The first question I often get about personal finance and investing is usually about what sources I would recommend for people who are looking to learn more.

It may be surprising, but despite the incredible variety and depth of information available online, some of the best sources for ongoing learning are still regular, printed magazines.

I began reading personal finance magazines around 1994, and over the years I’ve sampled most of the commonly available ones. The following represent my favorites, some of which I have subscribed to for over a decade.

Personal Finance & Investing

1. Money. Money magazine is published by Time Warner, and continues to be my favorite personal finance magazine. I think the reason I like it so much is that it takes a much more human approach to personal finance – the magazine always features the personal finance stories of one or more families, and you learn a lot month-to-month about how real people approach very real financial questions. I find it much more interesting to understand how a family who hasn’t saved much for college might approach the problem now that junior is entering high school, than about whether or not I should have a commodity ETF in my portfolio. If you are looking for stock picks, this isn’t the place, but as an overall well-rounded magazine, if you were only going to read one issue a month – this would be the magazine to read.
2. Smart Money. Smart Money magazine is one of my all-time favorites. Published by the Wall Street Journal, this magazine blends insight into current investing trends, fund managers, and personal finance tips. More investment focused than others, almost every issue features at least one or more “stock pick” lists. I have gotten a few good stock ideas from the magazine, but that really shouldn’t be the focus of the reader. Instead, as you read about the “case” for each stock, it helps hone your own thinking about how to approach investments.

Despite the fact that I have subscribed to the above magazines for over twelve years, I still look forward to each issue every month. Over time, I feel like one of the things you learn is to differentiate the trendy, popularity driven material from the real insights. The biggest danger reading investment magazines is that they always feel compelled to explain and promote the latest trends, and in investing any trend is usually a sign of over-investment. Over-investment typically means high costs with low returns.

Business

1. Forbes. Most people think of Forbes as some sort of conservative Republican vehicle for Steve Forbes. But if you skip the first few pages of editorial, what you have is a magazine that repeatedly finds unique and interesting angles to entrepreneurship, business, economics & investment. Some of my best investment insights and ideas have come from the columnists in Forbes, and among all of the business magazines I read, Forbes has the highest number of unique stories.
2. Business Week. Business Week is, in fact, a weekly, and as a result, it turns out to be almost like an aggregated business newspaper with slightly deeper reporting. Very timely, they tend to cover a wide breadth of business & investment issues. It’s light stuff, however, so the signal to noise ratio is not great. Still, several of the blog posts I’ve made here have been inspired by little 1-page articles in Business Week.
3. Fortune. Ah, Fortune. Glossiest of the Business magazines. This is like the People magazine of business. Several times over the past decade I have discontinued my subscription, only to find out, months later, that I missed some interesting article on a company, industry, or CEO that I really would have liked to have read. Take it for what it is, but I read it regularly.

There are a wide variety of other magazines out there that I have subscribed to from time to time. Kiplingers. Worth. Red Herring. Business 2.0. Entrepreneur. But none of them held my interest for more than a year, and in the end, I find myself coming back to the five I list above.

The Economist is probably the one great, relevant journal that I don’t read regularly. It has a far more global viewpoint, and less actionable investment insight. It’s dense, and I never seem to have time to finish it regularly.

Newspapers

I know this article is called Magazines, but the truth is that some of my favorite periodicals are daily newspapers. I’m going to call out the big three here.

• Wall Street Journal. I haven’t had time to read this daily in years, but I have never been sorry that I picked up a Wall Street Journal. This is the one paper to read if you want to really be in the flow of finance & investing.
• New York Times. Excellent Business section every day, capped off with the famous “Sunday Business” section every week. If you could only read the paper once per week, you should read the New York Times “Week in Review” and “Sunday Business” every Sunday. This is also my recommended cure in case you accidentally read a San Francisco Chronicle or Los Angeles Times one day, and you need to flush your brain out with something intelligent.
• San Jose Mercury News. This is not the largest or most comprehensive paper in the world, but if you follow high tech, this is the best business section in the nation. It has deep coverage of Silicon Valley companies, and its columnists are just one level deeper into high tech than others. It is roughly 1000x better than the other local paper, the San Francisco Chronicle.

Whew. That took longer than I thought. I’m going to follow this article with a post on the top 10 investment books that I recommend, and then I’ll get into specific topics. More to follow…

I caught a very interesting article in this week’s Business Week on a new Currency ETF that launched in September. The original article is here:

Trade Currencies Like a Hedge Fund | Business Week

It doesn’t look like they’ve released the article to the free portion of the site yet, so let me summarize a bit here.

