Mutual Fund Diversification: To Do or Not To Do?

Many a time people ask me why would you only recommend 3 to 4 funds when there are so many on the offer! Questions like are you mad? Why can’t I add further 4 to 5 funds after all I am trying to do is to diversify/ spread my risk? Well, diversification to say is good to have but diversification beyond a point is actually bad for your portfolio.

Let me narrate you a short incident that you will be able to relate well. Recently, I had been to my friends’ marriage ceremony. They are a business class people so the occasion was bound to be a grand one. When I approached the eating counter with one of my friend we were amazed to find around 50 plus different vegetarian menus on the block and a further 20 such delicacies in the non vegetarian section. I can’t even remember their names well and most of the dishes were quite alien to me since I had never tasted most of them. This triggered a sense of exploration for my friend. He got ecstatic and wanted to taste most of the dishes on the offer – so in the end he had around 10 to 15 such dishes on his plate. He tried hard to enjoy them all. But, all that my friend could do was he wasted most of the food items as all of them got so mixed up that he could not relish any of the dishes well.

Reason is simple –  he over-diversified his plate and therefore could not enjoy the food well. This is what most investors do. They try to buy most of the funds in order to get the most out of it. But hang on are you really doing it right. It is actually a matter of diversification. Adding multiple funds in the idea of diversification can actually dilute your performance and overall returns. Keeping things simple is really important – your tax calculation, your interest rate calculations etc. Plus having more funds like 8 to 10 in your kitty will be quite an uphill task for you to track and manage your portfolio performance well.

Would you be really interested to repeat such mistakes in your portfolio? In the end all we want is returns and an easy to manage portfolio just like a plate of few delightful foods that we can savor and enjoy to the maximum.

I have always been choosy so I just picked those dishes which could satiate my hunger buds and gleefully enjoyed the dishes to the most. The investor needs to understand that in order to derive the maximum returns from your portfolio all you need is simplicity. So the next time when you hear the story of a new fund launch or a fund that has recently started SIPs etc. Think about it for a second are you really buying it for the sake of spreading your risk or is it otherwise. So don’t go overboard in the name of diversification. Till then Happy Investing.

4 Easy Ways to Avoid Being Conned

Recently I drove past a couple of young men who were standing beside their car, which was parked in a right-turn lane near a gas station. They’d placed a red plastic gas can on the car’s roof, and they called out to passersby, asking for help.

Amazingly enough, those very same gentlemen were in the exact spot two days later. What an amazing streak of bad luck, hmmm?

Ahem.

I’m usually a fan of trusting your gut, but our guts are a little too naïve when it comes to con artists. “Con” is short for “confidence,” because these scamsters are experts at winning yours—at overcoming your suspicions, quieting your fears and giving you reasons to believe in them.

Here are four easy ways to avoid being their next victim:

1. Don’t click on links in emails. Emails purporting to be from your bank, your credit card company, PayPal, eBay, your best friend or any other source could be from con artists hoping to crack your computer—or your bank accounts. If you receive any kind of email alert that seems to require action on your part, open a new browser window and type in the address of the site yourself, or call the company on its toll-free line. Install, update and run antivirus and anti-spyware programs to prevent your computer from being taken over by others.

2. Don’t wire money to strangers. There are countless variations on counterfeit check scams, but they usually involve your depositing a legitimate-looking check and then wiring some of the money back to the scam artists. The bank will credit your deposit at first, before discovering it’s a fake, and then will take the money back out of your account—even if you’ve already spent it. Any transactions that bounce will be your responsibility; the bank owes you nothing.

3. Don’t open your door to a stranger. The risks to you are simply too great, and you could lose more than money. If there’s a true emergency, call 911 while the stranger waits outside. If they’re selling something, you’re not interested. (And by the way, if you don’t know them by sight, they’re strangers—even if they say they live in the neighborhood, or even next door.)

4. Don’t feel bad saying no. There’s no way for you to tell if a desperate stranger is just that, or a con artist. If you want to help people down on your luck, you can give money to legitimate charities.

Emergency Fund vs Credit Card Debt: What’s the Top Priority?

Is it better to start an emergency fund or pay off your debt as quickly as possible? If you are anything like most human beings, you want a definitive push in one direction or the other. Most financial advisors and ten-year-old kids can tell you which is better to go with by simply looking at the numbers. However, like all things in life, it is not quite so simple. This is a great example of people thinking the world is in black and white.

Paying Off Debt Saves You Money

It does not take a genius to tell you that paying off your debt as quickly as possible is the best numerical choice to go with. You get one to two percent interest a year from a dollar in a savings fund while the dollar in debt collects fourteen percent interest a year. Each year you don’t pay that dollar off you are losing by twelve percent. The smart thing to do would be to pay off the dollar and start building an emergency fund now that you are out of debt in order to avoid possibly falling into debt again. That is the whole argument made by those that advise it is better to pay off your debt before creating an emergency fund.

