Blog Archives - PFwise.com

Which Funds Are Good For Choppy Market - Part IV

4/30/2016

In our last blog post, we discussed Convertible Bonds as an option for investors who are worried about the choppy markets. Now we will discuss the last option:

Balanced Funds
Balanced funds typically invest in both stocks and bonds, for example, invest 60% in stocks and 40% in bonds. Bonds' yield maybe low, but if the stocks go down, bonds would offer certain protections.

However, the downside is if the stock market surges, balanced funds' return may not be equally spectacular.

A good example of the Balanced Funds is Vanguard Balanced Index (VBINX).

Which Funds Are Good For Choppy Market - Part III

4/29/2016

In our last blog post, we discussed Covered Call Funds as an investment tool to deal with choppy markets. Now we will show another tool for conservative investors:

Convertible Bonds
A convertible bond is debt that can be converted into the company's stock. Because of this feature, as stock prices rise, these bonds' prices also rise. If stock prices fall, these bonds still pay you interest so your downside is protected.

The convertible bonds are issued by various companies, therefore like any other bonds, an investor faces default risks. You can buy some funds that aggregate such convertible bonds, especially funds that invest in convertible bonds issued by quality companies.

An example is SPDR Barclays Convertible Securities (CWB).

In our next blog post, we will discuss one more option - Balanced Funds.

Which Funds Are Good For Choppy Market - Part II

4/28/2016

In our last blog post, we showed one investment option for investors who are concerned about the potential market drop, now another option:

Covered Call Funds
These funds sell covered calls (the right for others to buy their stock holdings at a set price) which bring in extra income that will help in a downturn.

Options are safer than bonds because unlike bonds, the options you write always move in the opposite direction of stocks. However, the downside of such investment strategy is if the stocks rise a lot, your gain will be limited. Also, such funds could still go down if the extra income brought in by the options not enough to offset the stock holdings' declines.

An example of covered call funds is PowerShares S&P 500 BuyWrite Portfolio (PBP).

In our next blog post, we will discuss a third option investors could consider in a choppy market - Convertible Bonds.

Which Funds Are Good For Choppy Market - Part I

4/27/2016

Q. I am concerned the stock market might go down significantly this year, which funds can I use to profit from this trend?

A. There are a few options for cautious investors, we will discuss them one by one:

Managed Futures Mutual Funds
Most funds could only profit when the market moves in one direction - either up or down. However, there is a subset of the mutual fund family that could profit when market moves either way - managed futures mutual funds.

These funds trade futures contracts, which are promises to buy or sell a commodity, stock or other asset at a set price on a future date. Because managed futures funds can bet on prices rising or falling in any of the markets in which they deal, they have as much opportunity to make money in a down market as they do during good times.

The managed futures funds shone during the 2007–09 bear market, when the average such fund returned a cumulative 36%, according to Morningstar. Over the same period, Standard & Poor’s 500-stock index plunged 55%. However, they haven't done well recently.

If you believe the market will trend down, then managed futures mutual funds could be a good candidate to consider, although one thing to pay particular attention to - expense, as these funds tend to have high fees.

In our next blog post, we will discuss the second option: Funds Use Options.

Is Term Life Insurance Better Than Permanent Life Insurance?

4/26/2016

Q. Is a term life policy better than a permanent life policy?

A. Because everyone has a different and unique situation, the answer is it depends on your unique situation as to whether term life or permanent life insurance is better for you. There is no one size fits all with life insurance.

Term life insurance has it's place to cover a specific debt or create an instant estate in case of an untimely death at an affordable rate. Permanent life insurance plans solve more problems such as lifetime coverage, cash value options to pay for critical illness expenses, supplemental retirement income, etc.

You should talk to an experienced independent life insurance agent to help determine your need and the proper product to fill that need.

Best Credit Cards for Students or Someone Without a Credit History

4/25/2016

Q. I am a foreign student in the U.S. without established credit history. What's the best credit card for my situation?

A. You can try student credit cards that are specifically designed for college students who don’t yet have a full-time income or established credit history. You can upgrade student credit cards to a regular credit card after a year or two of responsible use.

