My Personal Finance Blog

The insurance companies will always reward you for driving less. If you rarely put wheels on the road, the chances of a claim are small and all your premium will be “profit to the insurer. So how does this work? In theory, it could not be more simple. The insurance company looks at who you are, when you drive and where you drive in deciding how much of a risk you represent. If you live 50 miles from your work and have a daily commute along a busy Interstate, the chances of an accident are high. But if you live on a bus route to work and only use your vehicle for odd journeys at off-peak times, the chances of an accident are small. When you answer the questionnaire, you will see questions covering these possibilities. Remember, if you get caught out in dishonest answers, the insurer will cancel your policy and leave you without any coverage.

The first question is where you live. Although some states like California have outlawed setting rates according to your zip code, the majority of companies focus on your home address. If there’s a high accident or theft rate among people living in your area, you will all pay a higher premium. The only choice, if you can afford it, is to live some place where the crime and accidents rates are lower. You look for the middle ground between the worst inner city crime hot spot and a house on the prairie where you never see another vehicle from one day’s end to the next. All the discounts favor drivers who only drive off-peak during the day, and restrict their annual mileage. No more late night and early morning driving when the majority of other drivers may be tired or affected by alcohol and/or drugs. This raises the question of monitoring. It’s easy to answer the questionnaire and claim the maximum discounts. But the trend among insurers is to ask people to drop their vehicle in for a regular inspection of the recorded mileage. The maximum discounts are given to the drivers who agree to devices being installed which collect all the data on driving and transmit it to the insurers. These devices have a GPS element that records where you drive, the time and, in some cases, some measurement of the quality of your driving, e.g. how often you brake. The reward for accepting this invasion of your privacy can be discounts of up to 25% on top of the usual discounts. Obviously, it’s not a good idea to use your own vehicle to rob a bank since the insurance company will know you were there.

This set of discounts is somewhat frustrating. In the larger cities with well-developed public transport, it’s usually not too much trouble to get where you want on time without using your own vehicle. Assuming your vehicle is safely in a garage to reduce the risk of theft, you should break even or better, i.e. what you save on the insurance pays for your use of buses and trains. But the most of the US has poor public transport, so there’s little choice. Remember the car insurance quotes are not the final word. Call the company, explain your circumstances and discuss how you might qualify for discounts. In discussion, you often discover options not included in the website. So, treat the car insurance quotes as the opening offer and start negotiating. Investing a little time often saves you money.

As the dust settles from the Wall Street meltdown of 2008, the average investor needs to chart a course that threads its way through future growth and perils. Simply relying on the old investment adages may not be the wisest course. Here’s some things to think about.

(1) Wall Street is not your friend. At this point, it should come as no surprise that the goal on Wall Street is to make money for Wall Street, rather than giving investment advice that the average investor can actually benefit from. Washington makes a lot of noise about reform, but dont hold your breath about anything happening. We have gone through two major Wall Street screw ups since 2000 that cost most individual investors a good chunk of their portfolios. First was the attempt to convince everyone that there was a new math on how to value companies that had some relationship to the internet and, after that didnt exactly work out, Wall Street moved to use the environment of easy money to package high risk real estate mortgages that fell apart when real estate values started to decline. Even though most investors never owned internet stocks or CDOs, the collapse of these products helped drive down the stock market in general. To thrive, Wall Street must continue to find and distribute economic hot spot products. A good bet in the future might be derivatives created from cap and trade. After all, trading air seems ready made for the street.

(2) Take a new look at asset allocation. Although asset allocation models do not ensure a profit or protect against a loss, they have become the standard of investment models for many investors. The theory itself is over 50 years old. The world has changed since Dwight Eisenhower was in the White House. Thanks to a developing global economy, asset class correlations are becoming more similar and this increases volatility in a portfolio. Dont exit asset allocation like the last helicopter out of Saigon, but do avoid the rigid pigeon holing of asset classes thats become prevalent in asset allocation design. Investment managers today need the flexibility to move a little if the asset class returns really moves against them. You cant take your boat out without a life preserver on board. Your portfolio should be no different.

(3) Does passive indexing investing still work? Index investing was the flavor of the month back in the 1990s when proponents of efficient markets promoted that it was so difficult to beat the market that everyones best bet was simply to mirror a market index and go to the beach. Today, the market is full of inefficiencies and with the S&P 500 flat lining over the last decade, its time to pour the sand out of your shoes and get back in the game.

(4) Portfolio compression is the next best idea. The average investor doesnt need to squeeze all the upside out of a bull market as long as theres some protection against the next bear. Cutting portfolio volatility should be on your new years resolution list. The future market road will continue to be rough and rocky roads generally demand good shock absorbers. If you are a competent investment mechanic, by all means install them yourself. If you need a qualified mechanic, seek one out. If you enjoy a really rough ride, just hang on with your current portfolio. You may get a few teeth knocked out, but thats not whats going to hurt the most.

Although the stock market is going through a tough patch, its still where a lot of the action is to outpace inflation and grow funds for the future. No promises, no guarantees, but thats always been the story from the beginning. Going forward, caution will be your best friend. One old adage you will still be able to hold near and dear is that if it looks too good, it probably is.

[The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.]

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