Fidelity Select Fundranker

Fundranker Blog—January 2009 Archive

Smart Debt

Sounds like an oxymoron, doesn’t it? We all know some really good examples of dumb debt, such as high-interest credit card debt, high-interest car loans, and high-interest home equity loans. The common denominator of dumb debt is high interest rates. So smart debt has to be just the opposite--low interest rate loans.

Did you and your parents save up some money for your college expenses? Good for you. You still may qualify for low or no interest (at least while you are in school) loans to pay college expenses. Invest the money you and your parents saved where it can make a better return than the interest you pay on your college loans, which is pretty easy if you don't pay interest while you are in school. If your student loan interest rate resets higher when you graduate, be sure to rethink your situation.

Have you taken advantage of today’s low mortgage rates? Don't be in a hurry to pay off that loan. If you have extra money, don’t make extra principal payments. Instead, invest that extra money where it can make a better return than the interest you pay on your loan. Another bonus of drawing out your low-interest mortgage loan to the last drop is that you get to deduct the interest on your income taxes.

So how can you invest your extra money to make a better return than the interest you pay on your low-interest, smart debt loans? One great, sure-fire, easy idea is to pay down a high-interest, dumb debt loan. The difference in interest rates ends up in your pocket. If you are not averse to more risk and more effort, buy stocks or mutual funds. You could use your extra money for education to prepare yourself for a better job. Put it in a Roth IRA, where it will grow tax free for as long as you have it there and even when you take it out. Any kind of investment will do; it just needs a realistic, potential return that is greater than the cost of your low-interest, smart debt loan.

Here’s an incredible, probably once-in-a-lifetime, smart debt deal of which I took full advantage. We all complain about credit card offers that keep showing up in our mailboxes, but in mid-2006, I received an offer from Discover which included the option to transfer a balance and pay 0% interest on the transferred balance until it was paid off--that’s right, no time limit. The only catch was to make two purchases per month. Since the minimum monthly payments I make go first toward the transferred balance, the purchases have mounted up, and I do have to pay interest on them. I finesse this by making minimal purchases of a few cents at the self-checkout counter in the grocery store or at the gas pump. Two and a half years later, I’m still paying Discover’s minimum finance charge of $0.50 per month on my purchases balance and 0% interest on my remaining transferred balances. My wife and I and my adult daughter applied for three separate Discover accounts with this deal, and we transferred the entire balances of two second mortgages to the three accounts, about $25,000 total. So we have to make six minimal transactions each month (two each on three cards), but for that minimal effort, we have saved thousands of dollars in interest we would have paid on the second mortgages.

Posted 1/21/09 10:18pm ET in Investing | Permalink | Comments (0)

QRSC Credit

What is the Qualified Retirement Savings Contribution Credit? To put it simply, under certain conditions, the IRS is willing to reduce your taxes if you contribute to one or more qualified retirement savings plans, which include traditional and Roth IRAs among others (see the instructions for Form 8880). What’s more, you can take this tax credit even if you also take an IRA deduction for your contribution.

Unfortunately, this tax bonanza is not available to all of us. It is phased out when your AGI reaches certain levels. First, only $2,000 of contributions is considered per individual. Second, for 2008, married taxpayers filing jointly with AGI of $32,000 or less, head-of-household taxpayers with AGI of $24,000 or less, and other taxpayers with AGI of $16,500 or less potentially can claim one-half of their contributions as a tax credit; married taxpayers filing jointly with AGI of $34,500 or less, head-of-household taxpayers with AGI of $25,875 or less, and other taxpayers with AGI of $17,250 or less potentially can claim one-fifth of their contributions as a tax credit; married taxpayers filing jointly with AGI of $53,000 or less, head-of-household taxpayers with AGI of $39,750 or less, and other taxpayers with AGI of $26,500 or less potentially can claim one-tenth of their contributions as a tax credit; above these limits, the tax credit is completely phased out. For 2009, for married taxpayers filing jointly, these limits are raised to $33,000, $36,000, and $55,500; for head-of-household taxpayers, they are raised to $24,750, $27,000, and $41,625; for other taxpayers, they are raised to $16,500, $18,000, and $27,750. Third, the potential tax credit also is limited by your tax liability. In other words, this tax credit is not refundable; you cannot get a tax refund because of this credit.

Check this tax credit out when you do your 2008 taxes this year. Form 8880, Credit for Qualified Retirement Savings Contributions, is an uncomplicated form and could save you hundreds of dollars off your federal taxes for 2008.

Posted 1/19/09 8:22pm ET in Tax Tips | Permalink | Comments (0)

Market Perspective

Let’s review what happened in the market from its high in October, 2007, through the end of 2008 and try to put it in perspective. This isn’t just a run of the mill bear market and recession. We are in the midst of the worst downturn since the Great Depression. In general, nearly $7 trillion of shareholders’ wealth disappeared, setting them back nearly five and a half years. For Fundranker investors, however, this downturn set us back three and a half years, which is bad, but not nearly as bad as the general market.

Fidelity Investments’ Select funds, taken as a group, reflect the market as a whole and were hit hard and across the board in 2008. All 41 funds had losses for the year, ranging from 11.35% to 63.16% and averaging 40.98%, so it’s not surprising that the S&P 500 tracking portfolio, the Top Eight Model Portfolio, and the Nasdaq Composite tracking portfolio lost 40.104%, 41.132%, and 44.306%, respectively, from November, 2007, through December, 2008. For comparison, in the previous downturn, September, 2000, through March, 2003, a much longer period, the Top Eight Model Portfolio lost 24.465% and the S&P 500 tracking portfolio lost 42.129%. Fundranker was able to withstand that previous downturn much better than the market. We all thought it was bad when the Internet bubble burst, but this current crisis has done nearly as much damage to the S&P 500 in much less time and may have farther to go.

The Fundranker system works by positioning an investor in the best performing Select funds. Most times, there are at least a few Select funds that are performing well, and the Fundranker system is able to pick them out, hence its long-term, market beating results. In the first half of 2008, when oil peaked above $147/barrel, energy and natural resource funds performed amazingly well and allowed Fundranker to buck the general downtrend. In the second half of the year, however, the downturn spread to all sectors of the market, none of the Select funds were performing well, and the Fundranker system was reduced to selecting the least worst performing Select funds.

Finally, in December, over three-fourths of the Select funds came out of their funk and turned in some nice returns, which will give the Fundranker system some better grist for the mill, so to speak, but it remains to be seen if this is the beginning of a sustained market recovery. The incoming presidential administration seems to be taking the situation very seriously and has proposed a massive stimulus program, so perhaps 2009 will be brighter.

Posted 1/1/09 10:38pm ET in Fundranker, Market | Permalink | Comments (0)