Dirt Simple

Many people spend vast amounts of money on fitness. It’s big business, and the fitness industry has two really good hooks to get us to hand over our money to them–our vanity, and our health. But there was a time when the fitness industry was next to non-existent, and people still managed to stay in shape. In fact, our propensity toward excessive girth is a rather recent phenomenon.

The secret to physical fitness is extremely similar to the secret to fiscal fitness, it’s just the exact opposite. With fiscal fitness, we want to spend less than we take in. With physical fitness, we want to spend more (in calories) than we take in. Here’s one way that I’ve found recently that might help you achieve your fitness goals without having a negative effect on your fiscal goals. It’s the One Hundred Push Ups Plan. Read more »

In my last post, I talked a bit about how to research mutual funds, and I left off saying that I’d talk about some of the other asset classes, like international stocks, small-cap stocks, and bonds.  However, for now, I’m just going to cover the issue of foreign content, and currency risk.

There are a couple of reasons to have exposure to foreign stocks in your portfolio.  First, foreign markets may behave slightly differently from domestic markets.  As the world becomes more intertwined financially, markets often tend to move in similar ways, but sometimes a foreign market may be heading up, while the stock market at home is going down.  By having some foreign exposure you add diversification that may reduce the risk of your portfolio, and may also enhance your overall return.

The second form of diversification that comes from holding international securities, is currency diversification.  However, this one can be a real double edged sword.  I’ll give you an example from my own experience. Read more »

High fuel prices are leading some UK companies to try sharing delivery trucks in an effort to combat high fuel costs, according to a report on NPR’s Marketplace.

Today, three dozen companies, including Coke, Tesco, and Nestle, say they’ll start sharing delivery trucks in the UK. The move will slash their gas bills and could take some 800 trucks off Britain’s roads this year.

As much as we all complain about high fuel prices, it’s interesting how the situation is driving everyone from individuals to mega-corporations to seek out more efficient ways of doing things.

Carrying on from yesterday’s post, here are a few more things to look at when evaluating mutual funds.

Management Expense Ratios

The management expense ratio, or MER, is probably one of the most important factors.  The MER is essentially the total of all expenses which the fund manager deducts from the assets of the fund, expressed as a percentage.  In the United States, MERs are commonly in the realm of 0.80 to 0.90 percent.  Some are higher, and some lower.  In Canada, it is still quite common to see MERs in excess of two percent.  A lot of noise has been made about this, but not much has changed.

The MER is important because it is a drag on performance.  Funds that charge high MERs have to perform that much better in order just to match the performance of the market.  For example, if the S&P 500 index returns 10% in a given year, a fund with a 2% MER would have to beat the market by at least 2% in order to just match the index’s performance.  Given that the majority of fund managers can’t consistently beat the market year after year, it becomes clear that funds with high MERs are handicapped right from the start.

So, in general, the lower the MER, the better.  Index funds will always have the lowest MERs since they have very little overhead.  You don’t need a high paid fund manager to run an index fund.

Comparing Performance

It’s tempting when looking at mutual funds to spend a lot of time looking at past performance, but as the fund literature always says, past performance is not a guarantee of future performance.  Some funds have winning streaks for a period of many years, but then lose their touch, and never get it back.  Still, it’s one of the only indicators you have to go by in terms of evaluating the competence of the management team.

When comparing funds, we generally use some sort of benchmark.  Funds are typically compared against an index which most closely matches the types of stocks the fund holds.  For example, a large cap, U.S. stock fund will typically be compared to the S&P 500 Index, since that index is a measure of 500 large U.S. companies.  A fund that invests in smaller capitalization companies would likely be compared to the Russell 2000 Index, which measures small cap U.S. companies.

In addition to comparisons against these passive indexes, funds are often compared against a peer group of similar funds.

If you look up a fund on Morningstar.com, as we did in yesterday’s post, one of the first things you see on the page is a line chart like the one below.

This chart is for the Dodge & Cox Stock fund.  The red line indicates the growth of $10,000 invested in the Dodge & Cox fund.  The yellow represents the category average, and the green line represents the S&P 500 Index.

