Sunday, September 30, 2007
All Financial Matters
Get Rich Slowly
Money, Matter and More Musings
Rather Be Shopping
FILAM Personal Finance
Also, a special thanks to The 401K Insider and to Moolanomy whose readers spent the most time on Money and Such, and to Plonkee who writes a mean blog and who regularly comments on this blog.
Last October me and my team were placed under a new boss, and come December I received a nasty shock. My new boss gave me an outstanding evaluation, but only gave me 80% of my annual bonus. She explained her decision as follows: "As far as I am concerned, only God is perfect, therefore no one on my team is getting 100% of their bonus". Last year, I decided not to protest this absurd and obnoxious position. I felt that it would be a better long term strategy to build a stronger relationship with my boss and to prove my worth to her, before getting into any major battles. However, I hated and resented that decision and even more so I hated the rationale that my boss used to justify it.
This year, I fully intend to receive 100% of my bonus. Here is my strategy for achieving this goal:
1. Review my MBOs - Management by Objective (or MBO) is a favorite HR buzz term around Silicon Valley these days. It works as follows: early on in the year you receive from your boss a list of objectives that you must achieve. If you achieve those targets you get your bonus. I received my MBO papers in May, but I believe that I am well on track to achieving or exceeding all of my goals. In the next week I will make sure. I will review my MBO document in detail and will immediately tackle any deficiencies I discover.
2. Focus on What Counts - My philosophy is that in the employer-employee relationship, money speaks louder than words. It's fine to tell me that some task is high-priority, but if it's not in my MBOs, it's probably not that important. After all, if it were that critical wouldn't it be listed as a major objective for the year?
Before I do anything else, I make sure that MBO activities are at least at 100% of where they need to be to ensure achievement of my targets.
3. Obtain Buy In - it doesn't really matter what I think that I achieved, or for that matter, it doesn't even matter what I actually achieved. All that matters for the purpose of my MBOs is what my boss believes that I achieved. For that reason, it is my intention to go through my MBO list with my boss. Understand what she thinks I have already achieved and what tasks are not complete in her mind. I will also present to her all the activities and successes that I have delivered so far this year.
It doesn't help me to find out whether my boss thinks I achieved my goals at my annual review. That is too late. The bonus decision will already have been made. Nope. If my goal is to ensure 100% bonus this year, I must understand her thoughts and feelings about my performance while there is still time to do something about them.
4. Clarify My Position - it is now time to tell my boss that I did not feel comfortable with last year's 80% bonus award. I intend to tell her that I felt bad that I did not receive my full compensation in spite of my outstanding review, and that I fully intend to get 100% of my bonus this year. I will ask her what more I need to do to obtain this target and I will explain that unless I am able to achieve 100% of my bonus this year, I will consider this to be an unfavorable rating of my performance and will plan my steps accordingly. I will not threaten to leave, but will make it evident that I view my bonus as an integral part of my compensation package and that I consider it my right to receive 100% of the agreed upon bonus, if I deliver 100% of the agreed upon targets (which thankfully are very measurable).
5. Prepare to Appeal - Should my boss resort to the "only God is perfect" logic again, I will go to my boss's boss, our division President. Luckily, he knows me well and appreciates my work. He knows that I do not turn to him directly, except for very rare cases where I feel very strongly about something. In each of the few cases in which I turned to him for assistance he came through and provided the help I was seeking.
Bonus season is only three months away. Much to do, not a lot of time. I will provide updates on my progress and my results.
Saturday, September 29, 2007
People who know me, know that I cannot be bothered with physical exercise, with the exception of skiing which is an expensive and unfortunately all too rare activity for me. However, yesterday evening I spent three hours straight playing tennis, boxing and baseball against my brother who is in town for a visit. Best of all I did it all on the Wii.
You know what? After two rounds of Wii boxing you work up a sweat and your heart starts pounding. After three games of Wii tennis you feel like you just finished a good 3 kilometer run. In fact, after the first few Wii tennis games with my wife, my muscles were sore for a couple of days. It's a real workout.
So here's a heretical thought. Want to save $50 a month? Drop your gym membership. You can get a great cardio work out for the one time fee of $249. All you need to do is buy a Wii. It's fun and even better, it's a bargain.
Thursday, September 27, 2007
So what changed? Last month my son started kindergarten, and while I couldn't care less about what people think of my car or my house, I have been having these nagging concerns that my lack of housing & driving "style" will influence the way that my son is received at school.
