Thursday, May 31, 2007

Pay Discrimination & the Supreme Court

Two days ago, the U.S. Supreme Court released a decision in a case called Ledbetter v. Goodyear Tire & Rubber Co. I am not a regular reader of or commenter on Supreme Court decisions, however I thought that this particular decision is worth mentioning.

This court case is about a woman who was employed by Goodyear for 20 years, and a lower court determined that for years she was discriminated against on the basis of her sex, and that this discrimination resulted in her pay being dramatically lower than that of her male counterparts. How much lower? Her pay was 15% lower than the lowest paid male counterpart and 29% lower than the highest paid male equivalent.

To make a 47 page long story short, in a split 5:4 decision the court ruled against Lilly Ledbetter, not on the basis that she was not discriminated against, but on the basis that she did not file her suit within 180 days from the date in which Goodyear started discriminating against her. At best, the majority judges did not consider the implications of their ruling. At worst they are intentionally trying to gut employee's ability to sue a discriminating employer. I tend to believe that the latter is the case.

As the four dissenting Justices point out, the court's ruling essentially means that to get away with pay discrimination, all an employer has to do is successfully HIDE from the employee the fact that he or she is being discriminated against for a sufficiently long time. The clock starts ticking from the time of the violation, not from the time that violation is discovered... hmmm...

Justice Ginsburg (page 30):

"...Comparative pay information, moreover, is often hidden from employee's view. Employers may keep under wraps the pay differentials maintained among supervisors, no less the reasons for those differentials..."

If an employee is unjustly paid less than his co-workers, is he supposed to find out about it within 180 days from when this violation started? How exactly? Take me for example: I have been with my company for two years, and I have no idea what my peers are making.

This is bad law. The majority Justices are the usual suspects: Alito, Roberts, Kennedy, Scalia and Thomas. Although I consider myself an economic conservative, these guys make me look like a complete communist. Apparently, if it were up to them (and it frequently is) they would hand the country over to big business, and damn the little guy. Efforts are already on their way to get Congress to overturn this horrible decision. That would be exactly the right thing to do.

Wednesday, May 30, 2007

Saving Money on Tips?

If we are talking discretionary spending, there is probably no expense that is more discretionary than tips. After all, you are under no obligation to tip, and by eliminating tips you could theoretically save 15% or more of your dining-out costs, not to mention reducing your costs for everything from pizza delivery to getting a hair cut.

Although you could potentially save a bundle by reducing the tips you hand out, that wouldn't be the right thing to do. Here are my reasons for trying to tip well:

1. Other People's Income - Many personal service jobs don't pay very well. Waiters, cab drivers, barbers and other service providers often receive a large portion of their income from the tips their customers decide to pay. The amount you tip your waiter is probably not a huge deal for you, but for your waiter your tip could mean the difference between a good and a bad evening.

2. Better Service in the Long Run - Especially if you have an ongoing relationship with the establishment in question, if you give better tips the service you receive may be better in the long run. So, from an economic perspective, your tips may create a substantial value for you. Of course any specific value you would get is hard to quantify.

3. It's Part of the Price - Like it or not, in today's economy tipping is expected. It's part of the price. When you buy a service and are quoted a price, always figure out the real price including any taxes, tips etc. and if you don't think that that total price is fair, don't make the purchase.

Because of the three reasons outlined above, I make it a point not to try to save money on tips. In fact, I make an effort to tip a little bit on the high end (although no extravagantly so).

In spite of my comments above, I find that these days tip jars are proliferating faster than fungi. You can find them everywhere. In fact, the fast food Chinese restaurant that I sometimes go to at work now sports a tip jar, not to mention your neighborhood Starbucks(es). I find those requests for tips to be annoying given the really brief contact and minimal amount of work involved on behalf of the service provider. I keep those $1 bills to myself.

Tuesday, May 29, 2007

Wasting Money on Personal Care Products

Would you like to save $7.99 every three months? No big savings here, but I have discovered that buying shaving gel is a complete waste of money. I first figured this out a few months ago, when before boarding a flight on a business trip, the TSA deemed my can of shaving gel to be a danger to the flight and confiscated it (much to the relief of my fellow travelers and humanity at large). Since my flight arrived very late that night and my meetings started first thing the next morning, I had no choice but to shave using... wait for it... ordinary bath soap, instead of high-tech, top of the line, $7.99 per can Gillette shaving gel.

As I pulled the razor across my skin I cringed, fully expecting horrible pain or at the very least bloody gashes on my face. To my amazement, shaving using soap felt exactly the same as shaving with my fancy shaving gel. No blood, no pain, no rash, no stubble. Since then I have stopped using shaving gel on business trips. For one thing I think I am making America's airliners that much safer by leaving my potentially explosive toiletries at home (my god, the TSA are complete morons). For another I decided that I don't need shaving gel on business trips. I am still using shaving gel at home. I am not exactly sure why. Inertia?

