Thursday, December 20, 2007

It's Spending Time!

I have been AWOL for a week or so, and boy what a week it has been. I received my annual bonus (well, 90% of it, in any case); my company just went through a 10% "force reduction" even though we seriously out-performed our annual goals (I am safe); and we are just getting ready to pack our bags and head up to Tahoe for a well deserved ski vacation. Well, at least I think it's well deserved. Since we out-performed our corporate goals, my entire company will be shutting down between Dec 21 & Jan 2. The best part is: we are getting these vacation days free, i.e. on top of our normal vacation days. What a nice perk!

In Tahoe we are renting a huge "cabin" with 6 bedrooms, two hot-tubs and a pool table, into which we will pack 4 couples and god knows how many children. The weather has been very co-operative, with a foot of new snow falling in just the past 24 hours. This vacation will be an expensive one, but this is the sort of spending that I have absolutely no problem with. See, after my wife and I both maxed-out our 401k's for the year and even stashed away a little extra money for retirement, I think we are very entitled to splurge and make the most of our money.

Money should be enjoyed, so long as you don't rob your future self to spend in the present.

Tahoe here we come (in two days)!

Thursday, December 13, 2007

Get a Retirement "Quota"

This evening I asked one of my colleagues a simple question: "when do you want to retire?". Once again I am on a business trip, this time in good ol' Florida. I am traveling with one of my colleagues, a Director of Sales in his late 40's. When I asked the retirement question, I got a very thoughtful and encouraging answer. Here is what my colleague said (loosely paraphrased):

"Retirement is like sales. You have to meet a certain quota, and that quota is the amount of money you will need to fund your retirement. Just like in sales, to meet your quota you have to shoot for a higher number than you really need and build some safety margins into your plan. I am shooting for retirement at 58, but I know that I want to retire by 63. As far as I am concerned, if you don't plan for a specific retirement date, you will have to continue working for the rest of your life. I have plan, but I have built some flexibility into it. At the end of the day, being able to retire doesn't mean that I will actually retire. As long as I enjoy my work, I will continue do it."

Amen to that. A well thought-out and well explained retirement plan AND from a sales guy no less (sorry, I couldn't resist the dig at sales folks, being a marketing guy myself). I don't yet have a target retirement date myself, but I do have a target "quota" of $4 million. This is a stretch goal but I think that my wife and I can achieve it by developing our careers and living modest and balanced lives.

What about you? Do you have a target retirement age and "quota"? If so, are you on track to achieving those goals?

Tuesday, December 11, 2007

401(K) Plan Change - It's Finally Happening

It's finally happening. About 8 months after we launched the process, and about two months after we signed and sealed the official papers, this morning we will be holding the official employee meetings to announce the change of our 401(k) plan.

We are dumping our current plan with ING because of unsatisfactory returns, lack of transparency, high costs and a complete lack of index investing alternatives. Our new plan with ADP will offer very nice bells and whistles, including a wide range of index investment options, as well as highly rated actively managed funds (for those who insist on paying management fees without good reason); a ROTH 401(k) option and even a self managed 401(k) option for those employees that want more control of their financial futures. Even the good people at our finance department have something to grin about - ADP's 401(k) platform is integrated with their pay-roll management services, so there will be much less work for our accounting folks come pay-day.

For me, this day marks a personally satisfying milestone. I initiated the efforts to replace our 401(k) provider and led the search for a new provider, as well as most of the process to this point. So, if things don't work out as planned, my fellow employees are not going to like me very much. Of course, about $50K of my own money is in the plan, so I had a very strong financial incentive to make sure we got the best possible deal. I am just glad to see the train pull out of the station after such a long incubation period (I am also good at mixing metaphors, in case you haven't noticed).

Voluntary Sub-prime Bail-Out is Still a Bad Idea

Last week the White House announced a new voluntary sub-prime bail-out. Under the terms of the program, lenders would voluntarily freeze interest rates on certain ARMs for a period of five years, thus preventing them from resetting and probably averting a large number of foreclosures.

The program only covers home buyers who live in their homes, thus shutting out speculators. Also, it is only applied to those borrowers whose loans are in good standing and who are able to continue to meet their mortgage obligations at their current levels. It could have been much worse. Government could have used tax-payer dollars for the bail-out, or they could have chosen to ignore the free markets completely and legislated the bail-out into existence. As it is, the bail-out is a voluntary program by lenders.

Seemingly, this is a free market solution. Lenders are freely choosing to amend their contracts with their borrowers. Nevertheless, I am still opposed to the bail-out. Why so? Lenders and borrowers completely misjudged the risk of sub-prime loans. If priced correctly, sub-prime loans would have been much more expensive, and hence fewer borrowers would have been able to take them. The excess lending caused real estate prices to appreciate to untenable levels. Now that the bubble has burst, mortgage defaults and foreclosures are driving down home prices to their true market value. By "subsidizing" sub-prime loans, the bail-out will provide artificial price support to home prices, and will not allow them to reach their realistic free-market levels. In this way, the bail-out is creating conditions equivalent to price fixing. Since the interest rate freeze is only temporary, the true effect will be a lengthening of the sub-prime crisis and a drag on home prices and on the economy for years to come.

Yes, the unwinding of the home price bubble is painful, but bail-out efforts will only lengthen and defer the pain, not avoid it. This reminds me of the story of the dog owner who needed to surgically remove his dog's tail for medical reasons. Because he felt sorry for the mutt, he decided rather than to cut the tail off with one fell swoop, to only cut a small piece of the dog's tail every day... Doesn't make a lot of sense? Neither does a sub-prime bail-out.

Friday, December 07, 2007

A Break from Personal Finance

I have just returned from an international vacation with my family. Yes, that's where I have been hiding myself.

Something very interesting happened to me in my travels. For the past two weeks or so, I have spent about zero time thinking about our portfolio. I have read exactly zero personal finance blogs. I have checked our bank account exactly zero times. I discovered two things. The first is that our portfolio continues to do its job whether I watch it daily or not. That's not a big surprise given that our portfolio is index based and we do very little trading. Even though I did not check the value of our holdings for over two weeks, the world keeps turning. The second thing I discovered was that this break from my semi-obsessive interest in our financial well-being was a very enjoyable interlude. Who knew? You can completely forget about money, stocks, bills, credit cards and still have a blast. Wow.

As an interesting aside, while we were away, our landlord did some maintenance work on our house. He replaced the water heater, fixed a few minor things that were broken and was even good enough to bring-in two packages that arrived while we were away. The cost of all these nice changes: zero dollars. In fact, I think they could turn this into a MasterCard commercial: international airfare: $1096, two weeks of eating out in a foreign country: $500, coming home to a house that has been fixed up while you were away: priceless. Chalk one up for renting.

Wednesday, November 21, 2007

Dollar Decline: OK, It's Getting Crazy

Me and my family are on an international vacation and over the past week have experienced first hand the pain inflicted by a declining Dollar. The Dollar has declined against the local currency by about 15% in the last 18 months or so, and this means that everything we buy during our visit is noticeably more expensive in Dollar terms than it was last time we were here. This doesn't only make international travel more expensive, the same "problem" exists for Americans buying imported goods at home. Our money now buys less of everything, pretty much everywhere around the globe.

Of course, the story is not all bad. The declining Dollar is a boon to American exporters, who are now more competitive in the international market place. American goods have become cheaper for foreign buyers, and as this trend continues it may mean that the U.S. trade balance will improve significantly.

As an investor, the Dollar's decline poses some real dilemmas for me. I have previously written about how to defend your portfolio from the impact of a cheaper Dollar, but the main strategy for doing this is international diversification. Our portfolio already contains about 30% international stock, and given the frothy (not to say bubbly) state of some of the international markets out there, an increase in this position makes me somewhat uncomfortable. In addition, I believe that the world economy is headed for some tough times. With oil at about $100 a barrel and signs of inflation breaking out in China, I think we are going to see much more turbulence in the world economy in the coming years. I am not quite sure that I want to increase my exposure to this turbulence.

One thing seems clear to me: the Dollar will continue to decline in the near term. Talk of the Fed further reducing interest rates; an increased chance of recession; and international discussions about diversification away from the Dollar have created an atmosphere which will probably continue to put pressure on the Greenback. It seems to me that some sort of psychological barrier has been broken and that the world is willing to accept continuing declines for our national currency. We are in for some interesting times. I am not sure that they are going to be interesting in a good way.

