Certified Financial Planner (CFP)

A Certified Financial Planner is a financial advisor that has completed a very extensive curriculum in finance covering insurance, risk management, asset allocation, and much more. CFP’s are required to complete continuing education courses every few years to keep their skills and knowledge up to date and are required to pass a very difficult examination to earn their designation. This designation has become more and more popular in recent years and can be considered a minimum requirement for a quality financial advisor.

Certified Public Accountant (CPA)

A Certified Public Accounting is required to have some sort of degree in account and pass a rigorous 4 part examination that is extensive and difficult. Many are familiar with this designation as your tax preparer, if you have hired one, probably has a CPA. While accounting (duh) and tax issues are the major focus of accountants, they do have a background in other financial services.

Chartered Financial Analyst (CFA)

Chartered Financial Analysts are not required to have strict guidelines in what they have studied, but are required to pass three examinations in order to obtain their charter. From speaking to people in the industry, I have found that many of them regard the three CFA examinations as among the hardest exams to pass in the financial industry. The CFA exams cover a variety of topics including, but not limited to accounting, asset allocation, valuation, and ethics. This is a very popular designation for many asset managers and portfolio consultants.

Certified Investment Management Analyst (CIMA)
The CIMA designation is given by the Investment Management Consultants Association. This designation requires coursework and an examination in investment analysis and other related fields. Additionally, 3+ years experience in investment consulting is required to receive this designation.

Expense Ratios

In general, exchange traded funds have lower expense ratios than mutual funds. A large percentage of exchange traded funds passively track an index without significant manager intervention. This passive management contrasts the active management style of many mutual funds where more investment manager decisionmaking takes place. This added “expertise” tends to cause mutual funds to have higher expense ratios than ETF’s. It is important to note that there are plenty of mutual funds that also passively replicate indices and these funds tend to have lower expense ratios than their actively managed counterparts.

Mechanical Differences

Exchange traded funds behave just like regular stocks in terms of purchases and sales. In order to purchase an exchange traded fund, you can place an order for the shares on the market and your order is filled just like it would be for any other stock traded on an exchange. You will incur regular brokerage fees for purchasing or selling exchange traded funds.

Tax Considerations

Generally, ETFs are more tax-efficient than their mutual fund counterparts. The first reason is due to turnover. When securities are bought and sold, capital gains or losses are realized and these are passed on to investors. The more turnover their is in the securities of a fund or ETF, the more capital gains taxes there will be. Typically, ETFs have lower turnover ratios than mutual funds because of the difference between active and passive management (discussed in “Expense Ratio” area). However, it is important to note that some ETFs have high turnover rates and some mutual funds do have low turnover ratios so it is important to check your specific choices.

According to current tax law, qualified dividends are taxed preferentially. In order to qualify for preferential treatment of the dividends, a stock must have been held for at least 60 days and since ETF’s do not always fulfill this requirement, a portion of dividend payouts may indeed be taxed regularly and not in the tax-efficient manner that qualified dividends are taxed.

Cost Differences

Both mutual funds and ETFs have expense ratios. Mutual funds have brokerage commissions based on the brokerage you are using. Typically, these fees will be much higher than regular stock purchases unless the mutual fund is a no transaction fee mutual fund. ETFs do not have a special brokerage commission charged but they do incur the cost of a regular trade made at a brokerage. This fees will be paid when you purchase shares as well as when you sell them.

Additionally, ETF’s include an embedded cost of the spread. When you are purchasing a security, there is a price at which the market is offering the shares and there is a price as which the market is offering to buy shares. The difference between the two prices is called the bid/ask spread. Whenever you purchase an ETF, you are paying half the bid/ask spread up front when you make the purchase. For heavily traded ETFs this spread may only be a few cents but for thinly traded ETFs this spread may be far larger.

Cash Drag

Mutual funds are typically required to maintain cash on hand in order to immediately handle redemptions. This constant carrying of cash causes a slight bias of the mutual fund’s return (whether positive or negative) towards the cash rate. Since ETFs do not have to deal with “redemptions,” ETFs do not have a “cash drag.”

So, which do I choose?

A Financial Revolution does not take an outright position on which instrument is better. Ultimately, based on the information given and the specific ETFs and mutual funds themselves, you should be able to make an educated assessment about which investment vehicle is best for you…

Psychological factors including greed, denial, and fear cost investors bazillions of dollars every single year. This article will discuss some of the biggest errors that investors make. You are probably aware of these in some capacity but they will be stated here explicitly along with some reasons why they are actually mistakes as well as tips to prevent yourself from making these mistakes.

The Myth of the Inside Scoop

This is an error made by investors of many skill levels. When someone gives them a “hot stock tip,” they either immediately go and buy the stock or do a very quick and dirty check and then jump in head first. This is not the way it should be. Every investment decision you make should have sound reasoning behind it or else it is merely speculating.

