According to the Fed Reserve, the average credit card debt per household with credit card debt is $15,956. The average law school graduate now entering the job market has over $100,000 in debt. 

There were 1,800 individuals who renounced their US citizenship or returned their green cards in 2011. This is nearly 8 times the number as in 2008. It seems that more Americans than ever are trying to avoid the IRS. This might be a bit extreme, but the old adage applies: it’s not what you make that’s important, it’s what you keep.

The average investor is holding 26% of his or her investment portfolio in cash. According to banrkate.com, the average money market fund pays about .49%. You can earn between .75% and 1% at an Internet bank with a high-yield savings account. What does your bank pay? 

Southern Company, an Atlanta-based utility, expects to generate 57% of its energy from natural gas by the year 2020. Southern Company generates as much energy as the entire country of Australia and has cut its coal usage by half since 2007. This is an example of a company that goes into a sustainable investment mutual fund.

In the world of collectibles, the winning bid for an experimental 1792 penny was $1.15 million. There are only 14 of these known to exist and none was ever circulated. The same coin sold for $105,000 in 1974. A 900 year old Chinese porcelain bowl sold for $27 million at a recent auction in Hong Kong. 

April was the first month in seven that consumer confidence did not increase. Investors reacted to the lack of rising consumer confidence by staying on the sidelines and avoiding stocks. The average investor doesn’t get it: the time to invest is when everyone else is worried. Securities are on sale when consumer confidence lags.

Worldwide, 15% of people believe that the world will end during their lifetime and 10% believe that the Mayan calendar could signify that it could happen in 2012.  I guess these 10% don’t need to worry about outliving their money in retirement, but for the rest of us, it’s a fear that can only be overcome with a good financial plan.

With emerging market investing, you get the good and the bad. Emerging market investing focuses on companies in countries that are growing rapidly and are not fully developed economies yet. For example the economies of Brazil, Russia, India, and China are considered emerging. 

Over the 13 year period that ended in 2011, the average annual return of emerging market mutual funds has been 11.48%. By comparison, large US stocks averaged a 1.99% per year return during this period and the international index made up of companies from developed countries average 2.34% per year. There is another benefit to this asset class: they are not closely correlated to (they don’t move in the same direction as) the markets of developed countries like the United States, Europe, and Japan. 

However emerging market investments are much more volatile. The 10 year standard deviation is 38% for this asset class. This is by far the largest standard deviation among the 12 major asset classes. By comparison, the ten-year standard deviation of returns for the S&P 500 index was 20.5% and the standard deviation was 2.2% for US bonds.  

In practical terms, what this means is that even though the 13 year average annual return of emerging markets has been excellent, in 2008 they lost 53% of their value and in 2011 they lost almost 18.5% of their value. Of course in between these dips, emerging market funds gained on average 78% in 2009 and almost 19% in 2010. 

You can purchase index mutual funds that specialize in this category. The two largest emerging market index mutual funds are the Vanguard Emerging Markets Index (VWO) and the iShares Emerging Market Index Fund (EEM). 

The bottom line is this: for a portfolio to be diversified, it must contain emerging non-US stocks. However you must be prepared to take the good with the bad.

Warren Buffett is one of this country’s greatest business people. Note that I did not say greatest investor. His company, Berkshire Hathaway, Inc. is a fascinating conglomerate of companies that he understands, but he is not an investor in the sense that he does not own stocks and bonds and trades them to create value. Rather, he owns companies and buys them (and rarely sells them) based on their ability to create value for his company’s shareholders.

The distinction is important. You and I do not have access to the resources Mr. Buffett has for his company and his decisions about companies to buy or sell are based on very long time periods. Mr. Buffett is well known for the statement that his favorite holding period for a company he buys is “forever”. Still, Mr. Buffett is a funny, thoughtful, smart and insightful business person and his letters to shareholders make for interesting reading. You can read this year’s letter to shareholders and other year’s by going to the Berkshire Hathaway website.

Predicting the future

I wanted to point out two errors in business predictions that Mr. Buffett mentions in this year’s letter. He says:

“A few years back, I spent about $2 billion buying several bond issues of Energy Future Holdings, an electric utility operation serving portions of Texas. That was a mistake – a big mistake.”

