AAII - nonprofit investing organization

I have been an investor for over 15 years now. During that time I have subscribed to various publications, especially magazines, like Money, SmartMoney, and Kiplinger's.

At least once a year I would receive a letter from AAII - American Association of Individual Investors. Years ago, I noticed that at the end of the letter the yearly membership fee was slashed with the wording of something like "this is a one time offer" or "the dues has never been reduced before, act now."

Well, that was an outright lie, because I would get that same letter at least once a year. AAII has been praised by many publications as being a trustworthy valuable newsletter. To me, if they lie on their marketing material what do they do in their newsletter!

So several years ago, I wrote the CEO a letter, placed it in the postage paid envelope, and mailed it to AAII. Of course, I have never heard from them regarding the matter, but the new marketing letters I now receive just slash the yearly fee without any comments.

Since AAII is a nonprofit organization they need to submit an IRS Form 990 which lists their revenue, expenses, and salaries of the top people. The best website I have found that posts this information is the NCCS.

Upon looking at the 990 for 2009 we find their revenue was about $6 million and expenses were about $7.5 million. Of the $7.5 million in expenses about $3 million was for the salaries of the 28 people that work there. Of those 28 people, 9 make more than $100,000 per year. The chairman and the president/ceo each make almost $500,000 a year with their salary and benefits.

My point? For being a nonprofit it sure does sound like the chairman and the president/ceo make a nice profit for themselves! But these are just my thoughts.

Oh, and their investment income last year: $-264,774. Thanks, but I think I'll stick with my own investing plan and program.

Book Review

The Total Money Makeover by Dave Ramsey

The author presents a total money makeover in a few "simple" steps.

1. Save $1000 for emergencies
2. Create a debt snowball plan - make minimum payments on all debts and focus on paying off the smallest debt first.
   
3. Save a 3 to 6 month emergency fund (based upon monthly expenses)
4. Invest 15% of gross income
5. Save for college (ESA plan first, then 529 - $2000 per year)
6. Payoff Mortgage
7. Have fun - invest - give

Those are essentially the steps. Follow each one in order and don't move on to the next until you complete each step.

Overall, I agree with the author. There is no better plan for personal finances. However, that doesn't mean there aren't other plans that are equally as good. I do believe that if you follow his steps, you will eventually be debt free and living a healthy financial life.

One thing I didn't like about the book was the number of times the author said he was a millionaire, lost if all and is now a millionaire again! Seems a little egotistical to me.

I also found the customer testimonies annoying. They all seemed to praise the author, how great he is and how much they love him. Blah Blah Blah. I realize some testimonies are good and necessary, but I think most of them simply feed the author's ego and fill his book!

Overall, I would recommend this book and this plan for anyone wishing to get in shape financially.

Book Review

A Random Walk Down Wall Street by Burton Malkiel

This is a classic investment book. It gives a brief introduction to the major investing styles/theories and explains why the best bet for most people is to buy and hold (mostly index funds).

The book is separated into 4 parts:

1. Stocks and their value
2. How the Professionals operate
3. New Investment Methods
4. A Practical Guide

Even though this book provided me with no new insight, I believe this is a great book for anyone interested in learning about investing in the stock market.

The fact remains that buying and holding good companies over the long run works. The question is, what are the good companies? Why not just buy them all with an index fund!




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Hammered Again!

Well, as my faithful readers know, e*trade hammered me and many of its customers when they abruptly liquidated their mutual fund line. You can read my thoughts on it here and here.

It looks like another company is up to some games as well.

I "had" an S&P 500 index fund. It was the Harris Insight Index fund (HIDAX), now owned by Virtus.

On July 16th, I received an e-mail from e*trade stating that I have a new trade confirmation. I thought that is strange because I didn't make any trades.

I logged into my e-trade account and sure enough found all of my shares of HIDAX were sold, at a large loss of course. I sent e*trade's customer service a message questioning why the fund was sold.

This time it doesn't appear as though it was e*trade's fault. Here is their response:

"Dear Mr. Matthews,

Thank you for your message regarding your brokerage account.

The VIRTUS INSIGHT TR VIRTUS INDEX FD, HIDAX, liquidated its assets on 7/14/2009. As part of that liquidation your shares of the company fund were sold on 7/15/2009. "

So because some company can't manage an "unmanaged" index fund I have to lose over $7,000!

I have about had it with mutual funds. The only mutual funds that I have are with Columbia and TIAA-Cref.

I have been added some ETF's to my portfolio, but they are from Vanguard. So I will need to reevaluate my portfolio and determine what I need to do because of poor management!



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Letter to the Editor of Smartmoney

Below is a letter to the editor of SmartMoney Magazine.

While I agree that e*trade is a pretty good brokerage firm overall, ("Finding the Best Fit" June 2009) the article left out one huge mistake e*trade pulled on some of its clients.

In March, e*trade abruptly terminated their line of mutual funds. This of course forced investors to liquidate their holdings, no doubt many at huge losses. How's that for customer service!

I have yet to read any analysis about this from any newspaper or magazine source, probably because e*trade advertises in most major publications (including your own).




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Letter to Kiplinger's Magazine

Below is a letter sent to the editor of Kiplinger magazine regarding their April 2009 issue.


Dear Editor:

I enjoyed reading the article “Simple Plans to Beat the Market” (April 2009). This has been my investment strategy for a number of years now and has performed well for me. The Kiplinger portfolio, which sticks with one family of funds, is a nice idea. However, this can also be costly when the company decides to close the funds, which is what E*Trade decided to do recently.

