AllFinancialMatters
A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.
Wednesday, August 24, 2005
Let's Talk About Risk
I got the idea for this series of posts from Ric Edelman's book The New Rules of Money, which is a pretty good book (I can't say that about the rest of his books). Ric is a financial advisor and author. He also has a website.
So, what are the major types of risk? I'll list them first and then I'll go back and explain each one:
- Default risk - The risk that an investment will become worthless. Does this remind you of Enron or Worldcom? Those people who had all their wealth tied up in those two companies lost it all. However, this risk can be minimized through proper diversification. Had you owned Enron or Worldcom in a portfolio of stocks, the impact of their default wouldn't have been nearly as severe.
- Credit risk - This is the risk that an investment's financial stability might decline. Although this risk involves stocks, it is particularly important to bond investors. If you own a bond in a company who's credit rating gets cut by the bond rating services, the value of your bond is going to decrease. This is another type of risk that can be diversified away.
- Tax risk - The risk of loss due to taxes (income and capital gains taxes). Loss to taxes can be either postponed through tax-deferred accounts like 401(k)s, IRAs, and annuities. Loss to taxes can be eliminated with the use of a Roth IRA or Roth 401(k).
- Inflation risk - A very real risk faced by everyone (some have more exposure than others). This is the risk that an investment's purchasing power will be eroded by rising prices. This is a very real risk to someone invested in interest-bearing accounts. Stocks have been shown to handle inflation risk pretty well as long as the inflation is low to moderate.
- Interest rate risk - The risk that interest rates will rise. If you buy a bond today for $1,000 that pays you 4% per year and then interest rates rise to 4.5%, your bond is worth less than the $1,000 you paid for it. Why? Becuase why would anyone want to pay you $1,000 to earn $40 per year when they could buy a bond for $1,000 that pays $45 per year?
- Currency risk - The risk that foreign currency exchange rates will rise. If you are a US citizen and have an investment in China and China's yuan increases in value against the doller, your investment will decrease in value. (This looks like an excellent follow-up topic)
- Political risk - This risk is related to currency risk. Political instability can be a substantial risk when investing in other countries - especially emerging markets. Diversification can reduce this risk.
- Market risk - This risk has to do with the price fluctuations of the market as a whole. There's not a lot that can be done about market risk except for ignoring it.
- Event risk - The risk that something unexpected and beyond management's control will cause the invesment's value to fall. September 11, 2001 is probably an the example most people think of.
- Prepayment risk - The risk that the investment's principal will be returned sooner than expected. Investors in callable bonds face this risk when interest rates decline.
- Extension risk - The opposite of prepayment risk. In other words, you might not get your principal back as soon as you expected.
- Opportunity risk - The risk that by investing your money in one place you are missing out on the returns "you could be getting" elsewhere. Diversification can rid you of most of this risk.
Tags: Understanding Risk, Risk, Investment Risk Full text!
Carnival Submissions for Week 11
So, if you are a blogger and have a personal finance article that you would like to submit (preferably original material), please send me an email with the following info:
- Your Name
- Your Blog's Name
- Your Blog's URL
- Your Article's Title
- Your Article's URL
- Your Article's Trackback URL (if you have one. If you don't no biggie)
- Your Summary of the Article
Tuesday, August 23, 2005
Gas Prices
My local paper has been inundated with letters from people who angry over gas prices. It is sad just how little most people know about economics. Here is one example from today's paper:
I don't understand the price-rising criteria for gasoline. If the station has already purchased the gasoline to sell at a set rate, why does the increase affect the gasoline already in the station's tanks. To me the increase should be on the gasoline that is ordered, not what is already there.
It's kind of like buying bread: On the shelf it's one price, by the time you get it to the checkout counter, there's an increase because of the instability of the flour market?
My response:
Using this woman's thinking, when prices decrease the opposite should be true. When prices fall, a gas station that might have paid more for their inventory would have to keep prices high until that inventory is sold and then they could decrease prices. I wonder how long that would work in the real world?
Although I'm not exactly familiar with the way gas stations set their prices, I would speculate that the reason we don't see wide swings in prices from station to station is to avoid long lines and shortages at some and gluts at others. I'm not saying I agree with it, I'm just saying that that is one way to look at it. I will say that it does seem that prices go up FASTER than they come back down.
