Wednesday, October 29, 2014

Don't Leave Money On The Table: Home Insurance

This is the first of what I hope will become a series of short articles about claiming all the benefits you are entitled to – be that discounts, freebies, or whatnot. I’m not going to go to the length of, say, extreme couponing, but I have found there are often discounts or bonuses you can easily take advantage of that can save you money without making major changes in your spending patterns or behaviors.

Since this is the first article in this series, I have to mention what is probably the most important advice on not leaving money on the table:

If your employer offers a 401(k) match, contribute enough to get all of it!! This is a no-brainer. It's free money!!

I've talked about this before. It's an automatic 100% return on your investment. Don't pass it up.

With that out of the way, let's talk about home owners insurance.

If you're like me, you have never read your entire home owners policy or even the policy's declaration pages. It's pages and pages of legalese and numbers specifying exactly what the policy covers and the limits and exclusions of the coverage. Boring stuff.

For some reason, the last time my property insurance was due, I found myself, if not actually, reading the policy declaration pages, then at least skimming them. My policy gives me discounts because my home is fairly new and therefore has a relatively new roof and heating and cooling units. I also get a discount because I have a monitored alarm system for both fire and theft. But then I came to one of the last pages in the document. This was a list of discounts I may be eligible for.

I glanced over the bolded text. New heating and cooling units, new roof - doesn't apply to me. Protective device, i.e. monitored alarm system - that applies and was a discount I was getting. I almost stopped there, since there were no other bolded items on the page.

But what about that last section? Properties located in qualifying... Hmm.. Properties in gated communities and retirement communities are eligible for a discount! Hey! I live in a gated community! Furthermore, it fits the definition provided. Bingo!! There's a discount I wasn't getting that I was eligible for!

That, dear reader, is what I mean by leaving money on the table. For the ten years I have been living in my house, I was eligible for this discount, but was not claiming it. All it took to claim it was a 5 minute phone call to my insurance agent and I was saving an additional $18 a year. I asked if I could get the discount applied ten years retroactively, but was told no. Well, it was worth a shot...

Do you have any tips for not leaving money on the table? Leave them in the comments!

Thursday, October 23, 2014

This Is The Stupiest Tesla Story Ever!

So there is apparently a company that does nothing but break apart products and see what they are made of. They must hire only stupid, easily impressed people, based on their comments about a Tesla they took apart.

"In breaking apart a Tesla, IHS found the head unit alone holds nearly 5,300 individual components, more than four times the number of parts in an iPhone 5s."

Shocking! Just shocking!!! Who would have thought that a CAR has more components than a PHONE?!?! Incredible!

"Another factor that intrigued Rassweiler? "The simple fact that there's a 17-inch display controlling the vehicle. Kind of like a large iPad controlling your car.""

Apparently, they have never seen a Tesla before they bought this one.

What morons. And people actually pay them for this information???

Wednesday, October 22, 2014

How To Reduce 401(k) Fees (Part 2): An Example week, I wrote about my work in restructuring the money in my 401(k) to move into funds that had a lower expense ratio. When I was done, the weighted average expense ratio, meaning, the amount I actually pay based on the amounts I have invested in each fund was 0.749%, down from the 1% range I had before. That's not too bad, but I wanted to see if I could do better.

So this week, I took a deeper look. For this analysis, I looked not only at expense ratios, but also the 12b-1 fees (which are advertising fees the company collects to advertise the fund) and the maximum sales charge the fund may charge (which is the maximum amount the fund will charge you when you buy or sell shares). Note that funds can charge the sales charge either when you buy the fund (called a front load), when you sell the fund (called a back load), or continuously while you own the shares (called a greedy money grab). To tell when your fund charges the fee, look at the share type. Type A shares are front loaded, Type B shares are back loaded, and Type C shares bleed you to death by sucking a little bit of blood every year. Obviously, you do not want to buy C shares.

In addition to fund expenses, I also want to make sure my investments are diversified. I want the funds I own to invest in different areas of the economy and the world. This helps protect you from wild fluctuations in the stock market. For example, if you had all of your money invested in one or more mutual funds that invest in real estate in the United States and the real estate market crashed, as it did recently, your investment would lose quite a bit of value. But if instead, you had only part of your money invested in those funds and the rest invested in other areas, such as retail companies in the U.S. and real estate in foreign countries and government issued bonds in the U.S., then the real estate crash would have less of an effect on your overall portfolio.

To analyze all this data, I logged into my 401(k) provider's web site and downloaded the prospectus for each fund they offered. They offer about 50, so it took a while to go through everything. I made a spreadsheet and noted the expenses for each fund, as well as their 5 year and 10 year returns. I also noted what my existing allocations were (after I made the changes I talked about last week, which dropped my overall expense ratio down to 0.749%). Then I looked for different funds that had lower expenses, decent returns, and provide some decent diversification.

I should point out that my 401(k) plan does also offer a range of target date mutual funds. These are mutual funds that invest in a mix of stocks and bonds and change that ratio as the target date approaches. So if your target date (i.e., retirement date) is 30 years away, the funds will initially be more heavily invested in stocks, which are riskier investments, but have the potential for greater returns. As the target date draws closer, the fund will gradually shift it's holdings into more safer bonds, which typically offer a lower return, to preserve capital and insulate you from stock market volatility. I did not bother looking at these in detail, as the fees were on the high side. There are also some problems with these types of funds, which people have written about before.