The new PowerShares DB G10 Currency Harvest Fund (Ticker: DBV) has grown to about $180 Million already, allowing individual investors, for the first time, the ability to easily invest in the “long-short trade”. The long-short trade is when you buy the currencies of countries with high interest rates, and you sell short the currencies of countries with low interest rates. Normally, countries with higher rates see their currencies appreciate relative to those with low rates, and this strategy lets you capture the difference. You can think of it as borrowing cheap money (the short against the countries with low rates) to buy investments that pay higher rates (the countries with higher rates).

For example, right now New Zealand is paying interest rates of 7.6%, and Japan is paying just 0.5%.

This trade is a common one, but it’s not without its problems. There have been many times, historically, when large hedge funds used leverage to play this game, only to have the market move against them. Usually, however, the implosion involved big bets in emerging markets.

This fund only invests in the currencies of developed nations with high credit ratings, and employs only 2:1 leverage, so it’s relatively safe.

Here are the current holdings of the fund:

Long Positions:

• Australian Dollar
• New Zealand Dollar
• US Dollar

Short Positions:

• Japanese Yen
• Swedish Krona
• Swiss Franc

The fund is based on the new Deutsche Bank G10 Currency Future Harvest Index, which has been backtested to produce a 11.4% annualized return over the last 10 years. That being said, it’s a new index, and how it will behave in real life may vary.

What is interesting about the index, however, is that it has returned 3.2% more than the S&P 500 over the same time period, but with only half the volatility. Not only that, the carry trade has very little correlation with stocks, so it’s a natural for diversification.

Previous Currency ETFs, launched by Rydex, have allowed investors to buy into individual currencies:

• Euro (Ticker: FXE)
• Mexican Peso (Ticker: FXM)
• Swedish Krona (Ticker: FXS)
• Australian Dollar (Ticker: FXA)
• British Pound (Ticker: FXB)
• Canadian Dollar (Ticker: FXC)
• Swiss Franc (Ticker: FXF)

Unfortunately, the structure of these ETFs has built in high fees and spreads, making them poor ways to try and “own” that currency.

If you are interested in the new new PowerShares DB G10 Currency Harvest Fund, be aware that the strategy does have some limitations. As covered in TheStreet.com:

I’m convinced that the strategy has merit, but as with all strategies, there are flaws that should be understood before purchasing.

Higher yields do tend to make a currency more attractive, but that overlooks an important point: Currencies whose interest rates are moving up tend to be strong. A currency starting from a low base interest rate that is headed higher is likely to be a strong currency, but it could be overlooked by the ETF’s strategy.

However, if you are looking for a currency component to your asset allocation, this fund is definitely worth considering. There are some tax considerations as well, because the fund uses futures to do its trading. As a result, it might be best to hold this in a tax-advantaged account, like an IRA.

There was an article in the Saturday New York Times (1/27/2007) that really got me thinking. It was called:

A Contrarian View: Save Less and Still Retire with Enough

I must admit, my initial reaction to the title was extremely negative. In a country where private pensions are quickly becoming a thing of the past, and Social Security continues to float in a bizarre state of political denial, telling Americans that they need to “save less” seemed irresponsible, bordering on criminally negligent.

The article didn’t initially endear me either with its analysis. Witness the third paragraph:

Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry — and spending more — while they are younger. The negative savings rate, they say, is wildly distorted.

A small band of economists from universities, you say? No names, of course, of either the economists or the universities. But it’s good to know they are in a band, albeit a small one. Maybe they work with Robin Hood, and his merry band of thieves.

Of course, it’s rare for the New York Times to be this shoddy with reporting, so I move on through the article.  And it turns out, the article does have a point.  Look at the graph that was included with the article:

Aha!  Real sources, real numbers, and credible analysis.  It turns out, this is a legitimate piece, just written in a fluffy, air-headed style.  There is real financial analysis here to this question, and there are some issues raised by it which are worth considering.

One of the biggest innovations in personal finance in the last decade has been quick and easy access for individuals to sophisticated planning tools that previously were only available to professionals.   For example, many people used to just take a basic percentage of return, like 8%, and then project what their savings might be by the time they are 65.  (In fact, many people still do.)

Now people have access to tools, like at Financial Engines,  that do Monte Carlo analysis.  Monte Carlo analysis, like it’s name-sake city, is focused on risk & gambling. With Monte Carlo analysis, the computer will run through thousands, if not millions, of randomized versions of the future, based on the historical performance of different asset classes like stocks, bonds, and cash.  These simulators don’t tell you how many dollars you’ll end up with when you turn 65.  Instead, they give you probabilities you’ll end up with “enough money”, however you define that.

