Blog Archives - PFwise.com

Want to Game the Credit Card System?

9/30/2016

Q. How to play the credit card points game the smart way?

A. You might have heard friend who traveled the globe with no cost, and people who make $500,000 a year by gaming the credit card system, just as this article at Racked.com illustrates.

But the caveat? When you clink any of the links mentioned in that article, be careful not to be gamed by the system itself!

How Much Does It Cost to Have a Cat or a Dog?

9/29/2016

Q. How much does it cost to have a cat or a dog?

A. Knowing the ongoing, not just the initial, cost of having a cat or a dog would certainly help your budgeting purpose.

One-time Costs

Initial medical exam: $70/dog, $130/cat
Spaying or neutering: $200/dog, $145/cat
Collar: $30/dog, $10/cat
Litter box: $25/cat
Scratching cost: $15/cat
Crate: $95/dog
Carrying crate: $60/dog, $40/cat
Training: $110/dog
Total: $565/dog, $365/cat

Annual Costs

Annual medical exam: $235/dog, $130/cat
Pet health insurance: $225/dog, $175/cat
Food: $120/dog, $145/cat
Litter: $200/cat
Toys and treats: $55/dog, $25/cat
License: $15/dog
Miscellaneous: $45/dog, $30/cat
Total annual costs: $696/dog, $705/cat

In short, owning a dog or a cat could set you back by at least $1000 the first year. Of course, there are other hidden or surprising costs, depending on what food you buy, whether you travel frequently or not, whether your pet gets sick a lot or not, your actual costs could be a lot higher.

Can a Pregnant Woman Still Get the Best Underwriting Class Approval?

9/28/2016

Q. My wife is pregnant at this time, if she applies for life insurance, could she still get the best class approval?

A. Yes, if she is in good health and all the other conditions fit the underwriting guideline.

However, not all the life insurance carriers are the same. For example, some companies do reject life insurance applicants from woman during the third trimester, so make sure contact us so we could find the right company for your wife.

Life Insurance Application With Colorectal Cancer

9/27/2016

Q. If I have colorectal cancer, will my life insurance application be declined?

A. Not always! The following is a great educational article. Contact us if you need any help.

6 New Smart Beta ETFs From Fidelity

9/26/2016

Q. Are there any smart Beta ETFs from Fidelity?

A. While it's debatable if the smart Beta strategy is truly smart or not, starting from September 15, 2016, Fidelity has offered the following 6 smart Beta ETFs that rely on factors such as low volatility, dividends and momentum.

Fidelity Core Dividend ETF
Fidelity Dividend ETF for Rising Rates
Fidelity Low Volatility Factor ETF
Fidelity Momentum Factor ETF
Fidelity Quality Factor ETF
Fidelity Value Factor ETF

These ETFs will track indexes developed by Fidelity that draw on the expertise of its quantitative-research team with expense ratios 0.29%.

Could Social Security Income Rise After Age 70?

9/25/2016

Q. Could my social security income continue to rise after age 70, if I continue to work after that time?

A. Yes, it is possible for some people's social security benefits increase after age 70 if you keep working after that age, here is the reason -

Social security benefits are calculated by adding your highest 35 years of wages and divide by 420. This gives you the Average Indexed Monthly Earnings (AIME). The Social Security Administration applies a formula to the AIME to determine your full benefits amount at your full retirement age.

For the years you had no income (especially for many immigrants who have short work life in the U.S.), your wages for those years will be counted as $0, so if you keep working to get more wage-earning years towards the 35-year count, your AIME will increase, so will be your social security benefits.

Solution for Pension Reduction

9/24/2016

David and Katherine will be retiring soon at age 65. Between their pension and Social Security benefits, this duo should be financially set. Their lingering concern? David is worried that his pension may significantly be reduced over time due to the state's changing budget. There is a solution that will leave David and Katherine at ease in retirement.

Is Risk-Free Investment Really Free of Risk?

9/23/2016

Q. What's the risk of risk-free investment?

A. For many conservative investors, they park money on risk-free investments, such as Treasury bills, bank accounts, money market funds, etc. But if you are a long-term investor, you need to know the risk of such risk-free investments is very high, because these risk-free investments' returns could barely keep up with inflation, see the chart below.