Tuesday, November 20, 2007

Top Personal Finance Questions

People get to Money and Such through a variety of sources, and chief among these are the search engines. I figured it would be interesting to compile a list of some of the personal finance questions and key words that lead readers to my blog and provide a brief answer to each. So here goes:

1. How is my 401K doing compared to my peers? Check out this post.

2. How should I ask for a raise? Here is some advice on asking for a raise. And here's what to avoid.

3. How should I save for retirement in my 20's? Good for you! Here's something to get you started.

4. Should I invest in my company stock? Nope. At least not in a way that will unbalance your portfolio.

5. How should I invest my 401K assets? Here are some pointers.

6. Is rent a waste of money? Hell, no.

I also get the occasional intriguing question. Here is a sample, with my attempt at an answer:

1. What should I do in my 20's? Enjoy life, travel, learn.

2. What companies have the best 401K plans? Wish I knew...

3. What is the coin flip change over probability? errr....

4. How long should I stay at home with my parents? Until you can stand it no more... seriously, just get out of there, dude!

5. Insurance good or bad? Ugly. OK, it depends.

Finally, sometimes people get to Money and Such by using some really strange key words. Check these out:

"Art Dinkin" - huh?! who?!

"brake light, 1997 geo prizm" - I recently fixed my busted one.

"kenneth heebner" and "genius" - I have no idea who he is. Is he really a genius?

"im not good at picking stocks" - neither am I. Thank god they've already invented the index.

"how to cut a bubble" - I've heard that scissors work pretty well.

"random things" - should I be offended that this keyword sends people to my blog?

"my life makes no sense" - OK... welcome to Money and Such

"is it ok to ask your boss for a raise" - asking your cat does not typically yield the desired outcome.

I'm curious, am I the only one that gets traffic from such strange key words? Tell me about your weirdest ones.

Friday, November 16, 2007

Fashion Belongs in Milan, Not in Your Portfolio

Have you noticed how certain investment strategies all of a sudden become must follow investment trends? A few years ago everyone was talking about how it is virtually impossible to lose money in the real estate market. Well, tell that to the folks who lost their shirts in the sub-prime meltdown. Now everyone is talking about what a smart idea it is to invest in emerging markets or commodities.

Every investment fashion is based on an attractive (but flawed) story. Back in the late nineties at the height of the dotcom bubble, everyone was talking about how there was this thing called the "new economy" and how old fashioned businesses were going to be replaced by all these shiny new companies that would sell us everything from pet food to medicine. I still remember my accounting professor in business school lamenting that the income statement has gone out of fashion since investors are now rewarding companies for losing money... well, they did. For a time. And then it all went to hell in a hand basket with the dotcom bust.

At its core, every bubble has a grain of economic truth. The Internet is really changing everything about business and drastic change is likely to continue in the future. However, that did not justify the crazy stock valuations of the late 90's. China really is going to become an economic superpower and will probably have a very important role to play in the 21st century, but that does not mean that it can sustain the crazy stock valuations and triple digit gains its markets have been showing. Real estate can really play an important role in your portfolio, but betting your financial well being on that one asset class? Well, that's just crazy.

The point I am trying to make is a simple one. If everyone is talking about a certain hot investment strategy, that is exactly the right time to stay out of that particular market. Fashion belongs in Paris, Milan and New-York. A fashionable portfolio is a losing portfolio.

At the same time, betting against these hot sectors is probably not a great idea either. Even if you are right and have spotted a bubble, the markets can remain irrational for longer than you can remain solvent. That's why I don't think that pursuing a short strategy, such as the one the Div Guy discusses in this post, makes a lot of sense. My suggestion, as always, is to stick to your indexes.

Thursday, November 15, 2007

Prepare: More Government Idiocy Coming to an Airport Near You

Airport security. That's one of the dumbest, least effective and most disruptive government programs in existence. I know this is completely off topic, and has nothing to do with personal finance, but since I am headed for the airport this morning for an international trip, I thought I would expose you to this little rant. AND... here is the best part. CNN reported yesterday that:

" Investigators with bomb-making components in their luggage and on their person were able to pass through security checkpoints at 19 U.S. airports without detection, according to the Government Accountability Office."

Oh yes, they did, and if you are a frequent air traveler that should not surprise you one bit. Airport security is completely impotent. They are very capable at disrupting traffic, randomly searching 80 year old ladies and making business travelers take off their shoes and laptops. As we all know, shampoos pose a mortal threat to civil aviation and hence the common police saying:

"Sir, put the head-and-shoulders down and step away from the vehicle."

So as explained above the good folks at the GAO just proved that airport security is completely ineffective. Do you think that the TSA now understands the error of their ways? Do you think that they are likely to stop making you take off your shoes, relinquish your tooth-paste or search your grandmother? Not by a long shot. Here is what I foresee as the likely outcome: be prepared for more stringent and completely meaningless security measures.

Here is a hint of things to come (quote from the same article):

"Although it would not discuss the specific nature of its recommendations, the GAO said it recommended establishing special screening lines based on risk and passengers with special needs. The TSA should introduce more "aggressive, visible and unpredictable" measures to detect concealed items and develop new technology for screening at checkpoints."

And here is an even better quote from the article, from venerable TSA chief Kip Hawley:

"Our ongoing success is a result of the tremendous power in the reinforced, multiple layers. Truly, the whole is greater than the sum of the parts -- and together, they are formidable."

Yes, and my amazing success at keeping pink elephants from invading my living room is the result of my formidable defensive efforts, the special kind of screening process I inflict upon my guests, and the numerous pink elephant traps that I have strategically positioned around my drive way. Give me a break.

Before you label me as a crank and an unrealistic idealist who is "anti security" (which is almost as bad these days as being pronounced a communist or a liberal), do I have a better solution? Hell, yes. For one thing, how about we start using some common sense here. Your 80 year old grandma or three year old boy that I saw going through a pat-down during one of my trips are NOT terrorists. Yes, use your chemical sensors to look for explosives. Use your explosive sniffing dogs. The politically correct should now cover their ears: how about we use profiling to assess high risk passengers? There are intelligent things you can do to actually increase security. Real security, not the pretend kind.

Leave my laptop, shoes and shampoo alone, you buffoons.

It was Ben Franklin himself who said: "Those Who Sacrifice Liberty For Security Deserve Neither, and Will Lose Them Both." I am humbled by his eloquence.

Wednesday, November 14, 2007

Recommended Articles

This week's Carnival of Personal Finance is hosted by Million Dollar Journey, and features my article titled Active Resume Building. Here are some more recommended posts from this carnival:

The Personal Financier has a good article about common investment mistakes. I agree with most of the points Dorian makes, however one of his points "selling winning stocks too early, or holding onto losers for too long", contradicts another of his points cautioning against "Trying to time the market ". I actually agree that you should not try to time the market, and recently wrote a post on the subject, with some empirical data, but how can you practice this AND try to time individual stocks at the same time? Market timing is bad. Period.

Me vs. Debt has a post about asking for a raise, and the strategy he used for achieving his goal. I agree with every point he makes, and especially with his final point about "not mentioning his bills" as an argument. Honestly, your boss does not care about your bills. Your personal circumstances are not a factor in granting or denying your request for a raise. Your boss cares about two things: making his budget, and exceeding his departmental goals. If your raise moves him in the right direction on both - you are in good shape. If not, you probably won't be getting that raise. Here is some more advice on things to avoid when asking for a raise.

Canadian Dream wonders why there is no universal personal finance education in North America. He also gives a pretty cynical response: companies make money off of people's ignorance (he actually uses the word stupidity, but I am more diplomatic). I am not sure whether he actually believes in this explanation, but I have a simpler one: who should care about this issue? Is there a pressure group or lobby to push for more financial education? The people that need financial education, mostly don't realize that they need it. The ones that could provide it, mostly have no financial incentives to do so. And, finally, government only acts to serve the interests of various pressure groups - there are no campaign bribes (sorry, I meant to say "contributions") to be won by working on this issue. So there. Now who is the cynical one?

Finally, Money Walks offers a useful tutorial for those who are not sure about how to calculate their net worth. It also features some stunning art work, which may or may not have been stolen from the Museum of Modern Art.

Tuesday, November 13, 2007

Employee Stock Option Plans - Time to Sell?

I subscribe to "My Personal Finance Journey", an excellent PF blog. Last week mm posted an update of his net worth, which included a dramatic increase in the value of his employee stock options. I have heard this story before...

Back in the rockin' dot com bubble days, my wife worked for a high flying Internet company. She joined at the right time and received some stock options at a strike price of $3. At their highest, each share of the company was worth over $160, and we were close to being millionaires on paper (before taxes). Talk about a major windfall.

