Korea's policy change to bring down won
On Friday (WSJ), Korea announced that it has raised reserve ratio on its foreign reserves. This is aimed at decreasing dollar which is increasing the value of won. Though some part of won increasing is due to decrease in dollar, I am thinking it is mostly because of the booming economy there. Yet to see how effective this change will be.
China's policy change to expand imports
From my economics class, I learnt that China cannot have policy changes as it will affect its exchange rate. Its currency is pegged to a set of currencies and when those countries make a policy change, China is forced to increase or decrease its money supply to maintain the exchange rate.
For example, increase in money supply in US will decrease the value of dollar, which puts an upward pressure in Renminbi. To maintain the fixed exchange rate, Chinese Central Bank must have to increase the money supply too and bring the value of renminbi down.
In Friday's news (WSJ) China mentioned that it is going to expand its imports. I am wondering how it can have a policy change without a change in the exchange rates. I sent out a mail to my professor requesting an explanation of how this works.
Labels: China, fixed exchange, policy change
Review of my retirement portfolio FRESX
Fidelity Real Estate Investment FRESX
I earned about 33% per year with this investment. I am happy that I got a chance to ride on the real estate boom. This fund outperformed its peers in 3 and 5 yr returns. As real investments are losing value I will definitely consider this during my reallocation project. I am thinking of taking out half of the money from this fund. I will write about this in detail when I reallocate the funds.
3 year Risk Statistics
Alpha (against Standard Index) 14.58
Beta (against Standard Index) 1.14
Mean Annual Return 28.83
R-squared (against Standard Index) 29
Standard Deviation 15.60
Sharpe Ratio 1.53
Treynor Ratio 15.31
Morning star rating *** (stayed the same since my investment)
Exp ratio 0.83% ( a slight decrease)
Annual Turnover 61%
Asset Allocation %
Cash 1.02
U.S. Stocks 94.47
Foreign Stocks 4.51
Bonds 0.00
Other 0.0
Source:Yahoo Finance, FundAlarm, Morning StarLabels: FRESX
Review of my retirement portfolio FPURX
Fidelity Puritan (FPURX)
This is a good investment. Since my investment I earned about 9% annually. Very low risk, and good performance. Morning Star rating stayed the same - 4 stars. Expense ratio came down a little bit to .62%. Annual Turnover rate has also come down from 86 to 78%. Manager Tenure is 4 yrs (average). I chose this fund to get some bonds in my portfolio. I don't have any issues with this fund as of now.
3 year Risk Statistics
Alpha (against Standard Index) 0.63
Beta (against Standard Index) 0.84
Mean Annual Return 10.74
R-squared (against Standard Index) 80
Standard Deviation 5.66
Sharpe Ratio 1.31
Treynor Ratio -0.88
Asset Allocation %
Cash 3.15
U.S. Stocks 57.66
Foreign Stocks 3.93
Bonds 33.17
Other 2.1
Source: Yahoo Finance, Morning Star, Fund Alarm
Labels: FPURX
Review of my retirement portfolio FJSCX
Fidelity Japan Small Co (FJSCX)
In the Japan Stock category, initially I had Fidelity Japan, last year I sold Fidelity Japan and bought this fund. Expense Ratio has come down. Same Manager. Morning Star rating has come down to 4 stars. Their Sharpe and Treynor ratios for 3 and 5 yr returns aren't impressive. Approximately I gained 5% per year on an average which isn't enough for the risk taken.
I am going to hold on to this fund as I think that Japanese economy is strong and will grow. Their wages are increasing, corporate profits are going up, use of raw materials has also increased, though retail sales has to pick up. But given their steady growth in exports to US, it shouldn't be a problem. I will revisit this fund again in 6 months.As per Fund alarm, its performances were lower than the average of its peers for the returns of past 12 months and 3 yrs (bench mark - schwab intl index). As per Morning Star they are higher (bench mark - Japan Category). Though its performance went down, I don't think there was a big difference when compared with its peer group. Its risk is less. Another think to hold on to the fund is to see if it is getting stabilized as it is closed now. But it could turn otherwise too, have to watch out.
