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Are You A Long Tail Investor?

This is a guest post by The Digerati Life, a general personal finance blog covering topics such as 0% purchase credit cards and top credit card deals.

Long tail investing means looking outside the norm regarding potential investments.

For example, if traditional investing means opening an account with a cheap online broker and putting your money into stocks, bonds, mutual funds, and ETFs, long tail investing might be any of the following:

Get into a new kind of trading: No, I’m not talking about day trading stocks. I’m talking about building a simple trading business that involves buying goods in another country and selling it in America. For instance, you can buy goods from China and find a way to distribute them in local stores.

Investing in foreclosures: With the real estate investment climate still in the doldrums, foreclosures are common. If you take your time to shop around, researching numerous different properties, you may find one with the potential for very high returns.

Buying websites: Would you consider buying virtual real estate on the web and turning it around for a profit? It may not take much to monetize such websites to help them increase their value.

[Mike’s note: If I had more free time, I’d be buying defunct blogs left and right. After they quit blogging, many writers let their sites sit there (making no money), despite the fact that they continue to get traffic from search engines.]

As you can see, long tail investing is often a combination of investing and entrepreneurship.

Is Long Tail Investing High Risk?

You may think that long tail investing is riskier than traditional investing. That’s not necessarily the case. Yes, such investments can be high risk, but I’m not at all sure they’re riskier than, say, a small-cap value mutual fund — something which in many circumstances is considered to be a prudent investment.

Long tail investments have two unique risk-mitigating factors.

First, when searching for long tail investments, you have the opportunity to narrow the field to niches with which you’re intimately familiar. With large, publicly-traded companies, there’s no way to have this intimate level of knowledge unless you work for the company — in which case it becomes a terrible idea to put much of your money there.

Second, after making the initial investment, you play a direct role in the outcome via your resourcefulness and work ethic. This is quite different from stocks or mutual funds where you have no control over what returns are earned.

Finding Long Tail Opportunities

The trick is to look for niche strategies, because that’s where the undiscovered opportunities will lie. Do not simply go for the first potential investments you come across.

With this type of investing, you may stumble upon a niche that may become more widely known as time goes on. If you explore the options now, you can potentially get a good return on your investments before many other people realize what is happening.

Merrill Lynch Debit Card Review

This is a guest post by Michael from Credit Card Forum

If you want the best cash back credit card, check out Mike’s recent post about the Fidelity Retirement Rewards American Express, which offers rewards worth 2%. But if you prefer debit cards over credit cards, you may want to consider the Merrill Lynch Signature Rewards debit card.

What makes it special?

As we all know, it’s rare to find a debit card that offers rewards. There are a few on the market, but the fine print often includes traps or tricks. For example, Chase recently started offering a debit card with “up to” 3% cash back, but it’s not nearly as good as it sounds — there’s an annual fee, cash back is only given on a few categories of spending, and you have to spend over $1,000 per month to qualify for the maximum rebate.

The Merrill Lynch debit card is different from the rest. For starters, it offers a flat 1% back on spending — for a credit card that may be average, but for a debit card that is almost unheard of. It also offers a wide array of benefits that, to the best of my knowledge, aren’t offered on any other debit card at the moment. There is an annual fee, but you won’t necessarily have to pay it (which I will discuss further in a moment).

A closer look at the rewards…

You earn 1 “Merrill Point” per dollar spent, and for most redemption options, each point equals a penny (so 1% rewards). Here’s what you can cash them out for:

  • IRA Account: You can convert the points to cash which will be deposited into your Merrill Lynch IRA.
  • 529 Account: Your points can also be converted to cash for your Merrill Lynch 529 account (college savings account).
  • Fees & Commissions: If you don’t have a Merrill IRA or 529 account, you can still redeem your points to pay for fees and/or commissions posted to most other Merrill Lynch accounts during the current calendar year.
  • Travel: They say you can “travel anytime, anywhere, any airline with no blackout dates starting at 25,000 Merrill Points”
  • Miscellaneous: There are other options for merchandise, gift cards, etc.

A closer look at the benefits…

This debit card is a Visa Signature, which is something normally only found on credit cards. It comes with benefits for travel purchases made on the card, such as lost luggage reimbursement, trip cancellation insurance, medical evacuation coverage, common carrier travel accident insurance, and more. One benefit in particular I like (because I do not believe AmEx offers it) is the Hotel/Motel Burglary Coverage –- in the U.S. and Canada, you’re eligible for up to $1,000 in coverage if personal property is stolen from your room.

They also throw in phone concierge service and “Purchase Security” which covers eligible purchases made with the card for up to 90 days against theft, some types of accidental damage, etc.

What’s the catch?

