Mutual Funds Versus Stocks – Why I Choose Stocks

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Here is a shocking truth…  I don’t own any mutual funds in my regular brokerage accounts or Roth IRA anymore.  In fact, I wouldn’t own any mutual funds if it were for the fact that my employer’s 401k only has mutual funds as investment options.

Now you might think that I’m crazy, but surprisingly I’m not.  You see, mutual funds are too expensive of an option for me to own.  You don’t think so, then let me point out the ways in which mutual funds are expensive.

Let’s say that you have 10 thousand dollars and you want to invest it all in the financial markets, here’s how mutual funds versus stocks compare:

It’s free to put the money in a mutual fund, but each year the mutual fund charges operating expenses of 1% on the balance held within the mutual fund.  So if I bought 1 stock with the 10k, the transaction cost me around $10 and nothing at the end of the year.  With a mutual fund it initially cost me $0, but $100 at the end of the year.  Every year after the initial purchase my stock purchase cost me nil, but the mutual fund will cost me $100 each and every year that I own it!  TELL ME THAT’S NOT EXPENSIVE!  In some ways, buying individual stocks is a very frugal approach to investing.

Now let’s jump forward 10 years after investing 10k each and every year.  Not considering stock appreciation, your balance would be 100k.  At 100k, if you do nothing with the stock purchase it still cost you nothing per year, but the mutual fund is now charging you 1 thousand dollars a year!

Another financially hurtful thing with mutual funds is when the balance of the mutual fund is down, and year-end comes rolling around, the mutual fund company still takes their operating fees out of the balance.  To me this is like rubbing salt into an open wound, or kicking a guy when he’s already down.  The fund manager lost me money AND is still charging my for that loss.  nice…

I remember in the past a few bloggers that were college professors reprimanded me in the comment sections for not investing in mutual funds, but quite frankly, I’ve done much better in my regular brokerage account than my 401k.  So while I contribute less money to my regular brokerage account than my 401k, it has dramatically been rising in value and threatens to catchup to my 401k balance in 10 years or less.  Obviously, I’m happy with my non-401k balances catching up to my 401k balance, but I have to wonder about how great of an investment mutual funds and 401k that only invest in mutual funds really are?  One could advanced the idea (or is it really a fact) that the big winners with mutual funds and 401ks are the financial institution that provide such financial instruments.

As I was mentioned above that I was (gently) reprimanded, but perhaps people without experience shouldn’t do so without experimenting first?  Just because you repeat things that other people write about in a book, in front of college class, doesn’t mean that you know it all!  Or maybe I’m the exception to the rule and perhaps their route is best for the masses?  After all, I did pay off my house in about 10 years, and that kind of make me an odd duck.  Did I mention that by paying off my house early I was able to “not” pay 100k in interest to the banks.  What was I thinking… lol.

Perhaps if you are already rich it doesn’t matter.  Unfortunately I’m not so I have to go the frugal route and purchase my own individual stocks, etc.

So in conclusion, if you do the homework, stocks are a much more frugal and possible financially rewarding approach to investing.  If you are new to the game, and don’t feel comfortable doing it yourself, then don’t.  I personally have read tons of investment books and have an innate understanding of the stock market behavior and I understand the financial aspects that make a company “undervalued” so good, investment.

Bests,

Don

PayPal Bookkeeping System Update

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This is an update of the practice of using a PayPal Bookkeeping System as your core record keeping system.  If you want to read my original idea on the concept, please read my previous article titled “Using PayPal As A Simplified Bookkeeping System”

PayPal

PayPal Bookkeeping System Experience Update

Okay, I’ve made my first credit card payment from my PayPal Account to my PayPal Extras Credit Card.  While that simple payment transaction was fine (although it does take up to 24 hrs to show up), I tried to download the credit card transactions for the accounting system I blogged about earlier.  While Paypal captures the payment to the credit card, the actual credit card transaction aren’t downloadable to an excel format (it will do PDF though).  This is a huge disappointment for me because I was hoping to export the entire year and merge it with the basic Paypal transactions.  This would have been much easier than it sounds, so much for simplicity.  I don’t have many outbound expenses though, so the PayPal Bookkeeping System that I wrote about still might be of benefit.

 

The PayPal VRS (Voice Response System aka voice-mail) Was A Monstrous Disappointment

A huge disappointment for me was the PayPal VRS (Voice Response System or phone-mail) system.  I had to punch in the same information into the phone over and over again, what a joke.  If you have a question that’s predictable then the system is fine, but if you have a question like I had (downloadable transaction) you fall through the system in bitter disappointment.  I have experience with such systems, and I have to say that this system is one of the worst systems that I’ve ever encountered for questions that don’t fit within their canned response.  My question somehow lead me to a connections with no feedback.  So no elevator music, not reoccurring “An Agent will be with you shortly” message that’s in a repeating loop that occurs every 2 minutes.  Nothing!  Just a connection the system with no option.

So knowing that somehow I found a bug in PayPal’s VRS system, I did what any sensible person would do… I hung up!  But unfortunately, only after waiting on the phone system way too long (what was it 15 or 10 minutes I wait in the PayPal twilight zone?).

Change in PayPal Bookkeeping Strategy

So what a frugal guy to do, that sees the beauty of simplifying his bookkeeping system as much as possible?