Did we sell at the right time? Not exactly... The stock dropped all the way to low double digits, and while we made some money selling on the way down, we were left with only a fraction of the potential gain. We learned a very, very expensive lesson.

So, how do you know when it's time to sell your employee stock options? Here are few ideas:

It's Not Fake Money - many people are much less concerned about losing money on their stock options, than they are about losing their other assets. I can't quite explain this, but it may have something to do with the notion of "easy come, easy go". Truth is, there is absolutely no difference between stock option gains and money that you receive in your pay check. Treat your stock option gains as you would any other income.

Don't Be Afraid - when I urged my wife to sell more of her stock options, she was concerned that we would feel like dummies if the stock continued to appreciate, while we sold at a lower price. I had the exact opposite fear. I was worried that the stock was going to drop, taking our wealth with it. We were both motivated by fear, and both of us were wrong. Even though my proposed course of action would have generated more money for us, I could not have known it at the time, and my reasoning was not the correct one. One should not make investment decisions based on fear. Investment decisions should be based on goals; risk tolerance and diversification. The same logic applies to employee stock options.

Use the Materiality Rule - If your stock options represent a substantial percentage of your net worth, you should diversify your investment and sell at least some of them. For me, the materiality line crosses at about 10% of my net worth. Any less, and I am not likely to be too stressed by the ups and downs of my company's share prices.

Would You Invest More -if you were given an amount equal to your stock option gains and were told to invest these gains in the most productive manner, would you invest them by purchasing options on your company stock? If your answer is negative, it's probably time to sell.

Mitigate the Stress, Sell Over Time - to make the decision easier on yourself, I propose the automatic selling approach. When my wife and I could not agree on whether to sell or hold the stock options, we compromised. We agreed that we would sell a set quantity of options on the first day of each quarter, regardless of the price at which the stock was trading. The quantity we agreed upon would completely eliminate our position in the stock over approximately two years. This strategy of selling gradually allowed us to diversify away from the stock, while ensuring that we did not sell large quantities of stock into a temporary dip in the stock price.

There is also an important counter-argument here. For many of us, stock options are our best and biggest shot at riches. I mean, just yesterday I read a story about the office masseuse at Google retiring after her stock options made her a millionaire. Of course such stories are exceedingly rare, but if you believe that your company's stock could take off and catapult you into the ranks of the independently wealthy, should you really give up on this shot at riches? That's a question each of us has to answer for his or her self. Personally, I am probably too risk averse to hold onto sizable, unrealized stock option gains. How about you?

Monday, November 12, 2007

Are Late Fees Frivolous Charges

A couple of weeks ago, an anonymous commenter left a long and interesting comment in response to my post titled The Most Expensive Loan in History - which is basically the story of how Citibank tried to charge us $82 for being a few minutes late in paying off our balance. We did not notice that the cut-off time was based on EST (rather than our local PST)...

Anyway, here is an interesting excerpt from that comment, which I have been thinking about for the past few weeks.

"...The late fee of $39, of course, is the most obvious, and its impact declines as the principal of the loan increases. Nevertheless, one ought to ask exactly what a late fee is charged for. After all, the lender is charging you interest for all of those late days, and interest is usually considered to be the cost of using money. So what is the late fee for? It is not for the employee who looks at the books every day to see who is late - we know that is automated. So what cost, for which the lender is not already being paid, does the late fee cover?"

Hmmm... good question. In other words, if you are already paying a pretty aggressive interest rate on your credit cards, can late fees be considered a frivolous charge? Here are the two alternatives I came up with:

Alternative #1 - Yes, What Are You Going To Do About It?

You could claim that late fees are frivolous charges. However, if you are a staunch free market supporter, like me, you have to take the position that this makes no difference. These are commercial terms between consenting adults (well, one adult and one company). If you agreed to be charged a frivolous late fee, it's your problem. Deal with it.

Alternative #2 - No, Late Fees Are Legitimate Payments for Breaking the Deal

OK. So you are paying a high interest rate on your card, but as part of the loan terms you agreed to make your payments on time. If you don't pay on time, the lender should be compensated for your violation of the agreement.

In either case, whether you agree with option #1 or with option #2 the result remains the same. While late fees may not be popular or even fair, the credit card market is clearly a competitive one and the laws of supply and demand dictate what consumers pay for the revolving credit they use.

The only problem I have with the notion of late fees is that credit card companies appear to be creating intentionally confusing and misleading contracts that seem designed to entrap consumers into needlessly paying late fees and other charges. A clear example of this is our little Citibank adventure. If you do not mean to entrap your customers, why else would you base the deadline for payments on a different time zone from the customer's own?

Saturday, November 10, 2007

Customer Service and the Explanation for Corporate Stupidity

Moolanomy wrote an excellent post yesterday about how companies give preferential treatment and pricing to new customers, over the their long time loyal customers. That's exactly right.

There is an economic reason for this strategy, but sometimes it backfires. Recruiting new customers is difficult and expensive. To succeed companies must offer new customers something that their existing provider is not giving them. After all, why would you switch to a new provider if you would be getting exactly the same price and service? However, extending these promotions to the company's entire customer base can be a very expensive proposition for the company. For example, Comcast keeps coming out with teaser offers that essentially cut digital cable prices in half for new customers for six months. If they halved the price for their entire customer base, they may gain a bucket load of new customers, but the overall impact on their profitability would be devastating.

This strategy sometimes backfires with individual customers. One of my colleagues at work was a long time Comcast cable customer. One day he received in the mail one of those promotional rate offers and called Comcast asking them to extend him the same promotional offer. They refused since he was already a customer. He threatened to move to AT&T which has been aggressively promoting their services in our area, and which also offers aggressive introductory prices. They still refused.

Reluctantly, my friend moved to AT&T and got their six month promotional rate. When that rate expired, he moved back to Comcast and... received the new customer promotional rate. That outcome clearly did not make sense for Comcast. Comcast lost a customer for six months, and when he came back, he still got the promotional rate. Wouldn't it have been more profitable to retain him as a customer over the entire period? Of course it would have been. However, companies are banking on customer procrastination, laziness or ignorance to make this strategy work.

The vast majority of customers simply don't call to ask for a better deal. Of those that do, and are refused, a large majority still continues the service without receiving the discount. On average, the company makes more money by refusing to reduce prices for its existing customers than it would be by reducing prices to try to retain existing customers, such as my colleague. I guess they are not that stupid after all.

Friday, November 09, 2007

Recovering from Career Disaster

Welcome MSN Smart Spending Blog readers. If you enjoy this article, please consider signing up for the Money and Such free RSS feed.

This is the fourth and final post in my series titled Early Career Decisions. Today's post is on the topic of recovering from early career disasters. I have picked four of the most common career disasters and even though I could dedicate an entire post to each one of them, I will give a few quick tips on how to deal with each scenario.

Disaster #1: Selecting the Wrong Company

You did everything in your power to select the right employer for you, but soon after you start working you realize that you have made a terrible error. What should you do? Is it OK to quit immediately? Should you hang around for a year before you leave?

If you find yourself in the wrong company, the first thing you should do is wait. Give it a couple of months. Maybe you will find that what first struck you as horrible is not really so. Making an impulsive career decision is not a good strategy. However, if after a few months you find that the company truly is not the place for you, move along.

Toughing it out for a year is really not necessary. Future employers will understand if you tell them honestly that the company was not a good fit for you, and even though you tried your best, you could not fix the situation. Contrary to what many say, leaving the company after a few months will not reflect poorly on you, provided you do it once. If you bounce around several companies within a short time period, then you have a problem on your hands.

Advice: make sure it really is as bad as you think, but if it is, leave.

Disaster #2: Selecting the Wrong Profession

It is possible that you will find you strongly dislike the industry you are in. Perhaps it is too volatile or too stogy for you. Perhaps you don't deal well with the stringent regulations of the financial industry, or don't enjoy the pressure to bill more hours as a legal professional. Perhaps your industry requires too much travel for your taste, or requires you to work hours that are simply not acceptable. How do you switch to a new industry?

I started my career as a lawyer. After a couple of years on the job, I realized that I simply did not like working in a law firm. I had two options: I could leave my law firm and work as an in-house lawyer for a large company or in the public sector, or I could leave the world of law and try to switch industries completely. I opted for the latter and accomplished a smooth transition by getting an MBA. I haven't looked back.

In many cases you will find that you have similar options. You can choose to remain in your industry but change the circumstances which you dislike. This is a relatively simple transition, however it carries the risk that the change you are making will not be enough to make you happy. Alternatively, you can try to leave your profession and industry and aim for greener pastures. This course of action carries the risk that your new industry or profession will not be any more pleasing for you. It is also a relatively difficult transition to make and often involves re-training and considerable expenditure of time and money.