I wonder how many other products I am buying because I completely bought into a fictitious marketing pitch. Should I start brushing my teeth with $1 tooth brushes instead of my fancy electric one? Should we start using just any ol' washing liquid on our clothes, or is there something inherently better about Tide? How about a home made deodorant? Will that work? OK, I am kidding about the last one. Until a few months ago it wouldn't even cross my mind to shave without gel, I am guessing there are many other items that we are buying and that are probably superfluous. Finding out which could be a little tricky though.

Saturday, May 26, 2007

The Trouble with Buying Advance Tickets

A couple of weeks ago, I was bragging about how we saved some serious money on our Memorial Day getaway to San Diego, by buying all our park tickets in advance.

Well, I would like to add a little caveat to that story. You are only saving money on your advance tickets if you actually remember to take them with you when you leave for your vacation.

About an hour after leaving home, we remembered that the tickets remained on our dining room table... since going back was not a serious option, but wasting $300 worth of tickets was not acceptable either, we called our neighbor and asked her to use our spare key, go into our house and over-night the tickets to us for early delivery the next day. It worked like a charm. The tickets got here at 9:00AM yesterday, just in time for us to get going to Legoland. The cost: an extra $12.5 in shipping, and a small gift we will buy our neighbor to thank her for helping us out.

All in all, not a big deal, but this could have cost us some big bucks if our neighbor did not ride in to the rescue. It's nice to have neighbors you can trust and rely upon.

Thursday, May 24, 2007

Erratic Posting Schedule

My apologies in advance for an erratic posting schedule over the next few days, while I travel with my family on a 5 day vacation to San Diego. The next post will appear on Tuesday, May 29, at the latest.

Wednesday, May 23, 2007

401(K) Benchmarks & Averages

I am a member of my company's 401k plan management committee, so I periodically do some research on the topic of 401k plans. As part of this research I came across this document from ERBI (Employer Benefit Research Institute), a non-partisan, non-profit organization that researches the topic of employee benefits. This document offers a wealth of information about how people use their 401k options and how they invest their assets.

Some highlights from this document (relating to period ending 12/2005):
  • Average account balance (12/2005) - $102,014
  • Median account balance (12/2005) - $54,591
  • Account balances by age group -
  • 20's - $24,169
  • 30's - $50,930
  • 40's - $91,848
  • 50's - $127,766
  • 60's - $140,957

Note that these account balances are not averages for the entire age group, they are only averages for those members of the age group that actually have a 401k investment. So, if you average the numbers across an entire age group, including those individuals that do not participate in any retirement plan, the numbers will be lower.

The document itself notes that the averages provided are misleading since 401k account balances are strongly skewed by an employee's tenure with his current employer. If you take me for example, although I have maxed out my 401k contributions every year, my 401k balance is far below the average stated above for my age group, since I have only been with my company for two years.

I am also struck by the fact that balances do not seem to be climbing dramatically as people approach retirement. I am guessing that once again this is a factor of tenure, as the following figure seems to suggest.

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Assets in 401k plans are allocated as follows:

  • Equity Funds: 48%
  • Company Stock: 13%
  • Balanced Funds: 11%
  • Bond Funds: 10%
  • Stable Value Funds: 13%
  • Money Funds: 4%

As you would expect, investment in equities decreases with age - from 51.9% for participants in their 20's, to 37.8% for participants in their 60's.

Why people in their 20's would be this conservative with their retirement investments is beyond me. With such a long time horizon I would expect much more aggressive investments. My hunch is that this conservatism is a sign of lack of education and fear of investing, and not a conscious decision.

This is interesting data and I will explore it in more detail in future posts. It will also be interesting to note how this data changes for 2006. A new report that covers that period will probably come out in a couple of months.

Tuesday, May 22, 2007

Identity Theft and You

A friend at work yesterday told me that he recently applied for Family Leave after the birth of his child. Soon thereafter he was contacted by the California Employment Development Department and was told that someone had already used his social security number and name to apply for family leave. My friend was baffled, and asked me what he should do.

This is probably nothing more than some sort of bureaucratic mistake, but just to be on the safe side, I advised my friend to get a free copy of his credit report to make sure that no funny business was involved. My friend's credit report did not show any suspicious activity, so I am guessing that my original hunch was correct.

If you are concerned that your personal information may have been compromised or that your identity has been stolen, visit the FTC website for detailed information on how to address the problem. In any case, it is always a good idea to keep vigilant and watch for possible signs of identity theft. The FTC lists the following warning signs for identity theft:
  • Accounts you didn't open and debts on your accounts that you can't explain.
  • Fraudulent or inaccurate information on your credit reports, including accounts and personal information, like your Social Security number, address(es), name or initials, and employers.
  • Failing to receive bills or other mail. Follow up with creditors if your bills don't arrive on time. A missing bill could mean an identity thief has taken over your account and changed your billing address to cover his tracks.
  • Receiving credit cards that you didn't apply for.
    Being denied credit, or being offered less favorable credit terms, like a high interest rate, for no apparent reason.
  • Getting calls or letters from debt collectors or businesses about merchandise or services you didn't buy.