Real Life Has Emergencies

Unfortunately, most of us cannot start from scratch with nothing saved without ending up in debt again. It is an unpleasant fact that things go wrong. The emergency fund side of the issue is a bit more realistic. Basically, you want an emergency fund set up so that you can avoid going into more debt than you have already gotten into. The idea is that, even though the debt you currently have is creating interest and destroying your credit, you aren’t adding new debt on top of the old debt. This raises a good point. Using all your money to pay off debt only to end up penniless will lead you back into debt the second an unexpected expense puts a vice grip on your finances.

Finding Balance

So then, which should be top priority? Neither. One extreme or the other will only condemn you in this situation. If you ignore credit debt, it will be 20 years before it’s paid. Ignore emergencies and you may go into bankruptcy. That is why you have to take the eclectic approach and do a little of everything. Save money in an emergency fund in order to keep from ending up with new debt, but also pay as much of the debt you already have accumulated as quickly as possible. At the very least, keep yourself from being late on credit payments, amassing more expense.

Here’s how to calculate how much needs to go into your emergency fund to make sure your credit card doesn’t end up costing you more than it needs to. Unfortunately, this has to assume nothing else major goes wrong, like a job loss or the total loss of your uninsured car. (Hint – make sure your car insurance is paid!) In the beginning, there are only so many emergencies for which you can prepare.

Pay a Little Extra on Credit, Build Your Emergency Fund

So, you need to have enough money in your emergency account for the necessities for one month. That means gasoline to get to work, the bare minimum amount you need to get by for food, the monthly payment for your car insurance, and the total minimum payment on all of your credit cards. Most utility bills will let you slide for one month without a large penalty, so if there’s something that has to wait, let it be those…but no more than 30 days. Once you have this amount, you can first focus on getting that amount saved in your emergency fund while paying the minimum plus at least $10 extra on one of your credit cards.

Attack Your Debt Full Force Only After Emergencies Are Covered

Once you have your emergency fund covering the necessities, start throwing everything you’ve got at your credit cards. You can attack the biggest first or not, depending on which method motivates you best. You’ll save more money by paying high interest cards with bigger balances first, but some people need to see one card paid off quickly to feel like they are progressing. Those folks may be better off with snowflaking, or paying of the smallest debt first.

This simple solution will solve your debt issues in a slow yet manageable fashion that, honestly, will take longer than paying credit first, at least in a perfect world. In the real world, this might be faster. You will end up debt free, with a nice cushion should anything unexpected arise.

8 Easy Debt Reduction Tips

Many people have come to a time in their lives where debt is lingering. It may seem that there’s no way out of the vicious circle of accumulating debt, but this is not true. Debt trouble is a temporary situation that any person can get out if with the correct technique. The following tips are great for reducing or eliminating creditor bills.

1. Close the Revolving Door

The biggest problem with revolving accounts such as credit cards and store cards is that once you pay them back, the credit returns. A huge mistake that people make with these types of accounts is using the card for the next purchase. This must stop immediately. Once you pay the balance on a credit card, leave it alone for a while.

2. Make Larger Payments

Tiny payment does nothing to bring down the balance of a line of credit. When you make tiny payments, you are only covering the interest and finance charges. In order to make a dent in your balance, you must make a healthy payment every time. As a rule, pay ten percent of the purchase price, plus an additional $20. For example, if the item you purchased on credit is equal to $100, make a $30 payment.

3. Consolidate Your Accounts

A simple debt consolidation can do wonders for your financial situation. If you have more than five open accounts, you may want to consider applying for a debt consolidation loan. The loan will pay off your existing accounts so that you will only have one monthly payment to take care of. Your APR will most likely be less also.

4. Choose a Cheaper Place to Live

If your family is small, you can toy with the idea of moving into a smaller unit. Smaller square footage means smaller rent, and less electricity/water/gas is perfect for cutting costs. Also, if you live in the country, choose a residence that has well water. There is no water bill associated with well water. You can use the savings to pay down your debt.

5. Purchase a Beater

A beater is an automobile that runs great but does not have all the bells and whistles. Go for a reliable car instead of high priced financed vehicle. Pay cash for it. That way the only monthly payment you will have is the insurance premium.

6. Negotiate with Creditors

If you are having difficulty paying your creditors, it cannot hurt you to pick up the phone and talk to them. Sometimes creditors have hardship plans. You might be able to get a lower payment or have some of the finance charges knocked off the bill. Make the telephone your friend and your mouth your tool. Negotiation works. Feel free to obtain a copy of your credit report and dispute all suspicious accounts. The bureau will remove any accounts that the creditor is not able to verify.

7. Develop a Budget

Writing down what you have to spend each month will help you to keep your finances in line and keep your eyes on the prize. Update your budget every two weeks and if you’re coming up short, brainstorm ways to cut costs.

8. Earn Extra Cash

Working odd jobs and side jobs will help you to earn extra money to pay your debt. Use your imagination. Babysitting, lawn mowing, article writing, and house cleaning are some fine ideas – and tax-free.