Advice: understand the consequences, but don't be afraid to make a difficult decision. Few things are worse than working for decades in an industry or profession that you cannot stand.

Disaster #3: Working for a Horrible Boss

Boy, that can seem like quite a disaster. It really sucks to get up in the morning, go to work and know that your horrible boss will be making your life difficult the whole time. A crappy boss can really take the fun out of work. However, as strange as it may seem, working for a horrible boss is not such a disaster. Most people have had at least one terrible boss by the time they hit their mid-career stride.

A horrible boss can teach you many things, the most important of which is what you need to do to avoid being a bad boss. Learn from your bad experience. Watch your boss carefully and try to understand what it is that you don't like about their actions. Is your boss even aware of everything he is doing wrong? Treat the situation as a learning experience.

The good news is that since slavery was abolished, you have a choice of bosses. You could quit and look for a new job, but in many cases if the company you are working for is a good one, you may not need to do so. Many good companies will re-assign star performers to different groups in order to retain them. Your bad boss may be moved to a different part of the organization, he may leave the company altogether. There is even the possibility that he or she will (God forbid) get promoted out of your life.

Advice: unless your boss compares unfavorably with Attila the Hun, hang in there. The situation is temporary. Treat it as a learning experience. Consider seeking a transfer within the organization. If you've had enough, there's always a greener pasture out there.

Disaster #4: Getting Laid Off

Few things in your career will feel worse than getting laid off. If you get laid off you may feel inadequate or helpless. You may feel that you did something wrong. You will no doubt feel stress.

Reality is that in today's highly dynamic economy, getting laid off is a real possibility for most non-government employees. While you cannot defend yourself against the possibility of getting laid off, you can do certain things to prepare. You should start preparing for disaster well before any clouds appear on the horizon, and one of the first steps to take is to build an emergency fund, to make sure that you are financially stable even if you lose your job.

If you are proactive about building your resume, as I have suggested in an earlier post in this series, you will have put yourself in a great place to quickly bounce back from the unemployment line. If you have been maintaining relationships with many of your former colleagues over the years, as I have suggested in yet another post in this series, you will have a robust network to draw upon and your time out of commission will be greatly reduced.

Advice: losing your job sucks, but it's hardly the end of the world. To minimize the damage from losing your job, make sure that you have an emergency fund. Build and maintain a professional network.

Other posts in this series include:

Employer Selection: a Strategic Career Decision
Your Colleagues - Your Assets
Active Resume Building
Recovering from Early Career Disaster

Wednesday, November 07, 2007

Active Resume Building

This is the third post in my Early Career Decisions series. Today's topic is active resume building. While this post is aimed primarily at people in their twenties who are just starting to build their resumes, much of this advice would work just as well for those of us more advanced in our careers.

The thing to understand about your resume is that it is not a laundry list of your day-to-day responsibilities. Your resume is a story and you are the author. Much like a story, your resume needs to be structured, it needs to grip the reader from the start and draw him into the plot. Most importantly, your resume must deliver a strong and clear message. That message is: "hire me".

Writing the resume is only the final piece of your resume building process. Building your resume starts with what you actually do and what you actually achieve. However, I would like you to accept the following conceptual shift: rather than writing your resume about what you do, do what you want your resume to say.

Here are some steps to take you in the right direction:

1. Set Your Career Goals - before you take any action, it is important to understand what you are trying to achieve. Your actions should be determined by that goal. The goal you are moving towards may be your very next position, or it can be your long term career objective.

2. Create the Experience to Achieve Your Goal - go online to Monster or Hotjobs and find a job description that matches your career goal. Read it carefully and understand what type of experience hiring managers are looking for when searching for someone in that position. You can also talk to people who have already achieved your career goals and ask them what type of experience is required to get hired for a position similar to theirs.

3. Create the Experience You Need - now that you know what you are working towards, and you know what experience you need to get there, start creating the experience that you need. If certain academic degrees are needed, get ready for school. If certain professional certifications are needed, it's time to hit the books. If your career objective requires some international experience, start looking for an international assignment, etc. You don't need to do all of these immediately, but if you are serious about meeting your career objectives, you should come up with a plan for getting there.

4. Do Your Next Job - you will most likely find that much of the experience that is required for your career objective is outside the scope of your current job. That's to be expected, and it should not alarm you. You should find creative ways to get some of the experience you need for your next job, in your current job. That means that in some cases, you will need to seek projects and responsibilities that would not be in your current scope of work.

One way to move in this direction is to volunteer to participate in corporate initiatives. You can also ask to sit and listen to meetings that are not normally in the scope of your work. For example, I have asked to participate in my company's weekly revenue meetings in which sales people review the current status of their accounts, even though this is completely outside the scope of my day to day work. The reason I do this is to get involved in a different aspect of my company's business, which will be useful for me in the long term. There are two other side benefit to this strategy: first, it allows you to free yourself from your pigeon hole. Rather than being looked at as the marketing guy, the operations expert or the finance guru, if you venture outside the scope of your defined role, you are starting to create an image for yourself as a multi-disciplinary professional. Second, if you participate in such out-of-scope activities, eventually you will come across an interesting project that you will be able to participate in. Presto, new and useful experience for your resume.

4. Your Job IS Resume Building - please recognize the following important maxim: your job is your career, not what you happen to be doing at the moment. Your current job is only a step on the way to your next positions. Because of this you must make sure that your current job does not derail your next job or your career progression.

This statement means that in your current job, you should focus on those actions and activities that are important and that will help move you along to the next level. Surprisingly, this is very often the focus that would make your bosses happy as well. Do not focus on the small or urgent things. Focus on the big, important things. Like I told a member of my team last week, if it's not something you can put on your resume, don't focus on it.

Most jobs on the planet involve a lot of small, day to day, minor or urgent activities. These need to get done, but should not be confused with the important, strategic, major projects that will make you successful in the long run. The analogy I like to use in this context is the difference between a cost center and a profit center. A cost center is a set of activities that are required but that do not generate revenue for the company. A profit center is what pays the bills for the organization. The strategy for dealing with cost centers is cost minimization. The strategy for dealing with profit centers is maximizing profits. Similarly, in your work you should minimize the time you spend on routine tasks. Don't drop the ball, but don't go above and beyond. Spend the extra time you gain on something you can put on your resume.

5. Stay on the Ball - every Friday, ask yourself a simple question: "what have I done this week, to improve my resume?" "Nothing", is the wrong answer.

Other posts in this series include:

Employer Selection: a Strategic Career Decision
Your Colleagues - Your Assets
Active Resume Building
Recovering from Early Career Disaster

Tuesday, November 06, 2007

Your Colleagues - Your Assets

This is the second post in my series about early career decisions.

Today I would like to talk about one of the most under appreciated assets that each of us owns at work. Our colleagues. Whether you work for a small organization or a large one, in your day to day work you are probably building a large number of relationships with fellow workers, customers, suppliers and more. As these acquaintances move across companies and industries, your professional network extends with them.

Colleagues can shape your career to such an extent that many individuals never have to actively search for a job, as new career opportunities just seem to flow in their direction. Here are a couple of examples that I have personally witnessed in just the past two weeks:

Knowing that I am hiring a new member for my team, one of my customers called and told me about a good candidate that he used to work with in the past. I decided to interview that person, based solely on his recommendation. In the end I did not hire this candidate, but the point is that she would never have even gotten an interview without a recommendation from her colleague. Another example: my boss has been looking for a new member for her team for the past couple of months. Over that period, she has called five or six individuals that used to work for her previously, in the hopes of luring them to join her team. My point is this: if you are able to build and maintain a strong relationship with your colleagues, you will have created a long lasting and powerful career resource.

So how do you build such strong and long lasting relationships with your colleagues? Here are a few tips:

1. Make Your Boss Look Good - doing your job well; giving your boss credit where credit is due; supporting him in front of his boss; are some of the easiest ways of making your boss look good. Do that consistently, and when your boss gets promoted within the organization or moves to a better position in a different company, he may try to drag you along with him. Think I am overstating the case? The first thing a new executive does in a new position, is move people he trusts into positions of power around him. This is a quick and effective way to consolidate power and ensure that he gets the job done. Be one of those trusted few.