Risk and Return: Do You Understand Them? Part III - Risk Based Return

9/22/2016

From the return and risk measures of two portfolios we showed in previous blog posts, it's easy to see that investors often face a tough question - do you want a portfolio that has a higher return but also a higher risk? Or want a portfolio with a lower return and also lower risk?

There are a few measures that have been developed to help investors make such a decision.

Sharpe Ratio
The Sharpe Ratio is a measure to calculate risk-adjusted return, with it, now it's possible to compare two portfolios' performances fairly.

The Sharpe ratio is calculated by subtracting the risk-free return from the average return, then divide the result by risk. With risk-free return removed, the performance associated with the risk-taking activities could be isolated. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.

Return Over Max Drawdown
Are you willing to accept an occasional drawdown of x% in order to generate a return of Y%? With Return over maximum drawdown, which is calculated by using the average return in a given period for a portfolio divided by the maximum drawdown level, now you could compare two portfolios and answer the question.

Sortino Ratio
The Sharpe ratio uses standard deviation to measure risk, it has a problem - because investors welcome upside risk which brings higher returns. The Sortino ratio addresses this issue by only measures the standard deviation of negative asset returns. In other words, the Sortino ratio takes the asset's return and subtracts the risk-free rate, then divides that amount by the asset's downside deviation.

Risk and Return: Do You Understand Them? Part II - Measures of Risk

9/21/2016

In our last blog post, we showed that the large cap U.S. stocks portfolio had a better return than a diversified 7-asset portfolio over 46 years time period. Now we will compare risks of the two portfolios, because the better return could be due to taking higher risk, it's important to understand what's an investment's risk.

But how to measure the risk of a portfolio? There are actually a few different ways to measure the risk.

1. Standard Deviation of Return
This is a measure many investor find hard to understand, but intuitively low standard deviation means low risk. The standard deviation of the large cap US stocks portfolio is 17.31% over the 46-year period, a lot higher than the standard deviation of 10.31% of the 7-asset diversified portfolio.

If we measure the standard deviation of the 37 rolling 10-year periods' annual returns, we would get similar results - the large cap US stocks portfolio had 16.93% standard deviation of the rolling 10-year annual return, versus the 9.75% of the diversified portfolio.

2. Percentage of Time Had Negative Annual Returns
This is a measure easy to accept, no investor likes to lose money in any calendar year. The large cap US stocks portfolio had 20% of time over the 46 years had negative returns, again, a lot higher than the 13% of time the diversified portfolio had negative calendar year returns.

We can also look at the percentage of time had returns less than 10% and less than the return of cash, respectively. The answers are the same - the large cap US stocks portfolio had higher percentage of time with lower than 10% return and lower than cash returns!

3. Three Worst Annual Returns
For many investors who tried to time the market with their investment, a shorter term horizon and the associated return are good metrics to pay attention to. We will look at the worst 3 1-year return during the 46 years for the two portfolios, unfortunately here the large cap US stocks portfolio looks pretty risky: its 3 worst one-year returns were -37% (2008), -26.47% (1974), and -22.10% (2002). The three worst one-year returns for the diversified portfolio were a lot better: -27.61% (2008), -5.51% (2001), and -5.38% (1974).

4. 3-year Maximum Drawdown
This measure looks at the worst-case 3-year return. Of the 44 3-year rolling periods, the large cap US stocks portfolio had a worst 3-year loss of -37.61%, which should be very scary to any investor. As a comparison, the diversified portfolio's worst 3-year return was -13.40%.

The conclusion: a diversified portfolio is less risky than a portfolio consisting of only large-cap U.S. stock.

In our next blog post, we will put together our return and risk analysis of the two portfolios and draw some final conclusions.

Risk and Return: Do You Understand Them? Part I - Measures of Return

9/20/2016

What if you could choose one portfolio from the following two options:

Portfolio A entirely consists of large cap U.S. stocks (S&P 500);
Portfolio B consists of 7 assets: large-cap US stocks, small-cap US stocks, non-US stocks, real estate, commodities, US bonds, and cash, each class has equal share in the portfolio with annual rebalance.

Now assume you would hold it for 46 years (from 1970 to 2015). Which portfolio do you think would have a better return?

To answer this question, you first need to know how to measure return.

