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June 9, 2007

Now You Can Send and Receive Money with Your Cell Phone

Imagine this scenario: Your daughter is out-of-state at college and calls you and says, "Mom, I need extra money for books, now!" What do you do? Well, if you had Obopay, a new service we recently came across, you would immediately send her the funds she needed with your cell phone.

Obopay is a new service that combines a prepaid Mastercard with a cell phone. Basically, you would dial up your Obopay phone number, check your balance, input your daughter's phone number and the amount you wanted to send, and hit enter. The money would then immediately be available on your daughter's Mastercard. With Obopay carrying cash is a little less relevant. Other potential uses for Obopay would include splitting a dinner bill or paying back a friend.

The story behind Obopay is interesting. Carol Realini, the founder and a retired entrepreneur, noticed that while doing volunteer work in Africa that many people carried a cell phone but didn't carry a wallet. The "light bulb" went off and the idea of combining phones and "electronic wallets" was born. Upon returning to the United States she raised venture capital, hired seasoned telecom executives, and launched Obopay in 2005. The prepaid Mastercard component is handled through Citibank and other partners include most of the major phone carriers.

Now, of course, Obopay is not free, and users should be aware of the charges. Currently, there is a 1.25% fee to add money to the account and a .10 fee each time you send money to someone, whether via mobile phone or internet. Domestic ATM cash withdrawals are free but there is a $2.75 international ATM withdrawal fee. Miscellaneous charges could apply for other services.

So, it appears that the "electronic wallet" is now upon us and other funds transfer companies like Western Union, Xoom, and iKobo now have an additional competitor. With over 200 million cell phone users in the United States alone, we expect Obopay to be around for a while. To find out more about Obopay and other unique ways to send and receive funds, be sure to visit the ManagingMoney.com Banking Center.

June 8, 2007

Monte Carlo Analysis

A Monte Carlo simulation is a complex mathematical process that estimates the probability of reaching specific goals in the future. This method is often used to determine the probability that your investments will last for a certain number of years during retirement.

The simulation takes into account investment returns, volatility, correlations, inflation rates, and other factors. When making the calculations, thousands or even millions of different scenarios are randomly generated to determine the probability of meeting a specific goal.

Historically, forecasts have been made with straight-line assumptions. For instance, you might calculate how much you can withdraw on an annual basis over 40 years starting with a $1,000,000 portfolio earning 8% annually and 4% inflation. When making the calculation, you would assume that all these factors stay constant from year to year.

In actuality, your investment return and inflation will fluctuate from year to year. Even if the average return is exactly the percentage you estimate, the pattern of those returns and the pattern of your withdrawals can substantially change your answer.

That is where Monte Carlo analysis comes in. It takes your estimates, then generates scenarios providing a range of possible outcomes. It will then tell you the probability of reaching your goal with the current estimates. If you determine that that probability is too low, you can change some of your variables and rerun the simulation.

While Monte Carlo analysis is often considered a more thorough analysis than straight line calculations, there are still some concerns you should be aware of:

• As with all types of analysis, the results are sensitive to your assumptions. To ensure that the Monte Carlo analysis is useful, you need to ensure that the assumptions are reasonable and will approximate what you will encounter in real life.

• A Monte Carlo analysis is simply showing the probability that you will achieve your goal. It is often difficult to decide what an acceptable probability is. Should you settle for a minimum of 80% or 90%? What is the practical difference between these two answers? Even with a high probability, there is still a chance you won't reach your goal. If you find yourself in a situation where you run out of money late in life, a high probability will be little comfort.

• This analysis typically assumes you will maintain a level stock exposure, despite how the market is performing. In reality, many investors are tempted to change their stock exposure during periods of significant downturns. That can have a dramatic impact on the probability of achieving your goal.

• While it is easy to change variables to obtain a higher probability, make sure your assumptions are reasonable. Often, investors will increase their stock exposure for the analysis, rather than considering increasing savings amounts or spending less.

June 6, 2007

How Long Does It Take to Complete a College Degree

When planning for college costs, a common assumption is that your child will obtain a bachelor’s degree in four years. But how realistic is that assumption?

