Wednesday, June 29, 2016

Getting Investment Advice From Jim Cramer's Mad Money Is Mad

Jim Cramer's Mad Money show on CNBC is a ratings hit. In the show, Cramer does his stock-picking shtick, pacing around the set, yelling random facts about companies. Watching, you'd think he's got some magic ability to pick the winners and losers. Indeed, that's pretty much the whole point of the show - people watch it to find out what stocks to buy and what ones to avoid. He even sells a $15 a month newsletter subscription with his picks.

The problem is his stock picking skills suck. He can't beat the market.

Proof Is In The Pudding

An independent analysis by researchers at the University of Pennsylvania shows Cramer's Action Alert Plus portfolio has under-performed the S&P 500 by 2.5% over the past 15 years. It's worse in more recent years: it lost 9.5% in 2011 when the S&P 500 was flat and it gained only 1.3% in 2014, a year the S&P 500 gained 11.4%.


CNBC claims Mad Money isn't a show about stock picking. According to their website, their goal is "educational, to teach you how to analyze stocks and the market through the prism of events." Yet, when the show features segments such as The Lightning Round, where Cramer reels off two or three sentences about the company and then proclaims it to be a "sell" or a "buy", how educational can that be? This is entertainment, not education.

Jim Cramer's claim to fame, before he became a big TV star, was that he managed a hedge fund and made millions of dollars. That, one would think, means he must be great at picking stocks. The only problem is he didn't make money by picking stocks. He made money by manipulating the stock market. He admitted this. He admitted all hedge funds do it. And while he claims nothing he did was illegal, he says other hedge fund managers are not adverse to illegal market manipulation. When you have the ability to manipulate the market, you don't have to be good at picking stocks.

Yet More Evidence Of This Basic Fact

The bottom line is no one can consistently beat the market by picking individual stocks, especially frequent traders. Transaction costs and taxes will eat away any profits you might manage to get. John Bogle has proven this. Warren Buffett made a $1 million dollar bet on this and, with 2 years left out of a 10 year time frame, he's winning - by a lot. This analysis of Cramer's picks is just one more piece of evidence. Stick with low cost index funds.

Wednesday, June 22, 2016

Don't Leave Money On The Table: Deduct Mileage On Your Taxes!

I know tax time has passed, but I wanted to pass along one more tax tip that you can use all year long: The government allows you to deduct auto mileage on your federal taxes and many states do as well. If you have driven your car for business and have not received reimbursement for that mileage from your employer, you can deduct the costs from your taxes. That's fairly straightforward. However, most people (outside of those in the delivery industry) typically don't drive their own cars for their employer or, if they do, they usually receive some form of reimbursement for it. But did you know you can deduct mileage for other reasons?

Two More Ways To Deduct Mileage

Tax law also allows you to deduct mileage expenses incurred for medical reasons or charitable purposes. This means you can deduct the mileage for driving to the doctor's office or to the dentist. If you do any driving for charity - perhaps delivering supplies to a homeless shelter - that mileage can be deducted too. Taking a bunch of old clothes to Goodwill? Track your mileage and deduct it!

The Deduction Rate Varies

The amount you can deduct varies depending on what the trip was for - business, medical, or charity. The rates also vary each year to account for the fluctuating price of gasoline and other automotive expenses such as depreciation, maintenance, and licensing. For 2016, the IRS has set the standard mileage deduction rates at:

  • 54 cents per mile driven for business
  • 19 cents per mile driven for medical
  • 14 cents per mile driven for charity
Also, if you have to pay any parking fees or road tolls while driving, those are also deductible.

(I will note those rates are for the standard mileage deduction, which means the IRS comes up with the figure based on estimates for gas prices, vehicle depreciation, oil and tire changes, etc. If you want to, you can deduct the actual expenses, but that requires much more record keeping - such as tracking what percentage of time the vehicle was used for these purposes throughout the year, the actual amount and cost of the gas used, vehicle maintenance, licensing, etc. That is likely not worth the effort. Think of this as akin to the standard versus actual income tax deduction on the tax form - you can track all the details yourself or just use the IRS' best guess.)

