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How Credit Card Balances Affect Credit Scores

Is it better to pay off the entire balance on a credit card each month, or to always leave a small balance to carry over?

There is a common myth that carrying a balance on your credit card from month to month can benefit your credit scores, but that is not true. Ideally, you should pay off your credit card in full every month.

Leaving a balance will not help your credit scores. All it will do is cost you money in the form of interest.

The most important factor in credit scoring is always your payment history — whether or not you make all your payments on time. The second most important factor is your utilization rate, or balance-to-limit ratio. The lower your utilization rate, the better for your credit scores.

It's Best to Pay Your Credit Card Balance in Full Each Month

If you are trying to establish a strong payment history, you can do so by making small purchases on your credit card each month, paying the balance in full, and making sure all payments are made on time.

If you cannot p…
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Should Your Risk Tolerance Change with Your Level of Wealth?

Basically, accumulated wealth should have nothing to do with your risk tolerance, or risk management. There are two ways to look at this:
Your risk tolerance should decrease as you get older, because you have fewer years until retirement to ride out any bad markets or bad decisions. If you’re in your 20s, you probably should be investing in mostly stocks, which over the long-term have better returns, though from time-to-time bonds can offer very good returns. If you’re in your 60s, you should be in “safer” asset classes, such as bonds and money markets. I’m 67 and I have 25 percent in stocks, 10 percent in bonds (I believe bonds are in a bubble and the face value will go down in the next few years), and the rest in money markets. I’m kind of waiting to see what the market does, as it seems to not have much direction right now. (The S&P 500 is essentially unchanged over the last 12 months. Below is a chart of the SPY ETF, which tracks the index. Each candle is 1 week.)Your risk mana…

What's a "Self-Directed" IRA? Not What it Sounds Like

From time to time, I participate on Quora, providing answers to personal finance questions. This one came across my desk last night: "Is self-directed IRA a good idea?" I'm not sure the person asking this question really understood the question, so I provided this answer:

First, let’s define the difference between self-directed and custodial account. The previous answer would leave you to believe that in a custodial (or custodian) IRA is directed by someone else and this is not necessarily true. It’s a matter of terminology. A Custodial IRA is an Individual Retirement Account that a custodian (typically a parent) holds for a minor with an earned income. Once the Custodial IRA is open, all assets are managed by the custodian until the child reaches age 18 or 21 (varies by state). All funds in the account belong to the child, allowing them to get started early on saving money and reap the benefits of compounded growth. You can open either a Custodial Roth IRA or Custodial Tr…

Are We on Recession Watch?

While the yield inversion was only short lived last week and while yields are ridiculously low, where are we now? There just isn't anything that might bring on a panic-attack. 

Kelly Evans at CNBC, in her noon newsletter today, provided a very astute explanation of what to watch for. Hint: The easy-to-forget credit markets are important! 

You can sign up for her newsletter, called The Exchange, here. I recommend you do. 

Here's a copy of today's newsletter.

With everyone now on recession watch, let's talk about a couple of things to be watching for. A kind of "field guide" to the yield-curve-pocalypse.
There are two main avenues to watch: the real economy, and the financial markets. And you have to watch them both if you want to avoid "false positives." As the old Paul Samuelson line goes, the stock market has predicted nine of the past five recessions. And the economists always just say "there's a 40% chance" of a downturn.

The best leading…

Friends Don't Let Friends Buy and Hold

That's the subtitle to this entire blog, and a basic principle of mine.

Many brokers and some financial advisors are going to tell you to stay fully invested all the time. This is a buy and hold strategy. “Just re-balance your portfolio will do the trick!” This assumes that you have a properly balanced portfolio, which could be something like 70/30, which is 70 percent stocks (equities) and 30 percent bonds. The ratio could be something different, but the principle is the same.

This is bad advice. In fact, this buy and hold advice is so bad it should be criminal. To take a lesson from 2008, if you had done this buy and hold and re-balance crap, both your stocks and bonds would have tanked. You would have suffered losses approaching 60 percent. This is unacceptable. It would have taken the average portfolio nearly 6 years to return to break-even.

Granted, sometimes bonds will provide a safe haven, but not always. And other asset classes, like commodities, can also provide some protec…

Correlation is not Causation

When the 10 and 2 year bond yields inverted yesterday, the markets freaked out. Every recession since 1950 or some ancient time as been preceded by a yield inversion. But on the flip side, not every yield inversion has been followed by a recession. And the recessions, if they do come, come much later, like up to 2 years later. 
So yield inversions do not cause recessions. They are just a measure of imbalance in the bond markets. 

What does cause recessions? A contraction of activity in the economy. Business slowdowns, housing market weakness, a reduction in liquidity, cost of money (credit cycle and Federal Reserve policy), asset bubbles, and a host of other events can cause recessions. It normally takes more than one thing to cause a recession. 

But the U.S. economy -- in most regards -- is still doing just fine. 

Kelly Evans at CNBC (my favorite mid-day newsletter) said this: 
The U.S. data came in strong again this morning. Jobless claims have barely budged; the regional Philadelphia an…

Markets Throw a Tantrum Over Bonds

Time to panic? With the DJIA dropping 800 points in one day, what do we do? Basically, nothing. In fact, you will probably see a small uptick in markets today, Aug 15. 

I've been calling for market weakness since June. I've pointed out that the markets are overvalued, and others like Warren Buffett have large cash reserves right now. 

Even with the 800 drop in the Dow and a 250 point drop in the NASDAQ, the markets are not yet in correction territory. 

But have a plan. 

Here's the chart of the QQQ, the ETF that follows the NASDAQ. And below, I've added a video to Phil Town's take on market crashes. While he says he doesn't really care about correction or crashes, he does in the sense that when markets are down, it's time to actually start buying.