To be more in depth, most people when they estimate what their portfolio will do over time build an Excel spreadsheet to project the results and make assumptions about how each part of the portfolio will perform.

For example, let’s say there is $100,000 to invest and the assumption that the asset classes will produce the following annualized returns:

Stocks 9%
Bonds 5%
Cash Equivalents 2%

Now let’s assume that the allocation is:

Stocks 70%
Bonds 20%
Cash Equivalents 10%

If all the investments follow exactly this pattern for ten years, the portfolio would then be worth $213,722, for an annualized return of 7.89%.

This sounds realistic. But for in-depth planning purposes is really only one of a wide range of possibilities. In real life, stocks often return much more or much less than 9% a year. Bonds and cash equivalents also fluctuate, however they are usually less dramatic.

So there could be wide variations around this deceptively specific estimate. But how wide? How good, or bad, could it reasonably get?

Imagine a bad, but by no means impossible, scenario: over those ten years, stocks lose 5% a year, bonds lose 2% a year, and cash equivalents are flat. Then the $100,000 stake would be down to $68,253, for an annualized return of -3.75%.

In a good, but not extreme scenario, stocks gain 12% a year, bonds gain 6% a year, and cash equivalents gain 3% a year. The $100,000 would have grown to $266,665, for an annualized 10.31%.

Reality will probably be somewhere in between, but this is not a given. And how can you quantify the chance that your stake will reach a point that will get you to your investment goals?

A Monte Carlo simulation provides the answer. This estimation technique allows for the wide range of possible percentage changes in each asset class—and, therefore, the even wider range of possible portfolio values over your time horizon. Using thousands of scenarios, Monte Carlo simulation charts the relative likelihood of portfolio values. This enables a person to estimate the probability of reaching their goals. It should not be the only piece of financial planning, but is an important part of the overall picture.

One thing I won’t do is purchase something just because it is on their wedding gift registry. In fact, I don’t even know what stores they are registered at. I’ve always been a person to put thought into a gift of what someone would really want. For instance, the last couple I purchased a gift for I ended up purchasing a gift card at the apple store because I knew they were going to buy a computer soon and also knew that they were most likely going to purchase a Mac. Even though I didn’t know where they were going to purchase it, I knew that some money at this store would make them pretty happy and I figured they could always buy some accessory or software when they do buy the computer. I later found out that the bride and groom loved their gift!

So what to get them? I better figure this out soon!

What do you spend on a wedding gift? Am I too cheap?

Where I’m coming from
Our consumer driven society’s current saving level is the lowest since the government began recording this number in 1959, while the national consumer credit outstanding revolving (credit card) debt is up to $806 billion as of June 2005. It is absolutely sickening to see facts such as these and then consider the consumer driven garbage that is on television. What about shows that could teach us the value of the basics of personal finance, not the buy/sell opinion of a TV personality?

Is it TV in general or just shows like this?
I’m sure we can all come up with TV shows that are not financially prudent to watch. I think we also all know that advertisements are the biggest offender! If instead of watching TV and advertisements, we spent our time reading books on our hobbies, personal finance, or even great literary works I think our world would be better off. With regards to TV, for now I’d like to focus on Mad Money, Jim Cramer and the ill effects of active trading and preaching to to a world-wide audience.

Me vs. Jim Cramer
Perhaps, Jim Cramer ran a hedge fund and has other “Wall Street” experience, but I really think it’s bad TV for the general public to watch TV shows like Mad Money. According to what I’ve found, Cramer worked at Goldman Sachs and then formed Cramer & Co., a hedge fund in 1987. “After a stellar 2000, Mr. Cramer’s fund finished up the year +36% vs. -11% for the S&P and -6% for the Dow Industries. Mr. Cramer decided it was time to get out and he now devotes all his attention to TheStreet.com” and his TV show on CNBC, Mad Money. Yes, he also did graduate Harvard and Harvard Law School. This brings me to some questions I would like to answer:

Does this validate giving stock advice to millions (sorry couldn’t find a statistic that shows the audience size of Mad Money) with regards to what he believes and what is not necessarily prudent for that investors personal situation? Clearly NO, but Cramer isn’t the only offender, think about the broad brush strokes of folks like Dave Ramsey. Ramsey fans don’t murder me, I am merely stating that his responses to radio shows hardly dig deep enough to give prudent financial advice for that particular caller’s financial situation. Ramsey does do the world some good by preaching to get rid of debt and spend less than you earn, so don’t burn me at the stake. Heck, he even advocates turning off the TV and reading a book, which I definitely agree with. What I am merely pointing out is that Jim Cramer, nor Dave Ramsey, know the exact financial situation of the caller and shouldn’t be giving some of the advice they give. Yes, Cramer says he is just giving advice to those that have side money and want to dabble in the market, but does he know if that person’s portfolio is already overweighted in the sector that he is recommending a buy of a certain stock in that same sector?