  1. Make my credit card transactions atomic.  Atomic means that I’ll pay a credit card transaction as soon as I see it in the credit card transactions listing. Once is that I could PayPal any transaction I use the credit card for each time I use the Credit card.  This gives me instance accountability.  So for example, if I buy something Jan 13, as soon as it shows up on my PayPal credit card, I could instantly pay it.  Then for the next credit card transaction, wait until that previously paid one clears.  A pain, but it would work, and work well for me since I don’t have many expense transactions.  This would make all my transactions so that they are represented one to one in PayPal, so the transactions would each be record in my PayPal system.  Then I would just save and print the PDF credit card statement that my PayPal Extras Credit Card provides.
  2. Create an Excel Macro that could strip out noise transactions.  This would further simplify the manipulation of the spreadsheet after the import is completed.  The Macro would categorize reoccurring expenses, and delete statements that have no value for the bookkeeping system.  Such macro purges would be PayPal statements that are in a “pending” state.  Of course I’d make a copy of the original exportation of the PayPal transaction in a separate sheet in the same excel workbook.
  3. Create a future project to automate this process.  I could code something if I have time.  Not sure if I will or not, but if I do, I’ll make it available to everybody.  At this point I doubt that I will try this, but maybe…
  4. Moving income from my Connected Bank To PayPal and then back out again.  Much like step 1, this might seem like a pain, but it’s actually quite easy and fast.  Mostly by moving money from my bank to my PayPal then back to my bank, will enable me to acknowledge income sources such as Google Adsense.  Might look crazy, but it’s actually quite simple to do.

After next year concludes (or even after a few months of solid activity), I should have a better grasp of the strengths and areas that can be improved upon.

I view my PayPal Bookkeeping System as an experiment in how much I can simplify or partially automate this process.  If I stick to just PayPal and PayPal Transactions for my business transactions, there is no reason that I shouldn’t be able to dramatically reduce the bookkeeping process.

Happy Holidays,

Don

Financial Year End Strategy

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Well it’s almost the conclusion of a long, stressful year and now is the time for me to start on my “year end financial strategy and actions”.

This is the optimal time time of the year (mid December) that I find works for me and my financial year-end strategy and for starting my financial strategy for next year.  By starting to close my financial year end work now, I’m better able to plan my strategy and actions for financially attacking next year.  The idea is to wrap up all of my financial loose-ends for the current year and to place a clean setting for next year’s activities.

So what kind of Year End Financial Planning do I do?

Father Time

Closing Work for My Financial Year End

  1. My first step is to sell my stock losses in my regular brokerage account.  I try to offset as much of the capital gains and other incomes that I have realized so that my tax consequence is minimized as much as possible.  This is a tough one this year, because it might be better to wait until next year when the dividend tax rates are higher, to cash out of these losses (if you have any).  I have side income to take the losses against, so I’m better off taking the losses this year since I didn’t make any estimated payments in advance.  It is important to sell these losses now because it is the settling date of the actually stock trade which is important for tax purposes, and that can take a few days.
  2. Retirement Rebalancing (mostly my 401k) – I don’t always rebalance my portfolio at year end, but with the fiscal cliff coming up quickly, I’m considering the pros and cons of rebalancing now.
  3. I like to pay any bills outstanding online so that I start the new year as stress free as possible.  This enables me to drift a bit at the beginning of the year.  I don’t why, but I like to start the new year this way.
  4. Medical expenses need to be addressed if possible.  Actually, this is my downfall, my son had a serious wound earlier in the year, and if I was thinking better financially, I should have lumped in a lot of medical work that needed done, but since I was sick (vertigo), my mind wasn’t all there.  Kind of ironic actually, when I need the work done and it makes the most financial sense, my mind wasn’t working at that level so I missed the cost saving opportunity.
  5. Tax planning.  Yep, now is the time to think about where I could have improved my tax strategy for this past year, and to make a plan to improve on it next year.

I know that working on your financial year end work seems like it would totally suck, but actually think of it as a positive activity.  Doing it now enables you to create a plan for success instead of letting life give you want it wants.  Of course, even the best thought-out plans may vary from the goal, but not planning at all is the worst plan!

Happy Holidays,

Don

 

Blogging at Starbucks

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It’s December and I’m in a Starbucks listening to Fiona Apple’s version of “Across the Universe” drinking a caramel brulee latte.  Life is good, but not great…

This is an odd move on a Friday night, there is only two other people in Starbucks and the traffic coming in is very light.  I think traffic is light because of the drive-thru and obviously because it’s Friday and there are better opportunities out there to do!  But it makes me unique on a Friday night and with a blog post to write, so on I type…

Usually by now, the snow is falling, especially by now!  But today it’s about 50 degrees (Fahrenheit) and quite honestly it’s a bit depressing.  I also long for other bloggers like myself to visit.  It’s hard being in a blogger in the Midwestern states.  I occasionally watch the traffic that visits my site and while I see a lot of visitors from New York and California, there are some states that I don’t see any traffic from.  While my state does have a few hits, they pale in comparison to the larger states.  I can honestly say I don’t know another financial blogger within 100 miles of where I live.

Now it might seem like I’m whining, but some time blogging is a lonely process while trying to write in the middle of nowhere…  In many ways I feel like like the proverbial lonely tree in the middle of a corn field.

Tree in Field

As much as I whine, it much better than is was 10 years ago!  With the social media that exists today, it’s easy to reach out and talk to people online and in the blogging community.  Now I just need to use those social sites more (like twitter, Facebook and whatever the latest medium is…).

Another nothing to do Friday in the sticks,

Have a great weekend,

Don