And:

“Last year, I told you that ‘a housing recovery will probably begin within a year or so.’ I was dead wrong.”

I mention these errors not to poke fun at Mr. Buffett or ridicule his decisions, but to point out that if Warren Buffett can be wrong in his predictions, you and I have very little chance of success in predicting the future of a company. Remember this the next time you want to buy the stock of a single company or IPO (Facebook) because you “know” it will go up in value.  No one — not even Warren Buffett — can predict the future with a high enough success rate to make it anything less than speculation. Warren Buffett can afford to be wrong in his predictions once in a while becuase he is buying companies for the long-term. Can you say the same about your investment portfolio? Can you afford to be that wrong?

Investing 

What is your definition for “investing”? Perhaps my favorite commentary in this year’s Berkshire Hathaway letter to shareholders is Mr. Buffett’s definition. He starts out by saying:

“Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”

Anyone who is investing (that is, not spending money now so that you can have more purchasing power in the future) owes it to themselves to read this part of the annual shareholder’s letter that begins on page 17. I read personal finance and investing books, articles and blog posts all the time and this is one of the best descriptions of the landscape of investing I’ve read. It should be required reading before anyone opens an IRA, puts money aside in their company 401(k) plan or buys CD. Go to the Berkshire Hathaway website and treat yourself to the words of this thoughtful and wise person.

Over the weekend, Warren Buffett, the chairman of Berkshire Hathaway Inc., held court at the annual meeting for Berkshire Hathaway shareholders. As I have in the past, I’m going to write about several items they came up at-bat annual meeting in the next two blog post. In addition, we’ll discuss the annual chairman’s letter to Berkshire Hathaway shareholders that is available online at the Berkshire Hathaway website.

Part 1: Comments from the annual meeting 

As you probably know, gold has been a hot investment topic among some investors the last few years. However, Mr. Buffett does not believe in gold as an investment. He said “If you own an ounce of gold now and caress it for the next 100 years, you’ll still have an ounce of gold. It’s very hard for an unproductive investment to be productive for any period of time.”  

Data from Morningstar back up his observation.  Since 1980, gold has increased in value 3.4% per year.  The top asset class during that period? You might be surprised to know that it’s REITs at an increase of 12.1% per year, while US stocks increased 11.1% per year during this time period, and international stocks increased 9.4% per year during this time. 

Because we all have some money in banks, I thought Mr. Buffett’s comments about the banking industry are worth reassuring. He said, “American banks are in a far, far better position than they were 3 to 5 years ago. The US banking sector is in fine shape. European banking system is gasping for air. “ 

Mr. Buffett’s comments on stocks are also worth noting. He said, “The beauty of stocks is that they sell at a variety of prices. The market is a psychotic drunk, and sometimes Mr. Market does very strange things. It’s built into the system that stocks get mispriced. Don’t behave like the psychotic drunk. ” I think Mr. Buffett means that you should not buy and sell stocks like a psychotic drunk by buying stocks when you are euphoric, and selling them when you’re depressed. 

Next time: comments and observations from the annual letter to shareholders

A good client recently sent me a Wall Street Journal article from April 13 that described the fast start of the new PIMCO Total Return Exchange Traded Fund (ETF) (symbol BOND). This actively managed ETF is run by investment superstar Bill Gross (aka “the bond king”) and has attracted a near record amount of new dollars in a very short period of time. The client asked me for my thoughts on the success of this fund.

I told the client that this article highlights one of the siren songs of investing: the superstar syndrome and the allure of the performance fairy.

This siren song has two parts. Let me explain.

The financial media love to write stories about men and women who are charismatic and, for short periods of time, appear to be successful. The landscape is littered with media darlings like Bill Miller, Abby Cohen, Peter Lynch, Jim Cramer and Bill Gross. The media ties its survival to viewers and readers turning on to their programs, reading their blogs and buying its magazines and newspapers. And nothing attracts eyeballs like a superstar investor. Once viewers and readers are hooked by the superstar’s magnetic pull, they want to invest like them so they buy shares of their mutual funds. This is called believing in a “performance fairy.”