This New York Times article didn’t go into too much detail, but based on the tidbits in the piece, my guess is that the “band of economists” are focusing on a few ways that these models could demand “over-saving”:

1. 1929-1937.  All Monte Carlo simulators worth their salt include, as part of their randomization programming, historical extremes, like the Great Depression.  In fact, the book I read by Ben Stein constantly refers to this period as the ultimate measure of a good strategy.  However, is it prudent to base your planning on what seems to be more and more of a historical outlier?
2. Social Security. Almost all calculators that I’ve seen tend to evaluate your portfolio with no assumption of Social Security.  Now, I’m personally pretty negative on the idea that I’ll be collecting anything resembling the currently promised Social Security benefit, but in fairness, if you took the US Government at face value, that promise is worth a significant chunk of change.  Roughly $812,000, if you buy my earlier analysis.
3. 85% of Income Needed.  Almost all planning tools tend to estimate your needed income in retirement as 85% of your pre-retirement income.  This assumption is actually based on the idea that normally you save 15% of your income, so when you retire and you stop saving, you don’t need that 15%.  Fine.  But this assumption is likely faulty in two regards – first, it likely differs based on your expected lifestyle in retirement (travel, health), and second, it’s unlikely to be a flat 85% through the rest of your life.

So, there are points to be made here, and it is something to think about.  I personally have been faced with difficult choices for saving that don’t have immediate, obvious answers.  What do you prioritize – saving money for a larger house & family, for retirement, for college, or travel & family fun?  What’s the right balance?  There is some truth to the fact that you could, in fact, over-save for retirement, and miss out on your life with your family while you are young.  You could live to 125, but you also could also die tomorrow.  I’ve had close friends and mentors who have died before ever seeing retirement, so these aren’t just theoretical questions.

In the end, I probably agree more with critics that say that the last message Americans in general need to hear is anything that sounds like save less.  No, in general, Americans are already getting an A+ in that class.  They are getting a D right now in save more, so while their are nuances that are worth discussion here, this article was the wrong way to present them.

As personal finance tools grow more sophisticated, however, it is also worth noting that in the end, they are just tools.  Garbage in, garbage out.  If you put in bad assumptions about the market or your goals and values, you will get bad answers out.  Sure, they’ll look pretty.  But they won’t steer you toward happiness.

11 Basis Points. Not one percent. Not one half a percent. Not even one quarter of a percent.

0.11%. That’s the new expense ratio on the Vanguard Bond ETFs. These were announced this week on the Vanguard RSS Feed.

$11 for every $10,000 you have invested. Combined with the 9 basis points you pay on the Total Stock Market ETF, you could have a 50/50 balanced portfolio for the total cost of 0.10% every year.

I know that things like this don’t excite everyone, but I see this as more than just a good deal. I see empowerment for everyone. People forget that 30 years ago, you couldn’t get index funds unless you were a large institution with millions to invest. Even then, you couldn’t get one with an expense ratio under 0.5% until 15 years ago. And getting one freely, with no fees save commission, like this, with no minimum investment? Forget about it, until now.

Now the small investor, with just a few thousand saved, can have access to the tools previously limited to massive institutions. And it seems to only be getting better every year.

From the Vanguard website:

Vanguard has filed a registration statement with the U.S. Securities & Exchange Commission (SEC) to offer exchange-traded shares for four existing Vanguard® bond index funds: Total Bond Market Index Fund, Short-Term Bond Index Fund, Intermediate-Term Bond Index Fund, and Long-Term Bond Index Fund.

Pending SEC approval, the four new bond ETFs will provide broadly diversified exposure to the entire U.S. bond market as well as discrete segments of the market at an expected expense ratio of only 0.11%.

Vanguard ETFs™ are uniquely structured as separate share classes of existing Vanguard mutual funds. For example, Vanguard Total Bond Market ETF will be a separate share class of the $40 billion Total Bond Market Index Fund, the industry’s first bond index fund and one of the largest bond mutual funds in the country. Introduced in 1986, the fund seeks to track the performance of the market-weighted Lehman Brothers Aggregate Bond Index, and holds nearly 2,800 corporate, Treasury, agency, and mortgage securities.

The new ETFs will be managed by the Vanguard Fixed Income Group, which oversees $310 billion in fund assets, including $65 billion in bond index fund assets.

Sorry, but I couldn’t pass this one up.

