A Word of Advice on Chinese Mutual Funds/ETFs: Sell Some.

I generally avoid investing advice on this blog since I get paid to worry about those kind of decisions full time and it would be a conflict of interest with my employer to discuss individual equities here. However, I am going to make some comments on China today. What appears to be going on in their local A Share market is a classic market bubble. There are many Chinese investing for the first time and they do not know the risks associated with it, hence they are bidding prices ever higher. As far as they are concerned stock prices only go up. Also, there is no short selling in the Chinese A Share market so it seems like it is easier for inefficiency to creep into the system. Sure China is one of the fastest growing economies in the world, but that doesn't mean it should carry a P/E of greater than 70 as a market.

The hard thing about bubbles is predicting their end. I don't think anyone is particularly good at doing this. However, what you can do is choose not to participate once things get too frothy. Indeed if you have some China mutual funds (US investors can't own the stocks directly) or ETFs that are hold a significant amount of A shares it might be time to cash out some of those gains. I'd recommend selling down enough so that after taxes you have recouped all of your original investment. If you want to speculate a little longer with some of your remaining gains, that's your prerogative because calling a bubble's end is hard to do and they always seem to go on a little longer than anyone expects. While things economically are looking great for China at least through the Olympics in summer 2008, how long their market can continue to sprint depends on how long people are willing to pay any price for stocks. Rest assured that at some point there will be a big pullback (we indeed may be starting to see it now) and it will spook people and remind them that risk is associated with reward and then the Chinese market will come down just like technology shares did in 2000 and more recently like home building shares have done over the last couple of years. Those that have protected their principal will be glad and those who continued to speculate (or worse, put a boatload more money in because their returns had been so good) as the bubble intensified will lose a big part of their investment.

I'm not alone in this sentiment. Even Warren Buffett said people should be cautious with China.

Review of Mint On-line Personal Finance Tool: The Vault is About Half Full.

Mint is a great concept. Create an account. Enter a few usernames and passwords. See your whole financial world from one control panel. While getting started is easy and the concept is great, the product could definitely use some refinement.

First, let me focus on the positives:

1. The product is easy top use, it took me about 10 minutes to get up and running.
2. They offer support for a wide range of financial institutions. I was able to link accounts from Wells Fargo, Discover, AmEx, Chase, Countrywide, and Emigrant Direct with relative ease.
3. I like that they make recommendations to save you money.
4. Finally, diving up your spending categories so you can see how much you spend in each category is a great tool that I typically have to wait to see once a year with my credit card statement.
   

For anyone who doesn't check all of their accounts regularly, Mint is a good tool to get started and I would recommend trying it. Even if one does check his accounts regularly he might like to try Mint, though it might not be quite as in depth as one might like. For a 10 minute investment, it is at least worth checking out for anyone if you ask me.

Now let me focus on some of the negatives:

1. Where are the brokerage accounts? I couldn't link my Wells Fargo or Fidelity accounts. Ideally Mint should expand to support brokerage/retirement accounts to so I can monitor my whole personal finance life/net worth from one window.
2. Some of the money saving suggestions don't make sense. For instance, Mint said I could save $1200 per year by switching to Verizon FiOS. Unfortunately, despite having my zip code, Mint failed to realize that FiOS isn't available where I live. All this recommendation ended up doing was waste my time and make me jealous of all those people who have Fios.
3. Finally, I wish their categorization algorithm was better. For instance, in my checking account I have regular electronic payments to Xcel, a rather large publicly traded utility. There is no reason Mint shouldn't have a list of large utilities and automatically categorize regular checking activity as a Utility expense instead of requiring the user to categorize it manually. Both the frequency and the name of the company are dead giveaways. The same goes for Mountain Parks Electric, or Denver Water. The algorithm that categorizes spending should be smart enough to categorize these as utilities instead of not categorized.

So the bottom-line here is that Mint is a great alpha stage on-line personal finance tool. It has a long way to go before it replaces your budget or Microsoft Money or Quicken. I hope they eventually get there, because what they have is a great start. Now they just need to focus on expanding the functionality and improving some of the algorithms driving the savings and categorization suggestions.

Don't Be a Finance Pig: Be Sure Your Spouse is Financially Literate Too!

The quest for life insurance once again has the Armchair Fiduciary thinking about his own mortality. Perhaps the most important thing you can do for your spouse besides leaving him/her on stable financial footing is leaving him/her the knowledge to stay that way. If you are like the Armchair Fiduciary there is a clear division of labor in your house between finance and many various other tasks. While your significant other may not do the financial houskeeping very often s/he does have to know how. S/he should be aware of all financial accounts, insurance, bills, and debts you have and how to access and or pay them. Furthermore, s/he should have some basic understanding of the time value of money, the power of compound interest, and common sense rules like: "If it sounds too good to be true; it probably is." With these basic elements and your well laid financial plans, your spouse should be fine even if you face an untimely death. So take some time this weekend and bring your better half up to speed on some basic personal finance.

Tired of Paper Annual Reports and Proxies? Go Online.