Below are 3 of the best student credit cards and their perks:

Discover it for Students

Discover matches all the cash back you've earned at the end of your first year - automatically. Only for new cardmembers.
5% cash back in categories that change each quarter like gas, restaurants, home improvement stores and more -up to the quarterly maximum when you sign up. 1% cash back on all other purchases.
Good Grades Rewards: $20 cash back each school year your GPA is 3.0 or higher for up to the next 5 years.

Journey Student Rewards from Capital One

Earn 1% cash back on all your purchases. Pay on time to boost your cash back to a total of 1.25% for that month
There’s no limit to the amount of cash back you can earn, and rewards don't expire
Get access to a higher credit line after making your first 5 monthly payments on time

Discover it Chrome for Students

Discover matches all the cash back you've earned at the end of your first year - automatically. Only for new cardmembers.
2% cash back at restaurants and gas stations on up to $1,000 in combined purchases every quarter—no sign-ups needed. 1% cash back on all your other purchases.
Good Grades Rewards: $20 cash back each school year your GPA is 3.0 or higher for up to the next 5 years.

Perspective on Market Moves - April 24 2016

4/24/2016

Pitfalls to Avoid When Review College Financial Aid Reward Letters

4/23/2016

Q. My son is going to college this fall. Is there anything I should pay attention to when review the college financial-aid award letter?

A. The college financial-aid award letter usually follows the college acceptance letter, but there are a few common pitfalls parents should try to avoid when reading the letter:

a. First Year Only
The letter you receive is for the first year only, be careful that some colleges front-load scholarships or grants so the financial picture looks attractive for the first year. Each year a new financial-aid aware letter will arrive and the numbers might be different from the first year's figures.

b. Parent Plus Loans
The financial-aid letter might include parent Plus loan offers, be careful it's different from the regular student loans as parental borrowers must pay monthly payments right away and Plus loan carry high interest rate and fee.

c. Net Cost vs. Net Price
Net Cost is the cost after the entire financial-aid package numbers, including loans which is something you have to pay back later; Net Price is a more realistic number if you are looking for your trust college cost - it is your total Cost of Attendance minus free money such as grants, scholarships, and other aids you don't have to pay back!

What Does the New Fiduciary Rule Really Mean For Your Retirement?

4/22/2016

Q. Will the new fiduciary rules really protect my retirement savings?

A. While the new fiduciary rules (see details here) require anyone who offers investment advice to put a client's interests above his or her own interests, unfortunately it's still your job to look after your own interests, here are several reasons:

a. Be careful of new marketing pitches
You might hear the investment sales people touting "fiduciary duty" in their sales pitches going forward. But it is still perfectly legal for a fiduciary to charge you a high fee, for example, charge you 2% of assets under management as fees even though you could create your own market index funds at a tiny fraction of the 2% annual cost.

b. Action is better than words
A retirement advisor might claim fiduciary duty when talking to you, but he or she might be selling you certain investment products that are legal but risky. For example, private real-estate investment trusts that are not liquid, or other non-traded securities. What you can do? Ask your advisor if there is a better product than what he or she is recommending to you!

What Is the New "Fiduciary" Definition and How It Will Impact You?

4/21/2016

Q. What is going on with the new "fiduciary" definition and how it will impact me?

A. In April, 2015, the Department of Labor proposed a new rule to broaden the legal definition of "fiduciary" that will likely have far-reaching consequences for the investment industry and consumers. The final rule was released on April 5, 2016.

For details, please refer to the following links to the DOL website:

The text of the final rule can be accessed in the Federal Register.

Pros and Cons of Renting or Owning a Home for Seniors

4/20/2016

Q. As a senior, should I own or rent a home?

A. For senior people, there is a balance between housing needs and financial situations when it comes to decide whether to own or rent a place to live.

