More on air travel congestion

It's not your imagination, air travel delays are increasing (free WSJ Digg link). There are numerous reasons for this, as the stories I've linked to discuss. (Overscheduling infuriates me the most.) Here's another:

Yet one fundamental shortcoming in the nation's air-traffic system has gone little discussed: the federal map of routes, largely unchanged since the 1950s, that airplanes are required to follow.

Just like rush-hour freeways on the ground, the nation's airways, particularly on the East Coast, have become choked with traffic. Block one with a small thunderstorm and jets sit on the ground waiting for hours because there's no room for them on other routes.

How were these airways established? It's an interesting bit of trivia.

The nation's airways evolved from air-traffic routes established in the 1920s when the government was developing airmail service. Pilots followed established ground routes, generally flying low enough to trace actual roads and spot one geographic landmark, then another. In 1926, the Air Commerce Act authorized the government to build a network of other navigational aids, beginning with bonfires that were later replaced by illuminated towers and, eventually, radio beacons and radar.

That's right, we're still using routes that were originally marked by bonfires. Has anyone informed these people that Woodrow Wilson is no longer President?

Found money

A site called missingmoney.com allows you to search for money that has been in accounts you have forgotten about, and that the companies holding this money for you have turned over to the state (this is the principle of escheatment). This MarketWatch article has more:

It [the money] comes from a number of sources, including abandoned savings accounts and stock dividends, and forgotten utility deposits and paychecks. In all of these instances, businesses are legally required to turn the unclaimed money over to the state for safekeeping.

The site is very easy to use. You enter your first and last name and a state, and it conducts a search for you. Of course, it's easier to sort through the results if you have an uncommon name.

Wrap accounts going bye bye

A recent WSJ article delves into how brokerages are trying to keep customers (free WSJ Digg link) now that wrap accounts are no longer legal. The background is that the courts said brokers couldn't act like investment advisers and get a fee for managing money. Will this be a bum deal for customers who liked to actively trade? Maybe.

Of course, the brokers don't want to give up these potentially lucrative customers, so now they are trying to convert the customers' wrap accounts into nondiscretionary advisory accounts, and are even lowering account minimums (which will potentially allow more of the mass affluent segment to have these accounts).

To help lure clients into its Strategic Advisor account, UBS this summer lowered the investment minimums to $50,000 from $100,000 in investable assets. Citigroup Inc.'s Smith Barney has a minimum investment for its Smith Barney Advisor program of $25,000, which it recently broadened to include household assets.

Most affected is Merrill Lynch, the largest player in fee-based brokerage accounts with about $100 billion in assets. The firm is pitching its nondiscretionary advisory account, known as Merrill Lynch Personal Advisor, as the main alternative to fee-based brokerage accounts, Merrill brokers say.

So what is the difference between the old wrap accounts (fee-based brokerage accounts) and the nondiscretionary advisory accounts? The nondiscretionary advisory accounts

can hold individual stocks and bonds, mutual funds, exchange-traded funds, and cash investments -- investors can get more comprehensive advice from a registered investment adviser, but still call the final shots since the adviser must get the client's permission before making changes.

Customers are also being converted into traditional commission based brokerage accounts. I personally feel that the commission based accounts are the way to go, with a good discount broker, like Schwab, TD Ameritrade or E*Trade.

Mortgage refinancing tax trap

Business Week ran a column on a mortgage interest deduction rule that piqued my interest. The interesting parts:

In general, the IRS lets you deduct 100% of the interest you pay on one or more home mortgages, up to a total loan value of $1 million. But when you refinance and withdraw cash, the rules change: Only the interest on your original mortgage balance, plus an additional $100,000, qualifies for a deduction. (If you want to take out more cash, use a home-equity loan or line of credit. The law allows a separate deduction for interest on borrowings of up to $100,000.)

[...]

Here's how the refi tax trap works. Let's say you borrowed $500,000 at 8% in 1998 to buy your house. By 2003, the house had appreciated substantially and the mortgage balance had been whittled down to $450,000. Then you refinanced, taking a new loan of $650,000 at 6%. At tax time, Form 1098 would show that you forked over about $39,000 in interest on the $650,000 mortgage in 2003.