I had all of my funds in the E*Trade family and was forced to liquidate them realizing large losses with each fund. I switched to other similar funds that track the same indexes thereby minimizing the effects of the losses, but it still doesn’t make me feel any better about the way E*Trade handled the situation.

Your articles could mention the possibility of a fund shutting down and what investors should do (sell now or hold until the liquidation date). I have yet to read any real analysis about why E*Trade closed its mutual funds.





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How do you “lose” billions of dollars?

I still can’t quite figure this out. How are these companies losing billions of dollars? I suppose it all comes down to greed and mismanagement, but the money has to be somewhere, right? Let me give you an example.

Say I make blankets in my shop. Each blanket consists of yarn and labor. Furthermore, let’s say the yarn costs $10 per blanket and the labor costs $25 per blanket. My breakeven point would be $35 (ignore other indirect costs for the purpose of this example).

If I sell the blanket for anything more than $35, I make a profit. If I sell it for less than $35, I “lose” money.

Let’s say I sell the blanket for $10. Technically, I “lose” $25 on the deal. But that $25 really isn’t lost is it? Of course not, I gave that $25 to the person who made the blanket.

So the money is still out there somewhere, it is just in someone else’s pocket. That person then takes the $25 and buys things with it. So they don’t have the money anymore either. They have passed it on to someone else. This is the way our economic system works.

When AIG says they lost $60 billion, is that money gone or is it just in someone else’s pocket? I content that if the $60 billion loss is real and not just some type of accounting technicality, then someone HAS AIG’s $60 billion. It just didn’t disappear. Someone has AIG’s $60 billion! If it was just an accounting technicality, then it never existed in the first place, so there isn’t a loss!

A similar situation occurs with the stock market. For every trade there is a buyer and a seller. When the market drops that means people are selling, but it also means someone is buying.

The question is, who is this someone? Who has AIG’s $60 billion? Who is buying in this market?

Those questions I cannot answer, can you?

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What is your money in Suze?

I finished reading an interview with Suze Orman, you know her, she is the famous lady giving out all of the common sense financial advice to people. She is like the Oprah of finance. Her advice pretty much sounds like everyone else’s. Limit spending, cut debt, save, and invest in the stock market.

It sounds simple to do but how do you actually do it? On her PBS shows and her books she uses examples but they are usually rather extreme. Of course, if I move from Silicon Valley to Doe Valley I will save a ton of money in living expenses and taxes. However, I already live in Doe Valley! How do I save money?

Here are some questions and answers from the article: (Note: I changed the wording to read between the lines.)

Interviewer: So Suze, how did you make all of your money?
Suze: Giving the same simple advice to the same stupid people. It doesn’t matter if it is through my over-priced lectures, annoying PBS fundraising shows, my books that all say the same thing, or my "repeat myself over and over again" TV shows. It is the same advice. People just don’t get it, so I do!

Interviewer: Do you still recommend people to invest in the stock market?
Suze: Absolutely, the stock market is the best place to keep your money for the long-term.

Interviewer: So you have all of your money in the stock market right?
Suze: No, 99% of my money is in zero-coupon municipal bonds! I want to maintain my lifestyle of flying on a private jet to my many houses around the world.

Interviewer: How much do you need to be considered wealthy?
Suze: $100 million. That will give you about $2.5 million a year after taxes at today’s yields.

What a gal! She brags about the millions and millions of dollars she has to her name. I just can’t understand why people follow her. I have read or at least skimmed through a couple of her books and her advice does make sense. I have watched her on PBS and have not always agreed with what she says to do.

Each person’s situation is a little different, but in general spending less, cutting debt, saving and investing makes sense! Of course, you can't forget where the money and other possessions came from in the first place!

Diversification in Investing

Today’s topic is about investing and how simple it can be for you. I strongly recommend people under the age of 40 invest money on their own. At the very least, they need to take advantage of any retirement savings through their company.

The easiest way to invest is through Mutual Funds. I recommend no-load mutual funds and low expense funds as well (no commissions, no sales fees, and less than 1% management fee (even lower for straight index funds).

I recommend for the average person to keep the following allocation:

• 50% Large Cap
• 20% Small Cap
• 20% International
• 10% Real Estate Investment Trusts (REIT)

This will create a well-diversified portfolio, which should compete rather nicely with the market while minimize the risk to any one segment of the market. I started using this strategy in 2002 and have matched or beat the market as measured by the DOW and S&P 500 each year.

You can easily open an account with a mutual fund company and have your money invested into funds according to the allocation above.

Several good companies to invest with are:
T. Rowe Price
Vanguard
ING Direct

A simple way to start would be to take $1,000 and invest $250 in each type of fund mentioned above. Then add a set amount each month (say $100) according to your allocation. Each company has its own minimum investment requirements so you will need to observe those restrictions.

Once a year adjust your holdings so they are close to the desired allocations. You can do this all at once, by selling those holdings which have risen above your desired allocation and purchasing those holdings which are below your desired allocation. What I do, however, is simply adjust my future allocations by putting more money toward those holdings which are below my desired allocation level.

The complaint I hear most often is, “I don’t have $100 a month to invest!” Most people do, they just don’t realize it. Get rid of the $50 a month cell phone bill that you don’t really need and replace it with a tracfone. Then get rid of the $50 a month cable bill and get a subscription to an interesting magazine and join a library. Two slight changes to your lifestyle will get you that $100 a month.

Finally, you need to remember that this plan will probably not make you rich beyond your wildest dreams. It is a simple way to provide a retirement income for yourself.