Pros of Renting

A wider range of housing options
Flexibility (sign just 1-year lease and move to a new place after it ends)
Hassle-free (the landlord will be responsible for repairs and maintenance)

Cons of Renting

Rent may keep rising (problematic if your income is rising accordingly)
Not participating the long term trend of rising home equity values
Spend, rather than save, the money from selling the previously owned property when opted for renting

Roth IRA Contribution or Conversion?

4/19/2016

Q. Can you use an example to show the differences between a Roth IRA Contribution and a Roth IRA Conversion?

A. Sure, consider the following example:

Roth IRA Contribution
If your income qualifies, you can Contribute $5,500 to your Roth IRA account for the current tax year, with the deadline of such contribution being April 15 of the following year.

Roth IRA Conversion
If you have a Traditional IRA, you can Convert some or all of the funds in your Traditional IRA account to a Roth IRA account, but the deadline to do so is December 31 of the current tax year.

Spousal Benefit Before Retirement Age?

4/18/2016

Q. I am already collecting social security benefits, my wife has not reached her retirement age yet, can she claim spousal benefit for now?

A. If your wife has not reached age 62, which the minimum age a person could claim social security benefits, then she cannot claim spousal benefits.

The only exception is for surviving spouses - a widow or widower can claim benefits as early as age 60. A disabled widow or widower can claim as early as age 50.

A Great Educational Travel Website

4/17/2016

Q. I am interested in educational trips, where to find them?

A. The most popular website about educational trips is probably Road Scholar, it offers 5,500 tours in all 50 states and 150 countries.

Top 6 Tax Benefits of Life Insurance

4/16/2016

Q. What are the tax benefits of life insurance versus other investment or saving products?

A. Below is a list of the top 6 Tax Benefits of Life Insurance:

Life insurance premiums are paid with after-tax dollars: Because premiums are typically not a tax-deductible expense, taxes have usually been paid on these funds and they are able to GROW tax-free.
Tax-deferred cash value accumulation: Growth of policy cash value in excess of the cost basis are typically income tax-deferred while they remain in the policy.
FiFO tax-free distribution: For non-MEC policies, cash can be withdrawn from the policy tax-free up to the adjusted cost basis.
Tax-free death benefit: IRC Section 101(a) provides that death benefits of life insurance are income tax free when paid to the policy beneficiary.
Not subject to 3.8% add-on tax for "passive" investment income under the Affordable Care Act (ACA).
No deposit limits: There are no restrictions on how much can be placed in a policy versus QRP/IRA Limits (see chart below).

A Less Common Way to Bet Against the Market

4/15/2016

Q. Should I use VIX to bet against the market?

A. If you want to bet the stock market's fall, other than the bear-market funds or puts, the CBOE Volatility Index or VIX (also known as the market's fear gauges) is another effective tool, since volatility spikes when stocks plunge, and in market rallies, volatility recedes. You can purchase the Proshares Ultra VIX Short-term Futures ETF (UVXY) to accomplish the goal.

Complications
However, an investor on VIX ETFs will be better off to understand some of the details before actually putting money into the funds:

1. Aren't directly tied to VIX
The VIX ETFs are not directly tied to VIX because VIX is a mathematical calculation that isn't directly investable. Instead, VIX ETFs are linked to the futures market, and unlike a continuous index, futures contracts expire regularly. As a consequence, don't expect your VIX ETFs' returns mimic exactly the VIX's changes.

2. Not the best for long term investors
All futures-related ETFs face structural limitations because they use derivatives therefore must swap pricier longer-dated contracts for cheaper short-dated ones each month. This "roll" effectively means those funds continually buy high and sell low.

The Bottom Line
The VIX ETFs are best for investors who change their holdings frequently and don't want to use the bear market funds or put options to bet against the markets.

The Math Behind Risk Control - Part E

4/14/2016

In our last blog post, we introduced a simple way to exercise risk control in the real investment world. Now we will introduce another very important concept - risk : reward ratio.