[...]

If you use that $39,000 figure to calculate your annual mortgage interest deduction and you're in the 33% marginal tax bracket, you would wind up taking $1,980 more in deductions than you're entitled to, according to William Lazor, a CPA at Kronick Kalada Berdy in Kingston, Pa. That's because you may take a deduction on a mortgage of only $550,000—the $450,000 left on the original loan plus $100,000. On $550,000, the interest paid would be $33,000, says Lazor.

I did some further looking into this by reading IRS Publication 936. It says that any secured debt that's used to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt is not home acquisition debt, but may qualify as home equity debt.

My reading of this publication is that in the example from the article, the $450,000 is the home acquisition debt, and the $100,000 is the home equity debt ($100,000 is the maximum home equity debt you can deduct interest on). I'm a little confused on the first paragraph I quoted, where it implies that the $100,000 in the refinance PLUS a separate $100,000 in another home equity loan can both have their interest expenses deducted. I'll try to contact the author for clarification.

Update:
I was able to get in touch with the article author, and she graciously replied to me. She says that the explanation given in the article was confirmed with several tax experts. I'll continue to research this to prove it to myself.

Real estate commissions

OK, so it's a two-year old article in the Times. But I didn't want to lose track of this. See how one couple lowered their real eastate commissions:

Stan and Gloria Wakefield are no fools. They built their three-bedroom house 12 years ago in Ponte Vedra Beach, Fla., an oceanside resort community dotted with golf courses and picturesque inland waterways. The real estate market in the area, near Jacksonville, took off and the house, overlooking lagoons, rose in value to nearly $1 million. "This house has appreciated almost obscenely, " said Mr. Wakefield, a retired naval intelligence officer.

What the Wakefields did next should scare real estate agents everywhere.

They decided to put their house on the market this year, and concluded that the house would sell itself. So why pay a real estate agent a 6 percent commission? They tried negotiating a lower commission with prospective agents, who stood to make about $60,000, but the best they could get was 4.5 percent - and 5.5 percent if the agent had to share the commission with a buyer's agent.

They chose instead to list their property with one of the many real estate services that are challenging conventional brokerage firms, in this case, Assist2sell.com, an agency that charges a flat fee instead of a commission. The Wakefields had an offer within six days and sold their home for $985,000, paying a $10,000 fee to Assist2sell and $14,775 to the agent who brought in the buyer, for a savings of about
$30,000 over a conventional broker.

[...]

Wall Street Journal Web site to be free?

According to this article in the L.A. Times, Rupert Murdoch is considering dropping the yearly fee for Web access to the Wall Street Journal. The yearly fee for the Online Journal is $99 ($49 if you have a print subscription), which I happily pay. I don't have the print subscription, preferring to read the articles online. I listen to the Journal's podcasts on the way to work instead of reading the print edition. The argument for making the online subscription free is that the increase in ad revenue generated by increased traffic to a free site would offset the lost subscription revenues. I hope that if they make it free, they make the archive free too, so that more people could read the articles to which I link.

ETFs try to elbow into 401(k)s

ETFs are attempting to make their way into 401(k) plans (free WSJ Digg link), a move that the mutual fund industry is pushing back on. According to the story, 14% of total mutual-fund money is 401(k) accounts, while only 1% of ETF money is in 401(k) accounts. Total mutual-fund assets are $1.49 trillion, while total ETF assets are $500 billion. The arguments the two sides are making are:

ETF providers blame mutual-fund companies, some which run some of the biggest 401(k) plans, saying their resistance stems from fear of competition. ETFs in general charge lower fees than average mutual funds.

Mutual-fund purveyors see it differently. They say that they already offer plenty of low-cost mutual funds that track stock- and bond-market indexes as most ETFs do, and that some of the most heavily touted features of ETFs, such as tax efficiency and flexible intraday trading, offer few advantages in 401(k) plans, which already are tax-advantaged and geared toward long-term investing.