2. Be Fun to Work With - coming to work in the morning is much nicer if you like the people you work with. In every organization there are some who are liked by all, others who are tolerated, and a few who are despised. If you are someone people like, you will find that they try to take you with them into future positions. You know what they say, good people are hard to find. To achieve this goal, be courteous, professional and respectful to others. Try to avoid gossip or negativity, and most importantly in my opinion, try to avoid any blatantly political actions. Stay above the day to day corporate warfare and you will be rewarded.

3. Keep in Touch - the very essence of building a professional network, is keeping in touch with people. Ironically, when folks leave the company, is the time at which their value to your professional network increases the most. Luckily, these days keeping in touch with former colleagues has become a very simple matter. You can use such tools as or Plaxo to keep in touch with people. You can also send the occasional e-mail update or the annual Christmas card, and having lunch with some of your old colleagues periodically is not only useful, but fun!

Some companies actually encourage their alums to stay in touch. One consulting company I worked for in the past has a website for all it's former employees and sends quarterly news updates to everyone registered to that alumni network. In another of my former companies, alums themselves have started a Yahoo mailing group through which we all stay in touch.

4. Work Outside Your Team - developing your existing contacts is a good idea, expanding your colleague network is even better. To do so, try to find some opportunities to work with members from other parts of the organization. A great way to do this is to volunteer for some cross functional teams. It is always a good idea to reach-out to customers, attend trade shows, and participate in company social events. Those functions all offer opportunities for meeting and interacting with more of your colleagues.

Other posts in this series include:

Employer Selection: a Strategic Career Decision
Your Colleagues - Your Assets
Active Resume Building
Recovering from Early Career Disaster

Monday, November 05, 2007

Employer Selection: a Strategic Career Decsion

Last week I announced a new series which will focus on making the right career decisions in your 20's. This post is the first in the series.

Early on in your career, selecting the right employer can have a profound impact on the direction your career takes and on your prospects for professional success. Future employers will judge you based upon your previous employers; the breadth and depth of your professional knowledge will depend on your employer selection; and your chances for advancement are sure to be influenced by the type of employer you associate yourself with.

With so much riding on this decision, how can you increase your chances of selecting the right company? Here are some important pointers:

1. Brand Names - just as most people prefer branded products to generics, most hiring managers prefer to hire people from brand name companies. Hiring managers know that because more "prestigious" companies are more sought after by candidates, they tend to have a larger pool of candidates from which to recruit, and from this larger pool they recruit the cream of the crop. In essence, if you are able to land a first job with a "brand name" company you have another seal of approval on your resume. This seal of approval will be useful for many years to come. Generally speaking, a company whose name the guy next door is likely to recognize is a brand name company. Failing that test, choose publicly traded companies over privately held ones.

Advice: Always aim for prestigious companies within your chosen industry.

2. Training - in your first jobs one of the most important things you need to consider is on-the-job training. Believe it or not, college does not prepare you for the corporate world. The only way you can prepare is to make sure you are well trained by your first employers. When choosing an employer, be sure to consider the company's reputation for offering professional development to its team members. In fact, be sure to ask your interviewers pointed questions about how the company helps its employees grow professionally. In addition to getting a useful answer, that question is also sure to impress any interviewer.

Advice: choose a company which will offer you as much training as possible.

3. Large vs. Small Companies - should you go for a smaller company or a bigger one? The answer to that question is dependent on your career goals. Smaller companies tend to be more dynamic. They offer employees a much broader range of experience, since their work processes tend to be more flexible. Smaller companies, by definition, have fewer employees to handle many tasks. This means that in many cases employees have to wear several hats. This may give you a wide range of experience early on in your career, and may be ideal if you are considering an entrepreneurial direction.

The down side is that in many small companies, employees tend to become jacks of all trades in their functional area. This means that they find it difficult to become experts in any given area. Smaller companies also tend to have fewer resources for on-the-job training and professional growth. In addition, career mobility within these organizations tends to be limited, since there aren't that many roles you can move into.

Advice: unless you are positive you want to choose an entrepreneurial course for your career, starting in a larger company is a safe bet.

4. Select a Company Not a Supervisor - unless the hiring manager is Count Dracula, don't base your employer selection decision on your prospective manager's identity. Managers come and go. Positions change. People get promoted. People leave companies. If you choose your position based on the identity of a manager, you could be disappointed shortly thereafter if that manager leaves or is re-assigned. On the other hand, organizational cultures are very stable over the long term.

Advice: join a company with a good organizational culture and with strong industry presence. Ignore the identity of the hiring manager, for good or bad.

5. Do Not Follow the Hottest Trend - if everyone else is trying to get into a certain industry (say... private equity, for example), that's exactly the wrong industry to get into. There are a number of reasons for this. If all the best and the brightest are trying to get into an industry, it will be very tough to distinguish yourself and stand out from the crowd. In addition, much like the stock market, industry is cyclical and the industry that has seen the hottest streak in recent years is likely to cool off in the future. Don't pick last year's winning sector, pick next year's winners.

The same is true for companies. If everybody is trying to get into eBay, it doesn't necessarily follow that this is the right company for you. There are many brand name companies out there and some of them are starved for top notch talent. Go for those.

Let me share a personal anecdote here. Between my first and second years of business school, I received a lucrative summer internship offer from Intel. I turned down that offer to follow the latest trend and joined a dotcom. The year was 2000 and that story turned ugly pretty quickly, as we all know.

Advice: go into an industry and a company based on the merits. Do not base your decisions on fashions or trends.

6. Think About Your Next Job - you know those folks that buy a house and are always thinking about how each change they want to make will impact the house's resale value? Well, those folks have it exactly right. Before you take any job, think about how that job will look on your resume next time you try to sell yourself to an employer.

Before you accept any job offer, it is important to have a career plan. I know that for someone in their 20's who just got out of college and is working his first or second job the term "career plan" may sound scary. However, by career plan I don't necessarily mean a formal 10 year plan. For the purpose of this discussion, what I am referring to is a vague idea of where you would like your career to take you. Do you see yourself going to law school? Do you see yourself as an Ad Executive? Do you see yourself as a CFO? Wherever you think you are headed, is the job you are being offered sending you on the right path towards that goal?

Advice: before taking a job ask yourself: "is this job the right step towards [INSERT LOFTY CAREER GOAL HERE]."

7. Compensation is Secondary - Shadox are you mad? Isn't money what it's all about? I may be slightly off my rocker, but that has nothing to do with the specific point I am making here. Remember, you are not trying to maximize your immediate earnings potential. You are trying to maximize your lifetime earnings potential. Your first jobs will pay you peanuts compared to what you can make somewhere down the line. Keep your eye on the big prize. Don't accept a job that pays you $5,000 more a year if it doesn't take you where you want to go. That's like boarding a bus that is going to the wrong part of town, just because it looks nicer.

Advice: maximize your long term earnings potential, not your next pay-check.

Other posts in this series include:

Employer Selection: a Strategic Career Decision
Your Colleagues - Your Assets
Active Resume Building
Recovering from Early Career Disaster

Sunday, November 04, 2007

Stupid Financial Advice

I was traveling on business this week, in various parts of the country. On Thursday morning, I was having my breakfast at a Holiday Inn Express and casually watching a morning show somewhere in North Carolina, when I heard some extremely stupid financial advice coming from the TV.

The show contained a stock market segment in which the financial correspondent covered the recent run-up in Google stock. She commented that the stock just crossed the $700 mark. The anchor, impressed, asked if there were any plans to split the stock. The financial correspondent explained that Google's philosophy was to encourage serious investing rather than trading, and so had no intentions of splitting the stock. Here is where the stupid part begins. The following is not an exact quote, but it's pretty close:

Anchor: "If you only have a small amount of money to invest, how can you get in on the Google game?"

Financial Correspondent: "as a small investor, you can save your money and buy a single share of Google. Google has been showing such impressive results, that you would be better off buying a single share of its stock than buying more shares in weaker companies".

I am sorry, but if you do not understand the basics of investing, you have no business going on TV as a financial correspondent and misleading small investors.

What's wrong with that exchange? Well, for one thing, it assumes that Google's impressive past performance will continue into the future. Just because a stock, a mutual fund, or even the market as a whole has shown impressive results in the past, there is absolutely no guarantee that it will continue to do so in the future. In fact, assets have a tendency to "regress to the mean". If something has shown a dramatically faster appreciation than the overall market in recent years, it may be due for several years of under performance. That is the reason why investors should re-balance their portfolio by selling some top performers and buying some laggards. What the financial correspondent suggested is known as performance chasing and is a great way to ensure that you get burned financially.