If your identity has been stolen or misused, follow this link for information on how to address the problem.

By the way, if you remember my post from a couple of months ago about my own personal information being stolen from my Alma Mater, as of a couple of weeks ago, there were still no suspicious acitivities on my credit report. At this point I am guessing I am probably off the hook, but I will continue to monitor the situation.

Monday, May 21, 2007

AAA Discount - Really?!

Did you ever get asked for your AAA membership card when you asked for a AAA discount? Not me.

A friend of mine was in town on business this week, so both of us took Friday off and drove up to Lassen National Park on Thursday night for a little hiking trip (hence a couple of missed posts). Since this was a pretty spontaneous trip, we did not plan it in detail and did not have a hotel lined up. Driving up I-5, I decided to call ahead and get us a hotel room. I was quoted a rate and asked whether the hotel offered a AAA discount. They did. When we got to the hotel, we checked-in, but no-one asked me to see my AAA card. At that point I started thinking, and I can't remember a single time when anyone asked to see my AAA card before awarding me a discounted rate.

At this point, I am fairly confident that pretty much anyone can get a AAA rate, whether or not they are members. In fact, I think that the AAA discount, which I think averages around 10%, is pretty much a standard discount which you can get anywhere. I think they should change the name to "Brown Hair" discount, or "Tuesday" discount. Does anybody have a different experience?

Sunday, May 20, 2007

Dealing with Fear of Investing

In recent weeks I have had conversations with some people who acknowledge that their investment strategy is too conservative given their age and investment time horizon. One of the main reasons these people cite for their overly conservative portfolios is a fear of losing their hard earned cash. Consequently, these individuals invest their savings in CDs or bond funds, and shy away from the stock market.

Let me begin by saying that I understand and accept risk aversion as a primary driver of investment strategy. In fact, no one should make any investment decision if that investment strategy will lead to them not being able to sleep at night. However, in the long run, what might seem like the "safe bet" will almost inevitably turn into a money losing proposition, given the stock market's propensity to outperform safer investments such as CDs or bonds.

If you share this very low tolerance for risk, but still feel that you are making a long term strategic error in staying out of the stock market, I propose the following strategy for dealing with the problem:

1. Risk Aversion is Legitimate - accept that you are uncomfortable with a large amount of risk. Do not try to over compensate for your risk aversion by buying emerging market penny stocks. Know who you are and what you are comfortable with, but try to gradually increase your level of comfort with the market.

You can do this by educating yourself on the various investment options open to you; by gaining a better understanding of how the stock market works; and in general by having a better sense of the economic forces at play. You may discover that much of your risk aversion is based on incorrect assumptions or even on a simple fear of the unknown.

2. Take Small Positions & Increase Them Over Time - one way to deal with your risk aversion is to slowly tip-toe into the market. Don't dump 40% of your investment portfolio into the market over night, go slow. Perhaps you will be comfortable with initially investing 5% of your assets in the stock market? Do that, wait six months and then decide if you are comfortable with moving a little more of your assets into the market. Taking this gradual approach may also protect you from sudden changes in market direction just as you enter the market.

3. Diversify - one of the best tools for reducing investment risk is diversification. Investing in a single stock, or a single industry sector is a risky proposition. However, investing in a large number of stocks diversified across multiple industries and (hopefully) multiple international markets is less risky. While the stock market inevitably experiences strong price fluctuations, the more diversified you are the less dramatic those fluctuations tend to be. The simplest and most cost effective way that I know of to achieve adequate diversification is to buy a broad based index fund such as Vanguard's Total Market Index Fund (VTSMX).

4. Check Your Investments Once a Quarter - if you are very risk averse, the worst thing you can do to your peace of mind is to track your investment performance on a daily basis. Remember, you are investing for the long term. Who cares what the stock market did today? Who cares if your mutual fund dropped 5% this week? All you should care about is how your portfolio will perform in the long run. Think years, not months. With that in mind, do yourself a favor: turn off CNBC, don't check the stock quotes and don't work yourself into hysteria. Check your investments once a quarter, and do so only to make sure that your mutual funds are performing well enough compared to their benchmarks.

5. Make a Plan to Limit Your Risk - if you are very sensitive to risk but still want to participate in the stock market, set your risk limits in advance. For example, decide that if your mutual fund loses more than 10% of your original investment you will sell it. That way you know that your risk is probably limited to losing about 10% of your money. That would sting, but it wouldn't be the end of the world. If you are investing for the long haul, that is probably not the wisest of strategies - I would just hold onto my diversified investments even in a down market - but if this type of risk limiting strategy helps you be more comfortable with the stock market, go for it.

Let me end this post by admitting to having a personal history as a fearful investor. I am now cured, pretty much due to the strategies I outlined above. After having endured the worst that the stock market had to offer during the darkest days of the Dotcom Bubble, I know I can pretty much handle any bear market without falling to pieces. However, I won't pretend that that was a fun ride...