We have seen from the Kelly formula that even for investments you have higher odds of winning (for example, 60%), if your net winning rate and net losing rate are the same, then at most you should commit a very small % (a small single digit percentage) of your available funds to this transaction. Unless your available funds amount is a big number, otherwise due to higher transaction costs, it's simply not worthwhile to invest that very small % of funds.

So the key is to raise the Reward : Risk ratio for each transaction to make your investment transaction meaningful (my rule of thumb is at least >3), of course this implies that before each actual investment transaction, it's extremely important for an investor to evaluate the Reward : Risk ratio and only commit to the transactions with high such ratios.

How to set appropriate reward and risk levels for each investment transaction is a topic for future series of blog discussions.

The Math Behind Risk Control - Part D

4/13/2016

We introduced the Kelly formula and Shannon Entropy in previous blog posts. If you feel the math is too hard there or feel you don't have a good handle of your investment's p, q, Rw, and Rl, don't worry, you can use some low math formula to exercise risk control of your investment decisions.

A rule of thumb is this: if you are a risk taker, each investment you should aim not to lose more than 3% of your total available funds. If you are very conservative, lower that 3% to 0.5% to 1%. For average risk takers, try to keep no more than 2% of your funds at risk in each investment.

Once you set the % at risk target, let's say, 2%, next is to determine your stop loss price point (Yes, for each investment, you should set your stop loss price point, because nobody could guarantee your decision is always correct, you could lose money in the investment world), let's call it L, and your entry price is P, and your total funds is F. Based on all the information, the number of shares you could buy should be set as:

F*2% / (P-L)

For example, if you have $10,000 fund, your long entry point is $10, and your stop loss point is $9, then the number of shares you could buy is $10000*2%/(10-9) = 200.

In addition to risk control, another important decision every investor should make, before actually committing your money to an investment, is Risk:Reward ratio, we will discuss this in our next blog post.

The Math Behind Risk Control - Part C

4/12/2016

In our last blog post, we introduced the Kelly formula and showed its importance for an investor's risk control.

Based on the Kelly formula, now we will introduce another related and interesting formula that shows an investor's maximum compound growth rate (G), if the investor is going to keep investing a fixed % f each time.

G = p*ln(1+f) + q*ln(1-f)

If we recall f = p - q, and p+q = 1, after some transformations, we can get

Gmax = 1 - H

Where H = - [ p*log(p) + q*log(q)]

In information theory, H is the famous Shannon entropy.

There are a few important takeaways from the above Gmax formula -

1. Do not participate a gamble where H = 1, because your Gmax will be 0! For example, if a gamble has p = q = 0.5. There is no need to participate!

2. The lower H, the higher the investment certainty, the higher your investment's compound growth rate in the long term. This could explain why Warren Buffet mainly invests in things he understands, because he will gain an edge in those investments which maximizes his long term compound growth rate Gmax!

3. Avoid large loss. Due to the compound rule, in the investment world, a significant loss could wipe out a string of gains before it. That's why Buffets stresses: Rule #1, don't lose money. Rule #2, don't forget Rule #1!

4. Avoid over betting, even you have higher odds of winning! This could be easily seen from the Kelly formula, the math can't be wrong!

In our next blog post, we will introduce a low math way to manage your risk.

Is 401k Distribution Required If Still Working After Age 70.5?

4/11/2016

Q. I am at an age needs to take required minimum distribution but I am still working (and contributing to a 401k). Should I still take the required distribution?

A. IRS requires everyone who reaches age 70.5 to begin withdrawing funds from their retirement accounts. But if you are still working, this rule does not apply to your current plan.

Please note two key parts in the above sentence:

1. No distribution required from your current plan. However, you are still required to take the RMD from your former employer's retirement account or an IRA. Our previous blog discussed a trick to get around this requirement.

