Average Rate of Return

I took the opportunity this weekend to buy the new Quicken 2006.  I've been searching for a clear, concise definition of Average Rate of Return (IRR).  It's a very frequent measure of performance, but the formula is a bit involved.  Below is Quicken's definition.  It's pretty good...

Lance Armstrong Foundation

Many of you know that I am from Austin, but I most certainly am NOT a Lance Armstrong fan.  As a young teen, I competed in many individual events ( mostly running and cycling ).  Armstrong and myself are fairly close in age and we often competed in many of the same events in and around Austin.  Even back then, he had a reputation as a competitor and certainly did win most of these events for his age group.  But, the guy is a real snake ( don't even get me started on what he did to his wife and kids in order to be with Sheryl Crow ).

Anyway, aside from the fact that he is a real loser of a person, I would like to shed some light on his glorious "Live Strong" campaign and his efforts to parlay his "humanitarian" efforts into a future political career.

Fortunately, in this country, our government attempts to hold organizations financially accountable.  Annual financial reports are required by all non-profit organizations and must be made public.  Fortunately, for organizations, most people are put to sleep when reading such excruciatingly boring material.  Well, I'm one of the weird ones.  I actually find it quite interesting and revealing when reading these documents.  If you look hard enough, you will find the true motives of many of these Hollywood-esque "saints".

The primary figure that everyone should consider when looking at these Financial Reports is how much is spent on administration costs.

Well, in the case of the esteemed "Lance Armstrong Foundation", a solid 54% goes toward administrative costs ( see page 23 in the document ).  That's a lot of big cushy executive butts sitting in big leather chairs that should be going toward cancer research.  The foundation has spent almost $3,000,000 alone on wrist bands to hand out to support Armstrong's future political aspirations.

These so-called "caring" organizations do more to line their own pockets than to support the cause they use to promote their own agendas.  If you have not noticed, this is one of my very big pet peeves.

Car Donations

Dayna and I are having a bit of difficulty selling her Mustang.  It's a great car with very low mileage.  We've had it listed in Auto Trader for several weeks and have lowered the price once.  With this challenge, I decided to investigate the tax code for donating a car to charity.  I was curious to know how much we may save on taxes if we decided to give the car to a good cause.

This is what I found...

A Donor's Guide to Car Donations

I plugged the deduction into last year's tax return to estimate how much we may save in taxes in 2005.  If I estimate the fair market value of the car to be $7000, then we'd save about $2000 on our 2005 tax return.  Not sure it's worth it to donate.  We may just wait it out and keep lowering the price until we get a buyer.

Maximum 401K Contribution Increase

In 2006, the maximum 401K contribution will increase to $15,000 from $14,000.  The question I must answer this next year is "am I really benefiting from the maximum pre-tax contribution?".  With the baby coming next year, we've decided that Dayna will stay at home to be with the baby.  With one income, a small annual 401K contribution and our mortgage interest and property tax deductions, our income will put us in the 15% tax bracket, as opposed to our current 25% marginal tax rate.

With that being said, it is very likely that our current tax rate of 15% will be the same rate we encounter during our retirement years.  So, the question is, do we pay the tax now or during retirement?  Obviously, I want to continue to make the minimum 401K contribution that allows us to receive our 2% employer match.  That is a no brainer, but do I want more flexibility with the investable cash I have on hand?

In other words, do I want to pump the money into a 401K plan where it's unreachable until 59.5 years of age?  Or, do I want the ability to invest the money in an after-tax investment now such that I forego paying taxes on the money during retirement?  Another thing to consider is that the current tax on capital gains is also 15%.  So, any money I make in my after-tax investments will also only be taxed at 15%.  There is uncertainty as to whether or not the capital gains tax rate will remain at 15% in the future.

Once again, these are all questions that require addressing during the year-end financial checkup.

Nothing to say today.

Paris Riots

Good article on roots of Paris riots.  You know, I try not to be a controversial person, but I have found myself sympathizing somewhat with the plight of these young men.  It's events like these that awaken the world to the constant attempt by power hungry people to suppress the less fortunate.  Sometimes it takes harsh actions to bring attention to the "ugly" things of this world.  Left unchecked, human beings will make every attempt to force their superiority on the more vulnerable of our societies.

How do you think the American male population of 25 year olds would respond to 23% unemployment within their age bracket?  I'm sure their response would be similar if they did not have the luxury of loafing on their parent's sofa playing video games and eating all the food in the fridge they didn't pay for.

Housing Bubble

The housing market continues its upward slope.  In many parts of the country, homes have appreciated over 50% in the last five years.  It's only now that economists are predicting only about a 4% increase next year.  I think the Fed is also doing some things ( i.e. slowly increasing interest rates ) to help minimize the possibility of a housing bubble.  Hopefully, we won't hear a pop, but only a gradual return to more realistic growth figures.  A housing bubble burst would have a significant impact on the entire country, not just certain regions.  