The introductory letter to the recent 2007 Investor Guide issue of Forbes magazine (12/11/2006) has a really neat little tongue-in-cheek reference to a new way to beat inflation. First, check out this graph from the article:

Yes, that’s depressing. Most people learn that typical “money market” returns for cash match inflation over time. That means that the interest you earn on cash accounts historically lines up with the amount prices go up every year. It’s why many people use money market funds and other similar cash equivalents, like certificates of deposit, to “protect” their savings.

Unfortunately, what this chart shows is that your cash equivalents only keep up with inflation when they aren’t taxed. T-Bills, which are the basic proxy for the cash equivalent market, actually lose money against inflation because the US government taxes their gains.

The chart plots what would have happened to a hypothetical dollar invested in T bills by a top-bracket taxpayer. The government that issues these bills gets you two ways. First is via inflation, what Ronald Reagan called the “thief in the night.” The other is to send around the Internal Revenue Service to rob you in broad daylight. Your real aftertax return over the past 75 years is a cumulative –72%.

Interestingly enough, there are real investment options today, in both Europe and the United States to protect your money from inflation. Several options, in fact:

• Treasury Inflation-Protected Securities. This is the official, US, 10-year bond that is guaranteed to pay out both a real return and the inflation-adjustment based on the consumer price index. There are similar bonds in Europe as well. The only problem – you have to pay taxes on the inflation “gain” every year, even though it isn’t paid out until the end of the 10-year term. This also ignores the obvious fact that keeping up with inflation isn’t really a gain, so like the T-Bill, you are getting kicked in the stomach by the same government that inflated your currency.
• Series I Savings Bonds. I love these. In business school, I independently did an analysis for my finance professor on the expected return of these incredible instruments. Conclusion: The government is heavily subsidizing them. Translation: the government is over-paying for these bonds, likely to help small savers and to encourage college savings. Let’s count the benefits:
  • Taxes. None, until you cash in the bond. Up to 30 years of tax deferral!
  • No State Taxes. None, ever. It’s excluded, a real perk for high tax states like good old California.
  • No Taxes, education benefit. If you use the proceeds to pay for education, the gains are tax free.
  • Inflation protected. You get paid a real rate of return plus inflation, every six months. Better yet, they use the CPI-U (consumer price index – urban), which tends to run hotter than the CPI overall, but better reflects costs when you live in the city.

  In fact, the only limitation are the 1-year waiting period to cash out, the 3-month interest penalty you pay if you cash them in before 5 years, and the $30,000 per-person, per-year maximum (which I doubt many people hit).

• Municipal Bonds. My understanding is that there are now inflation-protected municipal bonds in some areas… all the tax-free benefits of municipal bonds and inflation protection sounds good to me. (unfortunately, the real rate of return on these is negligible)
• Gold. No, it’s not backed by any government, but the gold bugs out there will flame me to a crisp if I didn’t mention the oldest, and dearest inflation hedge in the world. The theory is that gold always stays the same price, and all other currencies just effectively float around based on how well they manage their money supply. You could make this argument about any precious metal, or even for commodities and real assets in general. Personally, I still think that one day we’re going to be able to find unlimited supplies of any metal, so not putting my 50-year money here…

But I am here today to mention a humble, fourth opportunity for inflation protection:

The new “Forever Stamp” proposed by the US Post Office.

The basic idea is that the post office will issue a new 42¢ stamp in 2007 (yes, another price increase), but one that will hold it’s value forever. No more price increases. The stamp will always be good for one first-class mail item, up to 4 ounces.

Let’s think about that.

First, we know that the US Postal rates have approximately kept pace with inflation over the past 25 years… maybe a bit more than inflation.

Second, there is no proposed “time limit” on the stamp. I guess the stamp will be valid as long as there is a US Post Office?

Third, there is no limit on resale. So, I am assuming that if postal rates increase, you could resell your stamps to someone else who needs them, for approximately full value.

Fourth, there is no accumulation limit. You could theoretically by $1M worth of these stamps, if you wanted to.

Fifth, no taxes. At least, right now, the IRS has not said that it will tax you on the appreciation of your first-class stamps. At minimum, there are no taxes until you “cash them in” by selling them.

The blog Marginal Revolution asserts this just gave the Post Office the ability to print money. Since the Post Office is effectively backed by the US Government, they can just print stamps to effectively increase the money supply. (I do love it when the stable money fanatics get worked up.)

The blog Economist’s View has another interesting take on the proposal.

There you go… tidbit for the day. If you are looking for a safe place to park your money, you may now have a new friend in the US Post Office. I will say that this looks like a very hot item for the Stamps category on eBay…