Since we are on the topic of gas, I want direct your attention to a pretty good post on the Freakonomics blog critiquing an article (free registration required) that was in the past weekend's New York Times Sunday Magazine. Both (the NYT article and the Freakonimics' critique) are must-reads.
Tags: Gas Prices, Oil Prices, Freakonomics Full text!
Monday, August 22, 2005
This Week's Carnival of Personal Finance
AllThingsFinancial will be hosting next week's carnival. Please start emailing me your submissions (please include "Carnival Submission" in the subject line). My deadline for submissions is Sunday, August 28, 5:00 PM so that I can have the Carnival up at midnight on the 29th. Full text!
Thursday, August 18, 2005
Building Wealth Doesn't Get Any Simpler Than This
- Work four summers, starting at age 16
- Save the income in a Roth IRA account
- Invest it in a simple, low-cost equity portfolio
- Simmer slowly for 47 years
- Serve ungarnished (and untaxed) at age 67
He then goes on to explain how it can be done. Good information! This is the kind of stuff I like. I think we tend to spend too much time talking about what can't be done instead of focusing on WHAT WE CAN DO NOW!
Tags: Starting Young, Becoming a Millionaire, Investing Full text!
AllThingsFinancial Mentioned in the Wall Street Journal
He did mention one thing that he didn't like about my blog and that's the fact that I don't have my articles categorized. I have to agree with him. I hate that too, but Blogger doesn't have that feature. That problem will be fixed once I change providers. Until then, I'll have to manually organize my posts. Full text!
Wednesday, August 17, 2005
Posts Organized by Topic
Blogger does not offer categorization so I have to do it manually. Also, you can use the Google Search box to search for specific topics on AllThingsFinancial. I have used it a couple of times and it works pretty good. More changes are coming.
Buying a Home (Mortgages)
The True Cost of an Interest-Only Mortgage
Comparing 15, 30, and 40-Year Mortgages
Beware of Interest-Only Mortgages
College Planning
College Funding Math - Part IV
College Funding Math - Part III
College Funding Math - Part II
College Funding Math - Part I
Paying for College via Income Shifting
Debt Management
Is There Such a Thing as Good Debt?
Financial Planning Basics
Understanding the Time Value of Money
How to Calculate the Present Value of an Annuity
How to Calculate Annualized Rate of Return
Twelve Key Elements of Practical Personal Finance
How Much Life Insurance do You Need?
Financial Planning Basics - The Net Worth Statement
Net Worth Statement - Part II
Net Worth Statement - Part III
Net Worth Statement - Part IV
Net Worth Statement - Part V
Financial Planning Basics - The Cash Flow Statement
Cash Flow Statement - Part II
Analyzing Your Financial Statements with Ratios
Analyzing Your Financial Statements with Ratios - Part II
Getting Started
Why it is Important to Start Saving When You Are Young
Investing
A Look Back at Index Returns
The Importance of Understanding Objectives When Investing
IRAs
Trusts & IRAs - Part 2
IRS Publication 590
Trusts & IRAs
Make Sure Your IRA Can be Stretched
Stretch a Small Roth IRA
Facts About the Roth IRA
Should You Leave Your 401(k) With Your Company?
The Beauty of a Stretch IRA - An Example
Stretching an IRA
IRAs
You Still Have Time to Make an IRA Contribution for 2004
The Beauty of a Roth IRA
Kids & Money
Great Resources for Kids
Roth IRAs for Kids
Teaching Kids About Business and Investing
Miscellaneous
Are Hybrid Vehicles Worth it?
Mutual Funds
What's a Wrap Account
Understanding Mutual Fund Fees
Questions to Ask Your Broker
Questions to Ask Your Broker Before You Buy a Load Fund
How Does an A-Share Mutual Fund Work?
Kiplinger's Mutual Fund Guide
Portfolios
Model Portfolios
How to Calculate Personal Rate or Return When Dollar-Cost Averaging
Retirement Planning
Ten Steps to a Richer Retirment
Are Americans Ready for Retirement
The Penalty of Starting Late
Full text!
Are Hybrid Vechicles Worth it?
