money flows as quickly as electrons, and there are more chances for you to capitalize on that now than ever before.”

Which we’d follow with examples of stocks available in, say, Europe and Australia, with recommendations on how to locate and invest in them. Which will take more than a few minutes, and which we might write about at length sometime. What we won’t do is patronize you with half a sentence about the most generic type of diversification.

2. The passive voice is not the one in which we communicate.

This isn’t just a schoolmarmish grammar issue. Here’s a recent example from a competing blog, citing different ways to pay your federal income taxes if you’re strapped:

“There are a number of factors that must be taken into consideration when deciding which payment option is best for your unique circumstances. It is important to consider how fast you can feasibly pay back the taxes owed, making sure to take living expenses into account. The applicable interest rate for each option is another significant factor.”

Are you trying to put me to sleep? I’m serious: are you actively, deliberately, attempting to render me unconscious? Write like a freaking human. You know, so people can understand you. Something like:

“If you owe the IRS, ask them for a payment plan. (Ed. Note: we’d follow this with the procedure for doing so, and the likelihood of it working.) Or borrow money from a friend or a professional lender. Paying interest is bad, but tax liens are worse. Prison is worse still.”

3. We’re not just going to cut and paste whatever Dave Ramsey said this week.

Dave Ramsey is a hero to many personal finance bloggers, likely because of his prolific output and his foundation in Biblical principles. Mr. Ramsey seems like a nice fellow. He’s as successful at this line of work – dispensing financial advice – as just about anyone. We’d be thrilled if we sell half as many books as he does. But his advice is obvious at best and stifling at worst.

Credit card debt is bad. Fine, so is putting your hand in a piranha tank. If you don’t already know that, you shouldn’t be in front of a computer or any other bright shiny object.

Some people, like Mr. Ramsey, take this to its logical extension and decide that credit cards themselves are horrible and should be put to death. This makes as much sense as going without a car because you got in a minor accident. Credit cards are tools, no better nor more evil than guns and flashlights. Exercise a little self-control, and your cards will be loyal and dutiful companions. Without credit cards,

-buying concert tickets and lots of similar items is a pain, if not impossible;
-you’re telling the world, “Rob me! I am completely liquid! (This goes octuple in exotic countries);
-you can dispute the charges on a big-ticket item if the seller turns out to be unscrupulous. Try doing that with a cash purchase;
-you’re screwed by the time value of money. Why would I pay for something immediately, when I can wait as long as 60 days and pay the same amount?

Incur the charges, pay the freaking balance off on time. Nothing is easier than this.

4. We stand “standard” advice on its head when warranted.

For instance, debt isn’t all bad. (Heresy!) If you really believe that, you shouldn’t buy a house until you can afford to pay cash for it. The median house price in America is about $184,000. How many times your annual salary is that? Now calculate it as a multiple of your salary minus what you require to feed and clothe yourself, among other things. You really want to pay cash for a house, and do so before you turn 90?

A house is a reasonable investment to finance. Groceries, bar tabs and tanks of gas are not. The house will still be there 50 years from now, presumably. It comes with built-in tax breaks. You need somewhere to live anyway. Sure, in 2010 your house can lose value in the eyes of an appraiser. But any rent check you write will lose value for you every time, without fail, regardless of the strength or weakness of the underlying economy, from now until the sun goes red supergiant, forever and ever, Amen.

5. We wrote this amazing book.

It drove us crazy. There was no personal finance book out there that had anything worthwhile to say. Well, that’s not technically true, but most of the books we saw would follow an insightful sentence or paragraph with 20 pages of fluff and nonsense.

So we wrote a book that explains every aspect of personal finance to the neophyte. We’re not looking for morons to read our book. We’re looking for people who aren’t intimidated by words like “neophyte”, and who know plenty about the world around them, but who admit that they don’t know enough about money. The book assumes you don’t have a handle on the jargon and the complex concepts that a regular Wall Street Journal reader understands, and also assumes that you’re not a retard. We know you don’t have time to plow through condescending “tips” (“buy things on sale”), but could probably use a little elucidation instead of guessing your way through your finances. Sound too good to be true? Read the sample chapter.