Closed to new investorsJapan Stock CategoryExp ratio 1.02Annual Turnover 65%
3 Year Modern Portfolio Theory Statistics
Alpha (against Standard Index) -4.66
Beta (against Standard Index) 0.87
Mean Annual Return 11.38
R-squared (against Standard Index) 15
Standard Deviation 22.17
Sharpe Ratio 0.46
Treynor Ratio -11.57
Asset Allocation %
Cash 0.65
U.S. Stocks 0.14
Foreign Stocks 99.21
Bonds 0.00
Other 0.0 Source: Yahoo Finance, Morning Star, Fund AlarmLabels: FJSCX
Review of My Retirement Portfolio FDGRX
FDGRX (Fidelity Growth Company)When I considered this investment for my portfolio it didn't satisfy some of my requirements (Morning Star rating, risk..), but with an intutive feeling I invested in this fund. When I invested, the Morning star rating was only 3 stars, now it is 4. Same Manager, no changes in investing strategy. Turnover rate also didn't change much (from 47% to 50%). Even now it is in high risk, but the return doesn't seem to be worth for the risk taken. For the past three years, the return was about 11% which is a decent return to me. But now I am seriously thinking about holding on to this.
Large GrowthMorning Star Rating ****Closed to new investorsManager 10 yrs (Steve Wymer)Exp Ratio 0.96% (increased from 0.85% but below 1%)Annual Turnover 50%High Risk1,3,and 5 year returns are higher compared to the avg returns of its peer group
Asset Allocation % Cash 0.65 U.S. Stocks 92.54 Foreign Stocks 6.50 Bonds 0.00 Other 0.3 3 year Risk (Modern Portfolio Theory) StatisticsAlpha (against Standard Index) -2.47 Beta (against Standard Index) 1.32 Mean Annual Return 11.11 R-squared (against Standard Index) 68Standard Deviation 11.76Sharpe Ratio 0.70Treynor Ratio -0.26 Source: Yahoo Finance, Morning Star, Fund AlarmLabels: FDGRX
Review of my retirement portfolio - FCNTX
FCNTX is in my investment portfolio for the past three years. I am satisifed with overall risk and performance. Expense ratio is below 1.0 (one of the requirements for my portfolio). Annual Turnover is well below 100%.This Fund was closed in March 2006. Though Fund closing is good for existing shareholders as it could stabilize the cash flows and improve its performance, a Morning Star study about fund closings and performance found that the performance detroriates after the closing. As of now, I am going to hold on to this fund because I believe in Will Danoff's consistent investing strategy. Fidelity Contrafund (FCNTX)
Large GrowthExpense Ratio 0.91%Annual Turnover 60%
Closed in Mar 2006Largest equity fund managed by Wil Danoff
Less RiskyManager Tenure is 16 yrs3 years return 15.98Past 12 months return when compared to its best benchmark is -1.89% (Vanguard 500Index)Its returns are higher than that of its peer groupMorning Star Risk rating lowMorning Star Return Rating highMorning Star Rating *****
Asset Allocation % Cash 10.19 U.S. Stocks 67.73 Foreign Stocks 21.69 Bonds 0.00 Other 0.4 3 year (modern portfolio theory) statisticsAlpha (against Standard Index) 3.28Beta (against Standard Index) 0.99 Mean Annual Return 14.93 R-squared (against Standard Index) 66Standard Deviation 8.93Sharpe Ratio 1.27Treynor Ratio 3.51
Source: Yahoo Finance, Morning Star, Fund AlarmLabels: FCNTX
SOX - New propositions to ease section 404
On Nov 10th, WSJ reported that regulators announced propositions to ease section 404 of SOX to save time and money for businesses and auditors. This will improve the current conditions for companies deciding which exchange to list their stocks. As more and more accounting, legal, and securities regulations are introduced, particularly after SOX, the number of companies listing their stocks in foreign exchanges have increased considerably.Labels: 404 SOX, SOX
Investment Securities
Municipal bonds - two categories General obligation bonds: backed by full faith and credit of the govt. Can be paid from any source of revenue. Revenue bonds: can be paid only from certain funds.
