The CFP (R) Exam is 40% Complete!

Which of course means I still have 60% to go.

Still, I can feel that 40% has lifted off my shoulders. I've been on a sort of high since I finished the first section of the CFP (R) Exam an hour and a half ago.

Overall I feel pretty good about how it went. At least, I feel better than I expected to feel. I felt the questions were fair, and I think I recognized all the concepts they were trying to test. I also don't think studying any more would have changed anything, so in other words I guess I feel like I was adequately prepared.

Which isn't to say that I thought I knew the answer to every question; there were more than a few where I had it narrowed down to two good choices and just don't know which was the "best answer" they were looking for.

There was also a lot more Fundamentals tested than I expected, especially considering this was just one out of three sections. Fundamentals is one of my weakest areas, which might seem weird, but that section comprises hundreds of little details that you pretty much either know or you don't; it's not like learning about all the different types of trusts used in estate planning where you can feel like you are finished learning it at some point and move on.

Then again they say that people always feel like the exam is weighted towards whatever they struggle with.

In any event I did my best and now it's behind me. Well, 40% of it at least.

Just A Little Retirement Reminder

It never ceases to excite me when I see in writing how much easier it is to accumulate big bucks when you start young (admittedly, this probably has a lot to do with the fact that I am still young).

These pointed analogies are what prompted me to start investing at age 14 when I first read one in a Motley Fool book I found lying in my grandfather's car.

Consider this example:

• If you're 25 years old and you want to save up $1 million by the age of 65, you'd only have to invest $85 a month at a 12 percent annual return.


• If you wait until 35 to start saving for retirement, you'd have to put away $286 a month to reach the same goal.


• At 45, you'd have to save more than $1,000 a month, and if you wait until 55, you'd have to invest a whopping $4,350 a month.

Source: Retirement Savings Through the Ages

Of course, this isn't to say that all you 25 year olds who are contributing at that level or even higher should be content. Keep in mind that 12% is probably on the very high end of what we can expect stocks to return over the next few decades.

In addition, you'll need nearly $5 million in 40 years to buy what you can get for $1 million today (assuming 4% inflation). So even though a million sounds like a lot (and it is), don't forget the power of inflation. The younger you are, the higher a figure you should be shooting for.

Besides, even $1 million in today's dollars might not be enough for you to retire on comfortably, depending on your standard of living. One million invested can safely provide about $40K a year in income - and that's before income taxes.

You can't really save too much for retirement, as long as you're not seriously jeopardizing your current lifestyle or responsibilities. Remember that when you turn 60 and can withdraw funds penalty free, you'll still likely have a third of your life left to live. If you have way more than you need at that point then you can always blow the money then! Trust me, you'll wish you had that option when you get there.

CFP Exam Looms

Six days to go until the big day. I'm studying 3-5 hours a day, so I apologize for the lack of posts. Preparing for this exam is completely maxing out my interest in finance. Some days I don't even check the market news, and I haven't looked up my personal account balances all week!

PS - Is it really necessary that I memorize every characteristic of every type of retirement plan (FYI there are more than 20), including eligibility, contribution limits, tax treatment, and distribution rules? It turns out there is a lot more to retirement options than IRAs and 401ks. It also turns out I don't really give a crap about most of it.

PPS - Please let this be the last Saturday night that I have to spend memorizing the applicable rules and tax treatments associated with Incentive Stock Options and Non Qualified Stock Options.

Observations from Behavioral Finance

Behavioral Finance is a field that proposes psychology-based theories to explain stock market anomalies. It argues that people (investors) are not nearly as rational as traditional finance theory makes them out to be.

Studies have been performed which indicate the following:

• People's decisions are often affected by how a problem or investment option is framed (for example, a patient who is told he has a 70% chance of living will choose the surgery; if he's told there's a 30% chance of death he will not).


• The Touchy-Feely Syndrome is the tendency for people to overvalue things they've actually touched or selected personally. Hence, analysts favor the stocks they research, and investors favor stocks they have picked.


• Researchers suggest that full service brokers and advisors are often hired to play the role of scapegoat. Since professionals are clearly shown to be unlikely to outperform the market, rational behavior on the part of investors would not lead to their widespread employment.


• People tend to remember their successes, but not their failures. This leads to an unjustifiable increase in investor confidence (similar to the gambler who clings to a handful of big wins as justification for throwing ever more money away in hopes of beating the game).


• Investors frequently trade on information they believe to be superior and relevant, when in fact it is not and is fully discounted by the market price already.


• People give too much weight to recent experience and assume recent trends will continue, even against statistical odds and long-run averages.
  
  People are more optimistic when the market is high and pessimistic when it is low - even though the reverse would be more rational since odds of a correction are best when the market is on a huge rally. This is what leads so many to buy high (after the run up) and sell low (after a fall which they assume must continue).

[Information summarized from my Kaplan Schweser CFP Study Guide]

Comparing Costs: Should I Drive or Fly?

I am debating how to get home for the Christmas holidays. My choices are a) to fly, or b) to drive.

When I was in college I made the nine hour drive home to Alabama at least once or twice a year all by myself. I didn't hate it, but I do remember sporadic awful times of boredom, struggling not to fall asleep at the wheel, and the occasional speeding ticket.

It's a long, boring, straight shot down I-20 for about 8 of the 9 hours, and I was often driving the last part at night (due to either classes or my inability to get up and on the road in good time). As soon as I got my first job out of school, flying home for the holidays went straight on my budget.