Silicon Valley Real Estate, Still too Darn Hot

One of my favorite topics to write about in the last couple of months has been the real estate bubble and its aftermath. See, for example, my post titled A Subprime Bail-Out? Hell, No! which created a lot of interest and started a long line of comments.

Personally, I think we are far from seeing a bottom in the real estate market.

Apparently, Frugal at My 1st Million (one of my favorite PF blogs), shares my views. On Friday he wrote about the continuing efforts to bail-out subprime borrowers and lenders. I really don't get why politicians feel that they have to mess around with the market. I said it before, and I will say it again: people must be allowed to bear the consequences of their idiocy, or else the markets will forever mis-price risk. If every time my investments head south someone bails me out, I am essentially taking very little risk, and so am encouraged to make more risky investments.

Also, see Frugal's interesting post titled California Foreclosure Up and Up in which he forecasts the bottom for the real-estate market will not happen until 2009 - 2010.

I have no idea when the bottom for the real estate market will occur, but I can say that based on my discussions with a friend who is in the process of buying a house in Silicon Valley, the bubble is not even beginning to unwind in this area. Bidding wars are still breaking out over every house on the market, and even complete tear-downs are going for well above asking price. Is that a permanent state of the Silicon Valley real estate market or will the downturn eventually reach us as well?

Thursday, May 17, 2007

Recommended Articles

A couple of days ago my article Beating the Market or Faking It? was included in the Carnival of Personal Finance #100 (!)

Other articles that I found interesting in the Carnival include:

Fundamental Indexing vs. Traditional Indexing from Accumulating Money is an excellent post that puts a spin on index investing. Essentially, instead of weighting stocks by their market caps in the index, creating an index based upon some other criterion. This is an interesting approach, however my concern is that the selecting the criteria will in fact add a bias that will take away the underlying benefit of passive indexing. Anyway, it is a very well written post, and worth reading.

Blunt Money makes a very good point about The Cost of Not Investing. I used to have a similar fear of investing, and my parents still do. However, being too conservative in your investments is, in the long run, just as bad as being overly aggressive. Point well taken.

Are you saving enough for retirement? That's a question that many people, including me, are asking themselves. This post, from Advanced Personal Finance offers a simple way to figure it out. Looks like I am personally in the clear.

Festival of Frugality #74 was also published today (late, but apparently with good reason). It includes my article about Saving Money on Vacation. I haven't actually had time to read too many of the articles in the Festival, but I will add some article recommendations to this post at a later stage.

Wednesday, May 16, 2007

Information and Consumer Behavior

My five year old son is very particular about what he will have for breakfast. One of the few things he is willing to eat is a certain breakfast item from Kellogg's. A while back when the FDA mandated the inclusion of information about trans fats on consumer food packing, I noticed that this product contained a small but significant amount of trans fats. At that point, I would have stopped buying the product, however my son would not hear of this. We kept buying the product, but a few weeks ago I noticed that all of a sudden trans fats are missing from the list of ingredients on the product. Interestingly, many companies moved to eliminate trans fats from their products once disclosure became mandatory. Take a look at this story.

In an unrelated story, a few months ago I had a quick bite at McDonalds. I noticed that my tray mat contained nutritional information about the food I was eating, and when I read it I was shocked to discover that the order of fries I was eating contained 8 grams (!!) of trans fats. I haven't ordered McDonald's fries since, and never will again.

The change in the ingredients of my son's favorite breakfast food and the change in my own behavior following the McDonald's incident got me thinking. Had the FDA not mandated the disclosure of trans fat content to consumers, it is likely that Kellogg's would have kept the trans fat content in the product indefinitely. It is also likely that while I knew they were bad for me, I would have continued to order McDonald's fries indefinitely. However, once that information became publicly available, Kellogg's quickly and quietly got rid of this harmful ingredient and I changed my own purchasing behavior. Once again, this is proof positive, if you ever needed one, that daylight is the best kind of antiseptic.

The same logic holds true for financial market regulation and pretty much every other form of human activity. People need complete information to make rational decisions. The markets can only function optimally if information is symmetrically shared by all. This is why I will always be in favor of ever tougher SEC disclosure requirements, ever tighter FDA disclosure rules and pretty much any other regulation that places more information in the hands of the public.

That is also why insiders are always objecting to tighter disclosure regulation. Your lack of knowledge puts money in their pockets. Your money. This is why, for example, analysts and CFOs alike were fighting SEC regulations requiring information to be released to the public at the same time it is released to analysts.

However, being that these groups of insiders are sophisticated, you will always hear them objecting to tighter regulation using such arguments as: (a) the public doesn't need, want or is unable to handle large quantities of information; or (b) the cost of disclosure will be too high and will place a disastrous burden on business; or (c) tighter regulation is not necessary, because industry is policing itself.

When they use these arguments and many others like them, you should only be hearing one thing: "give us your money".

Tuesday, May 15, 2007

New 401K - New Allocation

As regular readers of this blog know, my wife recently started a new position in a Bay Area tech company. Yesterday it was time to sign up for the new 401K plan. Options, options, options.