What $300,000 will buy today
What $650,000 will buy today

The Wealth Test

I heard a story on NPR a couple days about a couple guys in Estonia who hacked into the economics news organization Business Wire.  Apparantly, these clever gents were able to access the economic news headlines the day before the information was to be made public.  They were then able to make keys trades based on the information during after hours trading.  It turns out these guys also worked for one of the largest brokerage houses in Estonia.  This is one of the more subtle, yet creative forms of hacking I've heard about.

On a different note, I read today about something called the "Wealth Test".  I don't like to read any real meaning into these things since they are simply subjective barometers.  These things can often discourage people or give people a false sense of security.  So, take this with a grain of salt.  Apparantly, the Wealth Test is supposed to provide you with a general idea as to what your Net Worth should be at a certain age.

The Wealth Test is...Your age multiplied by your current salary divided by ten.  So, a 35 year old making $50,000/year should (in theory) have a Net Worth of $175,000.  Chances are pretty good you won't pass the Wealth Test ( I certainly didn't ), but if you did then that is awesome and you're well on your way to meeting all your financial goals.

Vegas

Hehehe...I forgot about these pictures from Vegas last June.  Dayna reminded me we had these and I got a kick out of looking at them again.

This is Dayna's dad, brother Darrell and Christy (Darrell's girlfriend) in the Ghost Bar at the top of the Palms hotel.  A great time was had by all.

Here I am trying to look cool in front of Doug's new Corvette.  Doug took me for a little ride and showed me how many ponies this sweet ride has.  This is just one of his stable of impressive vehicles he has acquired over the years.  I'm still waiting for him to surprise me with a 1970 Pontiac GTO as a Christmas gift.

    

Creative ways to determine a return...

You know, regardless of whether or not the equities market is doing well or going bad, people seem to find the most creative ways to determine their "return".  We all hear the ridiculous claims made by people regarding their uncanny ability to always have a higher return than the average guy off the street.  Calculating return comes in all shapes and colors.  People typically gravitate to whatever makes them look best ( and we all know very well that you can make the numbers mean just about anything your little heart wants ).

However, being the financially conservative person I am ( while being socially moderate/liberal ), I tend to lean toward the more realistic determination of return.  I like to look at two things...

First, simply return.  Just take the current market value for all your investments and divide it by total dollars invested ( if your investment portfolio is current $115,000, but you have only invested $100,000, then your return is (115,000/100,000)-1 = .15 or 15% ).  This is obviously oversimplified and does not take into account a lot of factors, but provides general idea of how you are doing.

Another thing I like to do is ( and this one usually makes me feel real good ) is to factor out the 401K employER contributions, as well as, dividends and increase in market share.  In other words...

Say you only outlayed $50,000 of your own money, but you received $5000 match from employer, your market value increased by $10,000 and you received $2,000 in dividends.  So, your current portfolio value is $67,000 (50000+5000+10000+2000).  In this case, I would say my real return is...(67000/50000)-1 = 34%, as opposed to...(57000/50000)-1 = 14%.  My reasoning here is that the employer match money and the dividends gained did not come out of my pocket, therefore, should not be part of your "total dollars invested".  The $5000 from your employer and the $2000 from dividends are part of your current total market value, not the amount invested.

Like I said in the beginning, you can slice and dice these numbers until you're blue in the face.  My personal goal in calculating these numbers is simply to see how much more money I have beyond the actual amount invested.

Since my divorce in 2000 ( which certainly did not help my financial situation ), I've been able to achieve a 15.3% return and a real return ( based on my definition above ) of 35.24% since the year 2000 consisting of the following mutual funds...

FDEGX - 43.6%

SGROX - 42.9%

FDIVX - 23.7%

FLPSX - 16.9%

FFFDX - 12.9%

FMCSX - 5.74%

FSPTX - 3.24%

VIGRX - 12.4%

VPCCX - 7.07%

VGSIX - 33.9%

VFINX - 18.4%

The President's Advisory Panel on Federal Tax Reform

Interesting new developments today from The President's Advisory Panel on Federal Tax Reform.  The most intriquing are the changes proposed for  mortgage interest.  The documentation states that Americans currently in a mortgage will not be affected.  However, for those in a high tax bracket and not currently in a mortgage, the affect on them could be significant.  To determine how you might be affected, identify which  tax bracket you are in.

I would tend to agree that the general thinking of most folks today is to stretch themselves to buy as much house as possible.  This allows people to have a maximum mortgage interest deduction each year.  However, under the proposed tax reform changes, mortgage interest deductions will essentially be capped.  Here's an example from the CNN website...

Take a new homeowner who pays $18,000 a year in interest on a $300,000 loan and itemizes his deductions on his federal return.

Under the current system, if he were in the 25 percent tax bracket, he'd reduce his taxable income by $18,000, for tax savings of $4,500 (18,000 x 0.25).

Under the panel's proposal, he'd only save $2,700 (18,000 x 0.15)

That assumes the $300,000 loan doesn't exceed the mortgage-interest cap.

But if he were in the 15 percent tax bracket, he'd see no difference under either scenario.

So, basically, if you are in a tax bracket higher than 15%, the tax savings through your mortgage interest is reduced.

There are a lot of other high-profile changes proposed in the plan.  I would encourage anyone to read the document.