There are some baseline questions that you should be able to answer before you even think about making an investment. First, why are you making the investment? What *is* the investment you are making? Can you describe how this investment will make you money? If there is an overarching economic reason for the investment and has that rationale already been priced into the investment? What are the factors that may cause the investment to move in the direction opposite of what your hot tip indicates?

Jumping on “tips” without knowing the rationale for the investment is bad for multiple reasons. First, if you don’t know what you are investing in, you may not know all of the risks involved in your investment. Are you investing in something with a lot of leverage? Are you investing in an inherently volatile security? Find out before you make that purchase. Second, if you don’t know exactly what you are investing in or what will drive the price of this investment, then how on earth will you know when to get out? What if the price doubles and you just sit there waiting for the triple when the market realizes the security is overvalued? Finally, if you don’t do your homework and find out what you’re investing in and why, you will never LEARN how to determine if something is a good investment or not.

Buying the Hot Stuff - Selling the Dogs

The conventional wisdom of buying low and selling high is actually very good advice but often people do the exact opposite in practice. By the time you hear about a hot asset class or mutual fund, how many other market participants do you think have heard about the same thing? If something is truly undervalued you can bet that more times than not the market will know about it and the price of security will likely reflect its true value. Of course, there are times when this is not true but the frequency of this is not very high.

The common mistake that investors make is to buy a hot investment when it has already reached or come close to its peak. In the same way, many investors sell investments after a big drop in its price because they are scared of further drops. Not to say that one shouldn’t buy solid investments and sell poor ones, but buying the hot investment near its peak and selling at a trough is not the way one should be investing.

When will an asset class peak? When will it reach its low? If I knew the answers to these questions I would be getting paid a lot of money by an asset management company. Timing the market is difficult… Instead, look to the future and do your analysis from TODAY. Starting TODAY, based on your analysis where will the investment go? If you think an investment is a winner at today’s price, buy it today. If you think an asset is overvalued at today’s price, sell it today.

Know When to Hold Em - Know When to Fold Em - Know When to Double Down

This may be the single most pervasive mistake made by investors. To understand this mistake, one needs to understand the concept of a sunk cost. A sunk cost is a cost that has been incurred and that cannot reasonably be recovered. Sunk costs should not influence decisionmaking processes but they often do. Examples:

• A (bad) poker player knows with a high degree of certainty that s/he will lose a hand but since s/he has invested so much money into the pot, they continue to play.
• You buy a movie ticket. You decide later that you don’t want to go to the movie. You cannot sell the ticket. You decide that you have to go to the movie otherwise it would be “wasting” the ticket (which has already been paid for).

I will post more on sunk costs in depth later but for now, just understand the basic concept. So how does this relate to investing mistakes? Good question. Too often, investors will purchase an investment only to have it consistently lose value over a period of time. Since they have already invested their original principle in the investment, they refuse to sell off the losing investment because they don’t want to think that they have made the investment for no reason. Why? I have no idea.

If at any point you would NOT want to hold the investment going forward, SELL IT.

In the same way, when an investment has made an investor lots of money they grow attached to the investments and grow less and less likely to sell them. BAD. Just because an investment made you money in the past does not mean it will do so in the future.

If at any point you would NOT want to hold the investment going forward, SELL IT.

So, What Do I Do William?

Easy. Don’t make these mistakes.

1. Do Your Homework - Make sure you know why you are making an investment. That is the only way to know when you should buy more, hold, or get the heck out.

2. Set Limits - When you purchase an investment, set a target price that you think the investment is worth. When it reaches that point, sell. Don’t let yourself be convinced that you can wait “just a little longer.” Conversely, set a loss limit. If your investment loses a certain amount of its value, promise yourself that you will sell it. STICK TO YOUR LIMITS.

3. Constantly Re-Evaluate - Your limits do not have to be (and should not) be static. If the fundamentals of an underlying investment change (strong earnings potential on a stock increases, etc) then revise your target prices. Remember that a revision should not come because you feel like it. You must be able to JUSTIFY a change in target price or loss limit.

I wanted to apologize for not posting for such a long period of time. Life circumstances have prevented me from being the prolific blogger that you all have come to know and love (I hope).

Unfortinately, I no longer have the time to post a few times/week, but I think that AFR can still help many people with postings much less often. I intend to keep publishing, but on a much less frequent basis. I am going to aim to make 3-6 in depth posts every month as opposed to 2-3 moderately in depth posts/week.

Any comments/feedback/questions/suggestions would be much appreciated. You know how to reach me!

-William Wallets

Many people are currently filing their tax returns or have already done so. If you are involved in investing, you will know that Uncle Sam can hit you pretty hard for your capital gains. You may also know that you’re allowed to use your capital losses to offset your capital gains. You can even claim up to $3000 of capital losses to deduct from your taxable income.