My wife's new 401k plan is actually not bad. It offers both a traditional 401k plan and a ROTH 401k option. We chose the traditional option, for a variety of reasons which I will go into at another time.

The plan offers about 15 fund options including, surprisingly, two index options: an S&P index fund and a midcap index fund. The plan even offers a real estate fund, and several international fund options - unfortunately, no index options are available for those two sectors. The only two bond fund options offered as part of the 401k have ridiculously high expense ratios of around 0.85%. To which I can only say: are you kidding me?! For a bond fund? In addition, over the past 12 months, both bond fund offerings substantially under-performed Vangaurd's bond index fund (VBMFX) in which we invest seperately. More cost for lower performance. Don't you just love actively managed funds?

Here is the asset allocation we selected:

Schwab S&P 500 Index: 30%
Dreyfus Mid-Cap Index: 35%
Harbor International Institutional: 25%
Cohen & Steers Realty Shares: 10%

You may notice that this is a fairly aggressive allocation, however I would like to point out a number of facts:

1. We manage our entire portfolio as a single unit, not attempting to optimize each individual account seperately.

2. The portfolio we selected, while aggressive, is well diversified with a sizeable international component, as well as a real estate component that has a lower correlation with the overall market.

3. Since we are both in our mid-thirties, our time horizon for retirement savings is a long one. We can afford to ride out eventual bear markets, and wait for the long term performance advantage of the stock market to kick-in. So, for now our retirment investments are mostly in highly diversified stock funds.

Monday, May 14, 2007

Rental Car Gas Scam

Yesterday I picked up a good friend at the airport. He will be here for the week on business, so he rented a car. At the rental car facility I noticed a big sign promoting a cheap gas deal: buy your gas in advance at $3.72 per gallon and return the car without filling the tank. The price per gallon at a regular gas station outside the airport is about $3.60 per gallon, so the price of $3.72 doesn't seem that high, right? Wrong. That's the scam.

What the rental car companies don't tell you is that if you buy their gas option they charge you not only for the gas missing from your tank upon return, but for a full tank of gas. Thus, if your rental car has a 15 gallon tank and you return the car with the gas tank 2/3 full, you will still be charged for a full tank: 15 * $3.72 = $55.8, i.e. $11.16 for each of the five gallons of gas you actually used!

Now, $11 per gallon. That's what I call expensive gas.

Of course, you wouldn't know that would be the case unless you specifically asked the car rental agent. In fact, the rental car companies do their best to lead you to believe that you are only paying the "low" $3.72 per gallon. If they really wanted to be fair, they would simply ask you if you wanted to return the car without fueling it for a flat charge of $55 (for example). The language of the offer is carefully chosen to be accurate, but misleading. It has to be, otherwise no one would take this horrible deal.

I am sorry to say that I learned this the hard way several years ago. I returned a rental vehicle only to find an outrageous gas charge was placed on my bill, even though I had returned the car with a virtually full tank of gas. It was a good lesson and I never made the same mistake again.

Saturday, May 12, 2007

Weekend Fun with No Money Spent

This afternoon we took the whole gang out to the park to fly a kite. The weather was sunny with a perfect breeze for kite flying. It was a blast.

It turns out that there are many fun things one can do with small children that are also very low cost. Here is a list of nine such activities that are specific to Northern California. You can also visit this other site I created for a much expanded list:

1. Flying a kite in Shoreline Park - there's a special kite flying area and on windy afternoons, when the weather is nice there are dozens of kites in the air. For you East Bay folks, the Berkeley Marina is also a great place to do some kite flying. That's what we did today.

2. A day at the beach in Half Moon Bay - a few weeks ago on a sunny winter day, we spent half a day at the beach in Half Moon Bay. It's amazing how much fun kids can have playing in the sand and chasing seagulls.

3. An afternoon at Chuck E. Cheese - yeah, I know, it's cheesy, but my three year old loves it, it costs almost nothing and getting a prize at the end really makes it easy to go home when you're done.

4. A visit to the library - going to the library with the little ones to hear some new stories is fun. Explaining that shouting in the library is a no-no is harder...

5. Riding the train - my four year old loves the train and riding it, even for a couple of stops is a treat. Especially if he gets to ride in the top floor. We typically take Caltrain, but BART works just as well.

6. Visiting the sea lions at Pier 39 - kids love them, just make sure it's the right time of the year. While you are there, Pier 39 also has a great old fashioned carousel, and some free shows for kids. It's way touristy though.

7. A Stop at the Local Fire Station - every kid on the planet gets excited at the sight of a fire truck. Most fire stations have times when they are open to the public and many will let you visit even when there is no special event if you ask nicely.

8. Ride a Cable-Car in San-Francisco - it's the most touristy thing to do in the city, but kids love it, especially if you get them a good spot to sit.

9. Explore Tide Pools at Bean Hollow State Beach - This one is a real gem, where your little ones can hunt for star fish, see hermit crabs and watch seals playing in the surf. Admission is free, and the beach is about 15 minutes south of Half Moon Bay. Make sure to visit when the tide is on its way out.