And oh how I have loved it. It's an easy direct two hour flight (plus one hour at the airport) - and yes, it only takes one hour at the airport. I fly Southwest out of Lovefield (a smaller airport in Dallas), and it's very quick and convenient to where I live. I got a Southwest Rapid Rewards membership, too, and I generally accumulate one free flight a year.

I love flying Southwest out of Lovefield. The baggage checkers out front are so funny and jovial and actually seem to remember me even though I only fly a few times a year. The staff is always pleasant, I've never had a problem getting quickly checked in and through security, and I only recall two instances of a delayed flight in all my years (during which wait I made lots of friends at the airport bar, and it was actually a great experience).

Plus during the holidays the flight attendants are even more festive than usual - I've gotten multiple free drinks and enjoyed several renditions of Christmas classics over the loud speaker. I swear I don't have any vested interest in the airline, but it really is a great way to travel.

So here are the numbers:

$271 Air fare
$40 Taxi to and from airport (I might be able to get a ride...)
$0 Checked bag fee
$5 Tip for the baggage checkers
$7 Magazines to read on the plane
$10 Snacks at airport
$333 Total Cost to Fly

$172 Fuel
$13 Meals on the road
$10 Snacks/beverages on the road
$8 Book(s) on tape
$203 Total Cost to Drive

I'm not factoring in the cost of putting over $1,300 extra miles on my car, but the basic question is whether $130 in savings is worth 12 hours of my life in my car.

I'm thinking it's not.

Non-financial pros for flying:

• The 12 hours I'd save are hours that would be spent with my family, who I don't see often.


• In addition, the 6 hours in the airport/plane could be spent reading, sleeping, meditating, meeting someone new, or even enjoying a glass of wine - as opposed to driving and endlessly surfing the radio.


• Spending 4 hours in flight is less risky from a liability and personal injury standpoint than spending 18 hours driving.

The only non-financial pros for driving that I can see is the potential for flexibility in my travel plans. What do you guys think?

True Investors Don't Buy Mutual Funds

The value of diversification in a portfolio is heralded constantly in the investment world; nobody really ever argues against it. Along those lines, mutual funds (particularly index funds and ETFs) have been championed for their ability to offer easy diversification to smaller investors.

I learned in a finance class in college that experts generally agree it takes a minimum of 50 stocks to create a diversified portfolio. Without mutual funds you might need at least $50,000 to build that diversified portfolio (assuming that it doesn't make sense to invest less than $1K per stock in order to minimize transaction costs).

But by investing in a mutual fund you get to purchase tiny slivers of hundreds or even thousands of stocks without incurring hundreds or thousands of trading fees. You get the benefits of diversification for a fraction of the cost!

For this reason most investors use these funds as the basis of their portfolio, including myself. I have a Scottrade account with which I trade individual stocks "for fun" and only with a small percentage of my overall portfolio. The majority of my "real" investments - including my retirement savings - are in Vanguard funds.

But consider this excerpt from Investopedia article "Think Like Warren Buffett:"

While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies.

Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due diligence process is completed, an investor should feel comfortable enough to dedicate a sizable portion of assets to that stock. They should also feel comfortable in winnowing down their overall investment portfolio to a handful of good companies with excellent growth prospects.

Buffett's stance on taking time to properly allocate your funds is furthered with his comment that it's not just about the best company, but how you feel about the company. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

I think this is a very significant point that should be considered by all investors. If you really have no knowledge or interest in finance and investing then a simple index fund may be the best thing for you. It also might be the best place to start for most people, especially if you have limited capital to invest.

But if you've got significant money to invest and you are educated in matters of investing (and an argument can be made that all of us should be), then could you be better off by condensing your holdings to a collection of fewer stocks - and bonds - that you have personally evaluated and selected?

In reality, you aren't an "investor" in the true sense of the word if all you do is dump your money blindly into mutual funds. A true investor can and does evaluate businesses on a fundamental level. They make informed decisions about where to invest their limited resources. They evaluate performance based on expectations and the earning potential of that business or industry.

In short, a true investor knows what she owns and why. Do you?

Saving Money This Holiday Season

I've come up with several ways to save some serious bucks this holiday season. They may not all work for you, but here are some ideas:

• I'm returning the $200 formal gown I bought to wear to a ball that my employer is requiring me to attend. I'm wearing an old prom dress instead (I also get to return the $80 spanx I needed to pull off the slinky new gown).


• I am driving 8 hours to see my grandparents in Louisiana this Thanksgiving, even though I have flown every year since I graduated from college. It will only cost me about $80 in gas compared to a $300 flight.


• I'm also driving home to Alabama for Christmas for around $300 savings.


• I'm also spending extra days at home this holiday season, which will save me money on food and entertainment this season.


• I'm saying "no" to at least 2 charity parties that I have gone to in each of the last few years. Savings is roughly $200 (sorry kids).


• Due in large part to the previous point, I will not be needing quite so many manicures/pedicures as I usually get this time of year. Savings = $150


• I'm not buying any extra or holiday-themed (and therefore overpriced) foods, decorations, flatware, scented goods, gifts/ornaments or anything else this year.


• As I'm not dating anybody in particular (I don't think...) I will save significantly on Christmas gifts this year. Also, I'm going to scrimp on my family and not feel bad since I've been relatively lavish in years past. Savings = $250

The reality is that most of this savings revolves aroung the Giving portion of my budget. I have noticed my giving has declined by about 50% year-to-date compared to 2008 (charitable giving, gifts for others, political donations, and donations to my alma maters).