Now, what people used to do was hold shares of a security and then sell it for a loss when it went down. This way they could deduct the capital loss on their taxes. The next thing they did was immediately buy back the same amount of shares and hold onto them (hopefully waiting for a rebound). If they held them past the end of the tax year, they may have made all their money back, but since the gains were unrealized (they didn’t sell the stock again) it was not counted as a capital gain. The IRS quickly put a stop to these shenanigans by implementing the wash sale rule. This rule states that you may not deduct a capital loss for a security if you purchase a substantially similar security within 30 days of the original sale. This stinks.

Enter ETF’s. ETF’s allow you to sell off positions for a loss and then purchase another ETF that is not “substantially similar” to allow yourself to recapture gains if you think they will come. This is an excellent strategy, as long as you do not abuse it. The IRS has yet to specifically define exactly what “substantially similar” means, so many people take it to mean different things. You may purchase an ETF from one issuer that tracks the Pharmaceutical sector and then sell it off. If you buy another ETF that tracks the exact same index AND is issued by the same issuer, you may not be able to duck the wash sale rule. However, if you select a different issuer and use a SLIGHTLY different index, you may be able to
get around the wash sale rule.

How does that work? If you sell your original ETF purchase for a loss, this allows you to claim a capital loss without actually cashing out of your position (because you are buying an ETF that is highly correlated with the one you sold, but is not “substantially similar”). You’ll want to make sure the securities you are selling and buying do not constitute “substantially similar” securities, and this may be difficult, but in general if you buy from a different issuer and have a slightly different market, you’re safe. Good luck, and don’t get too carried away.

Welcome to the 62nd Carnival of Investing, the first Carnival ever hosted by A Financial Revolution. You are about to join us for an exciting experience during which we will present the 5 Oscars of Investing to the bests posts of the week. I am your host, William Wallets. The staff and I here at A Financial Revolution are looking to put together an intensive blog that teaches the younger generation about personal finance and investing with examples and in depth posts about various topics. Please take the time to look around, I am sure you’ll find something that you’ll like.

Without further ado, let’s check out the Oscars Edition of the Carnival of Investing. This week, we received 16 submissions in 5 categories. The 5 awards we will be presenting this week are: Best Personal Finance Film, Best Directing of Investment Advice, Best Documentary (Most Informative), Best Foreign Film (Sector Specific), and Best Special Effects (Technical Explanation). First, I’ll present the nominees and then at the end of the post, I’ll announce the winners of the Oscars!

Best Personal Finance Film

• Bill presents Saving On Taxes posted at Ask Uncle Bill. Bill highlights some reasons why you should do your taxes yourself!

• Jim presents Can I Deduct My SEP-IRA Contributions? posted at Blueprint for Financial Prosperity. Jim discusses how you can go about deducting your SEP-IRA Contributions.

• Ybother presents Top 10 Money Tips For Almost Everyone posted at TodaysTen.com: Daily Top Ten List to jumpstart your knowledge. Some common tips to keep in control of your money.

Best Directing of Investing Advice

• Gualberto presents Lessons From Traders posted at Gualberto Diaz. Gualberto talks about 2 lessons that he learned from a trader.

• FMF presents $10k Challenge: Maximize Your Investments posted at Free Money Finance. A 1% difference in return makes a huge difference!

• Rich presents Before the Crash: Buying Stocks With Debt posted at Queercents. Rich shows his rage about buying stocks on margin.

• Ben presents American Century Ultra - Stupid Investment of the Week posted at Money Smart Life. Ben shows us why TWUCX is a silly investment.

Best Documentary (Most Informative)

• Silicon Valley Blogger presents 20 Typical Reasons To Sell Your Stock Or Mutual Fund posted at The Digerati Life. You know you’ve made the excuses. Now see why you shouldn’t.

• Andrea Dickson presents The ugly side of penny stock scams posted at Wisebread Financial. Andrea highlights some issues with penny stocks and talks about popular penny stock scams.

• Tom Hanna presents Financial Roadmap February 26 March 2, 2007 posted at Financial Options. Tom tells us what’s coming up this week in the economics world.

• jim presents Don’t Invest In Your Employer posted at My Retirement Blog. Jim gives us some great reasons why you should not invest in your employer in your 401k plan or otherwise.

Best Foreign Film (Sector Specific)

• Craig Higdon presents Effective Real Estate Strategies For Slow Markets posted at Investment Property Insider. Some ideas to get your real estate sold fast, in a cooling market.

• Jacqueline Lloyd presents Gold Production Overview Feb 07 Part 1 posted at Precious Metal Investment. Jacqueline gives us some information about gold supply and demand.

• Michael K. Dawson presents Time to Buy Subprime Lenders - You Gotta be Kidding! posted at Breaking the Shackles of the 9 to 5 | by The Time & Money Group. Michael explains why it’s be silly to invest in subprime lenders.