Students in public colleges take an average of 6.2 years to obtain a bachelor’s degree, while students in private colleges take an average of 5.3 years (Source: Trends in College Pricing, 2006). Taking an additional year or two to complete college can add substantially to the overall cost. There are several reasons why students take longer than four years to complete their degrees:

• Many students find that they need to work to help finance the cost of their college education. That could mean that they either take time off from college to work or they take a smaller course load and work at the same time.

• A substantial number of students switch colleges. One college may not transfer credits from another college, which prolongs the time needed to complete a degree. The National Center for Education Statistics found that 59% of students attended more than one college. Only 48% of students who attended three colleges completed their degree in six years, while 70% of those attending two colleges and 92% of those attending one college did so.

• Many students change majors, which typically involves additional coursework. The National Research Center for College and University Admissions estimates that over half of students switch majors at least once.

What can a parent do to help shorten the amount of time the child spends obtaining a college degree? Parents should actively get involved in helping the child with his/her selection of a college and a major. Since students who change colleges and majors often extend the time needed to obtain a degree, helping your child with those selections could help ensure that they make good initial selections. Parents should honestly assess the child’s abilities and goals when making those decisions.

Once the child is in college, the parent should also monitor the child’s progress. Find out how many courses your child needs to take to complete college in four years. If the child falls behind, perhaps a summer class or two can get him/her back on track.

June 5, 2007

Tips to Avoid Internet Fraud

The Internet has made online transactions commonplace. However, you should be aware of two forms of Internet identity theft: phishing and pharming. In 2006, losses from this type of identity theft totaled $2.8 billion, or $1,244 per victim. Consumers were only able to recover 54% of the amount lost (Source: AARP Bulletin, February 2007).

Phishing involves convincing consumers to divulge personal financial information on fraudulent web sites. For example, a consumer might receive an e-mail message from a phisher asking the recipient to click on a link in the e-mail to confirm account information. The web site the consumer is directed to is a fake or copy of the real web site. When the consumer enters the financial information, the phisher acquires all information needed to access the consumer’s bank account or commit other forms of identity theft.

Pharming is a similar, but more sophisticated, process. When the consumer simply opens the e-mail message, a virus installs a software program on the user’s computer. When the consumer tries to go to an official web site, the pharmer’s program redirects the browser to the pharmer’s fake version of the web site. The pharmer then learns the consumer’s financial information when that information is typed in the fake web site. Another form of pharming bypasses the e-mail message. A virus can be placed on a computer that tracks a user’s typing while on legitimate sites, thus stealing passwords and other sensitive information.

Some tips to help avoid this type of identity theft include:

• Do not use links in an e-mail message to go to a web page. Type the address directly in your browser.

• Avoid completing forms in e-mail messages that ask for personal financial information.

• Use a secure web site when submitting credit card or other financial information.

• Regularly check bank, credit card, debit card, and brokerage statements to make sure all transactions are legitimate.

If you believe you are a victim of this type of identity theft or receive this type of e-mail message, forward the e-mail message to:

• The Federal Trade Commission at spam@uce.gov
• The company that the phisher or pharmer is targeting
• The Internet Fraud Compliance Center of the FBI by filing a complaint at www.ifccfbi.gov

June 4, 2007

Measuring Your Investment Risk

How has your portfolio performed compared to the major indexes? Has it experienced sharper or milder fluctuations? The answer to these questions will help you determine your portfolio’s risk. Different measures of risk exist for stocks versus bonds.


Basically, stocks are subject to two types of risk: market risk and nonmarket risk. Nonmarket risk, also called specific risk, is the risk that events specific to a company or its industry will adversely affect the stock’s price. For instance, an increase in the cost of oil would be expected to adversely affect the stock prices of the entire oil industry, while a major management change would only affect that company. Market risk, on the other hand, is the risk that a particular stock’s price will be affected by overall stock market movements.

Nonmarket risk can be reduced through diversification. By owning several different stocks in different industries whose stock prices have shown little correlation to each other, you reduce the risk that nonmarket factors will adversely affect your total portfolio.