For starters, you must have a Merrill Beyond Banking or Cash Management account. Your card will be linked to it and purchases will automatically be debited from its balance. Last but not least, there is a $95 annual fee which you may or may not have to pay. I know at least one accountholder who has the fee waived. Whether or not they will be willing to waive it likely depends on your balance and relationship with Merrill Lynch.

Verdict?

If you use Merrill Lynch for your brokerage account, their Signature Rewards debit card can be a great way to offset fees and commissions. Alternately, the card can be an easy way to add to your 529 college savings or IRA. That being said, if they’re not willing to waive the annual fee for you, it might not be worthwhile.

Michael runs CreditCardForum, which is a message board and blog for the discussion of credit cards and debit cards. Topics range from cash back credit cards to credit card customer service. On a personal note, traditionally Michael has invested in individual stocks based on intrinsic value, but due to time constraints, during the last few years he has been sticking with index funds.

The Best Places to Retire

For the Baby Boomer generation, the current economic recession has meant both reduced investment accounts and impeded prospects for continued employment. In fact, many Americans are facing the prospect of retiring with social security as their primary means of income.

Naturally, most people do not want to see their living standards decline dramatically in retirement. As a result, many people have begun to ponder retiring overseas — particularly in the developing world — as a way to maintain their standard of living, or perhaps even elevate it.

While retiring overseas is an option, it’s not a perfect solution. Poor countries have many problems. The poorer the country, the more problems: poor infrastructure, political instability, and perhaps most importantly, economic instability. Further, poor countries might even suffer from periodic currency devaluation (as a result of defaulting on their debts).

Where You Can Retire

As a foreign retiree, you are essentially an immigrant. That means you will require a special visa to settle indefinitely in a new country. Most countries in the world do not have retirement visas and therefore make it next to impossible for foreign retirees to settle in their country. The United States, for instance, does not have a retirement visa program.

However, some countries around the world, particularly in Latin America and Southeast Asia, have created special retirement visas for foreigners. These countries believe that retirees with state pensions — such as social security — are a revenue generator, and they have made it possible for this group to settle permanently in their countries.

So which countries are best for a person to retire to? If you are approaching retirement with considerable assets and income, the list of countries you can retire to is considerable. If you are facing a retirement with low income, you really can only retire to the developing world. Developed countries are simply too expensive.

Best Places to Retire Abroad: Limited Income

Most of the following countries suffer from periodic currency devaluations, political instability, and poverty. But, on a limited income, they’re the best of the bunch.

Costa Rica: In many ways the most politically stable and economically vibrant country in Latin America (with the exception of Chile), this country is extremely popular with American tourists. It’s outlook is certainly bright, and it boasts a large number of nature preserves for those interested in a more ecologically friendly country for their retirement.

Malaysia: The most developed country in Southeast Asia outside of Singapore, this country is affordable and far more stable than its neighbor Thailand. It has a developed retirement visa program, and it boasts pristine beaches and wilderness. Beware though, that its conservative Muslim government is known for restricting the rights of some ethnic minorities.

Uruguay: One of the most affordable places to live in the Americas. It has a relatively low crime rate, and a politically stable government. However, its small economy can be dramatically affected by the volatility of its neighbor to the South, Argentina.

Panama: This progressive Central American country probably has the most economic incentive programs for foreign retirees. There are discounts for shopping if you are over a certain age, you can import some goods duty free, and you pay no tax on all foreign income. The Panamanian economy also uses the dollar as its currency. Beware the high humidity and somewhat-high crime.

Nicaragua: This is another Central American country trying to attract western retirees looking for a lower cost of living. Nicaragua is quite poor, but it is stable and has a rapidly growing economy. For those trying to get the most bang out of their buck, it may be ideal. But beware the lack of sophistication and high levels of poverty.

Best Places to Retire Abroad: Higher Income

France: A stable, strong economy with great healthcare and of course great scenery. However, it doesn’t come free, and this country has the highest cost of living of any retirement destination on this list. But if you can afford it, go for it.

Spain: Spain has great infrastructure that is improving by the day due to government investments. It has low crime and decent healthcare. While it’s cheaper than France, it’s still far more expensive than anywhere in Latin America.

Italy: Italy, particularly in its Southern and rural regions, is more affordable than France and Spain, but in urban centers it can get expensive. It’s famous for its ineffective bureaucracy, which can make applying for a retirement visa a headache. Infrastructure can be spotty in areas as well.

Portugal: The most affordable part of Western Europe, it is a country that is growing in popularity as a retirement destination. While it is cheaper to live there than other places in Europe, that affordability comes with a price: economic instability.

New Zealand: The ideal place for an American to retire. It’s cheap, has a diverse ecology, and English is the national language. The problem is that New Zealand’s retirement visa program literally costs millions of dollars in order to qualify. If you can afford it, and are not comfortable living in a country where English is not widely spoken, go for it. For others interested in New Zealand, a snow bird alternative — liveing in the country on a tourist visa for up to six months a year — will be the only realistic option.