When I drop off my kid in the morning, the other parents arrive driving their shiny BMWs, Porches and Mercedes, next to which my dinged up junker looks even worse. Dropping off my son is the only place where I feel uncomfortable driving my old ride, but let's face it I am not going to spend tens of thousands of Dollars just to satisfy an irrational urge to keep up with the Joneses. However, I did make a few concessions to good taste: last weekend I replaced my cracked windshield, bought a new set of hubcaps for $24.95 (one of my old ones was missing), and even went the extra mile and bought new floor mats for the Geo. If I am going to drive this beat up old car for a few more years, I might as well drive one that looks slightly better kept.
The total cost for this cosmetic treatment: $300 including the windshield. Ouch. But a much smaller ouch than buying a new car... Still, the urge to upgrade is not gone. I bet other parents experience the same pressures. I would love hear any suggestions and feedback from people that had similar experiences. Do share.
Wednesday, September 26, 2007
Flexibility - renting allows us to get up and leave at any time. Anyone who has tried to sell a house in the past year realizes that it's not such a simple undertaking in a down market. We are not facing that challenge. Some would say that this sword cuts both ways - we could get kicked out of our place next year. Sure, it could happen, but we have been living here for several years, the owners view this house as a rental property, and they like us because we keep the house well maintained and always pay our rent on time.
No Headaches - if something goes wrong with the house, our cost is zero. Just today I called our landlord and mentioned that we have spotted a minor leak below the kitchen sink. 20 minutes later our landlord was here and the leak was fixed. If I owned the house, I had to either fix it myself (not bloody likely) or pay someone to do it. I pay an all inclusive monthly fee, that covers everything from property taxes, to maintenance to trash collection. When I speak to my friends and colleagues who are home owners the conversation frequently turns to the repairs and housework that they do on weekends. I've got better things to do with my time.
Free Money - quite the opposite of being a waste of money, renting is a low cost financing option that allows me to commit our portfolio to a historically superior investment: the stock market. In a previous post I have written that our annual rent of $24,000 amounts to approximately 2.6% of the value of the house, according to Zillow. If this is the cost to finance my investment in the S&P 500, which has shown an average annual return (incl. dividends) of about 9%, by renting we are essentially making money, not losing money . But house prices have historically appreciated just as much as the stock market. Nope. House prices have historically barely kept up with inflation. Check out this graphic. Don't let the past 10 years fool you.
Far from being a waste of money, if you are a disciplined and diligent investor who does not need someone to force you to save money in the form of a mortgage, renting is actually a way of making money.
Tuesday, September 25, 2007
This week's Carnival of Personal Finance was hosted by Blunt Money.
Online Savings Blog describes Mint.com a new personal finance website that aggregates your financial data all in one place. To be able to do so they need all your passwords and user names... yeah, that sounds like something I would do. Why on earth would anyone risk their personal information by sharing it with any third party online? I visited the site and they claim to be encrypted, biometrically protected and so forth. I am sure that they think they are extremely secure, and I will grant that maybe they are, but why would I even want to take that risk? I can get the same benefits by buying Quicken software and running it at home. Sorry, I just don't get it.
Cash Money Life continues his excellent series about getting an MBA. This time the topic is the cost of the degree. I can testify that the cost of this degree is atrocious, but Patrick missed the biggest cost of all associated with an MBA: the opportunity cost - i.e. the cost of foregoing two years of income. Can't blame him for missing that cost - he hasn't taken that class in b-school yet... :-) Incidentally, I have a couple of mini sites on the topics of getting into business school, and acing the admissions interview.
Probargain Hunter has an interesting piece about Why Plug-In Hybrids are not a very environmental solution. Funny. I reached a very similar conclusion on regular hybrids. I fear global warming needs to be battled on a larger scale than shelling out extra cash to drive a hybrid. The sentiment is noble, but appears misguided.
The Bag Lady wrote an article explaining that not all 401K plans are the same. Don't I know it. Readers of this blog will have read my detailed adventures regarding my company's conversion of its 401K plan to a new provider. By the way, today, after about eight months of working on it, we finally signed the agreement with our new provider: ADP. Now the real work starts. Bag Lady, you may be interested to know that we looked at Vanguard as one potential provider for our plan, but decided against them. They could not provide the level of service that our company required. That's too bad, because their fund selection is excellent, and most of our personal portfolio is in Vanguard funds. I was cheerleading for them, but no dice.