The other challenge is the need to develop trading platforms to trade the ETFs in 401(k) accounts.

The logistics of offering ETFs also complicate things: ETFs can be bought and sold on exchanges like stocks, but most 401(k) programs aren't set up to process the trades. And because they trade like stocks, ETFs charge commissions -- costs that can diminish the returns of workers who make small, regular contributions to their retirement accounts.

[...]

To gain a foothold, many ETF providers are either building computerized "platforms" to support trading of ETFs within 401(k) plans or forming partnerships with companies that are. Some firms are devising solutions to minimize ETF trading commissions -- aggregating trades across investor portfolios, for example, to limit the role of stockbrokers and other middlemen.

[...]

Firms like BenefitStreet are trying to narrow that gap. The San Ramon, Calif., company, which runs about $8 billion in retirement money for more than 7,100 plans, started offering ETFs from Barclays Global Investors and others in June on a 401(k) platform it sells to client companies. Its approach involves aggregating ETF trades among, say, hundreds or thousands of employees, to diffuse commission costs. It eventually aims to send trades directly to stock exchanges, bypassing floor brokers.

Another small firm, Invest n Retire LLC in Portland, Ore., already trades directly with exchanges and has a patent pending on the method. Rather than bundle the trades, Invest n Retire processes them throughout the day with an automated system that executes them for a few cents a share. RPG Consultants of New York offers a system that places orders to brokers in bulk daily to help keep costs low.

Admittedly, I don't know all the details of how these systems work, but the aggregation and bundling of trades concerns me. One of the great advantages of ETFs is the ability to trade them like stocks, with near real-time execution of the trades. Another is the ability to put limit orders on ETF trades. Anything which would diminish these capabilities, which is what this aggregation and bundling sounds like it would do. I would suggest enhancing the individual stock trading capabilites already in some 401(k) plans to add ETF trading.

The story has some good nuggets of information about the retirement plan industry:

The plans held an estimated $2.7 trillion at the end of 2006, representing about 17% of the overall U.S. retirement market, according to the Investment Company Institute, a mutual-fund industry trade group. (About half of retirement money is held in defined-contribution plans, which include 401(k)s, and in individual retirement accounts, according to the ICI. The other half is in government pension and private-sector defined-benefit plans, as well as annuities.)

Just over half of the money in 401(k) plans was invested in mutual funds as of the end of last year, ICI statistics show, followed by investments in products offered by insurance companies, banks and other institutions.

The $1.49 trillion of mutual-fund money in 401(k) accounts represented about 14% of total mutual-fund assets in the U.S. at the end of last year. While assets in ETFs have more than quintupled to about $500 billion since 2002, less than 1% of 401(k) money is estimated to be in the products.

Beyond staid IRAs

The Journal has an article on self-directed IRAs (free WSJ Digg link), specifically delving into making home loans in an IRA.

Through a little-known tool known as a self-directed individual retirement account, individuals can pursue a wide variety of investments, from real estate to businesses. Now, at least several thousand people are trying to goose their retirement savings by using self-directed IRAs to invest in mortgages, according to companies that promote the strategy.

[...]

IRA owners pay an annual custodial fee and transaction fees, ranging from $50 to a few thousand dollars a year, depending on asset size and activity. They typically charge borrowers a rate of at least 10%. If the borrower defaults, the IRA can wind up owning the property at a deep discount, since these deals are typically structured with the property as collateral.

But these investments aren't without risk.

For investors, one risk in foreclosing on a house is racking up so many expenses -- from legal fees to repair bills -- that the IRA runs out of money. If that happens, the IRA owner faces a difficult choice: Get a loan, or close out your IRA and pay any taxes or penalties.

Yet they are growing in popularity.

Self-directed IRAs make up less than 2% of the overall $4.2 trillion IRA market, but they are increasing in popularity. And the handful of firms that handle such accounts are logging increased usage by self-styled mortgage lenders.

Self-directed IRAs allow you to invest in other things besides real estate, such as a business, but you have to follow the rules for them set up by the IRS.