Sarah Breckenridge of Smart Money wrote an excellent article in which she took four vehicles (Ford Escape, Honda Accord, Toyota Highlander, and Lexus RX) and compared the hybrid version of those vehicles with the standard version. I wanted to see how much a person could save (or not save) by buying the hybrid version over the standard version. Keep in mind that my numbers do not reflect maintenance costs or tax beneifts of hybrid ownership. I also made the assumption that the vehicles are driven 15,000 per year divided evenly between city driving and highway driving.
Ford Escape Hybrid | ||||
City | Gallons | Price | Ann. | |
City | 33 | 227 | $2.40 | $545 |
Highway | 29 | 259 | $2.40 | $622 |
Totals | 486 | $2.40 | $1,166 | |
Cost Per Mile | $.0777 | |||
Ford Escape XLT | ||||
City | Gallons | Price | Ann. | |
City | 22 | 341 | $2.40 | $818 |
Highway | 25 | 300 | $2.40 | $720 |
Totals | 641 | $2.40 | $1,538 | Cost Per Mile | $.1025 |
Honda Accord Hybrid | ||||
City | Gallons | Price | Ann. | |
City | 29 | 259 | $2.40 | $622 |
Highway | 37 | 203 | $2.40 | $487 |
Totals | 462 | $2.40 | $1,107 | |
Cost Per Mile | $.0738 | |||
Honda Accord | ||||
City | Gallons | Price | Ann. | |
City | 21 | 357 | $2.40 | $857 |
Highway | 30 | 250 | $2.40 | $600 |
Totals | 607 | $2.40 | $1,457 | Cost Per Mile | $.0971 |
Toyota Higlander Hybrid | ||||
City | Gallons | Price | Ann. | |
City | 31 | 242 | $2.40 | $581 |
Highway | 27 | 278 | $2.40 | $667 |
Totals | 520 | $2.40 | $1,248 | |
Cost Per Mile | $.0831 | |||
Toyota Highlander | ||||
City | Gallons | Price | Ann. | |
City | 19 | 395 | $2.40 | $948 |
Highway | 25 | 300 | $2.40 | $720 |
Totals | 695 | $2.40 | $1,668 | Cost Per Mile | $.1112 |
Lexus RX 400h | ||||
City | Gallons | Price | Ann. | |
City | 31 | 242 | $2.40 | $581 |
Highway | 27 | 278 | $2.40 | $667 |
Totals | 520 | $2.40 | $1,248 | |
Cost Per Mile | $.0831 | |||
Lexus RX 330 | ||||
City | Gallons | Price | Ann. | |
City | 18 | 417 | $2.40 | $1,001 |
Highway | 24 | 313 | $2.40 | $750 |
Totals | 730 | $2.40 | $1,752 | Cost Per Mile | $.0971 |
It is important to note that the hybrid models are $4,000 to $5,000 higher in price, which is definitely something to consider. Based on my gas price of $2.40 per gallon, these hybrids won't pay for themselves for a number of years.
Questions? Comments? Did I miss something?
Tags: Hybrid Cars, Hybrid Vehicles, Comparing Hybrid Cars, Comparing Hybrid Vehicles Full text!
Tuesday, August 16, 2005
Interesting Article About Blog Readers
Tags: Behaviors of the Blogosphere, comScore Networks, com Score Networks Full text!
Sorry for the Lack of Blogging
UPDATE: Here are my calling stats from yesterday (Monday):
49 Dials
18 Not Available
13 Left Messages
13 No - They can't or won't be able to volunteer
3 Yes - They will volunteer
2 Maybe - They have to check their schedules (I'm not optimistic)
Considering that I am working off a membership roster (that is full of names of men that understand that this is a volunteer organization), these numbers stink. I hope I do much better today. Based on those numbers, I have a 6.12% "closing rate" (3/49 = .0621). In order to find 20 volunteers, I need to make 327 calls (20/.0612 = 327).
I have some good stuff in mind for this blog. Stay tuned... Full text!
Monday, August 15, 2005
Tips on Cutting Gas Prices
We spend enough at Kroger to get $.10 off per gallon of gas. That $.10 is becoming a smaller and smaller discount percentage-wise, but every little bit helps.
I'm curious to know what my readers are doing. Got any tips you want to share?
Tags: Saving Money on Gas, Cutting Fuel Costs Full text!