Monday, September 24, 2007
I could not agree more. Where is Congress? Why are we paying those guys to spend all that time in Washington if they cannot be bothered to fix a system that is obviously broken and that many Americans will have to rely upon in their old age? There are about 20 presidential candidates running around the country, both Democrats and Republicans. How many times have you heard them talk about plans for fixing Social Security? Far fewer times than you heard them talk about gay marriage, that's for sure. Why is it that we cannot make our politicians focus on what's important to the vast majority of their constituents?
"1. Examine Social Security - Americans will not be able to rely solely on Social Security for a comfortable retirement. In the future, it's projected to cover an increasingly small percentage of the average retirement. There's debate as to whether it should be repaired or replaced. But What's clear is we need to reform Social Security now."
Here is a sobering statistic. Take a look at the following quote from Wikipedia:
If this information is true, politicians are choosing to ignore this problem knowing that the bad stuff will happen long after most of them leave office. Rule number one of politics: let the next guy deal with the bad stuff.
"According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2041 (by the Social Security Administration) or 2052 (by the Congressional Budget Office), the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security tax receipts would be sufficient to fund 74 or 78% of the promised benefits, according to the two respective projections."
More from the ad:
I completely agree. Especially since Social Security is in such a sorry state, 401(k)'s are extremely important to the financial well-being of Americans. For once, Congress did the right thing in encouraging companies to automatically enroll employees into 401(k) plans, as part of the Pension Protection Act of 2006.
"2. Boost Retirement Plan Enrollment. Companies should continue looking for ways to encourage employee participation in 401(k) plans. One proven way to increase retirement savings is through company matches. Another is automatic enrollment - employees are signed up for savings plans when they join the company, unless they specifically opt out."
My company is about to move to automatic enrollment, and it is my hope that this encourages the 20% or so of employees who are not yet enrolled, to do so.
Finally, the last quote from the ad:
"3. Increase Personal Savings. Ultimately, everyone is responsible for their own retirement. It's why we support laws that reward people for saving. Tax-advantaged savings vehicles like annuities and IRAs are two examples of products that can help allay Baby Boomers' biggest fear: living to see the well run dry. When planning for retirement, it's time to realize that no one is going to take care of us unless we start taking care of ourselves."
Once again, spot on. Personally, when making our financial plans for retirement I am assuming that the only resources we will have are the ones we save ourselves. We are not counting on a dime from social security, not a nickel from any inheritances, and we are certainly not taking into account any manna from heaven. It's all about our personal savings. That may be too conservative, but my philosophy is that it is better to have too much money saved up than too little. After all, you can always take an extra trip to the South Pacific if you have too much money, but if you have too little you may be planning on dinner for two at Chez Dumpster.
While we should fight to make sure that Congress addresses the Social Security situation, and push companies to become more generous and more diligent in their 401(k) offerings, the ultimate responsibility for your retirement rests with one and only person: you.
So there you go. I never thought I would write a favorable article about a financial ad, but I guess there is a first time for everything.
By the way, to read about how I think the retirement situation can be at least partially fixed, check out this post.
Saturday, September 22, 2007
My philosophy regarding insurance is a simple one: if you can afford to self insure, do it. There is no sense in insuring against a risk that you can easily afford to bear yourself in a worst case scenario. Complete loss of our Geo falls into the self insurance category, in my opinion. If I had to replace this vehicle tomorrow the dent to our finances would be minor.
With that in mind, I spoke with my wife and proposed that we eliminate the collision and comprehensive coverage on the Geo, especially given the fact that our insurance carries a $500 deductible. This move would save us a total of $300, or about 25% on our insurance bill. My wife quickly agreed to eliminate the collision coverage for a savings of $200, but did not want to get rid of the comprehensive coverage, which is supposed to insure us against theft or vandalism. She just did not agree with my reasoning that there is no real difference between the two types of insurance in terms of our financial exposure.
At the end of the day, our total cost to insure both cars was about $900 including the comprehensive coverage for the Geo. While it pains me to pay $100 that I don't really think are required, I would rather not have to fight and argue with my wife over a relatively minor expense.