Another risk to investors is running afoul of the Internal Revenue Service's rules for IRAs. "You cannot take any kind of fee from your IRA for doing something inside your IRA, and if you have to start using money from other sources to bail out something happening with the loan inside the IRA, that's a big problem," says Natalie Choate, a Boston tax attorney. So it's important to make sure the IRA has enough money in it to pay any legal fees involved in foreclosure, or property taxes and insurance costs if you wind up owning a house for a while before you can sell it.

Investing in real estate or a business would take a considerable amount of capital, more than the $4000 you can put into an IRA in a single year. Presumably, you'd want to use an IRA that had grown into a nice sum, or a rollover from a large workplace retirement plan to fund the self-directed IRA. Self-directed IRAs look to be a way for the mass affluent to attempt to get greater returns and diversify from just stocks and mutual funds.

While doing more research on this topic, I also found this Business Week article from 2006. It talks about some more of the rules you must adhere to:

The biggest risk is "self-dealing," meaning that you've effectively used these tax-deferred funds for current use. Say you take $100,000 from your $1 million IRA to buy property on which you hunt and fish. If the Internal Revenue Service finds out about your personal use of the land, the entire $1 million could be considered distributed, and all the money subject to income tax and withdrawal penalties for account owners younger than 59 1/2. Slott says you shouldn't even let family members use the property, or any other asset in a self-directed IRA. The IRS may decide that there is a benefit to you.

I checked out the site of one of the companies that will help you set up a self-directed IRA, Guidant Financial Group. They offer a number of webinars which I might check out if I have time. Another site to explore is http://www.tomandersonblog.com/.

Yet another resource I've been reviewing is IRS Publication 590 (The IRS publications are excellent resources). According to the publication, there are penalties and taxes for investing in collectibles, borrowing money from an IRA, selling property to an IRA. in a prohibited transaction, that person may be liable for receiving unreasonable compensation for managing the IRA, using the IRA as security for a loan or buying property for personal use (present or future) an IRA with IRA funds. It's a good idea to be familiar with this publication.

Outrageous 401(k) fees

Outrageous 401(k) fees are only one thing angering participants in the plans (free WSJ Digg link). Poor or limited fund choices are also causing Hulk-like feelings.

Similarly, Christopher Davis, an analyst with Chicago research firm Morningstar Inc., wrote last fall that retirement plans were "overly focused on large-cap domestic-stock mutual funds," giving higher-performing small-cap and international funds "short shrift."

Merriman also criticized the fees plan participants were paying. For example, Amazon.com Inc. offered funds in 2005 with an average expense ratio -- the percentage of assets taken out of an investor's account annually -- of 1.14%, Merriman said. The average annual expense ratio for all U.S. stock funds is 0.96%, according to Russell Kinnell, director of mutual-fund research at Morningstar.

For a (possibly unfair) fee comparison, let's look at the fees on the Vanguard International Growth Fund, symbol VWIGX. Vanguard is known for funds with low fees, but this is an international fund, which tend to have higher fees. Yep, much lower than 1.14%.

Getting a good steak at home

I enjoy a good steak. The best steak I've ever had was at Cabaña las Lilas in Buenos Aires (I took the waitress's advice and got the ribeye). So I enjoyed reading and learned a lot from a Journal article (free WSJ Digg link) and accompanying podcast about how to get steakhouse quality steaks at home.

Americans have grown accustomed to the taste of top-drawer steak since the steakhouse industry began to boom in the early 1990s. But for years, there was a still a difference between the beef served up at these pricey restaurants and the best cuts sold in most stores. That began to change toward the end of the '90s, when more retailers started carrying USDA prime, sometimes dry-aged. The "prime" label is the highest grade assigned to beef by the Agriculture Department based on the amount of marbling, or lines of fat, it contains. Lesser grades, such as choice and select, have less marbling.

... I started buying USDA choice beef at Costco for biweekly steak dinners.