Measures of Return
There are two ways to measure an investment's return - over multiyear period or over a rolling time period.

a. Average Annual Return Over Multiyear Period
This is easy to understand, when you invest $10,000 in 1970, after 46 years, how much you would have in 2015? Based on that amount, you can calculate the average annualized return over the time period.

As shown in the table below, the 46-year average annualized return of large cap U.S. stocks is 10.27%. It outperformed the diversified 7-asset portfolio which only had 9.78% average annual return over the same period.

b. Average Annual Return Over Rolling Period
This method takes into consideration that most investors' investment time horizons are short (although many investor claim to invest for the long term) therefore shorter time horizon's annual returns are more meaningful for most investors.

We will use 3-year and 10-year rolling periods as examples.

During a 3-year rolling period in the past 46 years (total 44 rolling 3-year periods), the large cap U.S. stock portfolio had average annual 3-year rolling return of 10.93%, slightly better than the diversified 7-asset portfolio's average annual 3-year return of 10.30%.

During a 10-year rolling period in the past 46 years (total 37 rolling 3-year periods), the large cap U.S. stock portfolio had average annual 10-year rolling return of 11.10%, again, slightly outperformed the diversified 7-asset portfolio's average annual 10-year return of 10.68%.

Based on the above return data, can we draw the conclusion that the large-cap U.S. stocks portfolio beats the diversified multi-asset portfolio over the 46-year period?

Not yet, we have to consider the Risk of the portfolio, which is a more complicated factor, we will discuss in our next blog post.

Is DCA or Lump Sum Better Investment for A Large Amount to Invest?

9/19/2016

Q. I have a large amount of money to invest, should I invest it all at once, or use dollar cost averaging to get the ups and downs of the market?

A. It depends on your investment time horizon. Also, it depends on how large is the amount.

If this is for long term investment, and the amount is not huge, you should invest it all at once as a lump sum. Because over the long term, the market will be up. If you are concerned the market might be down in the near future, you should diversify your investment into different asset classes so they don't all go up or down at the same time, and you will rebalance periodically to take advantage of the downs of some of the asset classes.

When dollar cost averaging is applicable? It's usually for a specific amount at specific time intervals, such as a portion of your paycheck needs be invested regularly. That works best for small amounts as you accumulate them, not for a large lump sum available now, because if you do DCA for the lump sum, you will face the question - over how long a time period? is half year long enough? 1 year period? 5 year period? Remember money not invested would be earning nearly nothing.

Key Disadvantages of Dividend Reinvestment Plan

9/18/2016

While DRIP is a great long term investment for many investors, it has some major disadvantages too.

1. Not all companies offer DRIPs, only some of the large public companies offer it.

2. Restrictions usually apply, such as the amount you are permitted to invest.

3. Many DRIPs start charging fees, losing its cost advantage over discount brokers.

4. Time consuming, for both transaction (many DRIPs require you to execute via U.S. mail, and only do it a few times a month) and record keeping (especially when it comes to tax filing time).

Life Insurance Stats - Why Life Insurance Is Important

9/17/2016

September is Life Insurance Awareness Month, below is an infographic that shows why life insurance is important.

Pitfalls to Avoid When Use a Home Inspector

9/15/2016

In our last blog post, we discussed some effective ways to find a good home inspector. Now we will turn attention to the pitfalls to avoid when use a home inspector:

1. Which Report?
Home inspectors have different report protocols, make sure to ask for the inspection checklist report and understand the report clearly.

2. What's Not Covered?
The inspection report can't tell you if anything is wrong inside the walls or under the floors.

Sewer inspection is typically not covered, neither are Pest and Chimney inspections. Make sure to find a specialist in those not-covered areas in they concern you.

How to Choose a Good Home Inspector?

9/14/2016

Q. Any tips on choosing a good home inspector?

A. For home buyers, it's essential to choose a good home inspector to avoid surprises after purchasing a home. Here are a few tips about how to find a good home inspector:

1. Word of mouth: ask for referrals from friends who have used a good one in the past
Pro: easy, proven
Con: an amateur can't separate out a good home inspector from a bad one

2. Search by yourself: at American Society of Home Inspectors (ASHI) website, it lists referrals in your area.
Pro: ASHI has ethical standards and requirements that a member must meet
Con: Not all good and qualified inspectors are members

3. Ask your Realtor: they typically maintain a list of referrals
Pro: easy, leverage a realtor's insights of the industry
Con: potential conflict of interest

What are the potential pitfalls in using a home inspector? See our next blog post.

