The May 2007 issue of arrived in my mailbox yesterday, and as I was at home dealing with my sore throat, I had the time to read it immediately. Here are the ten points from the issue that really jumped out at me.
“Two cycle billing” is insidious. Do you have a Discover card, or a credit card issued by Washington Mutual? They do “two cycle billing,” which basically means if you pay off your balance one month, you’ll still pay interest on half of that balance next month – even though there’s no balance on your card. Each month, you’re billed for interest on the average of this month’s and last month’s balance. That’s a rip off. (p. 19)
Reason #978 to invest in index funds over managed funds: they’re not nearly as taxed. Managed funds often have tax consequences due to the buying and selling of assets; index funds rarely make such moves. Unless you like giving portions of your “gains” to Uncle Sam on a regular basis, stick with the index funds and turn those short term capital gains into long term gains. (p. 21)
Consider all of the costs before signing up for a career switch. This is the only thing that’s keeping me from jumping on board and becoming a full time writer – I’m just not convinced I’m covering everything. (p. 30)
Earn up to 30% tax free! How? By paying off your outstanding credit card debt. If you have credit card debt, pay it off before even worrying about investing, because the long-term benefits of eliminating credit card debt are better than almost any investment you can find. (p. 38)
Paying off a mortgage is a great investment. It’s incredibly stable and offers a return around 6% (on an 8% mortgage). This is substantially better than most other stable investments – the stock market can beat it, but it’s not a guarantee. (p. 40B)
If you get started early (well before 30), you don’t need to save 10% of your salary for retirement. I’ve been saving at least 10% since I was 23, and according to this article, I can cut it back to about 7% and still retire at 65. Too bad – I want to retire earlier, so I’m keeping it at at least 10%. In fact, once we’ve made the move to buy a home, I may bump it up from there. (p. 50)
Life cycle funds vary widely. The article compares the AllianceBernstein 2025 fund and the TIAA-CREF Lifecycle 2025 funds and shows that their component investments are very different from one another and, as a result, their returns are very different, too. Just because two target funds have the same year doesn’t really mean much at all – investigate them anyway. (p. 54)
Scared to pick a fund? You can pick a mutual fund just as well as an investment advisor. Just trust yourself a bit. I followed my own path and wound up in the Vanguard 500 and I couldn’t be happier about it. (p. 56)
Invest in stocks, not real estate. That’s the conclusion of a lengthy comparison of the two investment vehicles. (p. 98)
Quote of the month:
I’m inclined to think there’s a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end.
– Robert Shiller, author of the book Irrational Exuberance, who called the end of the dot.com boom almost to the day (p. 83)