What Documentation Is Needed?

To deduct mileage, you need to maintain appropriate documentation. According to the IRS, this means:

  • identification of the vehicle used
  • documentation of vehicle ownership
  • log of miles driven, destination, and purpose of trips
  • receipts for any parking fees or tolls paid 
Additionally, to claim this deduction, you have to itemize all your deductions on your taxes - you cannot claim the standard deduction and get this deduction too. (If you have a mortgage, odds are, you are itemizing your deductions anyway.)

Is It Worth It?

The deduction amounts seem rather small and the documentation requirements sound like a pain in the ass. Is it actually worth it to claim this deduction?

The answer, of course, depends on how much you drive and how much you mind keeping records. I will however, tell you that the ubiquity of smart phones has made record keeping as painless as possible. I never leave home without my phone and, as the saying goes, there's an app for that! I use the Mile Bug app.

Mile Bug lets you define start and destination points for your trip, beginning and ending odometer readings from your car, and the reason for your trip. If you want, you can turn on GPS tracking and it will track the miles you drive via GPS. At the end of the year, you can email yourself or your tax preparer a report of all your trips. Here is a sample of my report for this year so far:

click to upsize

I typically end up with about $150 to $200 each year in mileage deductions, which translates to a $40 to $55 tax saving each year (at the 27% tax rate). You might as well take advantage of every deduction you can and don't leave money on the table!

Wednesday, June 15, 2016

Two Reasons Growing Older Is A Good Thing

To many people, birthdays are depressing. Another year gone, another year closer to death. But I'm here to tell you growing older isn't all that bad. As I've gotten older, I've noticed some benefits that come with age. Here are two of my favorite:

We Rule The Muzak

Stores play music to keep customers in the building and to keep them in a good mood. Happy customers spend more money. The music played tends to be from about 30 years ago because people that listened to that music back then have grown into consumers with money to spend now. I've noticed lately that when I'm shopping, I hear music from when I was in high school and college - Duran Duran, Debbie Gibson, Crowded House, Def Leppard. All the 80s hits. I gotta admit, I like it.

Me and Debbie Gibson, back in the day

We Rule The Compound Interest Curve

If you've been investing for a while, you're starting to hit the point where your compounding interest is becoming substantial. Look at this graph:
When you are young and in the beginning stages of saving, compound interest is so small, it's almost negligible. It's like a rounding error. "Oh yay. I got 3.5 cents this month instead of the 3.2 cents I got last month." Big deal. But after 40 years, of building up, that compound interest suddenly becomes noticeable. After 40 years, you're suddenly getting several hundred dollars a month in interest. Cha-ching!

It's All About Perspective

Don't dread growing older. Change your perspective and look at the benefits.

One more photo, just because:

Me and Debbie Gibson Again.
Shake your love.

Wednesday, June 8, 2016

How Many Accounts Is Too Many?

By its very nature, budgeting requires you to create buckets of money for different goals or expenses. You save X dollars for an upcoming vacation, Y dollars for some home repair, Z dollars for a new Tesla, etc. One reason many people fail when trying to stick to a budget is that they co-mingle funds. They might be budgeting $100 a month for going to restaurants and another $100 a month for clothing, but they keep that money in the same account.

One month, they might decide to go out for a really fancy dinner and end up spending $200. "That's ok," they think. "I'll just borrow from the clothing fund this one time. I'll make it up next month." Except they don't. Then when they need to buy new underwear, they wonder why they don't have any money, despite budgeting for it.

When money from different budgets is all lumped together, it's difficult to track spending and progress towards goals. When you start borrowing from one budget to another, it becomes almost impossible to track. That's why I prefer separate accounts for each goal.