Do Your Research

Retiring overseas is not easy. It is not a matter of simply picking up and moving. It requires research and a well thought out plan. It helps if you speak the local language of the country you plan to live in. And it is best if you visit the country before moving.

Visit the country, and see how far your budget will really go. Explore the country thoroughly in all seasons of weather to determine whether you can handle the climate. And ask other expats, particularly those from your own country, about their experiences and for their advice. Most importantly, however, make use of common sense when approaching an overseas move. If it sounds too good to be true, it probably is.

About the author: Rick Todd writes at Expat Investing, where he covers such topics as whether retiring abroad is right for you and how much it costs to retire overseas.

Retiring Soon? Pick Up a Copy of My Book:

Can I Retire Cover

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less

Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
  • How to minimize the risk of outliving your money,
  • How to choose which accounts (Roth vs. traditional IRA vs. taxable) to withdraw from each year,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"Hands down the best overview of what it takes to truly retire that I've ever read. In jargon free English, this gem of a book nails the key issues."

Arbitraging a SPIA and a Life Insurance Policy to Create an Inheritance

This is a guest post by Evan, author of the Blog My Journey to Millions.

Mike recently wrote an interesting post about using a Single Premium Immediate Annuity to protect the inheritance you intend to leave behind. He suggested creating two separate buckets for your assets:

  1. A Single Premium Immediate Annuity (SPIA) for your income needs, and
  2. A portfolio of other investments, intended to be left for your heirs.

Just so I don’t confuse myself I will call them Insurance Bucket (used to buy the SPIA) and Investment bucket (Investments).

But what if we turn what Mike suggested on its head? Can we use the investment bucket to provide income and the insurance product(s) for inheritance?

Note: The following strategy will only work in a small percentage of cases. We need an older person, who has a really good amount of money and is healthy.

SPIA-LI Arbitrage

In this planning technique we play two life insurance companies against one another. One will be betting on the fact that you die and the other is betting on the fact that you’ll live a long life.  Let’s use an imaginary man named Bob:

  • Bob is a really healthy 70 year old male (DOB: 1/20/1940)
  • Bob is living off his investments, but he doesn’t “need” all of them. (That is, he can get by with a withdrawal rate well within the “safe” range.)

In Mike’s plan, we would let the investment bucket be the inheritance and use the SPIA bucket to provide income.  I am flipping that around. We’ll leave enough in the investment bucket to live off of. Then we’ll purchase two competing insurance products with the SPIA Bucket (which, as an example, we’ll assume to be $350,000):

  • $350,000 will buy $2,379/month in income from a 150 year old, AAA Rated Insurance Company;
  • We’ll then use $2,000 of that monthly payout to pay the premiums on a Guaranteed Universal Life Insurance Product which provides a little over  $800,000 in Death Benefit!

Why did I use $2,000 instead of $2,300? To cover income tax on the SPIA’s payments.

Why does this strategy work?

An arbitrage is created because life insurance companies go through medical underwriting on a life insurance contract, but not on an annuity product. On annuity products they just use life expectancy tables based on your age.  So in my example:

  • Life Insurance Company A (knowing about your good health) is betting that you will live for a long time and that they will get to collect your premiums, and
  • Life Insurance Company B (unaware of your good health) is betting that you will die exactly in keeping with typical life expectancy tables, at which point they can stop paying your monthly annuity payment.

But, Evan you stacked the deck!

Of course I did. I said above this is only going to be used in a small amount of cases. If you have a struggling retiree who weighs 285 pounds and has 42 years of smoking behind him…no dice.

Benefits of Creating a SPIA-Life Insurance Arbitrage

We took $350,000 and turned it into $800,000 for heirs – this is the biggest benefit.

Another side benefit that can be looked into (if the numbers were bigger) is that the Life Insurance can be owned by a Trust and then not included in your estate when calculating your estate taxes.

Drawbacks of this Technique

The most obvious downside is that this strategy only works in a small number of cases. The second negative is that once you put this into place, it is very hard to get out of.

Evan is an attorney, admitted to practice in the State of New York and works as a Director of Financial Planning overseeing the firm’s high net worth gift and estate planning. His blog covers topics ranging from Estate Planning, to his personal financial situation, to libertarian views and hatred for big government.

Retiring Soon? Pick Up a Copy of My Book:

Can I Retire Cover

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less

Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
  • How to minimize the risk of outliving your money,
  • How to choose which accounts (Roth vs. traditional IRA vs. taxable) to withdraw from each year,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"Hands down the best overview of what it takes to truly retire that I've ever read. In jargon free English, this gem of a book nails the key issues."

Using Probability to Set the Size of An Emergency Fund

Austin Frakt at The Incidental Economist recently wrote an intriguing post using Charles B. Hatcher’s work to rationally set the size of an emergency fund.

