Advanced Personal Finance

Your mutual funds and ETFs are flagging.  The 401(k) balance is dropping almost daily.  Surely there’s a way for you to align your investment strategy to counteract these trends, right?  Well, once again Wall Street comes to the rescue.  There’s a new fad rippling through the mutual fund industry - the 130/30 fund.  Is this the common man’s hedge fund or just another money-losing gimmick?

The 130/30 Fund

So what the heck is a 130/30 fund?  It’s a mutual fund that is ‘long’ 130% of net assets and ’short’ 30%.  (An investor is ‘long’ a stock if he/she has purchased it in the hopes that the price will increase; a ’short’ is when the investor is hoping the price will decrease.)

That adds up to 160%; how, you ask, do they own 160% of net assets.  The short answer (no pun intended) is that the short position and part of the long position kind of cancel each other out.  It works like this.  When you short a stock, you borrow the shares and sell them into the market.  That nets you cash.  A 130/30 fund takes those proceeds from the short sale and reinvests them ‘long.’

Confused?  Don’t be.  In simpler terms, what a 130/30 is doing is just using leverage.

The idea behind the 130/30 fund is an alluring one.  By intelligently choosing which stocks to short and which to hold long positions in, you hedge against adverse price movements.  Just like the big boys at the hedge funds do!

Is a 130/30 fund for you?

Likely not.  There are a couple of serious negatives to 130/30 funds. 

First, they’re actively managed funds.  As we all know by now, actively managed funds never beat index funds over the long term.  They can’t - no advisor gets it right all the time.  Statistically speaking, you’re much worse off in actively managed funds.  Besides that, actively managed funds have higher expenses than index funds.  Expenses are one of the few ways you can truly influence your investment returns.

It’s even worse than that, though.  The second reason 130/30 funds are a bad idea is that their expenses are likely to be even higher than other actively managed funds for a couple of reasons.  First, when you short a stock, you have to pay dividends to the person you borrowed the security from in the first place.  Second, there are additional trading expenses associated with the ‘extra’ 60% of assets.

Another reason you probably don’t want to own a 130/30 fund is their whole reason for being - leverage.  As people learned in the recent real estate crash, leverage is great when prices are going up but murder when they’re going down.  Boiled to its essentials, what a 130/30 fund is doing is really just borrowing money to leverage up their exposure.  This is a way of end-running the mutual fund prohibition against buying on margin.

Though the idea is nice, I’ll personally be staying away from 130/30 funds.  But then again, I don’t invest in anything but index funds and ETFs, so I’m not exactly their target audience.

This article published only at Advanced Personal Finance.

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As a Gen-Xer, I know well the burden of student loans.  My wife and I, like millions of others our age, had to deal with a rather sizeable debt burden right off the bat when we left college.  But there’s a way to ease the weight of that burden.  Very soon, it may be the best time ever to consolidate student loans.  It can save you hundreds or thousands of dollars over the life of that loan.  Here’s how.

Student loan consolidation - what it is

If you have variable-rate federal student loans, you can consolidate them all into one fixed-rate loan.  This is totally above board.  In fact, it’s federally managed and regulated.  If you’ve exhausted your forbearance period and you can’t get your student loans cancelled, consolidation might be for you.

After consolidation (which is free, by the way), you have one payment per month.  There are four different repayment plans with various terms.  You might also qualify for a new deferment if you’ve already exhausted yours.

Who should (and shouldn’t) do it

If your monthly payment is a stretch and you have variable-rate loans, you might do well to consolidate.  On the other hand, if you’re aggressively paying off the loans and the end is in sight, consolidation is not a good option.  You should also know that, like a home refinance, consolidation might increase the total amount you repay, since it extends the number of years of repayment.

To consolidate, you must have Direct or Federal Family Education Loans (FFELs).  You cannot consolidate if you’re still in school, but you can if you’re in any other status, including default.  I’d like to note here that student loans cannot be discharged in bankruptcy, so if you’re in default, consolidation may be a good option.

Why soon it will be a great time to consolidate

The fixed rate on consolidations is set each July and it’s based on the three-month T-bill auction at the end of May.  I’ll spare you the charts and graphs, but T-bill rates are rock bottom, so it’s likely that when the new rate is announced, it will be an all-time low (we’re talking in the 3.5% range for Stafford loans and 4.25% for FFELs).

How to consolidate your student loans

Since consolidation is through the government, you must use their methods and they make it easy.

• Online at https://loanconsolidation.ed.gov/appentry/appindex.html
• By Phone at 1.800.557.7392

• By paper by downloading a form at: http://www.loanconsolidation.ed.gov/forms.shtml

This post published at Advanced Personal Finance.

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There’s a new kid in town.  I’ve been reading a new personal finance blog for a couple of weeks now and thought some of my readers might enjoy it, too. 

It’s called Wise Money Decisions. 

The author, Jeff, has been at it for a few months now and I like his writing a lot.  Stop by if you get a chance and check him out.

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[This is part two of a two-part story about how I quit first and got a job second.  Here’s part one.]

When I left the story, I’d just volunteered to get fired from my job (without having another job lined up) in exchange for an incentive.  I realize at this point I didn’t give any context to what that incentive was.  In exchange for quitting and signing a waiver, I got three months of salary as severance along with company-paid medical for three months.