These Days, It's Easy To Open Accounts

Just about every major bank or credit union offers online banking and there are also quite a few internet-only banks. All these places make it very easy to open new accounts from the comfort of your home. Electronic transfers are ubiquitous and make moving money between accounts or institutions quick and painless. As long as you watch out for accounts that might charge you fees, there really isn't a reason to use one account for everything any more.

We have 18 accounts (!) that I use for our budgeting. Here's what I use them for:

  • 3 USAA savings accounts - for clothing, gifts, and auto maintenance
  • 2 Capital One Investing accounts - new car (non-Tesla) and daughter's future car
  • 1 Capital One checking account - legal budget (need to get a will, power of attorney, and other legal documents drawn up)
  • 1 Capital One savings account - vacation budget
  • 2 Scottrade accounts - Tesla and home maintenance budgets
  • 2 credit union accounts - wife's checking and savings
  • 2 credit union accounts - checking account for daily use and a savings account for short term savings
  • 1 credit union account - savings account for life insurance budget
  • 4 Schwab accounts - 2 Roth IRAs and a Coverdale education account for retirement and college budgets plus one for our emergency funds

Not included in the list are the two 401(k) accounts my wife and I have with our employers. Longer term goals are saved for using stock market brokerage accounts while shorter term ones are in checking or savings accounts.

Am I Crazy?

Is eighteen accounts too many accounts? I obviously don't think so or I wouldn't be doing it, but your mileage may vary. The fact that I have gone paperless with all my statements makes administration quite a bit easier. Reconciling the statements takes a small amount of time, but even that isn't too bad because the statements all come at varying times of the month, so the workload is spread out. Additionally, some of the accounts are combined on a single statement, which makes reconciling easier.

Because each budget has its own account, it's very easy for me to see how much money I have for each budget item. It also helps stop me from "borrowing" from one budget to pay for another. I still have that option because the accounts are linked and it's not an issue to move funds from one to another, but doing so requires a positive action on my part. That alone is often enough of a deterrent to prevent me from doing it.

Look, I realize eighteen accounts may be too many for most people. I get that. I have no trouble keeping track of 18 accounts, but then, I'm very introverted and studies show introverts tend to be more detail-oriented than extroverts. The complexity of my set up doesn't bother me at all. In fact, I love paydays because I get to distribute money to all those accounts. To be honest, I didn't even realize how many accounts I had until I sat down to write this article. I understand there is also a good case to be made for simplifying your life and consolidating accounts. It all comes down to knowing what type of person you are and finding a method that you can use to reach your goals.

I suppose, objectively speaking, eighteen accounts might be a bit much. But it works for me. What about you?

Wednesday, June 1, 2016

Goal Update: End of May 2016

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of May, 2016
Current value: $23,161
Change from last month: +$343
Percent of Goal:  21.30%

No nice graph this month. Mint has made a change and now you cannot select Property accounts from the Assets graph menu. Since Mint classifies any custom account as Property, I can't make a graph :-(

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

Income this month from my online courses was a respectable $134, of which I took out 15% for taxes. My hard money loan continues to pay on time ($133.33 a month). I received $2.30 in ebook royalties.

Update: I had mentioned Paribus in a couple of previous posts as a way to help claim money back from Amazon on purchases using the price drop guarantee. This month Amazon changed their price matching policy. Now, they only offer a price drop guarantee on televisions. Given this, I have cancelled my Paribus account. Amazon was the only retailer I used it for, so there was no point letting it have permission to monitor my email.

Net Worth Update

Our net worth continues to grow, increasing by $8,816 from last month to a new total of $638,205.

April 2016May 2016

Our cash took a big drop, but that's because I moved $5,000 of our emergency fund from a savings account to a brokerage account - note the increase in the Investments category. (More on that move in a future post.) Credit card debt, which includes our HELOC, dropped. We also saw some property appreciation. Mint also includes my work 401(k) in that category and that saw an increase as well, so that contributed to the increase.

If you have any questions or suggestions for topics, please drop me a line!