As it happens, that's exactly where the pros told me to shop to find great beef -- the first step in my steak-cooking quest. Elias Iglesias, the 14-year veteran executive chef at the New York branch of Morton's, says though he uses prime at the restaurant, he happily cooks choice meat at home, often buying whole loins at big-box stores such as BJ's or Costco. If you like filet mignon, look for a cut labeled "beef tenderloin"; for strip steaks, buy "strip loin."

Mr. Iglesias then cuts them into even, 1½- to 2-inch steaks himself (filet should be cut 2½ inches thick). The 33-year-old recommends examining packages of precut steaks closely for the degree of marbling. In my experience, well-marbled choice steaks can taste as good as prime if they are properly aged and cooked.

[...]

At Peter Luger, where the tin ceilings and beer-hall-style decor hark back to its 120-year history, they go a step further and dry age the meat. There, several tons of beef sit on wooden racks in a huge dry-aging room that has a distinctly pungent, nutty, somewhat sour odor. This arcane and expensive technique -- what one beef expert described to me as "a process of controlled rotting" -- is what gives Peter Luger beef its signature flavor. To my mind, dry-aged beef is the best there is because it's not only tenderized, but much of the liquid evaporates, leaving behind a smaller, but more intensely flavored piece of meat.

Trolling through meat threads on food Web sites Chowhound and eGullet, I discovered a whole subculture of people who forgo buying dry-aged beef and prefer to do it themselves, despite warnings from health experts. Cook's Illustrated, the cooking magazine that rigorously tests recipes, and the Food Network's Alton Brown have also both published recipes for home-aging beef.

Jack Bishop, editorial director of America's Test Kitchen, which owns Cook's Illustrated, says "if safety is your No. 1 concern, you probably don't want to go down the road of aging your beef," but that he believes it is fairly safe if cooks observe strict hygiene and limit the aging to four days. Alton Brown also says aging can be safe if properly done.

Err, I think I'll stick to buying the aged meat instead of trying to do it myself.

Family offices can make you rich

This probably won't come as a surprise, but running a wealthy family's office can be a very lucrative profession.

Social networking brokers

Some of the newer online brokerages are building out extensive social networking features.

While their concepts and tools may differ slightly, TradeKing, Zecco Holdings, and thinkorswim all operate on the premise that the networking features they offer encourage more trading. On TradeKing and ZeccoShare, the social networking portal of Zecco Holdings, members create profiles that show their investing strategies, key stocks they follow, and if they wish, their recent trades. TradeKing users can even publish blogs to share their investment ideas and thoughts about market conditions.

I haven't investigated these brokerages in detail yet, but I'm always apprehensive of anonymous investment information. I've followed several stocks in the Yahoo! Finance message boards, and while there are occasionally gems of information hidden in posts, I find it to be mostly name calling among posters or unwarranted cheerleading of stocks. The story gives some details on how these brokerages will try to prevent that from happening.

The growing popularity of these sites raises questions about security. TradeKing is governed by the new Financial Industry Regulatory Authority (FINRA). TradeKing keeps FINRA informed of new features, such as the year-old certified trades function, which shows the quantity and price of actual shares traded by customers. "Being a regulated entity, this would be a stupid place to perpetrate a scheme because you're creating a trail attached to your name," Montanaro says.

TradeKing officials also review every blog entry and remove unethical or potentially harmful comments. The company has no suitability rules beyond the warnings listed under the disclosures and terms and conditions tabs on its site, which customers are supposed to read before opening an account.

Air travel congestion

Air travel is just a terrible experience these days. There are many reasons for this. Point fingers and blame almost anyone in the industry. I doubt it's going to improve anytime soon. This fact aggravates me the most:

One of the big reasons flying is so miserable is because airlines schedule more flights at desirable times than airports can handle—much as they sell seats to more passengers than their planes can hold. On a typical Tuesday morning in August at New York's John F. Kennedy International, the airport has enough capacity for around 44 departures between 8 and 9 a.m. But airlines schedule 57, guaranteeing delays, even under perfect conditions.

That is just absolutely moronic. There is no excuse for scheduling more flights than an airport can handle in a given time period.