The master plan

Here was the plan. 

The company mandated that, once you volunteered, you had to be off their payroll in about two months.  That meant I had two months of getting paid and working while I looked for new employment.  After that, I’d be out a job, but I’d get paid for another three months.  We figured I could certainly find a good job in four months or so.  If it stretched beyond that, we had a decent amount of money in savings and investments.  Plus, my wife was supposed to return to work around that time after having our baby.  (As it happened, I didn’t get the severance check for a full month after I stopped working.  Good thing we didn’t need that money to, say, pay the bills!)

The job search and the perfect job

This story isn’t really about how I found another job, so I’ll keep this part short.  In the span of a few weeks, I had several phone interviews and some in-person interviews.  I was lucky enough that they were kind of clustered around the same time.  Of the three in-person interviews, one place flaked out, one place turned me down for lack of experience, and the third offered me the job.

The job I was offered was the one I really was hoping to get.  It is exactly what I wanted to do.  Moreover, and more importantly, it is work I’m really good at.  And it came with a sweet perq - I work from a home office.

Now let me tell you right now that working from home is absolutely, positively, one hundred percent as awesome as you dream about.  I am way productive because I don’t have people bugging me all the time.  My commute time is five seconds.  I get to wear shorts and a t-shirt.  Yeah, it’s good.

Funny thing is, that’s not even the best part.  I absolutely love my job.  I seriously can’t believe it.  You know how, every once in a great while, you’ll talk to someone who says they love their job?  I never believed them.  Never.  But I’m here to tell you, it is possible.  You can actually love your job.  I’ve seen the other side.

Is there a point to this story?

Well, yeah, there is.  My point is that you can take a chance and sometimes it will all work out.  It won’t always work out like you want.  It won’t even work out like you want very often.  But every once in a while…

I’m not saying to do what I did and quit before you have a job.  I’m saying be courageous.  Have faith.  Do not be miserable.  If you don’t like your situation - change it!  You do not want to look back on your life and wonder what might have been “if only.”

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I think I can say with a good degree of certainty that people who read PF blogs are, by and large, planners.  I know I am.  So what I’m about to write is going to seem contradictory to that statement.  I’m going to tell you about how I recently left my job without having another one just months after the birth of our second child.  Don’t worry - it has a very happy ending.

[It turns out this story is way too long to be just one post, so this is part 1 of 2.]

Look before you leap, right?

I just read on Free Money Finance a post commenting on the story of a guy who quit to stay home with his 2-year-old son.  FMF sprinkles comments on the story throughout the post.  Some I agree with; some not so much.  Essentially, the guy quit while his lower-paid wife kept working.  They made some pretty major lifestyle changes to accomodate the new arrangement.

I disagree with one thing FMF said in particular and if you read his blog, you know he’s hit on this a few times.  He abhors the idea of quitting first and getting a new job second.  I mean he really hates it.

I disagree with him because that’s exactly what I did.  Let me tell you the story.

Where I was

A couple of months before our second child was born, my company offered one of its periodic buy-out offers.  It’s an old-line company and they routinely do mass firings (I hate the terms ‘lay-off’ and ‘RIF’).  Before they actually fire anybody outright, they usually offer an incentive if people will volunteer.

A little bit of back story.  I’d worked at this job for several years.  I was competent at it but had no passion for it.  I learned nothing on a day-to-day basis, but the pay and benefits were excellent.  I can tell you that many people there felt like they were trapped by the golden handcuffs (ok, maybe ‘gold’ is an exaggeration, but you get the general idea).

I didn’t exactly hate my job.  I just didn’t like it very much.  Ok, I didn’t like it at all.  The only reason to go was the people.  My coworkers made it bearable.  At the point when I left, not only did I not like it, I didn’t care.  That’s a dangerous place to be.

When the company made the offer, initially I was ambivalent.  I mean, they’d done this so many times that it wasn’t much of a surprise.  What shook me a little bit was the intimation that this firing was going to be bigger and they didn’t expect enough volunteers.

If you’ve ever gone through a mass firing, you know that they are indiscriminant.  I firmly believe the correlation between how good a job you do and your likelihood of being canned is close to zero.  Companies just aren’t that smart.  They routinely let good people go and keep idiots.  So in a situation like this, anybody can get whacked.

So, just to catch you up, I am at a job I don’t like and the company is giving me a pretty decent incentive to quit before they might fire me.  Did I mention that if I don’t volunteer and they fire me anyway I get nothing?  Yeah, that’s important to know.

Talking it over

My long-suffering wife, to her great credit, was very supportive.  I obviously didn’t make a snap, unilateral decision, but she didn’t do what a lot of people would have done in her situation.  By the way, when all this went down she was in her final month of pregnancy.

Imagine if you will.  You’re about to become responsible for the life of a second child when your husband tells you he’s considering quitting his job without having another one lined up.

She was great, though.  We talked it over.  Talked about the possibilities.  Discussed back-up plans to our back-up plans.  We prayed a lot and we didn’t sleep a lot for a few days. 

We decided.

I told my boss I’d be volunteering.  I quit.

Tune in next week to find out how it all worked out and I got my dream job.

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