What’s Jim’s portfolio record? If you take a gander over at Booyah Boy Audit one can see an unbiased record of Jim Cramer’s Performance Scoreboard for the last month and a half. Has he beat the market?…yes (Cramer 2.11% vs. S&P500 -0.47%). Does he have a 70+ year record of annualized rates of return of 12.74% for Small Stocks (Small Cap) or 10.43% for Large Stocks (S&P 500)? NO

Should the typical investor be in and out of the market to “Back up the truck and buy” or “Sell, Sell, Sell” as Cramer’s soundbites suggest? Let’s rack up another NO for this one! One thing I don’t think is reflected in Jim’s return at the above link, is the commission charges for executed trades, or the short term capital gains one would have to incur on a winning pick. Yes, you would have to pay to buy the stock, then pay to sell the stock, and then pay the government if you made money on the stock. What a great arrangement, I wonder why Jim Cramer isn’t recommending buying the stock of On-line brokerage firms who are making the money off of Jim’s advice.

Is Jim Cramer doing any good for the general public? Hmm….I’ll give this a MAYBE. The reason for the maybe is that while he is giving specific recommendations that I think would be crazy to act on alone, he does provide market insights and sometimes backs up his recommendations with an explanation. However, this should only be the beginning of one’s research into investments in general or a specific investment (if they have determined that they want to dabble in individual stocks, which I don’t agree with in the first place). Do you think a lot of viewers are doing anymore due diligence with regards to what Cramer is saying…or seeking the individual advice of an investment professional? I don’t.

So, what is my point?
My basic point is this. America turn off your television, pick up a book (or read blogs like this one!), and learn. Is Jim Cramer the only offender of bad TV? No, but it was fun to highlight a show and drill down why it’s bad for America to watch it.

On another note, if you would like to know my opinion on investing (not very valued, I know) here is the very, very simple version:

Spend less than you earn and pay off your debt if you have any.
If you don’t have any debt, invest the remainder.
For short term goals, liquidity is your friend.
For long term goals such as retirement, buy passively managed, low fee ETFs or Mutual Funds.
Allocate/Diversify these funds in different asset classes according to your risk tolerance and time constraint for being in the market. It’s been proven that that your Asset Allocation Policy provides 91.5% of a portfolio’s return (Financial Analyst Journal, May-June 1991). Also, according to the William F. Sharpe (Stanford Univ.) Study of 1990, 90.9% of a portfolio’s return is based on the style selection (read Asset Class), compared to only 9.1% coming from the security selection.
Rebalance your portfolio once a year.

Sound off and let me know what you think!

PS – If anyone wants to sign up for ActionAlerts PLUS by Jim Cramer, it’s $349.95 a year to get emails of what and when he trades. Sorry, I don’t endorse it so I won’t provide a link to it!!!

Well, I found a great article over at MSN’s Moneycentral titled The high cost of smoking. More fuel to the quitting fire!!

I’ve already figured out that the future value (FV) of my smoking habit if put away for 30 years at 8% a year is $194,393.99! However, according the article rather than an average of $5 a pack, “researchers at Duke University found that the total cost of smoking — the cigarettes, lost earnings, impact on insurance mortality, even the impact of secondhand smoke — runs about $40 per pack for the average 24-year-old.” Dare I calculate that FV!! Other financial snippets highlighted in the article:

1) Decreased resale value of your vehicle due to smoke smell, ashes all over, and burn marks in the fabric.
2) Increase cost to get your house “saleable”, citing that most houses with smokers need to at least be re-painted if not new carpet installed.
3) Higher cost of life insurance and homeowner’s insurance compared to non-smoker.
4) Higher dry cleaning bills because clothes stink.
5) “Smokers due to higher mortality rates, obtained lower lifetime benefits compared to never smokers, even after accounting for their smoking-related lower lifetime contributions.”
6) Mints for bad breat and teeth whitening for yellow teeth add up as well.

Where to go from here? I wish smoking was as easy to quit as it is to pick out a shirt in the morning for work! I will win! I will keep you abreast of my continual struggle!!

My grandfather saved quite of bit of money over time with the 3 points I made in that submission. However, since he lived to the ripe old age of 94, he used a lot of his savings on expenses such as 24 hour in-home care and life’s necessities over the last 5-7 years of his life. Still, his four children should be very thankful for the mini-legacies he left each of them.