2. Still working means you cannot own more than 5% of the company you are working for.

Retirement Planning Resources

4/10/2016

Q. Any good resources or tools that can help me plan my retirement life?

A. Try the following resources or tools from reputable companies or organizations:

Life Reimagined (AARP): offers free online tutorials on topics including setting goals and career planning
Encore: helps find second acts with social impact
Life Planning for You: provides exercises to help you identify a path that might suit you best
Life Planning Network: a group of professionals and organizations that help people navigate second half of life
Coming of Age: has an eBook (The Age for Change) that answers What Now?
Project Renewment: helps women shape their future
Transition Network: helps women shape their future

Life Insurance Underwriting Guideline for Children as Applicants - III

4/9/2016

In our last blog post, we shared the underwriting guideline for juvenile face amount under $500,000, now we will show the underwriting guidelines if the face amount is between $500,000 and $1,000,000.

Face Amount Between Half Million and One Million
First, all requirements as shared on the previous blog post apply, plus:

Proof of the owner’s existing insurance coverage, including any group employer coverage

For all in force coverage on the owner, a copy of the policy page(s) providing the face amount and premiums are required.
For employer group coverage, proof of the face amount is required.

Minimum household income must be $100K or greater. Evidence of income must include one of the following:

A copy of the owner’s pay stub
Schedule C (if self employed)
Or a copy of the previous year’s Tax Forms

Underwriting will obtain the child’s medical records • Submission of an illustration reflecting overfunding of the policy is strongly encouraged

If you are interested in getting a life insurance for your child(ren) for some or all of the benefits we discussed before, please contact us so we can help you shop around and get the best product for your needs.

Life Insurance Underwriting Guideline for Children as Applicants - II

4/8/2016

In our last blog post, we discussed some potential benefits to get life insurance for children. Now we will share some common underwriting guidelines for juvenile life insurance applications:

Underwriting Guidelines for Insured Amount Under $500,000

Parents or legal guardian should have a minimum of two times the face amount requested on the juvenile
All siblings should have equal coverage
Parents or guardians must always witness the applications and complete the non-medical declarations
The owner of the policy must be the parent or legal guardian
The owner and the juvenile must be residing in the U.S. permanently either as a U.S. citizen or a visa type that is not consider temporary or uninsurable based on our international underwriting guidelines

If the face amount is greater than $500,000, the underwriting guidelines tend to be more stringent, see our next blog post discussion.

Life Insurance Underwriting Guideline for Children as Applicants - I

4/7/2016

Q. What are the guidelines for kids applying for life insurance?

A. First of all, there is usually no current financial need for juveniles to apply for life insurance since they don't have any income and have any family responsibilities. However, there are a few reasons some parents do consider life insurance for their children, here are a few major ones:

Future insurability that is guaranteed as long as the policy remains in force
The opportunity for tax-deferred cash value accumulation over the long term
Access to cash value once it is sufficient, through loans and withdrawals
Providing funds for such things as college tuition, a wedding or future home
Potential for a tax benefit through the annual gift tax exclusion

Typically the total juvenile insurance coverage with all carriers cannot exceed $1 million. The specific underwriting guidelines for juvenile life insurance could vary by life insurance carriers, but we will present two quite common guidelines in our next two blog posts.

How to Use ADX to Tell a Stock's Trend and Strength of the Trend

4/6/2016

In our last blog post, we introduced the best stock movement indicator - ADX and how it is calculated.

Now we will discuss how to apply ADX in stock investment.

ADX Greater Or Lower Than 25?
In practice, most technical analysts use 25 as the threshold for ADX reading - if ADX is above 25, then it indicates a strong trend (note the trend could be up or down since ADX is directionless). A reading of ADX below 20 usually means there is no trend.

ADX Rising or Dropping?
A rising ADX line means the existing trend is strengthening, this is good for some trading strategies. For example, you could use a trading strategy to pick a stock's buy or sell price, but it will be nice to use ADX to confirm the stock is in a strong upward trend before you buying a stock or selling a stock if ADX indicates a stock is in a strong downward trend.

DI+ vs. DI-'s Relative Positions
DI+ line and DI- line complement the ADX line as they help determine the trend's direction. The direction of the trend is positive if the DI+ line is higher than the DI- line. Conversely, the direction of the trend is down when the DI- line is higher than the DI+ line.