Obviously, my list is very specific to the San Francisco Bay Area, however, I am sure that similar activities are available anywhere around the country (or the world for that matter).

I also find that those activities on which you spend the least tend to be the most fun and the most memorable. Let the good times roll!

Friday, May 11, 2007

Saving Money on Vacation

When we go on vacation I try not to think about cost constantly. While we don't go crazy with our spending, a vacation is one of those times where you really want to enjoy yourself and unwind, without constantly thinking about money.

However, if there is an easy way to reduce the cost of your vacation, why not do so? So as my family is getting ready for our Memorial Day Weekend getaway to San Diego, I thought I would share a few of the things we do to reduce the cost of our vacations, without giving up on any of the fun:

1. Travel - guess what, driving is cheaper than flying. So for this vacation we will be driving from the Bay Area to San Diego. It's a good long drive, but we will be saving quite a bit of money on flights, and we won't need to rent a car while we are there.

If flying is necessary, we typically use the regular travel sites, such as Expedia, Travelocity and Orbitz, however a new crop of travel sites, such as FareCast and Kayak are even better, and FareCast adds an interesting twist by predicting whether you should book your flights immediately or wait a few days for the price to drop.

An old fashioned, but highly effective way to save money on flights is to call a travel agent. On a recent trip, my wife was able to save about $300 on the cost of an international flight (that's below the lowest online price we could find) by calling a travel agent. The downside? Paper tickets, and no electronic check-in, or pre-booking the seats on the flight.

Finally, and this is an old one, booking your flights as much in advance as possible will almost guarantee a lower fare. Alternatively, most airlines offer last minute getaway deals at substantially discounted prices. Although if you opt for that option, you need to be flexible on your destination. Hey, Topeka is lovely this time of year!

2. Accommodations - we find that renting a vacation home is both cheaper and more fun than staying at a hotel. In addition, many vacation homes have great amenities that you can never get in a hotel, such as a hot tub, DVD player and of course, your own kitchen.

Staying in a vacation home is even more fun if traveling with friends or family. Instead of saying goodnight after having dinner together, when staying in a vacation home everyone can hang around together, watch a movie and share a good bottle of wine. It's simply more fun.

An excellent resource we use for locating a suitable vacation home is Vacation Rentals by Owners. There are many other sites and resources of this nature, but we have had an excellent track record with VRBO over the years.

3. Tickets - a guaranteed way to waste money is to purchase attraction tickets when you get to the park / show / attraction. Once you are there you are already hooked, so the chance of a discount is almost non-existent. However, if you buy your tickets in advance, most places offer sizable discounts.

For example, for our ski vacation this winter we purchased our lift tickets to Northstar at Tahoe at our neighborhood REI, reducing the cost of the tickets by $13 per person, per day. That adds up to serious savings. Similarly, we were able to purchase discounted tickets for a quick trip to Heavenly at our local Albertson's store before we left the Bay Area.

Many companies offer their employees discounts on a variety of activities through services such as Beyond Work. For our Memorial Weekend getaway, we already purchased tickets to Legoland ($41.5 instead of $57), SeaWorld ($48.5 instead of $55) and the Wild Animal Park ($26 instead of $33). That's a considerable discount if you are taking the whole family.

The bottom line: with little planning and common sense you can save substantial amounts on your vacation, without giving up any of the fun, and without constantly worrying about your spending.

Thursday, May 10, 2007

Great Article on Punny Money

I just read an excellent article on Punny Money, titled The True Cost of Do-It-Yourself. It was so good that I just had to recommend it right here.

Nick accurately and completely captured my feelings regarding the Do-It-Yourself industry. The true cost of do-it-yourself is what Nick calls the "Oh Crap" factor. The cost of completely and needlessly screwing up a basic home improvement project.

What Nick doesn't say is that in addition to the "Oh Crap" price, there is also a mental price do-it-yourselfers are liable to pay: the price of feeling like an utter and miserable failure at failing to complete a simple task.

My motto: if it involves a screwdriver, a hammer or any other mechanical contraption or tool, pay someone to do it!

Globalization and Your Check Book

Globalization has gotten a bad name. Vocal pundits like Lou Dobbs are talking about how American jobs are being exported abroad and how this is all part of a supposed war on the middle class. They would have you believe that globalization is an evil plot to ruin America. The truth is that globalization and free trade are good for us.

Here are some examples of how globalization is helping me personally. I am sure that my readers will be able to think of many different ways in which globalization is good for them:

1. My Job - let's start with my job. My company, which is traded on the NASDAQ, was founded and is still headquartered internationally. Without globalization, my job would not exist. So, every time Mr. Dobbs and his ilk talk about how globalization is responsible for the loss of American jobs, remember that there are many people in this country who owe their jobs to globalization.

2. My Blog - It is amazing how much people from around the world are alike, and many of us share the same financial concerns: how to save for retirement, how to ensure financial stability for our families, how to advance our careers. These concerns seem to be universal, and many of this blog's regular readers come from places outside the U.S.