There is another fundamental problem with the financial correspondent's advice. If you only have enough money in your portfolio to buy a single share of Google stock, the resulting one share portfolio is completely undiversified. From that point forward, your portfolio's fate is completely tied to the fate of a single company. This is a very risky proposition, regardless of how strong you believe the company you invested in really is. If you only have a small amount of money to invest, do yourself a favor and buy a diversified index fund instead of a single company stock. Vanguard's Total Market Market Index fund (VTSMX) may well fit your needs.

Friday, November 02, 2007

Early Career Decisions

In your twenties and early thirties, your career is typically your most important financial asset. Any investment you make in your career in those early years will have decades to pay-off, and early success or smart career choices can translate into millions of Dollars in future income.

In the coming days, I will be publishing a series of posts on the topic of getting your career going in the right direction. This series will focus on how folks in their twenties can greatly improve their chances for long term prosperity by making a few smart career choices. Here are the posts that I am planning for this series:

Employer Selection: a Strategic Career Decision - Your early employment history will have a profound impact on the rest of your career. This post will offer specific advice on how to select your first companies, including a detailed discussion of important issues to consider and traps to avoid.

Your Colleagues - Your Assets - This post will focus on developing one of the most important and under appreciated career assets that each of us owns. Our colleagues.

Active Resume Building - Far from being a laundry list of everything you have done in your career, your resume is a story, and you are the author. This post will show you how to plan and acquire an enviable resume.

Recovering from Early Career Disaster - everyone's career has its ups and downs. However, early career mistakes can have a long lasting effect unless they are dealt with quickly and decisively. This post will discuss some of the more common career disasters and offer ways for turning them into career assets.

This promises to be a very interesting series. I hope you enjoy it.

Thursday, November 01, 2007

The Real Estate Bubble Hits Close to Home

Shadox is on the road yet again, on a business trip. What else is new? The good news is that my travels this week have brought me to Washington D.C. where I spent last night having dinner and spending hours of lively conversation with a good friend of mine from business school, who I have not seen in about two years.

One of the many topics that came up in our conversation was my friend's real estate predicament. Several months ago, my friend and his family decided to sell their suburban Northern Virginia house and move to another suburb not far away. The move shortened my friend's commute and brought the family into a better school district. At the time, my friend was pleased that the declining real estate market in the area meant he could get the house he wanted for a lower price. In fact, the previous owners bought the house at the height of the bubble in 2005, and sold the house to my friend at a loss.

After my friend and his wife closed on their shiny new house, they put their own house on the market. The way my friend tells it, they put their house on the market right before the sub prime crisis hit. They were forced to repeatedly slash their asking price, and their house still remained unsold. Eventually, they decided to take the house off the market, and rent it instead. They just found a renter using a broker, and are anxiously expecting their first rent check to arrive in the mail in the next couple of days. The check should cover all but $50 of my friend's monthly mortgage payments.

My friend's entire net worth (minus his 401K) is currently locked up in bricks and mortar. He would like to sell his old house, but cannot afford to do so at a big loss. He is hopeful that the real estate market will pick up and that he will be able to sell the house in a few years. He is very hopeful that he can sell within 3 years, since this will allow him to protect his hoped-for capital gains from taxation. Because their equity remains locked up in the old house, my friend and his wife were not able to roll any of their equity into the new house, and consequently the family's mortgage payments on the new house are higher than they expected.

My friend is a smart, talented and educated person. He holds a well paying, but stressful and possibly precarious, job. Although he did not say so explicitly, I could see that my friend was stressed and somewhat distraught by his financial situation. What can I tell you? My friend is certainly not member of the sub prime crowd. He did not reach above his means in buying his new house. He is a victim of a sudden market turn that caught him unprepared. Even so, I believe that my friend is on sound financial footing and will probably come through the crisis stressed, but financially stable. Unfortunately, the same cannot be said for many others that got caught in this crisis.

As an addendum to my story I would like to add that as sad as I am to see my friend unhappy, I hold firm in my opinion that the government should stay out of the sub prime mess and not attempt to bail out borrowers or lenders. It is simply not the government's job to interfere in such cases. As a side note, I would like to mention that the fact that my friend took his old house off the market rather than sell at a big loss, is an illustration of why real estate prices are more risilient than other asset prices.

Wednesday, October 31, 2007

Personal Finance Nightmares

In honor of Halloween, I thought I would share my top six personal finance nightmares. Some of these are far fetched, others a real possibility. All of them are very scary to me.

Here they are, in no particular order:

1. Disability - not being able to take care of myself, financially or otherwise, is one of my biggest nightmares. I am a very independently minded person, who deeply values his freedom and autonomy.

2. Persistent Joblessness - I have never really been unemployed, but I am very much aware of this possibility. I am a well educated, highly skilled and eminently employable individual, but bad things happen to good people. It's a fact. I have invested a great deal of time and money in my career and the thought of seeing that investment go down the drain is tough to confront. If I found myself in a state of long term joblessness, I would probably start my own business. However, I would like to do something like that on my own terms, rather than be forced to take such action.

3. Health Emergency - last year I got a small taste of what a health scare feels like. I felt unwell for several months, and despite a battery of tests, doctors could find nothing wrong with me. To my deep relief, the condition simply dissipated, gradually and slowly. Someone once told me that we are all one major health crisis away from bankruptcy, health coverage or no. I can believe him.

4. Major Natural Disaster - last week's California wild fires are one such example. A colleague of mine from San Diego was evacuated from her home due to the fires, and was allowed to return two days later only to discover very minor fire damage to a portion of her house. Unfortunately, her next door neighbors were not as lucky. Their house burned to the ground.

We live in earth-quake prone, fire prone, mud-slide prone California. The prospect of a natural disaster is something we have to live with, but that does not mean I am comfortable with the thought.

In fact, after writing these lines, I found out that Northern California was struck by a 5.6 magnitude earth quake tonight. Talk about a potential nightmare - a strong earthquake while I am on the other side of the continent and my wife is alone with the kids. Thankfully, all is well.

5. Complete Stock Market Meltdown - yes, it's unlikely, but a global 1929 style market crash could happen again. As someone who has a very considerable portion of his net worth invested in the markets, that would be one massively scary turn of events. What could trigger such a crash? Who knows? But it is possible that if we had a massive terrorist attack, such as nuclear terrorism, we could face a very different economic reality.

6. Homelessness - I have repeatedly spoken out against treating houses as an investment. I prefer to rent rather than buy, at least for now. However, homelessness is a very scary prospect for me. Can you imagine not being able to provide basic shelter for your family? Well, there are many homeless families out there. I believe that one of our greatest failures as a society, is our inability to eradicate homelessness and hunger in this country.

Those are my personal big, bad, six nightmares. I would love to hear about your own personal finance fears and concerns.

In an upcoming series of posts I will discuss personal finance crises, and ways to prepare for them and to mitigate their most adverse consequences. Let me know if there are any specific topics you would like me to cover.

Tuesday, October 30, 2007

She Makes More Than Me

I have noticed that some men have a problem with their wives making more money than they do. What a crazy notion that is. Some women feel bad about making less than their husbands or feel that their pay check may not be worth the effort. That's just as crazy. Here is the way I see it: marriage is a partnership. You share the responsibilities, the obligations and the rewards. If one of you does well, you both benefit. However, feelings are feelings and it's tough to ignore them, so here are some techniques you can use to make both parties feel better about the relationship and about their earning power:

1. Acknowledge the Facts - unless you have a magic wand you can wave around to change your respective earning power or fundamentally change the circumstances that brought you to where you are today, you are going to have to live with reality. One of you makes more than the other. Put that fact on the table and find a way to make peace with it.

2. Understand that Things Can Change - "for richer or for poorer" is not just an empty statement. Things in life change. Today you are making more than him, tomorrow something happens and the roles are reversed. God forbid, the higher earning partner could fall ill, lose their job or decide to accept a lesser paying job with more job satisfaction. The situation you are in now is not permanent. The important thing is to understand that your partner is a part of your financial foundation - a sort of diversifying asset, if you will. Isn't it a great thing to know that if things go badly for you, you can rely on someone close to carry you through?

When I was getting my MBA my wife was raking in the dough. This was at the height of the dot com bubble and her stock options were worth a nice chunk of change (no, we did not sell at the right time). She made much more money than I could generate from my measly teaching assistant gigs. She also contributed much more than I as I was going through law school. Now things have changed for us, and who knows, they could change again.