No matter how many stocks you own, you can’t totally eliminate market risk. However, you can measure a stock’s historical response to market movements and select those with a level of volatility you are comfortable with. Beta and standard deviation are two tools commonly used to measure stock risk.


Beta, which can be found in a number of published services, is a statistical measure of the impact stock market movements have historically had on a stock’s price. By comparing the returns of the Standard & Poor’s 500 (S&P 500) to a particular stock’s returns, a pattern develops that indicates the stock’s exposure to stock market risk.

The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market and has a beta of 1. A stock with a beta of 1 means that, on average, it moves parallel with the S&P 500 — the stock should rise 10% when the S&P 500 rises 10% and should decline 10% when the S&P 500 declines 10%. A beta greater than 1 indicates the stock should rise or fall to a greater extent than stock market movements, while a beta less than 1 means the stock should rise or fall to a lesser extent than the S&P 500. Since beta measures movements on average, you cannot expect an exact correlation with each market movement.

Calculating your portfolio’s beta will give you a measure of its overall market risk. To do so, find the betas for all your stocks. Each beta is then multiplied by the percentage of your total portfolio that stock represents (i.e., a stock with a beta of 1.2 that comprises 10% of your portfolio would have a weighted beta of 1.2 times 10% or .12). Add all the weighted betas together to arrive at your portfolio’s overall beta.

Standard Deviation

Standard deviation, which can also be found in a number of published services, measures a stock’s volatility regardless of the cause. It basically tells you how much a stock’s short-term returns have moved around its long-term average return. Higher standard deviations represent more volatility. In statistical terms, 68% of the time, the stock’s range of returns will fall within one standard deviation of the average return, while 95% of the time, the stock’s range of returns will fall within two standard deviations.

Consider this example. Assume you own a stock with an average return of 10% and a standard deviation of 15%. Sixty-eight percent of the time, you can expect your return to fall within a range of –5% to 25%, while 95% of the time, you can expect your return to fall within a range of –20% to 40%. (This example is provided for illustrative purposes only and is not intended to project the performance of a specific investment.)


Interest rates and bond prices move in opposite directions, which can significantly affect a bond’s market value. However, it is often difficult to determine what impact a given interest rate change will have on a specific bond, since maturity date, credit ratings, coupon rate, and current interest rates all affect the result. Duration can be a helpful tool in estimating the expected impact of interest rate changes on your bond portfolio. Duration calculates how much a bond’s price will move for every 1% change in interest rates. For instance, a bond with a duration of six years will experience a 6% decrease in value for every 1% increase in interest rates. A bond’s duration is typically shorter than its maturity. You can set an overall target duration for your portfolio, so you’ll have a reasonable estimate of how your bond portfolio will fluctuate with interest rate changes.

These three measures can provide important information about your portfolio’s volatility. If your portfolio is riskier than you realized, you might want to take steps to reduce that risk. When investing, you might want to take a look at an investment’s risk first.

June 1, 2007

Establishing Good Investing Habits

Good investing habits will help ensure you follow through on your investment plan. Below are four tips to hone your investment habits:

Write everything down in a journal or diary. Every time you make a trade, write down why you did so and what was going on in the markets to precipitate that trade. This will force you to develop objective reasons before making trades. The journal/diary will also be useful when evaluating your investment strategies.

Keep track of your portfolio’s performance. Don’t get overzealous and review your portfolio’s performance daily or even weekly. Monthly, quarterly, or even annually are adequate. The point is to assess how your investments have performed compared to a relevant benchmark. Evaluate all your investments, not just your retirement accounts or taxable accounts.

Monitor the market and your investments. You can’t just purchase investments and then forget about them. While you don’t have to read everything in print about your investments, make sure to set aside enough time to review quarterly and annual reports and other major news. You’ll also want to stay current on national and international news to have a general sense of what is going on in the market.

Evaluate your strategies. Once a year, thoroughly review your investment strategies and make sure you are on track in pursuing your financial goals. The other habits will assist in this review. Pull out your journal/diary and the analysis of your portfolio’s performance so you can review all your trades and investments in detail. You’re looking for trends and trying to analyze what you did right and wrong during the year.


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