Structured notes: FNMA, GNMA and similar institutions pool their securities, whose interest rates could periodically reset based on a reference rate. It has a cap and floor rate included in the agreement.
Securitized assets: Are backed by mortgage loans, auto loans, etc. of similar type and quality. Three categories - Pass thru', CMO, MBS. Pass thru' - backed by mortgage loans, removed from issuer's balance sheet. Interest and principal are 'passed thruough' to investors. CMO - Collateralized Mortgage Obligations are pass thru's divided into multiple tranches each with its own risk and interest rate. MBS - Mortgage backed securities are not removed from issuer's balance sheet. Interest and principal of loans are not connected to those of MBSs.
Stripped securities: Zero coupon bonds that are formed from either principal or interest of Tbonds or MBSs.
Source: Banking Management and Financial Services
Investment Portfolio of Banks
Uses:Stabilize income, offset credit risk exposure in loan portfolio, provide geographic diversification, provide liquidity, reduce tax exposure, hedge against interest rate risk, collateral, flexibility in assets portfolio, and dress up to make it financially stronger.Money Market (lesser than one year maturity) and Capital Instruments (more than one year maturity) are the two types of investments available for Banks.Crossroads account - since they stand between cash, deposits, and loans. Increase investment when there is excess cash, decreased loan demand, lesser deposits and vice versa. Investment securities held by banks FNMA, GNMA, FHLMC, municipals, Non-mortgage related asset backed securities.Factors involved in choosing investments: Tax exposure, rate of return, interest rate risk, credit risk, business risk, liquidity risk, call risk, prepayment risk, inflation risk, and pledging requirements
Source: 'Bank Management and Financial Services'
Labels: Investment portfolio of Banks
IRA withdrawls and mistakes
Rollover IRA
You have 60 days to rollover the money. If you pass this deadline, you have to pay income tax on the entire amount that year, rather than continue to let your assets grow tax free until you start making withdrawls. There is a fix, if you missed the deadline by mistake - you can request a 'private-letter ruling' from the IRS (by filling an application and paying a $95 fee, plus other fees if you hire an adviser to get off the hook.
If you are already over 70.5 years old and taking required distributions from your IRA every year, be sure to make your annual withdrawl before doing a rollover. Otherwise both custodians could wind up reporting your distributions to the IRS even though you only took one withdrawl. Also if you are in pay status, you are not allowed to rollover that year's minimum distribution.
Roth conversion
If you plan to pass along your IRA to your children and you want them to have it as a Roth, you have to do it, they cannot do the conversion.
Taking too little or too much
You have to take what the IRS calls a series of substantially equal periodic payments, on a schedule. And you must continue taking them for at least five years or until you turn 59.5 whichever period is longer. So if you start taking withdrawls at age 50, you are on the hook for 9.5 years; if you start at age 57, you would have to take the withdrawls until you turned 62. And you should work with someone who is familiar with 72(t) payments to set up your plan.
Missing the low tax window
If your tax bracket drops after you stop earning a regular paycheck, and you expect your tax rate to increase again when you start taking mandatory IRA withdrawls, it may be good time to take some money out of your IRA. That way you pay lower taxes on your IRA money than you would by postponing those withdrawls.
To figure out how much to take out, you would subtract your income for the year from the ceiling of your current tax bracket, and then withdraw as much as you could from your IRA without bumping yourself into a higher bracket.
