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For All The Men — How to Buy Diamond Jewelry

June 7th, 2010 No comments

I’m in the market for a diamond pendant for my girlfriend to celebrate her birthday. I’ve bought diamonds before, so I thought I would write a post about what I’ve learned about the purchasing process. Here’s what I will cover in this post:

  1. How to pick jewelry she will want to wear.
  2. What you need to know about diamonds to make an informed decision.
  3. How to buy quality diamonds without breaking the budget.

First, In the Old Days…

Before the information age, buying diamonds was harder because the sellers kept tight control of the buying process. Kind of like buying a car where the salesman controls which cars to show you, based upon what his opinion is about what he thinks he can sell you. It’s always been possible to make informed buying decisions if you were willing to do the research. It’s just that today, it’s much easier to get exactly what you want without dealing with controlling sellers.

Before you go all out and run the ‘specs’ in your search for the perfect jewelry, keep in mind that . there’s still one thing that hasn’t changed at all: you need to find out what she likes. It doesn’t matter how much you spend or how big the diamonds are, she still needs to like it enough to want to wear it.

Tips to find out what she likes…

  1. Ask her what she likes directly. Diamond jewelry is usually either trendy (‘knot’ and ‘journey’ pendents are currently fashionable) or traditional (a diamond on a simple mount). Find out what she prefers.
  2. Look at what she wears. If you haven’t been paying attention to what she wears currently, take a look. It can help to determine the kind of jewelry she likes.
  3. Find out what she already owns but doesn’t wear. If she has a bunch of stuff she never wears (most women do) you might want to steer clear of buying something similar. Also, you don’t want to buy a duplicate.

What you need to know about diamond jewelry to make an informed decision.

The two components that make up diamond jewelry are the mount material and the diamonds. Most of the cost of the jewelry is in the diamonds, though, the mounting materials vary in cost depending on how precious the materials are. Diamond jewelry is typically mounted in these material choices. I’ve listed them here by decreasing cost.

  • Platinum – expensive, has a silver color.
  • Rose Gold – gold mixed with copper, looks pink. Uncommon in the U.S.
  • White Gold – gold mixed with nickel/silver looks silver.
  • Yellow Gold – gold mixed with both copper and silver/nickel.
  • Palladium – low cost metal that is silver in color. Typically used in engagement rings to lower their price point.

When is comes to diamonds, they are offered either with a statement of their quality (certification) or without. There is a methodology used (so called 4Cs) to certify their quality created by the Gemological Institute of America (GIA).

Diamonds that pass the GIA certification process are “certified”. These diamonds typically will cost more because of the labor involved, and only the higher quality, less flawed, diamonds pass.

If you buy diamonds that are certified you should get a report that used the GIA methodology. The certification process measures a lot of stuff, but these are the basic criteria (4Cs) that are the most important.

  • Cut – how well the diamond reflects light.
  • Clarity – how clear the diamond is, the inclusions (flaws) it has.
  • Carat – the diamond weight.
  • Color – the degree of color in the stone.

How to Buy Diamonds Without Breaking the Budget

The secret to buying diamond jewelry cost effectively is to know when you need to buy the highest quality and when you don’t. This is not unlike other consumer purchases you make where you will make choices about cost/benefits and adjust your spending accordingly.

Here are the (4) main choices, ordered by increasing cost:

  1. Pave settings, or multiple small diamond mounts. Diamonds are usually un-certified.
  2. Un-certified large diamond setting
  3. Certified large diamond setting
  4. Signed diamond jewelry (by Cartier, Tiffany’s, etc.)

The most cost effective way to buy diamonds is to buy jewelry made of up ‘many’ diamonds. This is typically a piece that contains more than (3) diamonds, it’s sometimes referred to as ‘pave’ (pronounced paa-vah). So, for example, a heart shaped pendant may contain 10-20 diamonds. These will typically be sold using un-certified diamonds which also reduces the cost. The downside to this type of jewelry is that it does not hold its value as well as jewelry made up of one or a few quality diamonds. Here’s why:

  • Pave settings contain smaller diamonds. These are less valuable. For example, (4) 1/8 carat diamonds are less valuable than an equivalent 1/2 carat diamond.
  • Pave settings are more difficult/costly to ‘reset’ in another piece if you want to reuse the diamonds.
  • Pave settings are usually set in trendy designs that can go out of style.