Friday, September 21, 2007
Pretend Diversification - one employee told me that his investment strategy is to split his contributions between all available fund options. Since we offer our employees a total of 15 funds, he essentially puts 6.7% of his funds in each of them. What a horrible strategy. Essentially this employee believes that whatever it is we put in front of him is worth spending money on, regardless of cost or performance. That's not diversification, it's laziness. Such laziness makes me want to roll up a newspaper, smack that guy on the nose and yell, "No! Bad investor!" This is probably the second worst 401K investment strategy that I have heard about. Here is the worst:
Putting Your Money in the Safest Investment - one employee puts most of his money in the stable value fund offered in our plan. He thinks he is doing himself a favor by playing it ultra conservative. This is a poor strategy. A 401K is a very long term investment. Arguably it is the longest term investment most people make. That being the case, the daily, monthly and even annual ups and downs of the market are not relevant. All the matters are the long term trends, and in the long run stable value funds barely keep up with inflation. Try to be too conservative with your money and you are bound to end up with a cash stash too small to support you comfortably in retirement.
Over Confidence - more than one employee told me that they are investing their money in only one or two funds. Unless you are talking about a lifestyle fund, or a couple of very broad based index funds, you are probably not going to get the diversification you need from such a small number of funds. You may feel confident about the hotshot international equity fund you picked, but without sufficient diversification you'll be sorry when the next international melt down hits.
Not Paying Enough Attention to Cost - few employees demonstrated to me an understanding of the costs associated with the investments that they picked. That's too bad for them. Costs can have a critical impact on your portfolio. Let me give you an example: let's say that your equity fund generates an average return of 8% a year. If your fund charges an expense ratio of 2%, you are essentially paying a commission of 25% on your profit! And don't think I am exaggerating either. Our 401K plan has more than one fund that carries that expense ratio. That's partly the reason that we are switching 401K plan providers.
So how should you invest your retirement money? Here are a few tips:
1. If You Don't Know Ask - ask your plan's sponsor or call a financial advisor directly. Better yet, go online and read some personal finance blogs for some hints. Go to the library, get a few books and read. Whatever you do, educate yourslef before you commit to any investment strategy.
2. Consider the Costs - very few investment options are worth 2% per year in fees. I am a big proponent of index investing. If your 401K plan offer a broad index fund, check it's expense ratio and consider investing some of your money in that option. Generally speaking, if you are given the choice between two funds that cover the same asset class, you probably want to pick the one with the lower cost. Studies have shown a negative correlation between investment fees and investment returns: the more you pay, the less you get for your payment. What a scheme.
3. Diversify for Real - Don't just select multiple funds. Select funds that cover different asset classes. Get a broad exposure to the domestic stock market, the international stock market and to the bond market. If you can add a small exposure to the real estate market, that might not be a bad option either.
4. Consider Lifestyle Funds - lifestyle funds are an excellent option for investors who feel that they don't know enough to invest for themselves or that don't want to deal with the hassle. All it takes is for you to pick your retirement date, put in your money and the fund invests your assets in a mixture of stocks and bonds that gets progressively more conservative as you age.
5. Stay Out of the Money Market Fund or Stable Value Funds - such funds are great if you are building an emergency cash reserve or saving for your summer vacation, but if your investment time horizon is long, putting your money in such vehicles is a poor decision.
Thursday, September 20, 2007
Here is the comment in full. I added emphasis in a number of places:
First of all, what an awesome comment to receive. I really enjoy writing this blog, and it's nice to know that my readers find my articles useful. Thank you very much for taking the time to write such a detailed comment.
"Thanks for the great series. I read it very carefully as I AM in my 20's, fell into a GREAT job, and realize there is great financial potential if I make the right choices now. Everyone says "start young" or "don't make mistakes when you're young" or "I wish I would have... when I was young." But not very many people offer practical advice of what to do WHILE you're young, have a great paying job, and need to know what to do with all that disposable cash.A few
Points of reaction:
1. House. I bought one. The housing market where I live was far too tempting not to, I couldn't stand living with family a second longer, and I wasn't about to throw away thousands in rent. I think if you're planning on staying with your current job for at least 5 years, and you are in a strong growth area, you can't do any harm purchasing a house. It also helps TREMENDOUSLY at tax time, since I have no dependents to claim on my return.
2. Savings: I currently contribute 6% to the company 401k and my company kicks in an extra 4% (yay for free money), but having non-taxable savings seems VERY attractive. I will definitely look into the ROTH IRA. I hadn't considered IRAs, since I have pretty much maxed my current paycheck out.