To date, I have had visitors from 40 countries and territories, including: Antigua and Barbuda, Argentina, Australia, Belgium, Brazil, Brunei, Canada, China, Egypt, Finland, France, Germany, Hong-Kong, India, Indonesia, Ireland, Israel, Italy, Japan, Kuwait, Malaysia, Mexico, Netherlands, New Zealand, Norway, Pakistan, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Taiwan, Thailand, Turkey, United Arab Emirates, United Kingdom, United States and Vietnam.

Globalization is not only helping this humble blog, it is the cornerstone of much of U.S. industry. Globalization ensures that Microsoft operating systems, Cisco routers, Hollywood movies and Detroit cars get sold around the world. And those sales mean jobs here in the States.

3. My Kid's Toys - when I was a kid, getting a new toy was a big deal. These days, my oldest son has so many toys that we are literally running out of space to store them all. Other parents in my son's school are apparently running into the same problem. In some recent birthday parties, the parents have asked kids no to bring gifts, and instead bring a book that the kids can trade. One big reason for this ridiculous bounty of toys is that due to globalization, manufacturing has gotten extremely cheap. And it's not just toys that are becoming cheaper, it's practically everything you buy: just look for that "made in China / Malaysia / Philippines" tag and you'll know I'm right. Globalization means that your hard earned Dollar can buy more.

4. My Portfolio - I have previously written that my goal is to keep 25% of our portfolio in international stocks. By investing in foreign equity, we are getting more diversification and exposure to rapidly growing foreign markets. However by investing in the S&P you are also getting some international diversification since practically every large company out there has gone global. Just like diversification is good for an individual portfolio, it is good for companies.

By going global companies limit their exposure to the vagaries of a single economy and regulatory system. They can insure themselves, and hence their shareholders, against a recession in a single country or a small group of countries. By allowing for easier diversification, globalization is making your U.S. investments less risky, while also providing U.S. companies with access to rapidly growing markets.

OK. Let me slowly get off from my soap box and end this speech. Don't get me wrong, I know that there are serious problems and challenges with globalization. These problems may merit their own article but these days there are plenty of people out there who argue against globalization, so I will leave that job to them. However, on balance, I think it is patently clear that globalization is a good thing. Someone should explain that to Lou Dobbs and some of the populists on Capitol Hill.

Tuesday, May 08, 2007

Gas at $4 per Gallon? Bring It On!

CNN reported today that some pundits are now forecasting $4 per gallon of gas before the end of the summer. My response to that: bring it on! Now before you start sending me angry comments, here's why I made what some may consider an obscene statement:

1. It's No Big Deal - on my way to work this morning I filled up at my local station and paid $3.54 per gallon. So the fearsome $4 per gallon price is only 12% more expensive than I am currently paying.

2. The Financial Impact is Minor - My fancy Geo Prism 1997 gets 30 miles to the gallon, and I drive about 1,000 miles per month. That means that at $4 per gallon I will be spending $15 more on gas per month. My wife's increase would total about $25 per month given that she drives a mini-van and her commute is slightly longer. This puts our total increase at $40 per month, not trivial, but hardly cause for a major uproar.

3. It's Better for the Environment - like any other commodity, an increase in the price of oil will encourage people to conserve and buy less of it (or at least cause demand for oil to grow at a slower pace). This means less smog forming emissions, and less CO2 in the atmosphere.

The higher the price of gasoline, the more cost-effective alternative fuels become, and the higher their adoption rate. In addition, a high and increasing price of gasoline provides an incentive for the market to innovate and bring to market new technologies that otherwise there would have been little financial incentive to develop.

4. Energy Independence - no, I don't believe in the fiction of energy independence. I think that it is mostly a ruse by oil companies and Washington insiders to justify drilling for oil in some of nature's most pristine environments (such as Alaska's ANWR). Nevertheless, in the long run, with the advent of new technologies that will replace the "black gold", America's reliance on unstable and often distasteful regimes that produce much of the oil we consume, will decline. The only proper response to that statement is: "AMEN".

Bring on those higher oil prices, we will pay them and even thrive. In the long run, high gasoline prices accelerate the day when oil will no longer be an important commodity. With that in mind, even at $4 per gallon gasoline would be too cheap in this country.

Monday, May 07, 2007

A Household Budget Update

Recently I noticed that several readers reached this site by searching for information on building a household budget. I thought it would be interesting to share some information about my own family's budget. Here is how our spending breaks down for the past 12 months:

Childcare 33%
Rent 24%
Vacation 7%
Household 7%
Medical 6%
Groceries 5%
Auto 5%
Utilities 3%
Other 3%
Dining 3%
Recreation 2%
Clothing 2%

A few take-aways:

1. Kids are expensive... especially in California. Rent and childacre together account for 57% of our annual spending.

2. Discretionary spending, including vacation, dining out and recreation account for 12% of our spending. To me, this suggests that increasing our savings by means of reuction in spending would be a pretty difficult thing to do. Notice also that our spending on groceries is very low as a percentage of over all spending.