Here’s what a pave pendant looks like:

Tip: I recommend that you steer clear of Pave settings, if possible. The downsides outweigh the cost savings.

For jewelry pieces that offer just a few diamonds, such as a pendent or earnings, these are offered with both uncertified large settings as well as certified large settings. Here’s an example of a very simple pendant with a prominent diamond setting:

Here are some tips on how to buy these.

  • Diamond Engagement Ring. The solitaire diamond is very likely to be scrutinized up close within inches. You want this diamond to be the highest quality you can afford, you will want to go ‘certified’. Here’s how to save money: keep it simple and buy only one diamond on the ring, and you can save money on the ring mount by using palladium instead of white gold or platinum.
  • Diamond Earnings. Earnings are rarely scrutinized less than, say, 1 foot away. They need to be sparkly, buy not necessarily visually without flaw. Buy these without certification or buy a lower quality certified diamond.
  • Diamond Pendant. These are more like to be scrutinized than earnings, but you can probably get away with going without certification, or a lower quality certified, if you pick correctly.
  • Diamond Bracelet. Similar to earnings. It’s important that the diamonds look similar in size, clarity and cut. As long as they match well, you can go un-certified, especially for the smaller carat sizes.

By far the most expensive option is to simply buy signed diamond jewelry, such as from Tiffany’s or Cartier or DeBeers. Signed jewelry from a famous dealer offers the assurance of getting quality diamonds without much effort. The bonus is that these pieces can often maintain or exceed their higher cost over the long term much better than other jewelry (the ‘signature’ has value in excess of the value of the components). I will leave it up to the reader to determine whether or not this is worth the extra expense.

My Recommendation

You can’t go wrong buying simple settings that display diamonds, either the un-certified large diamond setting or one that is certified. If you buy a fancy or trendy setting, there’s a risk that she won’t like it. I haven’t met a woman who didn’t like a simple beautiful diamond pendant or stud earnings. And even if she doesn’t like it, the diamonds can be recycled more easily into something else, whereas the jewelry with a pave setting usually can’t.

Diamonds are forever, and can even last longer than your relationship 😉

All images courtesy of BlueNile.com

Categories: Lifestyle Tags:

Self Insure To Save On Car Insurance

June 1st, 2010 No comments

No doubt you’ve seen those commercials/ads for countless companies claiming they can save you money on your automobile insurance. It makes me wonder which companies are still left charging too much? Anyway, those ads always make me think about what saving money really means. I don’t think that you can save money by buying something. Well, maybe once I saved money by buying something in a Macy’s store. When I got to the checkout counter, the clothing I purchased rang up lower than what I expected. I lowered my automobile insurance premium by eliminating coverage. This may work for you. First a summary of what is included in a typical automobile policy (this is not complete, but good enough for now).

  1. Liability Coverage – Insures damages you cause to other persons or property.
  2. Health Care Coverage – Insures your own injures when you are injured in an automobile related collision.
  3. Collision/Comprehensive – Insures your vehicle against damages you cause, or other damages unrelated to an automobile collision.

The first two types of coverage (1) and (2) are coverage you will want to carry. In a future post, I will discuss how I reduced the premium for these types of coverage. The third type of coverage (3) only affects your vehicle – the maximum payoff is the depreciated value of your vehicle. If you eliminate the coverage, you will be on the hook for any damages that occur – so that’s why it’s self insurance if you forgo the policy.

If you have a loan on the vehicle or are leasing the vehicle, the title holder (not you) will require you to have coverage to protect their financial interest. So the first check is to make sure you have clear title to the vehicle.

Chances are if you have owned vehicles before, you have self insured one without realizing it. If you kept a vehicle for a number of years and have paid off the car loan, you probably dropped Collision/Comprehensive coverage because the value of the vehicle had dropped low enough such that the insurance doesn’t make sense (the payoff for a ‘totaled’ vehicle was near the cost of the premium + policy deductible).

