Tips for Giving to Charity
It’s getting close to the end of the year, so you are probably considering donating to charity. Here are some quick tips for giving to charity.
Check your charity’s financials. All nonprofit organizations, except for churches, are required to file basic financial forms with the government. The two data points I always look at are executive compensation and percentage of expenses that go to programs. You can find this data for free on GuideStar, which stores Form 990s for all major charities. Charity Navigator also rates charities according to their own criteria.
Donate appreciated investments. If you plan on donating money, consider donating appreciated investments in taxable accounts instead. If you donate investments such as stocks, mutual funds, and ETFs, you avoid paying capital gains tax on the donated shares. Further, your income tax deduction will be based on the full market value of the donation, not the cost basis.
Glide Path: A Target-Date Fund’s Secret Sauce
You probably have never heard of the term “glide path,” but you’ve definitely thought about it before. The rule of thumb of holding 100 minus your age as a percentage in stocks is probably the most well known glide path. Even if you’ve never thought about what percentage of stocks and bonds to hold over your lifetime, you instinctively know that your allocation to stocks should decrease as you get older. A glide path is nothing more than a relationship between your asset allocation and age.
Currently, the easiest way to implement a glide path as part of your investment strategy is to buy a target-date fund. These funds automatically shift your portfolio from stocks to bonds and cash as you get older. However there is no industry standard glide path, so each fund company uses its own, making your choice of fund company quite important. Let’s take a look at the glide paths of the three biggest target-date fund companies and an index provider: Fidelity, T Rowe Price, Vanguard, and Morningstar.
Asset Allocation, A Brief Introduction
As mentioned previously (here and here), I am a huge fan of using index funds or ETFs to construct a portfolio. The natural follow-up question is, “Which index funds or ETFs should I buy?” To answer that question, we must first discuss the concept of asset allocation.
Asset Allocation
Asset allocation is your strategy for dividing your investments across various asset classes. The set of asset classes you use can be as simple as stocks, bonds, and cash. Or you can divide investments into smaller buckets, such as US stocks, foreign stocks, real estate, commodities, bonds, and cash. Next, you need to decide the percentage of your portfolio you want in each asset class–this is your target asset allocation. The goal is to set the percentages so that the risk and return profile of your portfolio is appropriate based on your investment horizon, risk preference, and financial situation.
2010: Year of the Roth IRA Conversion
If you’ve been obsessively reading personal finance news like I have, you know that the eligibility rules for Roth IRA conversions are changing in 2010 and that some people are getting quite excited about it. The current $100,000 income limit for conversion will be gone starting 2010. As an added bonus, converters in 2010 have the option of dividing their conversion income over two years (2011 and 2012, curiously skips 2010).
So, I’m not going to write a long post about all the factors that go into whether you should convert. You can read what Vanguard and Fidelity has to say about that. What I am going to do is discuss what is typically missed and share a simple calculator I plan on using next year to help me decide whether to convert.
The Roth 401k Decision
Contributing to a 401k account to save for retirement is an easy decision, especially when a company match is involved. However, how would you choose between contributing to a traditional 401k vs a Roth 401k? The obvious differences are:
- Traditional 401k: Income taxes are paid when the money is taken out during retirement. Contributions reduce current taxable income.
- Roth 401k: No income taxes are due when the money is taken out during retirement. Contributions have no effect on current taxable income.
Actually, there is one other major difference–the contribution limit. The 401k limit is the same dollar amount for both traditional and Roth versions, therefore the contribution limit for a Roth 401k is effectively higher since it is funded with after-tax money. One other benefit of the traditional 401k is that it can be converted into a Roth IRA later on, with some restrictions. The key benefit of both 401k’s over a regular taxable account is that they do not incur annual taxes on dividends and capital gains, allowing earnings to compound freely.
Trying to Beat the Market
The NY Times recently highlighted an academic study that estimates the proportion of mutual fund managers that can truly outperform the market. These types of studies have been conducted countless times, and all show that beating the market is very difficult. The results of this study using data from 1975 to 2006 are:
The researchers’ tests found that, on a pre-expense basis, 9.6 percent of mutual fund managers in 2006 showed genuine market-beating ability — far higher than the 0.6 percent after expenses were taken into account. This suggests that one in 10 managers may still have market-beating ability. It’s just that they can’t come out ahead after all their funds’ fees and expenses are paid.
Invest Like a Googler
Before Google’s IPO in 2004, the company felt responsible for preparing their employees to manage their upcoming IPO wealth. So Google hosted a few experts in finance and economics to speak to their employees about personal investing. Some of the speakers were:
- William Sharpe: 1990 Nobel Laureate economist and professor emeritus of finance at Stanford’s Graduate School of Business
- Burton Malkiel: former dean of the Yale School of Management, now a professor of economics at Princeton, and author of the classic “A Random Walk Down Wall Street”
- John Bogle: founder and retired CEO of The Vanguard Group, the first company to offer index funds to retail investors
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