This term was first used by Frank Armstrong III in his book The Informed Investor. Here is how Armstrong describes the siren song of the performance fairy:

If you believe in performance fairies, you are convinced that somewhere out there is one that can “beat the market.” You might even believe that you yourself are a performance fairy. You persist in this delusion against all available evidence, but remember, it is extraordinarily difficult to beat Mother Market. Few actually do it over the long haul, but many a fool continues to confuse pure, dumb luck with skill.

Rather than believe in performance fairies, I suggest that you trust the results of academic research that shows over a five-year horizon a majority of active mutual funds in most categories fail to outperform their indexes.

Even during times when investments are surging or falling (bull and bear markets), when some people assert that active fund managers have an advantage “to be nimble and go where the smart money is going,” less than half of actively managed mutual funds beat their indexes. For example, in the most recent bear market from November 2007 to February 2009, about 68% of stock mutual funds did worse than their comparable indexes.

Lest you think that Mr. Gross is a performance fairy, keep in mind that in 2011, the PIMCO Total Return Fund that he also manages returned 3.74% to its shareholders; the comparable index for this fund earned more than twice this return (7.84%).

So should you invest in the newest, hottest, ETF run by superstar Bill Gross? To quote from the Wall Street Journal article: “Ultimately, a bet on the ETF is a bet on Mr. Gross.” I don’t think so.

Robert Frost, the American poet who lived in the middle part of the last century, may not have been specifically thinking about personal finance when he wrote these lines, but many of his verses apply to managing your personal finances. For example:

“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” (Keep your credit history current and up to date by asking for a copy of your credit report annually and correcting any errors you find on it. Your free, annual credit report can be ordered here.)

“Nobody was ever meant to remember or invent what he did with every cent.” (A good spending plan takes only about an hour a month to update and follow. Don’t worry about the pennies; focus on the big dollars.) 

Or, how about: 

“A person will sometimes devote all his life to the development of one part of his body – the wishbone.” (Buying lottery tickets is not good financial planning; instead, save at least 10% of your pre-tax earnings and strive to get to the point where you save 20%.)

“Don’t ever take a fence down until you know why it was put up.” (Think of personal insurance, an adequate emergency fund and having current estate documents as fence railings to protect you and your family.) 

And, another of my favorites when it comes to personal finance: 

“How many things have to happen to you before something occurs to you?”

Last week, the National Football League (NFL) annual player draft took place and my hometown team selected a player in the first round that very few “experts” believe is a good choice. The conventional wisdom believes they should have taken this player or that player or done this or that. The day after the draft, the newspaper “experts” and the sports blogs were near unanimous in saying the Seahawks made a huge mistake.

I’m a casual pro football fan and Seattle Seahawks fan so I don’t have an opinion on the player the Seahawks chose, but I couldn’t help but notice that the Seahawks executives cared not a whit for what the experts said before the draft and seemed immune to the criticism after the fact.  From what I read, they have a plan to build their team and are sticking with it no matter what the “experts” say or write. They chose a player because it fits within their overall plan and are sticking with that plan.

I got to thinking that the approach the Seahawks have taken is a pretty good personal finance lesson too. Have a plan, choose the parts to put that plan into action and ignore what the conventional “experts” (Wall Street money managers or talking TV heads) think or say. For example, passive index investing is not conventional wisdom, but it has proven to work over time, even though it’s boring and not that fun to talk about at parties. The same goes for such tactics as rebalancing your portfolio by selling funds that have gone up in value and buying funds that have done poorly lately. Or selling individual stocks that you “love” and buying boring index funds. Or keeping six months of cash on hand for emergencies instead of buying that big screen TV you want. Or saving at least 10% of what you earn pre-tax or better yet, 20%. And my favorite, living with a spending plan when all around you the advertisers you “need” this or that great technology gadget, a bigger house or a new car.

Robert Frost, one of my favorite American poets, was probably not thinking about personal finance when he wrote “The Road Not Taken”, but it applies:

Two roads diverged in a wood, and I,

I took the one less traveled by,

And that has made all the difference.

There are four types of Individual Retirement Arrangements (IRAs) for individuals:

• Traditional IRA
• Rollover IRA
• Roth IRA
• Inherited IRA.