I took this idea one step further by self insuring my vehicle well before it had depreciated to this endpoint. About (3) years ago, I was offered a renewal Collision/Comprehensive policy for my then (3) year old car. The coverage cost almost $500, whereas I estimated the value of the vehicle was about $8,000-$8500. These numbers didn’t make sense to me, because the premium didn’t in my estimation reflect the actual risk of loss for the vehicle. The vehicle is used for errands and day trips only – no commuting. After doing the math, I decide to go for it.

But, it takes a certain amount of financial security to pull it off. Here’s why: The vehicle needs to be paid off. In my case, I had already paid off the $7K loan. Also, you need to be in a position to ‘pay the loss’ on your ‘policy’, either by having cash to buy another car or potentially take out another loan.On the benefit side, I gain the following as illustrated in this table (the car value is estimated using Kelley Blue Book [kbb.com], the policy premiums are estimates from my automobile insurance company):

Year

Car Value

Policy Premium

Deductible

Max Loss Payoff

1

8,000

500

500

7,000

2

7,000

450

500

6,050

3

5,000

350

500

4,150

4

4,500

350

500

3,650

5

4,000

300

500

3,200

Total Savings

1,950

Each year, I gain the savings from not paying the premium. Also, as the vehicle depreciates, the loss potential is reduced – this isn’t savings in your pocket but can be looked as reducing the cost of ownership and increasing the money available for your next vehicle.

Use Market Volitility to Increase Your Income

May 27th, 2010 No comments

In this article, I talked about 5 different ways to increase your investment income. Here’s another advanced way: use market volatility to your advantage.

If you look at how the stock market has performed over the last two years, it has gone up and gone down quite a lot, sometimes violently in a single day. At a lower detail level, at individual companies you will find that during each cycle some companies perform better than others, while others may falter at a larger clip.

Market volatility works in your favor because when an income investment falls in price you earn more for the same amount of investment.

Example: Let’s say that an investment is worth $50, and earns $1/year in income. If the investment, due to market volatility goes down to $40 and you buy it at that price, you will still earn $1/year. You just got it for less.

Here’s a simple strategy to take advantage of the situation.

First, Collect Dividends But Do Not Reinvest Them.

Most brokers offer the ability to reinvest dividends/interest income automatically back into the same security when they are received. (Check with your broker – not all securities may be available for this option). However, if you do not automatically reinvest, you will then accumulate money in your account. Hold this money.

Evaluate All Your Positions / Watch List Stocks

OK, since you have a bunch of money (the un-invested dividends/interest plus any new money you have added), seek out the most attractive investments that you already hold or others that you have wanted to buy but perhaps are now becoming attractively valued.

Buy the Most Attractive Investments

Put your money to work in the most attractive investments. By consistently buying the most attractive investments over time, you will increase your income more than if you simply put the reinvestment on autopilot.

A IncomePort Example

In the IncomePort we own some high quality companies. If we want to add to some of our existing positions, we need to evaluate each to determine whether or not it’s attractively priced. I will compare the attractiveness of two of our positions: Realty Income Corporation (O) and Philip Morris (PM).

If you look at the current market downturn for May 2010, it’s easy to see that (PM) has been hit harder than (O). It’s down almost 20% from its 2010 high, while (O) is down only 10% from it’s 2010 high. Here’s a more detailed look.

Realty Income Corporation (O)

  • Trading above it’s 200 day EMA, near its 50 day EMA. Technically the stock is still in ‘bull’ mode.
  • Trades at 17X cash flow, which is expensive relative to piers and historical valuation.
  • Dividend yield, at 5.30%, is below average relative to its history.
  • Recent dividend increases have been weaker than in the recent past, just 4% last year. (still not bad considering the state of the economy).

Philip Morris (PM)

  • Trading below it’s 200 day EMA, below its 50 day EMA. Technically the stock is in ‘bear’ mode.
  • Price to earnings multiple is 12X, while expected 5 year earnings growth rate is 12X. Very attractive valuation for that amount of growth.
  • Very attractive 5.30% dividend yield, that complements the earnings growth.
  • Expect an increase in dividend of 8-10% this year in August, given recent earnings statements and historical company dividend policy.