3. Trick Yourselves a Bit - who said trickery is a bad thing? The better earning partner can bear more of the deductions to allow the lower paid partner to bring home a bigger check. For example, the higher paid partner could ask for a higher withholding level, which would allow the lower paid partner to claim more deductions and increase their take home pay (as long as you end up withholding the correct amount - IRS penalties and interest suck). Similarly, the better paid partner could bear the costs of the family health care and any flexible spending accounts, again increasing the other partner's take home pay. If you decide to go this route, make sure that you are not opting for worse or more expensive medical coverage or for lesser benefits, just to make yourselves feel better.

4. Consider Your Full Contribution - I make more money than my wife these days, but she spends much more time with the kids and that's worth a bundle. It is frequently the case that the lower earning partner contributes more around the house or with other responsibilities. Make sure that you acknowledge this fact and give credit where credit is due. These additional responsibilites are just as important, if not more important, than money.

5. No Extra Credit - It is also important to acknowledge the fact that just because you bring in more cash than your partner, you are not entitled to more control and have no more rights to that money than does your partner. One of my colleagues at work once told me that he "gives his wife an allowance". This statement rattled and disgusted me. If you treat your partner as you would a child, and if you do not recognize the value that you each bring to the table just because one of you is currently making more money than the other, than I am afraid the future does not bode well for your relationship. Seriously, marriage is, first and foremost, about sharing.

6. Motivate Each Other - recognize that your financial futures are tied together, as are the rest of your lives. If one of you feels unhappy about your level of income, motivate each other. Help each other network, find a new job, get a raise, start a business, get an education - whatever it takes to improve your financial situation as a couple.

As a bottom line, I would like to leave you with the following thought: marriage is a partnership, not a contest. If one of you makes more, it only means that together as a family, you have more. It's a good thing.

Monday, October 29, 2007

Lowest Price Guarantee Scam

How many times have you heard the phrase: "we'll beat anyone's advertised price, or your mattress is free!"? One of the local mattress store chains here in Northern California routinely uses this pitch in their radio and TV ads. There is only one problem, and it's a big one: advertised mattress prices are never their true prices. Much like the sticker price on a car in the used car lot, the price advertised on a mattress is completely meaningless. It's a point from which you start your negotiations.

Lowest price guarantees in that context are a way to give consumers the feeling that they are getting the best price possible, without actually giving them any real value whatsoever. On the other side of the equation, there are some price guarantees which actually provide considerable value. Some electronics chain stores guarantee that if you find a lower price anywhere within 30 or 60 days from your date of purchase, they would pay you the difference. This guarantee is a good one in an industry in which price erosion is a constant fixture. There is nothing I hate more than buying the latest gadget only to find that the price dropped substantially a couple of weeks later.

Many chains will also refund your money if a certain product you purchased at their store later goes on sale. There is nothing sweeter than showing up at a store with nothing but a receipt, and walking out with the same receipt and some cash in your pocket.

When is a price guarantee a real one, and when is it a marketing scam? To find out, ask and answer the following two questions: 1. In purchasing the product, will you be required to haggle for a price in order to get the best deal? If so, the price guarantee is meaningless; 2. Is the product you are buying a commodity? If so, the guarantee is more likely to mean something.

At the end of the day, the price guarantee is a way for marketers to get you to buy immediately rather than wait for a price decline, and to prevent you from doing extensive comparison shopping. Marketers know that once people make a purchase, the vast majority of us go home to enjoy their new toy, and tend to forget about the price that they paid. The vast majority of us will never walk back into the store to claim a refund based on a price guarantee. Regardless of whether they are intended as such, most price guarantees end up being a scam from the consumer's perspective, a way to get us to buy something, without offering us any real value.

Sunday, October 28, 2007

Vote for Shadox!

The new Carnival of Personal Finance is up and is hosted by the Millionaire Mommy Next Door.

Our gracious host has selected my post about the professional price that stay at home parents pay, as one of her top 10 carnival picks. She is also asking Carnival visitors to cast their vote for their favorite article. Well, here comes the shameless request for votes:

Visit the Carnival of Personal Finance and vote for Shadox!

A vote for Shadox is a vote for a better America; a vote for Shadox is a vote for the future of our kids; A vote for Shadox is a vote for campaign finance reform. It is essentially a vote to end world hunger and eradicate evil!

So, what are you waiting for?

Recommended Articles

This week's recommended articles post is a little (OK, a lot) late. The problem is that I have time enough for only one post per day, and this week there were some things that I really wanted to write about, for example the price new parents pay to stay at home with kids; the fact that having too many mutual funds can lead to less diversification; and the fact that government is way too involved in business sometimes. So, the recommendations got delayed a little bit - even though there were a ton of great articles out there this week.

This week I only participated in one Carnival, the Carnival of Personal Finance, hosted by The Dough Roller.

One of The Dough Roller's editor's picks for the Carnival was an article about how China could crush the Dollar on a whim. Why, yes, they could. Just like Russia could annihilate the U.S. with a nuclear strike, but that's not likely to happen either. The article completely misses the point. Every action China could take to harm the USD would immediately backfire and greatly damage the Chinese economy, since it too is highly dependent on the value of the Dollar. If China starts dumping large amounts of Dollars, the Dollar would indeed decline, and with it the value of China's own foreign exchange reserve. China's exports to the U.S. would become more expensive, and demand would decline, leading to a slow down in the Chinese economy. Stop with the xenophobia. The rise of China is a good thing for the world economy. Let's stop worrying about them and start worrying about us.

One of the most amusing articles in the carnival was published by A Penny Closer. Apparently, she recommended someone for a job who was the worst candidate ever to interview with a company. You gotta read this one to believe it. However, I think Melissa did everything right. Sometimes bad things just happen to good people.

In other news, Blue Print for Financial Prosperity, one of my favorite blogs, had a detailed discussion of a new tax reform proposal that Democrat Charlie Rangel is trying to push through Congress. Among other things the bill would eliminate AMT and would impose a 4% surcharge tax on families earning more than $200K. Well, this bill is about as likely to pass as George W. Bush is likely to get re-elected. However, there have been many calls recently for imposing additional taxes on families earning more than $200K per year. My problem with such proposals is that $200K means very different things in different parts of the country. If you live in rural Kansas, $200K will make you very wealthy (I recently met someone who was doing very well on $29K per year in that part of the country), but it will not get you far at all in Silicon Valley, where very ordinary houses cost close to a million Dollars.

Gen X Finance is running a poll asking his readers where they would put their money if they could only invest in one asset class. The scary result: 40% of responders said they would invest in international stocks. Is it a coincidence that this has also been the best performing asset class in recent years? Is there a little bit of performance chasing going around? Maybe more than a little.

Finally for this week, The Finance Professor (he is a real finance professor), had an article about whether finance professors practice what they preach when investing their own money. Turns out that they absolutely do. About two thirds of them invest.... passively, i.e. in Index Funds. Do you need more proof that index investing is the way to go??

That's it for this week. As I said, there were some really excellent articles this week.

Saturday, October 27, 2007

Asset Allocation - Oct 2007

It's been two months since my last asset allocation update, so here is a quick overview of our relative asset class weights as they currently stand:

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The biggest change in the past couple of months has been the share of our portfolio allocated to international stock. That share has climbed from 21.5% in August to 27.3% currently. That increase is due to both capital appreciation as well as to the fact that I have been slowly putting more money into our international funds.

To be honest, I am nervous about investing more money internationally, primarily because stock markets worldwide, but especially in emerging markets, have been on a tear in recent years. If there is one thing that history (and statistics) tells us is that things tend to regress to the mean, and if that is the case international stock markets are in for a little bit of a fall at some point.

I have decided to ignore my fears and to slowly increase our international position for two reasons: first, in the coming decades, I believe that the relative importance of the U.S. economy to the global one will decline, and that most opportunities for growth reside outside our small corner of the globe. Second, I am very concerned about the U.S. economy and the value of the Dollar - this is not a short term concern for me. I think that the Dollar is in for some long term declines, based on macro-economic trends. My goal is to insulate our portfolio from the effects of a declining USD to the best of my abilities.

I will say this: I clearly smell something is wrong with the global stock markets. Investing internationally has become a sort of a fad these days. AND if there is anything you truly want to avoid like the plague, it's investment trends. Nevertheless, I know that I am not chasing performance, and I will not try to outwit the market. I have a plan, the plan calls for 25% of the portfolio to be invested internationally, and this is what I am implementing.

The second portion of the plan I outlined last time was to increase our exposure to real-estate, especially now that the sector has taken a major hit. Well, even though I have slowly injected more money into our REIT Index fund, our total exposure to real-estate has only increased from 5.8% to 6% of the portfolio in the past two months. I will continue to slowly add to that position, until we reach my target exposure of 10%, but this will probably take another year, assuming no major market fluctuations.