The basic idea of the post is that the ratio of the annual opportunity cost of forgoing a higher investment return to the cost of borrowing should an emergency occur can be interpreted as a probability, and this probability can be used to estimate the needed size of the emergency fund.

Or, in plain English: It’s rational to have an emergency fund if the cost of the emergency fund should no emergency occur is less than or equal to the cost of borrowing should the emergency occur.

Explained Mathematically…

M = the size of the emergency fund, r2 = rate of return of investments, r1 = the rate of return of the emergency fund, rb = the borrowing rate, p = the probability of an emergency occurring in a given year.

Using the above variables,

  • The cost of the emergency fund if no emergency occurs = (M)(r2 – r1)(1 – p)
  • The cost of borrowing if the emergency occurs = (M)(rb)(p)

So it’s rational to have an emergency fund if:

  • (M)(r2 – r1)(1 – p) <= (M)(rb)(p)

…which can be reworked in the following manner:

  1. (r2 – r1)- (p)(r2 – r1)<= (p)(rb)
  2. (r2 – r1) <= (rb)(p)+ (p)(r2 – r1)
  3. (r2 – r1) <= (p)(rb + (r2 – r1))
  4. (r2 – r1)/ (rb + (r2 – r1)) <= p

Since (r2 – r1)/ (rb + (r2 – r1)) <= (r2 – r1)/(rb) we can simplify the expression to

(r2 – r1)/(rb)<= p

Applied to Real Life

Following Mr. Frakt’s example and using the equation above, if the liquidity premium (i.e., the amount by which the rate of return on other investments exceeds the return on an emergency fund) is 2% and the interest rate for borrowing is 9%, then the probability of an emergency in a given year needs to be greater than 22% in order for it to be rational to have an emergency fund.

In other words, you’d have to believe you’re likely to have an emergency at least once in five years to justify the opportunity cost of the fund given today’s liquidity premium of 2% and borrowing rate of 9%.

Using the once-in-five-years probability, Mr. Frakt proposes that we can guess the necessary size of an emergency fund based on our experience. What kind of emergencies occur within a five-year period and how expensive are they? The catch is that if you already know from experience how much money is needed to cover emergencies occurring once every five years, I wouldn’t call these emergencies at all. They are periodic expected financial events that can be planned for via sinking funds.

The whole point of an emergency is that it’s an unexpected event, and it’s very difficult to assign probabilities to unexpected financial events. Sure, we know that over a very long time frame we’re bound to encounter an event we didn’t plan on, but we can’t really know the probability of such an event occurring this year, next year or in ten years.

It it, however, useful to consider the probability/frequency of emergencies in a general sense:

  • The higher the liquidity premium relative to the cost of borrowing, the more frequently emergencies would have to occur in order for it to make sense to pay the premium to keep liquid funds available, and
  • The lower the liquidity premium relative to the cost of borrowing, the less frequently emergencies would need to occur to justify the liquidity premium.

About the Author: Susan D. Tiner, financial organizer and consultant writes the blog Brain Dead Simple! Financial Organizing.

Index Funds: Are They Really Passive Investing?

Index funds are–and probably will continue to be–the easiest way for an average Joe to invest. But contrary to popular belief, they’re not a “set and forget” type investment.

With index funds, you still have to:

Decide Which Index Funds to Use – Most people think of the Vanguard S&P 500 fund when they talk about index funds, but there are actually over 1,000 index funds we can invest in.

Worry About Asset Allocation – Perhaps more important than the right fund is to have the right mix of investments for your overall portfolio. Spending some time doing so is crucial, especially if possibly retiring someday is important to you.

Remember Rebalancing401(k)s are great in that they allow you to automatically rebalance your portfolio without intervention. Too bad none of the other accounts allow you to do that! Though it’s not hard, the process still takes time.

Consider Fees and Choices – Once you dig deeper, you will find that there are multiple funds tracking the exact same index, all with different fees and performance. While I highly recommend going with the most popular fund that has the lowest fees, it pays to know the differences of how they manage to mimic the performance of an index.

Where to Buy It – Vanguard has its own web portal, but you can generally buy most index funds with pretty much any brokerage account. Pick the one that you are comfortable with, and if at all possible, try to simplify your finances by having as few accounts as possible. Otherwise, more time keeping track!

Which Account to Buy It In – Finally, some index funds are more tax friendly than others. For example, REITs are particularly tax-inefficient, so it make sense to put them in tax-sheltered retirement accounts.

Essentially, most of the questions you need to answer for mutual funds apply to index funds too. You may mistakenly believe that index funds are a form of passive investing. But for completely carefree wealth building, you’d need to outsource your portfolio management to a competent financial advisor.

This is a guest post from MoneyNing, who writes about sensible personal finance tips every day. Check out his blog to learn the art of protecting your wealth.

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