I ended up with the selections below. The Current column was my previous allocation and the New column is the new allocation I have decided on. Looking at the rightmost column, you can see I am more heavily invested in funds that invest in large and mid cap companies, but I have some small exposure to global investments, fixed income investments, and some balanced funds. Given my age and years to retirement, I'm comfortable with this mix.

Click to embiggen

Once I rebalanced my portfolio to my new funds, I re-ran the analysis I did last week, using my new allocation. I managed to drop my weighted average expense ratio from 0.749% to 0.675%! (Note that this analysis only looked at the gross expense ratio and did not factor in 12b-1 fees or sales charges.)

Click to embiggen

Wednesday, October 15, 2014

How To Reduce 401(k) Fees (Part 1): An Example

I've written before about how mutual fund fees, in the form of expense ratios, can really cost you in your 401(k). While an expense ratio of 1% or so may not seem like much, over the course of 25 to 30 years, it can cost you tens of thousands of dollars in lost returns. Look at the below table. If you have a starting balance of $25,000, get an average 7% return, and pay 0.5% in fees, after 35 years, you'll have $227,000. But look at what happens if you pay 1.5% in fees:

How Much Does That Fee Cost You?
Initial Balance
Average Return
After 35 years

That one additional percentage point in fees may not sound like much, but because it is taken out of your account every year, year after year, it ends up reducing your final total by 28%! That innocent sounding one percent fee can cost you almost one third of your retirement savings!

 This is why you need to look at the fees your investments are charging you.

The impetus for writing my previous post about this came from my investigation into my company's 401(k) offerings and their expense ratios. When all was said and done, I rearranged my 401(k) funds so that I was out of the most expensive funds and tried to move most of my money into offerings that had ratios under 1%. My 401(k) doesn't have a huge selection of choices, but I think I did pretty good with what was available to me.

Recently, I received notification that one of the funds I had invested in was being removed from the 401(k) plan and replaced with another fund because the old fund did not meet the performance objectives defined by the plan. I took this as another opportunity to review the funds I was invested in. I was not looking to move money into new funds, but rather just to review my current selections and see if I should rebalance my investments among them.

I started out by listing all the funds I currently owned and their performance, as defined by their 10 year return. (Because I'm a buy and hold investor, I'm not worried about shorter term returns and I prefer to look at longer term returns to gauge performance.) I next noted the expense ratio each fund charged. And finally, I noted the amount of money I had in each fund (which isn't that much because I've only been with my current company three years).

I threw all these numbers into a spreadsheet and stared at them blankly for a while. What did this tell me? I am invested in 8 different mutual funds with expenses ranging from 0.5% to 1.31%. I can see the fee each fund charges me, but I don't really have a good idea of what I am paying in fees over my whole account. So I took the average of the fees the funds charged. In my case, that worked out to 0.82%.

But that's not the whole story. If I was invested in each fund equally, that would be the expense ratio I am paying, but I'm not invested equally. For example, I only have 5% of my balance invested in a fund that has a 1.31% expense ratio and I have 25% invested in a fund that has a 0.51% ratio. So clearly a straight average of expense ratios will not work. What I need is a weighted average, that will give me a number based on the percentage I am invested in each fund.

To make matters more complicated, because each fund performs differently, my allocation percentage, or the way I direct my contributions be split between the funds, is not the same as how my overall account is actually split between the funds. Some investments have more gains or losses than others, and so, over time, the actual distribution has drifted from my specified allocation percentage. (This is why you sometimes need to rebalance your portfolio once in a while.)

The first step in creating a weighted average, is to calculate the percentage of your total account a particular fund represents. This is simply the amount invested in that fund divided by the total value of your account. I did this for each fund I own, and it is shown in the screenshot below in the column labeled "% of total portfolio."

Next, I took that number for each fund and multiplied it by the fund's expense ratio. This is shown in the column "weighted % * fee".

The weighted average of the expense ratios is then found by just adding up this column. You can see that, although the average expense ratio for the funds in my 401(k) is 0.82%, what I am actually paying is 0.749%, because I am more heavily invested in funds with low ratios and less invested in funds with higher ratios.

I should note that, although I did all this manually using a spreadsheet, the website Personal Capital will do all of this for you automagically. Personal Capital is like, but more geared towards investment accounts and their performance (whereas Mint is more geared toward budgeting with checking and savings accounts). I have not used Personal Capital because they do not support the company my 401(k) is with, but I learned about them from the Listen, Money Matters podcast and this page on their blog shows how Personal Capital does exactly what I did here manually, only with pretty graphs. They also calculate how much money those expense ratios will cost you over time.

Now that I've got my 401(k) set up with funds that have acceptable expense ratios, my next task will be to look at other funds my plan offers to see if there are any that might be better than what I am currently invested in. This will require a bit more research because it's not simply a case of finding the funds with the lowest expense ratio. I also need to take into account the fact that I want to be diversified across different investment areas. I'll post my results next week!

Wednesday, October 8, 2014

Tesla Owner Tracks Stolen Model S With Tesla Phone App

I came across this story and just love it! A woman's Model S was stolen. She called police and then
remembered that the Tesla phone app can track that car, providing it's location and speed. They scary thing is that, as the police chased the vehicle, she could see it reached speeds of 100 MPH. Yikes! I would be so nervous watching my $100,000 car being driven like that. The police eventually stopped the car by using spike strips.

What I didn't know was, according to this story, the phone app can disable the car when it is not in motion. That's an awesome feature and has got to be a huge theft deterrent!

The best part is the owner's comment: "After this, I'm not going to get any other car for sure." How many times have we heard Tesla owners say that?