Best Special Effects (Technical Explanation)

• Ironman presents Approximating Social Security’s Rate of Return posted at Political Calculations. Check it out… Does your rate of return look any good?

• FIRE Finance presents Investing - Asset Allocation - Part 4 posted at FIRE Finance. Great primer on asset allocation!

The Oscar for Best Personal Finance Film goes to Top 10 Money Tips For Almost Everyone!

The Oscar for Best Directing of Investing Advice goes to Before the Crash: Buying Stocks With Debt!

The Oscar for Best Documentary (Most Informative) goes to 20 Typical Reasons To Sell Your Stock Or Mutual Fund!

The Oscar for Best Foreign Film (Sector Specific) goes to Effective Real Estate Strategies For Slow Markets!

The Oscar for Best Special Effects (Technical Explanation) goes to TWO Nominees, in an extremely close race. Approximating Social Security’s Rate of Return and Investing - Asset Allocation - Part 4!!

Welcome New Visitors - An introduction to A Financial Revolution. Why we’re here and what we’re setting out to do.

The Staff - The staff of A Financial Revolution. Right now it’s just me (William Wallets) and Benjamin Frankbling. We may add on some board members soon, stay tuned.

The Archives - A Financial Revolution’s Archives. Here you’ll find a list of every post that has ever appeared on AFR. Search the archives, I am sure you’ll find something that interests you.

Multi-Part Series - A listing of the multi-part series posts on AFR. The popular series include Introduction to Investments and Uncle Sam’s Revenge! Have any suggestions for series? Let us know!

Product Reviews - Various financial products and services and AFR’s take on each of the products. We here at AFR have high expectations and give our reviews with this high expectations in mind.

William Wallets’ Library - Suggestions for financial reading from William Wallets. Reviews and overviews will be added over the course of the coming weeks.

Subscribe to AFR - Get AFR delivered daily to your feed-reader of choice!

Where Do I Get The Data?

There are many places from which you can download financial data. Some sources are free while others charge money and some are simple to use while others are quite complicated. For the purposes of this tutorial, I will be using a free and simple source: Yahoo! Finance.

So How Do I Start?

The first thing you will want to do is select some stock tickers that you’d like to research. In this example, I’ll use a mutual fund with ticker RYVPX (I do not advocate or discourage the ownership of this fund, yet). RYVPX is Royce Value Plus Service mutual fund.

Step 1: First, you’ll want to proceed to yahoo finance at http://finance.yahoo.com. Then, at the top left corner of the screen, you’ll want to enter the ticker symbol you want to look up. In our example, it is RYVPX. When you’re done, hit the get quotes button!

Step 2: Now, you should be looking at a Summary of the mutual fund RYVPX that looks something like this:

Click on “Historical Prices” on the left side of the screen to proceed. In the image above, you can see it highlighted inside the red box.

Step 3: Now that we’re in the historical prices area, we need to decide what sort of data we want. Let’s say that we want to analyze RYVPX over the last 3 years and we want to be very, very specific. In the start date, we’ll enter Feb 16, 2004 and for the end date we’ll enter Feb 16, 2007 to give us the last 3 years of data, as of last Friday. Now, we’re not scared of lots of data, so let’s use daily returns. When you’re done, press “Get Prices”.

Step 4: So we are now staring at the data we want. Now what? Let’s export it into Excel. This is surprisingly easy. Just scroll down to the bottom of the page in your browser and look for this:

You should find it immediately under the Yahoo! data table and once you click it, you’ll be able to download and open the Excel File. Once the file is opened in Excel, you can move to step 5.

Step 5: You’ll be looking at the Data in Excel and in order to do your analysis, you’ll do various things with the data and manipulate it in all sorts of ways. That will all be covered in the upcoming posts, but for now, let’s calculate the % change in price from one day to the next (since running analysis on price is less common than running analysis on % change).

There should be data in columns A-G, as shown below. The highlighted column (H) is where you will want to input the calculations for percent change.

Step 6: Finally, enter the formula into cell H2, as shown below. All you want to do is put the previous close in the denominator and the current day’s closing price in the numerator and then subtract 1 from that entire quantity. Drag that formula down and voila, you have the percent change from day to day! Note: The last day will not have a % change, this is ok. Make sure you delete the last % change, as it will show up at 1.00, you don’t want this!

Now what?

Stay tuned over the next few weeks for various analyses you can do and metrics that you can calculate using this base data set. Remember that your analysis is not limited to RYVPX. Data for any ticker that you’re interested in (that Yahoo! has data for) can be downloaded and used to run different analyses.

You have the Yahoo! provided data and daily percentage changes in stock price. Feel free to explore and run any sort of analysis that you like and stay tune for some specific suggestions. Good luck!