Advanced Personal Finance

I’d love to have the opportunity to make investments like this.

By now, I’m sure everyone who reads this blog knows all about JPMorgan Chase’s purchase of what’s left of Bear Stearns.  Supposedly, JPMorgan rode to the rescue to save Bear Stearns and possibly ‘the entire Western banking system.’

Gimme a break.

All JPMorgan did was use your money to make an investment.  If you boil the deal down, the U.S. government is guaranteeing JPMorgan against losses.  I’d love to make an investment like this - there’s no down side risk at all!

Now I’m sure lots of people will argue that doing nothing was not an option for the government.  The thinking is that financial institutions are now so tightly entwined by trading (mostly derivatives) that the collapse of one could bring them all down.  In fact, Warren Buffett and Bill Gross have been saying just that for years, and I agree.  But the way it got this way is from lack of true oversight by the government and years of mistakes by the Fed.

Speaking of the Fed, I’m not sure how many ordinary people realize this, but right now the Fed is accepting mortgage-backed securities as collateral for good-as-gold Treasuries.  More of the same from the Fed.

So today they’re expected to cut a key rate.  It’s all the Fed seems to know - increase availability of money.  And here’s what that means to individuals in a personal finance sense - inflation.  Three in four Americans believe the economy is in recession.  I think they might be watching the wrong game.  I think inflation is a much bigger problem for most people.  And it turns out, according to a CNN poll, 91% of Americans agree.  But like I’ve said before, inflation is not something you can control, but your response to it is.

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After recently changing jobs, I rolled over my 401(k) into my existing IRAs.  I learned an interesting tax quirk along the way, too.  Now I’m to the point where I need to rebuild the asset allocation I had in the 401(k)…or not.  My question about this is really simple.

Should my Roth IRA asset allocation be the same as my Traditional IRA asset allocation?

I can think of a couple of reasons why and why not.

Yes, the asset allocations should be the same.

1. Since both IRAs are for the same goal (retirement) and the same time frame, asset allocation theory seems to say they should be identical.
2. They should be the same just for simplicity.  Since you’re possibly going to change the asset mix as time passes (to reduce risk, say), keeping both IRA types the same makes it considerably easier.  However, the use of a lifecycle fund might mitigate this factor.

No, the Roth IRA asset allocation should be different than the Traditional IRA.

1. Using both a Roth and Traditional IRA allows you to do tax diversification.  As such, your goals and objectives for the two types of IRAs may be different.  [Thanks to Lily who pointed this post from Dough Roller out to me on this subject.]
2. Since conventional wisdom says there’s a certain order in which you draw down retirement assets, the allocations of those assets should differ.
3. There are some peculiarities about Roth IRAs that may dictate a different asset mix.  Specifically, you can withdraw contributions to your Roth IRA penalty free at any time.  That’s generally not so with a Traditional IRA.  This may mean the two types should hold different assets, especially if you anticipate you might need to take a withdrawal.

Anyone have any thoughts on this? 

I want to take action and set up my asset allocations, but I’m not sure which way to go.  Right now, I’m leaning toward having them a slightly different mix simply because of how I’ll (hopefully) be drawing down the retirement assets.

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I’ve kicked around writing a post about gold for a long time.  Now, sitting in the tire place waiting for my tires to get rotated, I no longer have an excuse for putting it off.

Gold as an investment.  People seem to love it or hate it.  I’ve read quite a bit about gold from a personal finance standpoint.  And despite its recently approaching $1,000 per ounce, I’ve come to the conclusion that investing in gold is not for me.  These are my reasons.

It’s not the hedge people claim

Gold proponents love to tout its supposed hedging properties.  The thinking goes that gold is a hedge against inflation.  After reading several scholarly papers and articles from respectable sources, I believe this to be untrue.  Gold, it turns out, is a great hedge against uncertainty.  In times of war, political or economic uncertainty, gold performs well.  But in times of inflation?  Not so much.

I think the belief in gold’s supposed inflation hedging properties comes from the fact that inflation sometimes accompanies these other events.  For example, war very often brings with it inflation as government spending crowds out supply.  Lower supply, higher prices.  So if gold performs well during times of war, it will appear to be a good inflation hedge.  Analytically, it just ain’t so.

Gold isn’t the ‘ultimate currency’

In times of catastrophy, the idea goes, you want gold on hand to buy essentials.  Paper currency will be worthless in the most extreme circumstances.  Gold, on the other hand, is always accepted as payment.

I don’t think so.  True, if the world economy collapses, paper money won’t be valuable (or, at least, it will be heavily discounted).  But is gold a good substitute in a situation like that?  No.  Barter, cigarettes, gasoline - these things people will value highly.  But gold?  I doubt it, at least to the degree those who talk up gold think.

Gold as investment has unfavorable tax treatment

People who like gold as an investment typically don’t advertise how it’s taxed in the U.S.  Gold is treated by the IRS as a ‘collectible.’  That means gains in the value of gold are taxed at up to 28% instead of the 15% maximum long term capital gains rate (and many people are taxed at a lower rate yet).

You have to do something with the gold

When you own gold, you have to secure it.  This is obvious in the case of owning gold bullion.  The big thing now, though, is gold ETFs.  But the problem remains.  Gold Shares, the biggest gold ETF, still has to keep its gold somewhere and that costs money.  That cost is passed on to owners of the fund.  Of course all investments have fees associated with them.  Just don’t forget that owning gold has a cost, too.

Though I’ve personally toyed with owning some gold, I’ve ultimately rejected the idea.  For me, these reasons outweigh any potential upside to gold.

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As I pondered the latest dismal housing market news, a funny thought popped into my head.  There’s an old saying that goes, “Never borrow to buy a depreciating asset.”  Usually that means something like a car.  With the current climate, though, it could apply equally well to a house purchase.  That’s a bummer.

We’re buying a new house (from the builder).  When we made our counter-counter-offer, we got the price we asked for…if we closed within 30 days.  We couldn’t do that, so they wanted us to pay the carrying (interest) cost for the extra month.  I’ve had the thought since that we probably could have waited a month and gotten an even better deal than what we offered.  Oh, well.

Anyway, it’s pretty clear that we’re violating that personal finance maxim to avoid paying for a depreciating asset (at least near-term) with borrowed money.

Balancing this thought is my strong belief that inflation will accelerate in 2008.  In a time of high inflation, you should get rid of your dollars as fast as possible.  So if I’m right and we are headed for high inflation, we’ll be paying the mortgage with cheaper dollars each month.  I guess it’ll be a race to see if inflation outpaces the drop in home prices.  That’s a curious situation.

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