Overall, things seem to be going according to plan. As I previously wrote, I will be introducing small, diversifying positions of commodities and global real estate into the portfolio at some point in the future. So far, I have not decided on the appropriate vehicles for such investments. I will keep you all posted.

Thursday, October 25, 2007

Think You're Diversified? Think Again.

Diversification is the mark of a good portfolio. Modern portfolio theory shows that for any given level of risk, the best performing portfolio is a diversified one. You can diversify your portfolio by buying a large number of individual stocks and bonds, but many of us choose a simpler method of diversification - we buy mutual funds.

A potential problem with that approach is that if you own more than a single mutual fund, you may be less diversified than you think. This is because it is possible that your funds are investing in overlapping sectors or even in the same individual stocks. Even though I invest our portfolio exclusively in highly diversified index funds, I recently decided to dig into our portfolio to determine whether we truly are diversified. I did so using e*Trade's recently launched portfolio analyzer tool.

The good news is that we do appear to be well diversified. However, even in our diversified portfolio there were some overlaps between funds. For example, Vanguard's Total Market Index (VTSMX), Vanguard's Growth Index (VIGRX) and the QQQQ ETF all contain a small percentage of Google stock. The result is that our portfolio contains double the amount of Google stock it would if we simply invested in the Total Market Index fund. The same is true for Apple, Cisco, Intel, GE, 3M and so forth. All in all, there is no real problem for our portfolio, since no stock accounts for more than 0.6% of our holdings. Still, you get the idea.

So how can you make sure that you don't over expose yourself to undiversified stock positions by investing in mutual funds? Here are a few rules of thumb:

1. Check Your Portfolio - using a tool such as e*Trade's portfolio analyzer made this process very simple for me, but you can achieve the same result by simply going through your fund prospectuses. If you find substantial overlaps, consider divesting of one or more of your funds.

2. Invest in Indexes - investing in Indexes should reduce the likelihood of dramatic overlaps, since index funds are, by nature, diversified and do not place sizable bets on specific stocks.

3. Avoid Sector Investing - if you concentrate your investments in a specific segment of the market, you are more likely to be investing in multiple funds that hold large, overlapping positions of a particular stock.

4. Don't Double Up - realistically, you only need a single mutual fund to cover each major asset class. Theoretically, you could invest in a total market index fund (e.g. VTSMX), a total bond market index fund (e.g. VBMFX), a total international index fund (e.g. VGTSX), and a real estate index fund (e.g. VGSIX) and your portfolio would be very well diversified. There is no need to select more than one mutual fund that covers a specific segment. The fewer funds you have, the lesser the risk of these funds overlapping and creating an under diversified position.

There is one more complicating factor: most of us have multiple accounts with different financial institutions - brokerage account, IRA, 401K, 529 and so forth. Checking for overlapping stock positions across multiple accounts is somewhat harder, but it is a worthwhile exercise. Even if your positions are well diversified in a specific account, you may have some overlapping, undiversified positions in some of your other accounts. You'll only know if you check.

Wednesday, October 24, 2007

Weddings in Sonoma

My wife and I went away to Sonoma for a quick getaway, last weekend. For those readers who are not familiar with the name, Sonoma and Napa are Northern California's most famous wine producing regions.

Conspicuously, everywhere we went that weekend we ran into wedding parties. When I asked one of the servers at a winery about this unusual number of weddings, she told us that Napa county has regulations prohibiting wineries from holding wedding receptions, so many wedding parties are held in Sonoma instead. She also explained the regulations were put into place with strong backing of the hotel industry association, who wanted to prevent wineries from moving into the event business and competing with them.

Think about this for a second. What business is it of the government, local or otherwise, to tell private businesses what types of events they can or can't host? Why do we allow crooked politicians to sell us all down the river for a bunch of special interests and economic pressure groups? Why do we allow weak industries to insulate themselves from competition by essentially making that competition illegal?

My philosophy: if hotels are worried about losing wedding parties to local wineries they should make themselves more attractive to their customers. What an original thought.

Tuesday, October 23, 2007

Citibank Late Fee Update

A couple of days ago I wrote about how Citibank screwed us by "upgrading" our account and essentially making us miss our payment due date. To add insult to injury they charged us $89 in late fees and financing charges for their mistake.

Today my no nonsense fighter of a wife called Citibank and gave them a piece of her mind. Bottom line, charges reversed. Citigroup CEO should be arriving tomorrow at 5 PM to apologize in person and offer us his first born (no thanks, Chuck, we have three of our own).

Never acquiesce to unfair business practices.

Stay at Home Parents Pay a Professional Price

When our twin sons were born, my wife and I faced a decision. We needed to decide whether my wife would take a break from the corporate life to stay at home with the kids. Having me leave my job was never an option since my income is substantially higher and, quite frankly, I don't think that I could become a stay at home dad and remain sane.

At the time, my wife was working her old job, and her salary was barely enough to cover day care costs for the three boys. So seemingly, the financial decision should have been a simple one. After all, why work if your entire salary gets immediately signed over to Uncle Sam and a couple of day care centers. Right? Not so fast.

Here is the trick. Parents contemplating the stay at home option tend to make the financial portion of their decision based on their current financial situation. However, there are three additional financial factors that need to be considered:

1. Loss of Experience - as your career progresses and you gain more experience, your compensation increases. Say you are thinking of taking a five year break from work to stay with your kids until it's time for them to head to kindergarten. During that period you lose not only your current income, but also any pay increases you would have gained had you continued to work. You also lose five years of experience which are directly translatable into compensation and probably into a more senior position at work.

2. Loss of Skill - the term "use it or lose it" may be a cliche, but it's right on the money. If you stay out of the labor force, your skills degenerate. Let me give you a personal example: my readers know that I hold a law degree, but I haven't practiced law in 8 years (I like to think of myself as a reformed lawyer). At this point most intelligent people would not hire me as their lawyer, and with good reason. I am so rusty and out of shape that I couldn't even credibly play a lawyer on TV. The same is true for virtually any other skilled or professional position. Your degenerating skills mean a lot less pay down the road when you do decide to jump back in the water.

3. Rejoining the Labor Force is Tough - I am currently in the process of hiring another member for my team. I am reviewing dozens of resumes, some of them sent by people with some useful background and experience but with some unexplained gaps in their work history. Now, I am sure that many of these gaps can be easily explained away, the problem is that I review a very large number of resumes and only have time to interview a limited number of candidates. Do you think I am going to choose to interview someone with a stellar and steady career track? Or someone which has some clear holes in their resume but which could potentially be explained away? Don't get me wrong, I am not saying that people with work history gaps can't rejoin the labor force, only that it is not an easy matter, and many find themselves accepting lesser positions to get back into the game.

I am not arguing against stay at home parents. However, I am suggesting that most people underestimate the long term financial implications of the stay at home parent decision. For many people staying at home with the kids turns out to be a very smart and emotionally satisfying decision, however before making that decision, be aware of all of the career consequences associated with your plan.

For those making the decision to go back to work, I have a couple of pieces of advice:

1. Don't Feel Guilty - many families feel that they are doing a disservice to their kids by sending them off to daycare at the age of only a few months. I can attest from personal experience that children of working parents can grow up to be well adjusted and happy adults. My parents both worked since we were very young and my siblings and I have all remained pretty much jail free and advanced degrees are common in my family. My own five year old is as smart and well adjusted a boy as you can hope to meet (if I do say so myself). He is a very happy child, in spite of (or perhaps because of) having started at family daycare when he was 4 months old.

2. Work to Pay for Day Care - many couples with more than one kid feel that one of them is simply working to pay for day care. Getting your paycheck and seeing that your take-home pay is more or less equal to the daycare bill, can be emotionally difficult. To cope with this, my wife and I made some adjustments. For example, we put all the kids on my company's health insurance. Health premiums are deducted from my paycheck leaving a bigger paycheck for my wife to take home. We decided that we would fund our medical and child care flex accounts all from my salary, for the same reason. Similarly, you can decide to stop contributing to your 401K for a short time, if this helps you to feel better about your salary.

These changes were more or less cosmetic. I mean after all, does it really matter which pocket the money comes from? It turns out that it matters a great deal psychologically.

3. Finally, Do what Feels Right - regardless of anything I said, or of anything anyone else may say, make the decision that feels right for you. You will not hear this frequently from a personal finance blogger, but to hell with the money. Happiness and your family are the most important considerations. Make the decision that will make you happier in the long run.

Coincidentally, Trent, from The Simple Dollar is apparently considering this very issue right now. Check out this very interesting post about his greatest financial concerns.