Comparison of the Top Term Life Policies' Conversions

9/13/2016

Q. As my financial situations change, I might need to consider transforming my term life policy into a permanent one. Which term life product has the best conversion feature?

A. You can use this Term Conversion Comparison table below to see how 13 of the nation’s top term life providers stack up.

Do I Need a Term Life With Conversion Feature?

9/12/2016

Q. Why should I convert a Term Life policy to a Permanent Life policy?

A. For many young people, a term life insurance makes sense, but a convertible term life policy can make even more sense because it provides greater flexibility later on.

Term life insurance provides the insured with a benefit upon death within the stated time frame of the contract, typically 10, 20, or 30 years. If during that time period, the insured experiences a need for permanent life insurance, the convertible term option allows him or her to change from the temporary plan to a permanent plan of equal or lesser face value if the change is made prior to the end of the convertible period.

Perhaps the greatest benefit of convertible term insurance is the guarantee of insurability. Without the conversion option, if you were to purchase a permanent life insurance policy at the end of the term, you would need to undergo medical underwriting. If that process reveals a health condition or the insured’s health has declined since the term policy ended, you may be uninsurable or may be required to pay a substantially higher premium.

In our next blog post, we will compare some of the top term life policies' conversion features.

Should I Buy or Rent a Home?

9/12/2016

Q. Is there any rule of thumb for me to determine should I buy or rent a home?

A. There are many factors impact your decision, below is a flow chart that takes you through the decision making process. Also, remember the final decision is based on your answers for now, which could change later.

Perspective on Market Moves - Sept 9 2016

9/11/2016

How Is Fixed Annuity Taxed?

9/9/2016

Q. How is fixed annuity taxed?

A. It depends on which component of the fix annuity and where it is held.

The gain on an annuity is taxed as ordinary income.
If the annuity is held in a qualified retirement plan and premiums were previously deducted from income tax, the entire amount received is taxed as ordinary income.
If the annuity is held in a Roth IRA, Roth403(b) or Roth 401(k) none of the distribution is taxed.
Taxation also varies according to where the annuity is held in the case of death.

Can I Get Life Insurance While On Disability?

9/8/2016

Q. Can I get life insurance while on disability?

A. Yes, although your choices might not be as wide as otherwise.

There are simplified issue and guaranteed issue term life policies that with little health related questions asked, although their coverage amount tends to be lower. In addition, some medically underwritten policies will approve applicants with disability, assume the disability not life threatening.

Contact us if you need help on this topic.

What If Will and Life Insurance Beneficiary Are Different?

9/7/2016

Q. What if Will conflicts with Life Insurance beneficiary? Will the Will override the life insurance beneficiary?

A. No, a Will does not override life insurance beneficiaries.

Unless you could prove that the life insurance owner was mentally incompetent at the time choosing the life insurance beneficiaries. Otherwise, life insurance beneficiaries are designated outside the Will.

Top 6 Insurance Mistakes People Make - Part VI

9/6/2016

In our last blog post, we discussed the mistake of having estate as the beneficiary. Now a related mistake to avoid.

6. Estate Tax Issue
If an individual is the owner of a policy, all of the death proceeds are included in the estate. For most individuals, this will not be a problem; however, if the estate is large, unnecessary estate taxes may occur.

Typically, when an individual discovers that ownership of a policy creates an estate tax problem, they transfers ownership to another individual or trust. Unfortunately this usually won't work because the Internal Revenue Code contains a rule that provides that if an insured owns a policy on their life and gives the policy to another person, trust, or entity and then dies within three years of the transfer, the policy proceeds will be included in the estate of the insured and subject to estate taxation.

A simple solution is to purchase a separate insurance policy for the three-year period during which the policy would be subject to estate tax.

Top 6 Insurance Mistakes People Make - Part V

9/5/2016

We discussed the mistake of failure to have a succession owner here. Now the fifth mistake to avoid.

5. Estate As The Beneficiary
If the estate becomes the beneficiary unintentionally, the policy proceeds may be subject to probate, creditor claims and estate or inheritance taxes. Make sure that you name both primary and secondary beneficiaries to ensure that the estate does not unintentionally become the beneficiary.

Next mistake to avoid - policy is subject to estate tax.