3. Stock: I have several thousand shares of options in my company, and have just started participating in the company stock purchase program which allows me to purchase stock every 6 months at 85% of the lowest market value. I am maxed out at 10% of my gross in that program.
4. Charitable donations. This is one you didn't mention that I think you should have. Young people, no matter how poor, should get in the habit of giving back. I give between 10-12% to my church and other charitable organizations. It helps at tax time and it's the right thing to do. If you wait to be "rich enough" give back, you will wait forever.
I wish I could do more... like start a ROTH, or diversify my portfolio, but I'm pretty maxed out. I had to give up my glamorous vacations to start doing the stock purchase program. Now I just go home for the holidays. I have to constantly evaluate my life/money balance, and certain things like gym memberships and cable TV have all met the chopping block.
Also, I really liked your post about investing in yourself/career; spending the extra time and effort while you don't have attachments. I spend my evenings doing work on my own start up company, and while it gets tiring, I'm hoping it will all pay off in financial independence in the future.Any ideas, feedback, suggestions are welcome... "
Let me comment on some of the points the reader made:
My anonymous reader is clearly well on his way to financial security. He seems to have made many smart decisions, and he understands the trade off between spending and saving. He has taken those first steps to financial stability a decade or more before most of his contemporaries will start to think about issues of financial planning. Kudos!
Regarding the purchase of a house while you are in your 20's. I have written a number of posts about why I don't think that real estate is a good investment, and particularly why I don't think it is a good investment for people in their 20's. However, if you are buying your house because you want to move out and own your own place - and not as an investment - there is absolutely nothing wrong with it. I completely understand that some people really need the emotional attachment, convenience and perceived security of owning a home. However, I always find it strange when people refer to renting as throwing away money. I have many points to make on this topic and will address them in a future post. For now, I will share only one important thought: by renting I am able to take the large chunk of cash that would otherwise be tied in bricks, and invest it in highly diversified, high yielding investments. I am not throwing away money on rent, what I am doing is the equivalent of taking out a low cost loan to invest in a highly profitable opportunity. Somebody else's capital is tied up in the house I live in.
One a different note, there are two financial errors I think that the commenter is making. The first is owning a large number of shares in his own company stock. To find out why I think this is a big error, see my post on the subject. I also think that the reason the commenter is accumulating shares is his company's ESPP which allows him to purchase shares at a discount. Purchasing the shares is the right move. Hanging on to them is not. Once the shares are purchased at a discount, it is probably a good idea to sell them and pocket the difference. More about my proposed ESPP strategy in this post.
Although the commenter does not say so explicitly, I am getting the sense that he thinks he is not diversified. If that is the case, this is a serious financial error. To diversify your portfolio you don't need to have a lot of money, and you don't need to to pay through the nose to achieve diversification. Here is a good way to take a step in the right direction: when you sell your company shares, use the proceeds to purchase a diversified index fund, such as Vanguard's Total Market Index Fund. Diversification is a sound financial strategy that will pay off in the long run.
The reader is clearly doing almost everything right financially, but he appears to be paying a high personal cost for some of his decisions. For example he mentions that he is no longer taking "fancy vacations". To me it's all a question of happiness. I used my 20's to travel the world. Yes, it cost a lot of money, but I don't regret that expense for a second. Let me tell you something: as a mid-career professional, taking large chunks of time off to go traveling is not very feasible. Doing it with three small kids is pretty much impossible. So, yes, plan for your financial future but make sure you don't fixate on the money. Enjoy your youth. Your memories will last a lifetime and the money is very well spent.
Regarding the after hours start-up and giving back to the community, all I can say is "more power to you!"
As you can see, I read every comment left on my blog, and respond to pretty much all of them. So, keep 'em coming. Let me know what you think about my posts and let me know if there are any topics you would like me to tackle. I will be glad to do so.
Wednesday, September 19, 2007
What does the rate cut mean for the average investor and what is the correct reaction? Frequent readers of this blog know that I am a "steady as she goes" kind of investor. I do not let the ups and downs of the market change my carefully planned investment strategy and asset allocation. Having said this, the rate cut is likely to effect different asset classes in different ways:
1. Money Markets and CD's - even before the cut experts have been talking about the fact that yields on CDs and money market funds were destined to go lower. With the turmoil in the market, many investors were panicking and moving their investments to safer investment vehicles. With more money being thrown into CDs and money market accounts, financial institutions could reduce the yield that they offered.