You probably know that there are different tax issues for a traditional IRA and Roth IRA, but many people are un-aware of the traps and pitfalls that can occur with an inherited IRA.  The tax rules for inherited IRAs are complex and confusing and the penalties for failing to follow an IRS rule are severe. For example, a person who doesn’t meet the required minimum distribution for an inherited IRA pays a penalty equal to 50% of the RMD amount that was not withdrawn plus, of course, the income tax that was due on the withdrawal.

The purpose of this post is to point out a few of the inherited IRA challenges, but mostly to urge you to see a qualified tax expert if you inherit an IRA. I cannot emphasize this point enough: if you inherit an IRA, especially from someone other than your spouse, please get help right away from a qualified tax professional.

Factors to keep in mind about inherited IRAs:

• The rules governing inherited IRAs are different if the beneficiary is a spouse or someone other than a spouse. This is the first factor to keep in mind – if you inherit an IRA from your spouse, you follow one set of rules; you will follow another set of rules if you inherit an IRA from someone other than a spouse.
• A spouse who inherits an IRA can co-mingle funds with their own IRAs and then the normal IRA distribution rules apply. If your inherited IRA is not from a spouse, you must keep the inherited IRA money separate from any other IRA and you can’t make new contributions to the inherited IRA account.
• There is no 60-day rollover rule for an inherited IRA. Unlike rollovers between other IRAs or between an employer-sponsored savings plan like a 401(k) and a traditional IRA, any transfers involving an inherited IRA must be between trustees only. If you touch the money at all, it’s taxed.
• If you are the sole beneficiary of a non-spouse IRA, generally, you have two choices:
  • Take distributions over your lifetime according to an IRS life expectancy table, or
  • Choose to receive the entire account by the end of the fifth year following the year of the owner’s death. If you make this election, you don’t have to take distributions earlier.

However, depending on the age at which the IRA account owner died, there may be other distribution rules and the rules for taking distributions if there are multiple inherited IRA beneficiaries are complicated.

You can read more about inherited IRAs in IRS Publication 590. Due to the complications of an inherited IRA and the costs if you make a mistake, please don’t trust what you read on the Internet. Please see a qualified tax advisor as soon as you know you will be the beneficiary of an inherited IRA.

Because it’s Spring (finally), it’s a good time to do a few things around your personal finances. For example:

• Go through your personal finance files and throw out stuff you don’t need like old bills, insurance and investment account statements you no longer need and old copies of policies.
• Review your beneficiary designations on life insurance policies, investment accounts and especially employer sponsored benefit plans like 401(k) and 403(b) plans.
• If you haven’t done so recently, ask for three estimates on your home and auto coverage; one of the estimates should be from your current insurance company. Make sure your deductibles are as high as possible when you do this too. Plus, consider adding umbrella liability coverage if you don’t have it already or review the limit on this coverage if you already have it.

Spring cleaning is not just for closets and garages. Take the time now to do some personal finance Spring cleaning and make it an annual process. You’ll feel better and it will make it easier to find information when you’re looking for it later.

Today is Earth Day. A day to celebrate mother earth and all she gives us…the air we breathe, the food we eat, the water we drink. In short, Earth Day honors what sustains us and reminds us to consider what we can do to make the planet better. Thank you mother earth. I am grateful for the bounty and abundance.  

Because its Earth Day, let’s ask the question, why would anyone want to invest in an earth-friendly way?  You can you know; it’s called “sustainable investing” and I’ve been blogging about it on this site for the last few days. 

What are the benefits of sustainable investing? It’s about:

• Putting your money where your mouth is. That is, taking action that supports a value rather than just say you believe in something.
• Supporting companies that share an earth-friendly value with you.  
• Withholding capital from companies that damage the earth.
• Being a part owner of a company that does something good. 
• Leaving the world a better place for our children. 
• Feeling good about yourself because you’re doing something that you know is right, the way you do when you stop to pick up a piece of litter.

Imagine how it will feel to know your money is doing good and doing well? What will it be like when you look at your investments and know that you’re supporting companies that have a long history of positive environmental practices and avoiding companies with a poor history of environmental practices?

Since the investment returns you earn investing in an earth-friendly way are about the same you would earn in a conventional manner over a reasonable period of time, perhaps the question to ask yourself today is: 

Why don’t you invest in an earth-friendly way?