There’s a couple things to note here.  Just looking at the lines on the chart can lead you to believe that this fund continually outperforms both the index, and the category average.  However, look at the numbers below, and you’ll see that in 2007, and to date in 2008, the fund has underperformed both the index, and the category average.  The exceptional outperformance that it had in 2004, and 2005 has skewed the funds performance line away from its two comparisons.  But if Dodge & Cox Stock were to have a couple more years of underperformance, that line would come closer to the other two, and might even cross them.

Notice one other thing about these lines though.  There’s a lot of similarities in the peaks and valleys.  In other words, there’s a strong correlation between the market in general, and the portfolio that the managers at Dodge & Cox have selected.  Notice also that there appears to be an even stronger correlation between the category average, and the index.  This is why we say that in the long run, asset allocation is more important than individual security selection.  Over time, the overperformances, and underperformances tend to cancel each other out, and you end up pretty much matching the index, minus the expenses you incurred along the way.

However, given the fact that you may only have certain funds to work with in your retirement account, this is at least one way you can gauge the past performance of the fund management.  Looking at Dodge & Cox in my example, I’d feel comfortable having this fund in my portfolio.  They at least have demonstrated the potential to outperform.  Whether they will continue to do so in the future is a crap shoot.  They also have an acceptably low MER of 0.52%, which is not bad for an actively managed fund.

Tomorrow, I’ll get back to the subject of asset allocation, and discuss some of the other asset categories, like international stocks, small-cap stocks, bonds, and real estate.

I left off yesterday’s post at the point where you may have several equity funds from which to choose.

Typically the plan provider will offer funds which cover different types of equities ( ie. large cap stocks, small cap stocks, international stocks).  Actively managed equity funds also fall into different style categories as well.  Some managers take a value approach, seeking out stocks which they believe are trading for less than their fair market value.  Other managers take more of a growth approach, seeking companies with above average growth records.  And, as I mentioned yesterday, there’s the index funds, which don’t try to pick winning stocks at all.  They just aim to track a given market as closely as possible.

Researching the Offerings

I’m not going to suggest you spend a whole bunch of time researching the performance of the funds that are offered to you, but I do think you should at least know what the differences are between the funds in your plan.  Your plan provider should give you some information about the various funds offered to you, but if they don’t, or the information is lacking, you can get more information from the Internet.

You can find information on funds either directly from the fund company’s web site, or from an information service such as Morningstar.com.  If you’re Canadian, there is a Morningstar.ca, and also Globefund.com.

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I was going to cover the concept of asset allocation as a topic by itself, but since so many people have company sponsored retirement accounts, I decided to approach it from a different angle. The topic is quite long though, so I’m breaking it up into bite size pieces.

Millions of people have company sponsored retirement accounts in the form of a 401(k) in the United States, or a group RRSP in Canada. Typically these plans will offer participants a relatively small selection of mutual funds from which to choose. From talking to different people who have these types of plans, I’ve learned that a lot of people are not sure how they should pick from among the various funds offered to them. If you find yourself in this situation, or you’ve made some choices, but aren’t sure whether they were good ones, please read on.
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This morning we went for a fairly long bike ride–17 miles in total. Considering I haven’t been riding a bike much for the last several years, this was quite an accomplishment for me. My leg muscles are currently questioning my behavior.

By coincidence, I ran across this guide to bicycle commuting on a blog called Firedoglake. There’s a follow-up post with some more ideas as well. If bicycle commuting is something you’re considering to deal with high gas prices, this might be worth a look.

I stumbled across a listing of fuel efficient cars on Marketwatch.com. Our Honda Fit was the second one on the list. The list notes that 2008 Fits are hard to find. That certainly was our experience.

It’s also worth noting that the MSRP of $13,950 for the basic Fit has absolutely no relation to the actual price you will pay for one of these hot little cars. Expect to pay at least two to three thousand more, depending on which style you choose–standard, or sport.