The rate cut will certainly cause the yields to decline. If not tomorrow, then in the next few weeks. This means that if you are planning to keep a cash position as part of your portfolio, you may want to look into the option of locking some of that money in CD's at the current higher rate.
2. International Investments - with the yield on the Dollar going down, and the international economy still expanding, the chance for a further decline in the Dollar vs. other major currencies has increased. This means that investments denominated in foreign currency will be worth more in Dollars, and that companies that do business abroad or rely on exports to a large degree will be seeing their income increase when converted back into Dollars. If your portfolio is short on foreign investments, now may be a good time to boost that portion of your investments.
3. The Domestic Stock Market - the stock market loves interest rate cuts. The reason? When interest rates go down, the yield on safer investments becomes less attractive and people move into the stock market to find higher returns. With a greater demand for stock, their price climbs. In addition, companies find it easier to borrow money to expand their operations, and find it cheaper to pay their obligations. Both factors tend to support earnings.
Is the bull market coming back with a vengeance? I have no clue, and neither does anyone else. However, if I were a betting man I wouldn't put my money on it quite yet. The economy is not out of the woods. No by a long shot. In fact, I think we may just be starting to walk into them. If that is the case, the stock market is going to see some choppy water before any celebrations can begin. I am guessing volatility will continue at least for several more months.
4. Bonds - Have you gotten tired of seeing the bond portion of your portfolio stagnate for the past several years? I know I have. Many a time I thought about dumping my bonds and doing something productive with the money, but prudence won out. I stuck to my asset allocation plan. Now come the better times for bonds. As yields on the money market drop and as interest rates continue to decline, bonds start to look better and better for those conservative investors that don't want to jump into the stock market. An environment of interest rate cuts is typically one in which bonds show some muscle. That would be nice.
5. Real Estate - remember the woods I mentioned a couple of paragraphs ago? These are the woods I am referring to. The Fed cut interest rates, and that's good. The cut may mitigate some of the pain and save some homeowners from foreclosure. BUT I am not rushing out to buy a house, or to increase my exposure to the real estate market. There are too many darn houses on the market. Those are still there whether or not the Fed cut the rate. Let's face it. We just came through a major real estate bubble and prices have a ways to go before they return to sanity. They can either drop outright, or they can stagnate while inflation catches up. Either way, real estate has had its day in the sun, and I think it will be a while before we return to the crazy day of the flipper.
6. Commodities - the Fed cut is likely to boost economic activity and with more activity comes the need for more raw materials. We have seen crude oil prices break records two days in a row, and I suspect high commodity prices will last. Am I investing in metals, corn futures or oil? Nope, but until economic activity cools down substantially, I think we will continue to see high commodity prices. In fact, I wouldn't be surprised to see commodity prices holding at current prices or higher for years to come.
That's my take on the economy and the likely outcomes of the Fed rate cut. Unfortunately, I am no prognosticator. I wish I had a functioning crystal ball, but lacking one I think I will stick to my tried and true asset allocation strategy. I go through this analysis as an intellectual exercise, but I don't typically act on my own advice. I don't recommend you act on it either.
Tuesday, September 18, 2007
The Carnival of Personal Finance was hosted by Money, Matter and More Musings this week. My article titled "The Real Estate Market is About to Get Worse" was included in the Carnival.
FILAM Personal Finance has an article about how utility companies are now offering rebates for consumers who purchase energy efficient appliances. At least in Northern California this is certainly true. PG&E is also offering consumers the option to pay a variable rate on their electric usage depending on the time of day. For most folks that's not a great deal, but my in-laws used to own an electric vehicle, and saved a bundle by using this option and re-charging the car at night.
Limeade over at Fiscal Musings has a post about how he and his wife enjoyed an outing to McDonald's at a very low cost. He especially liked the fries. OK. The reason I am mentioning this article is that I am wondering if the cost of the dinner includes the cost for the Cardiologist visit. The last time I ordered fries at McDonald's was the time I read on the menu the nutritional value of the food I was eating. My large order of fries had 8 grams of trans fat in it. They should hand out bottles of Lipitor with those fries. It's a sad statement about our society that the cheapest and most easily available food is also the most harmful from a health perspective.