If I had to chose between these investments, right now Philip Morris (PM) is much more attractive.

Categories: Investing Tags:

How To Define Wealth

May 25th, 2010 No comments

What is wealth? It can be many things including non-financial stuff, such as having your health, your family and living in a safe place. From this point of view, many Americans and people around the world can consider themselves wealthy. Since this is a financial site, I will talk mainly about ‘financial’ wealth.

Here’s how I define wealth.

Wealth is the ownership of a valuable asset that can in the future (or already does) product income.

Why does this matter? Understanding what wealth is and using it to your advantage can help you to improve your quality of life. Here’s how:

  1. Increase your standard of living. Owning assets that produce income can add to, or replace income you earn at your job.
  2. Enhance your income security. If you can earn additional income consistently, it can help tide you over with your bills if job loss occurs.
  3. Enhance job flexibility. By not depending on your job for all of your income, you can consider other employment options which may fit your lifestyle better: take a lower paying but more fulfilling job, taking time off, becoming a consultant, going part time instead of full time.
  4. Help you to afford to fund your goals, such as retirement, college costs, or big purchases such as a home.

One of the goals of this site is to demonstrate that owning wealth is not just for people with a lot of money. Anyone can own assets no matter what you earn or what your job is. On this site, I will be talking mainly about general personal finance topics, with a primary focus on wealth building.

Categories: Personal Finance Tags:

How Preferred Stocks Differ from Bonds

May 10th, 2010 No comments

In short, preferred stocks are a hybrid of both bonds and stocks. They are more like bonds, and have less similarity to common corporate public stocks. The ‘stock’ part is relevant because preferred stocks have a stock ‘symbol’ and trade on exchanges just like stocks.

From a functional point of view, they act like bonds because they pay periodic income. However, there is one important difference with bonds that you should consider before you buy preferred stocks. First, here some of the characteristics of bonds:

  • Face/Principal Value
  • Maturity Date
  • Coupon Interest Rate
  • Coupon Payment Frequency
  • Credit Rating

When you buy a bond initially it will sell at its face value. Over time, the bond will pay interest to the holder according to its payment schedule. If you hold onto the bond until it matures, you will receive the full face value back to close the bond out.

The key difference preferred stocks have with bonds is that they typically have very long maturity (30 years), or possibly none at all if the prospectus offers the ability for the stock to be renewed after the initial maturity date. The advantage that bonds have over other investments is the ability to get back all the money you invested if you simply hold to maturity. This is the major reason why bonds are perceived to be ‘safer’ than common corporate stocks since the ‘principal’ has a safe guard.

So, for this reason preferred stocks are not as ‘safe’ because maturity may not be available or known.  If you want to sell the investment to get your money back, there are some options:

  1. The company ‘calls’ your preferred stock, i.e., closes it out and pays you full face value according to the rules in the prospectus.
  2. Sell the preferred stock on the open market at market prices.
  3. If the preferred stock is ‘convertible’, (meaning you can swap it for common stock), you can then sell the common stock on the market.

Out of these options, #2 is the most likely case. If you want to sell but the market will pay you less than full value then you will lose principal value. Before buying preferred stocks, consider the following tips to increase your chances for success:

  1. Buy preferred stocks with a good credit rating. These will likely lose less principal value.
  2. Carefully read the stock prospectus (or use the following website: quantumonline.com ) to determine how the stock can be called, how it matures, and also, if/how interest payments are delayed/canceled due to credit issues.
  3. Keep a long time horizon, and hold the stock. The more interest you collect the better return you will get.
  4. Make sure you get an adequate margin of safety (i.e., a higher interest rate) to compensate you for the risk you are taking. So, if a 10 year U.S Treasury Bond is paying 4% (which is a virtually risk-free investment), you want to get a higher interest rate on a preferred.

For more information on preferreds, check out Quantum Online.

Categories: Investing Tags: