Indexfundfan\’s blog (new URL is

April 23, 2006

Resource for withdrawal strategies

Filed under: Investing — indexfundfan @ 11:21 am

The following link is a good resource for withdrawal strategies and considerations. As Taylor puts it, it is a wonderful resource for anyone faced with the problem

“How much can I spend without running out of money?”

April 20, 2006

Coin inflation

Filed under: Just for fun — indexfundfan @ 10:06 am

The price of commodities have risen sharply over the past few years. As we know, coins circulated through the ages have been made from various base metals such as copper, zinc and nickel. Cheaper metals are used to mint new coins as the intrinsic value of the old coins start to exceed their nominal values.

The website gave some interesting information for this trend. According to the website, the quarter issued from 1932 to 1964 is now worth $2.63, more than 10 times its nominal value. More recently, the 1959-1982 one-cent coin is worth about two cents at today’s copper prices. I guess people might start to horde the more valuable coins if metal prices continue to rise.

April 19, 2006

Prepay mortgage or invest the money

Filed under: Finance — indexfundfan @ 10:03 am

Many investors juggle with mortgage payments as well as making regular contributions to their investment accounts. The question that sometimes come up is whether does it makes sense to prepay (i.e. make additional payments) the mortgage or invest the money.

Larry posted (49553) a paper that discusses the advantages and disadvantages of prepaying mortgage payments versus investing the money in tax-deferred accounts. Here’s the abstract:

We show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax-deferred accounts (TDA). Using data from the three latest Surveys of Consumer Finances, we show that more than 45% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean tax benefit of 11 to 17 cents per dollar, depending on the choice of investment assets in the TDA. In the aggregate, these mis-allocated savings are costing U.S. households as much as 1.7 billion dollars per year. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity or other constraints, and that self-reported debt aversion and risk aversion variables explain to some extent the household preference for paying off their debt obligations early and hence their propensity to forgo our proposed tax arbitrage.

April 16, 2006

Benefits of DCA: Forget cost savings, think risk reduction

Filed under: Investing — indexfundfan @ 9:35 pm

Many investors are familiar with the concept of DCA (dollar-cost averaging) and this technique is sometimes said to offer cost savings (i.e. lowering the cost basis of the investments).

The paper Lifetime Dollar-Cost Averaging: Forget Cost Savings, Think Risk Reduction by Robert Dubil in the FP Journal however argues that

… the cost benefit of dollar-cost averaging (DCA) is dubious, since one cannot predict the path of prices. But, the risk-reduction benefit of DCA is real: averaging over time is akin to buying less-than-perfectly correlated assets. This produces a lower volatility of the terminal value of the investment — that is, a more certain outcome.

The figure below shows the volatility reduction (according to the author) due to averaging:

April 13, 2006

Contango and backwardation

Filed under: Investing — indexfundfan @ 12:56 pm

Investors interested in commodity futures investments should at least have some understanding of the concept of contango and backwardation. This article from Smartmoney tries to explain this with reference to the newly listed crude oil ETF.

April 12, 2006

Jack Bogle’s portfolio

Filed under: Investing — indexfundfan @ 8:44 am

Sue Stevens talks to John (Jack) Bogle about his portfolio in a recent article on Morningstar.

Jack’s portfolio is approximately 60% fixed income, 40% equity. The funds are

VG Total stock market index
VG 500 index
VG Extended market index
VG Explorer
VG Windsor

Fixed income
VG Intermediate bond index
VG Inflation-protected securities
VG Limited-term tax-exempt

Balanced fund (legacy)
VG Wellington
VG Wellesley

A few final words from Jack: “In all, my portfolio could have well been designed by any serious Boglehead. Sure, I may be too conservative, but that’s who I am and always have been. But I know–I know!–that whatever returns the stock and bond markets are kind enough to deliver in the uncertain, risk-laden era ahead, I’ll earn my fair share. That’s good enough for me. So I shall ‘press on, regardless,’ and “stay the course!’. No surprises there.”

April 10, 2006

Crude oil ETF starts trading

Filed under: Finance — indexfundfan @ 2:15 pm

The first crude oil-based ETF (ticker USO) started trading today on the American Exchange. This ETF is designed to track the price of U.S. benchmark crude oil and would probably become a hot favorite among “black-gold bugs”.

The figure shows the trading action for this first day. A substantial 3.8 million shares were traded.

April 8, 2006

Disclosure of conflict of interest

Filed under: Finance — indexfundfan @ 7:34 pm

When the client is ill-informed about certain products, does disclosure of conflict of interest by the advisor help? This paper, in the Journal of Legal Studies, has an interesting viewpoint, arguing that disclosure can have perverse effects instead. I think this is because the disclosure lulls the clients into thinking that they are in good hands and reduce their guard as a result.

The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest

Abstract: Conflicts of interest can lead experts to give biased advice. While disclosure has been proposed as a potential solution to this, we show that disclosure can have perverse effects, and might even increase bias. Disclosure may increase bias because advisors feel morally licensed and strategically encouraged to exaggerate their advice even further from the truth. As for those receiving the advice, proper use of the disclosure depends on understanding how the conflict of interest biased the advice and how that advice impacted them. Because people lack this understanding, disclosure can fail to solve the problems created by conflicts of interest.

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