The Festival of Stocks was hosted by Trading To Go this week. My article To Time or Not to Time the market was selected Editor's Choice. Sweet. I must say that the Festival had some excellent articles this week. Check it out. Here are a couple of examples:
Ask the Advisor, ranks the 25 most influential investing blogs. For any of you guys that just stumbled on my humble blog but are not familiar with some of the titans of our PF blog community, check out this list and visit some of these excellent websites. Many of these blogs are also featured in my blogroll (check out the left column on this page).
The Agonist has a smart and detailed article about the sad state of the U.S. political system and the connection between "business political contributions", which I fondly refer to as bribes, and stock appreciation of the contributing companies. This is highly recommended reading. In the name of freedom of speech, companies are being allowed to buy influence and favors in Washington. From my perspective, freedom of speech is a basic human right that should be reserved for individuals. Corporations, which are fictitious legal entities should not enjoy this right, at least as far as political contributions go.
Adventures in Money Making takes an unpopular position, with which I tend to agree. Better a relatively small recession now than a much bigger and more painful recession later. He also thinks that we are already in recession.
Another Carnival that is up this week is the Stock Market Carnival published by The Investor's Journal. I haven't had a chance to read any of the articles and may add some recommendations later.
Monday, September 17, 2007
You must have heard at least a dozen versions of this lie, but here is the most recent version that I have heard. The following quote actually comes from a good article that I quoted from a few days ago, taken from Charles Schwab "On Investing" Magazine . It goes like this:
"...I showed a chart highlighting that if you missed the top 40 best single market days (less than 1.6 of trading days) over the past 10 years, your annualized return plunged to -6.4% versus the S&P 500's +8.4%."
So what's wrong with this statement? It's very simple. This statement assumes that you missed the top 40 days, but were somehow able to hit every single one of the worst days. Well, if by some black magic you were able to accomplish this feat, you would be the person with the worst luck who has ever walked the face of the planet. In fact, if you are able to do this, stay away from me, because there is a good chance you will be hit by a meteor and a lightning bolt on the same day. Reality is that if you are out of the market, you will miss both the good days and the bad days in equal measure. Removing only the good days from the calculation vastly overstates the problem.
So called financial advisers frequently use this lie to push people into putting their money in the market even in bad times. I completely agree with their underlying goal: people should systematically continue to invest in the market, regardless of whether the market is having a good year or not. However, there is no reason to overstate the facts or come up with impossible scenarios to encourage them to do so.
Saturday, September 15, 2007
A Bank of America spokesperson gave USA Today a different reason. Try not to laugh hysterically as you read this:
If the spokesperson's name was Pinocchio, we could have used her nose for a mast on an ocean going yacht.
"...Betty Riess says the higher fees help offset the "significant investment" the bank has made to upgrade and expand its cash machines. The bank decided to charge non-customers a $3 fee at 10,700 ATMs — nearly two-thirds of its network — in bank branches and supermarkets as a way to "reduce wait time for our own customers," Riess says."
Seriously, if you want to increase fees, do so, but don't try to feed us a line. I am a BoA customer, and I use the Bank's ATMs all over the country. I can remember very few times in which I actually had to wait in line to use the machines, and even when there was a line it was gone in about 20 seconds. If customer service was a true concern, BoA would hire more tellers so that I wouldn't have to wait in line for 15 minutes when I go into my local branch in the middle of the day. How gullible do they think we are?
Since that excuse didn't fly, BoA tries an even more ridiculous one: they would have us believe that they increased fees to off-set the cost of their investments in ATMs. Any moderately intelligent consumer sees right through this excuse. The return on the ATMs is immediate and dramatic and it comes in the form of fewer customers who need the assistance of a human bank employee. This means that BoA can employ fewer tellers, which translates into big savings come payday. And yes, the same long lines at the bank remain, because each remaining teller still needs to serve the same number of customers.
Here is what I think is the real reason for increasing the fees: BoA is increasing the fees because it thinks it can get away with it. I don't blame them. BoA is a for profit corporation that is there to make as much money as it can. If they thought they could charge us $27 to use a Kleenex, they would do so faster than you can say gesundheit...