If you are like me, you are tired of having your mailbox filled up during the beginning of the year with proxies and very thick annual reports. Save your mailbox and save the companies you invest in some money by signing up for your proxies online. To do this, first call your broker and see if they can do it for you. If they can't then go to the websites of the companies you own directly and sign up for online proxy voting. Here are links to the sign-up (or investor relations contact if I couldn't find an electronic delivery sign-up) page for the twenty most widely held U.S. stocks just to save you some time:

ALU
BAC
C
CMCSA
CSCO
CVX
DIS
GE
IAR
INTC
IBM
JPM
JNJ
MSFT
PFE
PG
T
TWX
VZ
XOM

Should I Pay Down My House Early If I Can?

Assume you just inherited a bundle of capital from your long lost uncle and you could pay off your house today; should you do it? I don't think there is really a right answer to this question, but what I will do here is walk you through how I think about it.

First, what is the current rate you are paying on your mortgage ? Take this rate and then multiply by 1-your tax rate. This should be your after tax cost of debt. So let's say you have a fixed mortgage at 6%. If you are in the 25% tax bracket then your after tax cost of debt should be 6% * (1-25%) or 4.5%. You need to have a safe investment that has a better after tax return than to justify not paying off your house.

Next, consider your investment options. I would look only at nearly risk free investments. For instance 10 year treasury bonds trade at 4.58%. Multiply this by (1-25%) to find your after tax return which would be 3.43%. Based on this analysis you are better off paying your house off than putting money into 10-year treasuries because you get an after-tax risk free return of 4.5% by doing it. Likewise, it looks like most CDs don't have enough of a yield today to suggest that you shouldn't pay off your house.

But what about putting the money in the stock market? After all doesn't it return 8% or so on average? In general the answer is yes, but the reason that you get an 8% return instead of 4.5% from treasury bonds is that there is more risk associated with this decision. In general if you were to just invest the money and pay off the house later you should be better off in the long run. However as a conservative Armchair Fiduciary, I feel like doing this would be taking too much risk. You can always pay off the house and then take what you would have been paying in monthly payments on the mortgage and invest it in the market. This may lead to somewhat less long-term wealth on average, but it is the much less risky option in my opinion. Better safe then sorry in my opinion. Got a better idea? Leave a comment.

Scalable Professions: Big rewards for the same amount of work

I recently read an interesting book called The Black Swan by Nassim Nicholas Taleb. Most of the book centers around the concept of fat tails. It is a bit of a dive into philosophy as well, which in my humble opinion made it tedious in parts. Overall though, it is a great read if you have some spare time. One part that was particularly interesting was a discussion about "scalable professions." Scalable professions are the ones that have big upside for the same amount of work no matter how many zeros start to follow the first $.

As I was browsing the Forbes 400 this weekend John Arnold struck me as the quintessential example of someone with a scalable career. At 33, he was the youngest member of the Forbes 400 this year. He has parlayed some good success in his Enron days and $8 million that came with it into a rather large fortune of $1.5 bil; greater than the GDP of Sierra Leone (population ~6 mil). John is an energy trader and his profession is highly scalable since it would require roughly the same amount of work to run a $100k portfolio as he would to run his $3 billion Centaurus Energy portfolio.

Non-scalable professions include dentists, doctors, and pretty much any profession where the rewards are directly tied to the time you put in. Taleb points out that it is the existence of scalable professions that has led to such a lopsided distribution of wealth in the world. It really does make one wonder. What happens when no one wants to be a doctor, or a lawyer, or a teacher because they could use their time and effort to get into more scalable careers? I don't have any profound answers as to what should be done about wealth distribution worldwide (though Jeffrey Sachs does) or how we keep people motivated to enter necessary but non-scalable professions, but if you do feel free to leave them in the comments. If you have some time read The Black Swan and spend a few minutes thinking about it.

Brain Candy for Economics/Finance Geeks: The Economist

One of my favorite publications is the Economist. I think it is better than the New Yorker, New York Times, Wall Street Journal, or Financial Times. While it isn't cheap at about $100 per year if you get a good subscription deal, I do think it is money well spent.

The top five reasons I like the Economist are:

1. Global coverage. Unlike most US-based publications the Economist reminds me every weekend that we live in a big world with many countries and points of view. George W. Bush would have been well served if someone forced him to read the Economist each week since he has been in office. Or, at the very least, he might not make so many mistakes when giving speeches.
2. A focus on the big picture instead of the day to day (a benefit of being a weekly publication).
3. A balanced mix of poltical and business coverage. I generally hate politics, but these guys usually put an interesting financial spin on what is going on.
4. The Science & Technology and Books & Arts sections which help keep me from being a total economics/finance dullard.
5. The Big Mac Index. Gotta know how much it costs to kill yourself in nearly 50 countries.

So if you are intrigued pop over to their subscription page and sign up for the free 6 week trial they are running right now. You won't be sorry. (Note: Armchair Fiduciary gets no personal financial benefit from you signing up for the 6 week trial; this link is merely provided as a service to my readers.)