3. You may be interested to know that our utility spending breaks down as follows: Gas & Electric - 38%; Cable TV - 19%; Internet - 18%; Water - 11%; Telephone - 10% (thank you skype); Other - 4%.

By the way, I compiled this categorization using Quicken

Friday, May 04, 2007

Shadox Will Return Monday

A word of apology to my regular readers. I am currently (still) on an international business trip, and am unable to find the time to post regularly. Hence the hectic publishing schedule of the past week.

I will be back to the US on Monday and will resume my regular publishing schedule at that time.

The good news is that this trip has given me a lot of great ideas for new topics to explore. Next week I intend to start a series of articles that will focus on globalization as it impacts personal finance and your bottom line. This should be interesting, if I do say so myself.

Thursday, May 03, 2007

Investing without Goals

Earlier this week I had a conversation with my younger brother about his personal finances. I was very pleased to learn that my brother is saving and investing his money - no debt for him. On the flip side, I also learned that he is making his investment decisions without a coherent investment strategy and without defining fixed goals for his portfolio.

Smart investing starts with setting clearly defined goals. The goals that you set, together with your tolerance for risk, largely determine your optimal investment strategy. My brother, who is in his mid-twenties, could not tell me what he is saving for or define the time horizon for his investments. He is unclear on the concept of risk vs. return, and is largely investing based on the annual results published by the various mutual funds, without consideration for asset classes, diversification or investment cost.

Since he is unclear as to the time horizon for his investments, and is invested largely in volatile stock funds, my opinion is that he is accepting more risk than is appropriate for his situation. Given his age and personal status, most of his personal goals are likely to be shorter term goals (under 5 years). Investing all your money in the stock market with such a limited time horizon is a risky proposition. If I were in his shoes, I would place no more than 50% of my assets in the stock market and put the rest in a combination of bonds and high-yield money market funds.

I also think that my brother is over estimating his appetite for risk, having never gone through a real bear market. He marvels at the fact that his investments have yielded about 10% year-to-date, but like many other investors I don't think that he grasps the connection between high-yields and high-risk. The fact that an asset yields high returns is typically an indication of the higher level of risks associated with that asset. The higher return is the payment investors receive for being willing to accept that added level of risk. I think that this is a topic worth a post on its own, and will take up the challenge in the coming weeks.

My brother is already saving for his retirement (there might be some sense in him after all!). Appropriately, his retirement assets are all investing in the stock market. However, he is not yet a convert to the Index Fund cause, still opting for actively managed funds. I am trying to get him to read my recent post titled Beating the Market of Faking It, and hopefully with time I will be able to help him to see the light.

Over all, I am positively surprised. My brother is debt free and is thinking about personal finance. Yesterday he even went to a personal finance seminar. Now I only need to teach him not to buy swamps and bridges, and he'll be fine.

Tuesday, May 01, 2007

Beating the Market or Faking It?

Here is a story I heard a while back (I have no reason to believe that it's true): a new financial advisor moves into town and wants to drum up some new business. He buys a mailing list and drafts a marketing letter. In the letter he talks about stock XYZ. In 50% of the letters he praises the stock and forecasts that the stock price will go up in the following two weeks. In the remaining 50% he explains that the stock price will go down during the same period.

He mails the letters, waits two weeks and repeats the process, but this time he only sends marketing letters to the 50% of residents who got the version of the original document which turned out to be true, i.e. if the stock went up only the ones that received the positive remarks about the stock receive a new letter, and vice-versa.

If the financial advisor repeats the process four times, each time using a different stock as the subject of his fraudulent letter, at the end of the period 1/16 of the town's population will be convinced that the new financial advisor is a stock picking genius, having guessed the short term performance of four separate stocks correctly with a 100% success rate.

Of course, there are many reasons why this scam would not work. For example, some of the residents could compare notes and realize that conflicting advice was being sent to them. However, this is not the point of the story. My point is that residents who received the correct predictions would have no way of knowing whether the advisor was providing insightful advice or whether he was merely lucky four times in a row. After having received four correct predictions, many of the residents would probably hire the services of the scheming advisor, even though in reality he did not add any real benefit to their investment decisions.

Although this story sounds far fetched, in reality it is something that happens every day. However instead of happening with a single financial advisor, it happens with a hoard of financial planners, brokers, fund managers and so forth. Some say a stock will go up, some say a stock will go down. Some happen to be right. Some will happen to be right four times in a row. Because there are hundreds of thousands of professionals in the financial services industry, some will happen to be right dozens of time in a row. In many cases their success will be based on pure coincidence. The laws of statistics virtually guarantee that some advice givers will be correct a seemingly implausible number of times by pure coincidence.

I concede that there may be a select few whose success is based upon knowledge and expertise rather than luck, but the real question is:


So what remains? Index funds. Don't try to out-guess the market. Don't try to outperform the rest of the population. Simply aim for average returns and reduce your costs. Academic studies have repeatedly shown that using this seemingly lackluster strategy will yield a higher than average return.