For example, a retired married couple with $50,000 income would be in the 15.5% bracket, which has a ceiling of $59,400 in income. They could withdraw $9400 from their IRA before bumping their tax rate for additional income to 25%.
What to do with the withdrawls - You can use that money for life insurance or a real estate investment where you could leverage it even further. Or you could roll it into a Roth IRA, an account in which you can invest after tax money in exchange for tax free growth.
Inheriting IRA
If you inherit IRA from anyone other than your spouse, you cannot under any circumstance, roll into your own IRA. You also can't withdraw the assets from an inherited acct and then deposit them into a new IRA. And you can't consolidate IRAs you inherit from different people into one acct. But traditional IRAs and Roth that you inherit have one important thing in common with the ones that you hold yourself. You can stretch out the withdrawls across your lifetime, rather than taking them as a lumpsum. That gives you a chance to postpone the tax bite and lengthen the time that tax free earnings can accrue, possibly increasing your inheritance by thousands of dollars.
You don't have to cash out the inherited IRA within 5 years of the owner's death - many people assume to do so because the govt made that as a default. You can stretch those withdrawls across your life expectancy.
With your own IRA you have to start taking minimum withdrawls by April 1 of the year after you turn 70.5 and you determine the minimum amount each year by looking up your life expectancy in the appropriate table and then dividing your year end acct balance by that number.
But with an inherited IRA, you first need to retitle the IRA so it is clear that the owner died and you are the beneficiary. After doing that you would look up your life expectancy one time. Each year you simply subtract a year from your initial life expectancy to figure out how much to withdraw.
Beneficiaries
When it comes to your IRA, your will is irrelevant. The way an IRA gets passed along to your heirs is governed by the beneficiary form you are supposed to fill out when you open the acct. It is a good idea to review those forms regularly and keep your own copy for easy access (don't expect your bank/brokerage should hold this, sometimes they don't). In the forms, you may see a box to check for a 'per stripes' designation - which means that assets would go to your beneficiary's children if he or she dies before inheriting your IRA.
Books
IRAs, 401Ks, & Other Retirement Plans - Twila Slesnick and John C.Suttle
Parlay your IRA into a Family Fortune - Ed Slott
The Retirement Savings Time Bomb And how to defuse it - Ed Slott
www.irahelp.com
www.ataxplan.com
www.irs.gov
personal.fidelity.com/retirementLabels: IRA, IRA mistakes, IRA withdrawls
529s and Coverdells
529 - Invest tax free for college whereas with coverdell you can invest for any education level which includes private elementary schools.Comparitively 529 has a higher expense ratio.For 529, total contribution varies by state but in hundred thousands. For coverdell, it is 2000 per year. No income limitations for 529 contributions but coverdell has. 529 has its own investment options which varies by the state. In coverdell, you can invest in any non insurance securities. You can invest in both 529 and coverdell programs.
Life Insurance - Term Life and Cash Value
Term Life insurance is best for the majority of people. Insurance agents get 50-70% of your first year's premium as their commission for Cash Value policies. One doesn't need insurance after the debt has been paid off and the children are out of home. Cash Value policies offer life long protection, no risk, guaranteed returns, tap the cash for a low interest loan. Statements from insurance companies don't explain the savings and the rate of return. They don't always break out on commissions, charges and fees - all of which are subtracted from your premiums and reduce your rate of return. Also one should contribute to the retirement plans to the maximum before thinking about life insurance.
Finalizing 529 plan
Ok, I have finally decided which one I am gonna go for, its.... Nevada's Vanguard 529 savings plan. The reasons why I chose this because of the number of investment options it has and also the comparitively cheaper expense ratios. In a way I am little against those age based portfolios as we are not in control of those investment allocations and I figured out it has too much buying and selling every once in 2 years. Those costs going to bring down my returns. My son just turned 9, I am going to invest in 40% bonds and the rest in stocks which includes 10% international stocks.
