Finance

Vacation is over, bring on 2009! Time for a quick look back. Instead of accounting for all my various cashflows, I decided to first review how the individual mutual funds in my investment portfolio did during 2008. (Data taken from Morningstar.) Here are the numbers along with the breakdown by asset class:

  Holding % Asset Class 2008 Total Return 34% Broad US Stock Market -37% VTSMX - Vanguard Total Stock Market Index Fund 8.9% US Small-Cap Value -32.1% VISVX - Vanguard Small Cap Value Index Fund 8.5% Real Estate (REITs) -37.1% VGSIX - Vanguard REIT Index Fund 25.5% Broad International Developed -41.4% FSIIX - Fidelity Spartan International Index Fund* 8.5% International Emerging Markets -52.8% VEIEX - Vanguard Emerging Markets Stock Index Fund 3.8% Bonds - Short-Term +6.7% VFISX - Vanguard Short-Term Treasury Fund 11.3% Bonds - Inflation-Indexed -2.9% VIPSX - Vanguard Inflation-Protected Securities Fund Total Portfolio Weighted Return -33.2%  

Just about every asset class related to equities was in the toilet, especially emerging markets. The bonds held their ground overall. I had a relatively aggressive mix of 85% stocks and 15% bonds, with an overall weighted return of -33.2%.

As a reference, the total return of the Vanguard S&P 500 Index Fund (VFINX) was -37% while the Vanguard Total Bond Market Index Fund (VBMFX) was up 5.1%. The Vanguard Target Retirement 2045 Fund (what I used to own) had a 34.6% drop.

Did I hold too much in stocks? I don’t think so. I’m only 30 years old right now, and if I’m lucky I’ll have potentially another 55 years in the market.

On the other hand, I do think that some retirees and near-retirees held too much stocks. “You need at least 60% in stocks at all time?” *Cringe*. Take the Vanguard Target Retirement Income Fund (VTINX), which is an all-in-one fund with an “asset allocation strategy designed for investors currently in retirement.” For 2008 it dropped only 10.9% with an asset allocation of 5% cash, 30% stocks, and 65% bonds. This is probably more appropriate for people in the withdrawal stage - something to sleep well with!

So, I am stuck trying to resolve two somewhat conflicting feelings. The volatility didn’t really worry me that much this year, and am happy to take some risk right now. But I also know that I don’t want to take risk later. I may need to shift my asset allocation towards more bonds faster than 1% per year, especially if I am going to retire early.

Coeur d'Alene Mines Corporation (Public, NYSE:CDE)

Technical Analysis: We certainly have a bad track record with gold and silver charts, but we are bullish again! CDE has found a bottom with support (D) around $0.40. The devastating downtrend (A) has been broken by the sideways movement between support (D) and resistance (C) at $1.00. A break of resistance (C) is a buy signal with an expectation of a move to resistance (B) at $2.00.

Summary: Hold.

Few more quick reminders:

• The WTDirect $250 Winter Bonus offer ends 12/31.
• The MyCorporation Free Corporation/LLC Filing Service offer ends 12/31 has been extended to January 2009.
• The California 529 $50 Gift Card offer ends 12/31.

Always the procrastinator, I finally sold some shares of my punished mutual funds and ETFs in order to do some tax-loss harvesting. There are only two days left in 2008!

What is Tax-Loss Harvesting?
The main idea of this tactic is to legally pay less taxes by taking advantage of the fact that losses are taxed at potentially different percentages than gains are.

The IRS lets you claim a deduction for investment losses against your ordinary income, up to $3,000 each year. (If your net capital loss is more than this limit, you can carry the loss forward to later years.) For example, if you lose $3,000 on an investment, and you realize that capital loss by selling the stock or fund that incurred the loss without realizing any capital gains in the same year, you can claim a $3,000 deduction on your income tax return. This means you won’t have to pay income tax of up to 35% on $3,000 of your income that you would’ve had to pay otherwise.

On the other hand, a realized capital gain of $3,000 which you held for at least a year would only be taxed at a maximum of 15%. Therefore, although losses are still undesirable, if we plan on holding the investment for at least another year, we should “harvest” all the losses we can get.

Expanded Example

Taken and edited slightly from a older post:

Scenario #1: You are in the 28% tax bracket. Say this year you bought $10,000 of IVV, an ETF that tracks the S&P 500. In 2006 it drops to $9,000, and in 2007 it rebounds to $11,000 and you sell. You’d have a long-term gain of $1,000 from your original $10k, so you pay 15% in taxes ($150), and end up with $10,850 in your pocket. Net gain of $850.

Scenario #2: Same 28% tax bracket, same start period. You buy $10,000 of IVV, and in a year (2006) you sell at $9,000, and the very same day you buy IWB, an ETF that tracks the Russell 1000 Index, but is very similar (but not identical) to the S&P 500. Since it tracks very closely, your $9,000 of IWB in 2006 will also rise back to $11,000 in 2007. After a year and a day, you sell your IWB for $11,000.

Now in 2006, you had a capital loss of $1,000 from your IVV. So you deduct $1,000 from your ordinary income taxed at 28% and save $280 in taxes. That’s $280 in your pocket. Then, in 2007 you realized a long term capital gain of $2,000. You pay your 15% tax ($300) and you end up with $11,000 - $300 = $10,700. Add in your $280 from the last year, and you end up with $10,980.

This time, even though you had basically the same level of market risk, you obtained a net gain of $980.

Substantially Identical?
Note that you must do this with similar, but not “substantially identical” investments. For example, you can’t buy IVV back again right after selling it and try this. That would be called a ‘wash sale‘ by the IRS.

The $100 bonus promotion from the Discover Business Card is going away on December 31st. You can earn a $100 Cashback Bonus when you make $1000 in purchases within 3 months after your account is opened.

In addition, there is 0% APR on purchases for 12 months, so there is no hurry to pay the whole balance off right away. Just keep in your bank account earning interest. Finally, you can get 5% back on office supplies, 2% on gas, up to 1% on all other purchases.

As with all these business cards, individuals can apply as sole proprietors by simply using their name as the business name. You just need to put your Social Security number as requested, and leave the Federal Tax ID blank for this application (it will use your SSN). More details here. More $100 bonuses listed here.