I have another sneaking suspicion about the reason for the increase. Many independent banks that either have no ATMs of their own, or have only a small number of them, such as E*Trade and HSBC, have recently started offering to reimburse their customers for any ATM fees the customers incurr when using another bank's ATM network. This strategy essentially negates a major competitive advantage that the banks with large ATM networks have over their smaller rivals. Bank of America has the largest ATM network in the country, and has been aggressively leveraging this network as part of its customer acquisition strategy. Remember their commercials about "where can I find a BoA ATM?" I think that the increase in fees may not even be an effort to improve the bottom line, so much as it is an effort to prevent smaller banks from being able to cost-effectively lure customers by offering to reimburse them for ATM fees. I think that this may be part of a larger strategy to combat small rivals and online upstarts. Of course, the extra $1 per pop is certainly nothing to sneeze at. Gesundheit.
Friday, September 14, 2007
Even though the Journal survey placed the average chance of a recession at 36%, it showed a wide range of opinions by economists. Some say a recession is practically a foregone conclusion, while others seem to think that a recession is simply not in the cards.
"Economists in the latest WSJ.com survey pegged the risk of a recession at 36%, on average, up from 28% a month earlier. Fifty-five economists took part in the survey, and 52 answered the question about the likelihood of a recession. The survey was conducted after last Friday's report on August employment, which
showed the first monthly jobs decline in four years."
To me this survey suggests that even the professionals, the so-called smart money, don't really have a good sense for where this economy is going. Having said this, the trend in expectations is clearly negative, with far more economists now worried about a recession than were concerned about one only a month ago.
I think that this lack of consesus about where the economy is headed is also a clear indication that the volatility that we have seen in the financial markets will continue, so buckle your seat belts and enjoy the ride. Expect strong up days and dismal down days to follow each other in quick succession in the near term. Personally, I intend to ignore these swings. My friend put it best when he told me the other day: "I know where I am going. Sometimes the view from the road is beautiful, sometimes its ugly, but the view outside my window does not change my destination." Amen to that.
There is one thing that analysts seem to be in agreement about: more pain for the housing market:
I think that the operative phrase in the paragraph above is: "at least". Unfortunately, if you party too hard a hangover is part of the deal.
"...few analysts say they believe the housing market has reached its low point. Home prices are expected to drop, sales are expected to slow and construction activity is set to decline further through at least the next year."
Thursday, September 13, 2007
1. Timing is Bad for Your (Financial) Health - last week I read an excellent article in a Schwab publication that my wife received. The bottom line of this article is something that I have known for a long time, but have never tried to quantify: market timers lose money. This graphic really drives home the point. Here is a quote from the article:
I don't know about you, but negative 2% annualized returns don't sound that appetizing to me.
"...for the 20 years 1986–2005, the S&P 500® index had an annualized return of 12%. Unfortunately, the average equity fund investor had significantly lower returns—only 4% annualized (barely nudging out inflation). Most interesting, though, was the difference in returns between "systematic" and "market timer" investors. For those who were consistent in their investments, the annualized return jumped to 6%—still only half that of the S&P 500 but much better than for the average investor. On the other hand, those investors who tried to outsmart the market by timing their inflows and outflows saw their returns plunge well into negative territory—generating an annualized loss of 2% over the period!"
Here is a link to the full article, in case you want to read it for yourself.
2. I Am Not That Smart - quite frankly, I am wise enough to admit that I am simply not smart enough to predict the course of the economy. I have some ideas and I have some feelings and opinions on the subject, but I don't delude myself for a minute by thinking that my opinions are anything but opinions. Moreover, I am not going to try to outguess the combined wisdom of hundreds of millions of investors. The markets may not be correctly valued at all times, but the chances that I am the only one that will spot a pricing error are not very good.
If you think that you can time the market, you are implicitly saying that you are smarter than the person who will be buying the stock you are selling. For all you know that person may be a finance professor, a hedge fund manager, a star broker or the idiot day trader down the hall. You simply don't know. Under such uncertainty, you should assume that the person buying your shares is just as smart and informed as you are. What makes you think your decision to sell is better than his decision to buy?
Let's face it, I am simply not that smart, and neither are you... although have I told you lately how good looking you are? Have you lost weight?
3. Uncle Sam Always Wins - regardless of whether I make the right timing decision or the wrong timing decision, as soon as I get out of the market I automatically lose. Uncle Sam reaches deep into my pocket and grabs his share of my gains. That makes the cost of getting out of the market pretty steep.
So, even though I think the economy is not in great shape, I will hold my ground and continue to regularly invest and follow my long term asset allocation plan. Steady as she goes.
Wednesday, September 12, 2007
Before I tell you the results of my inquiry, I would like to point out that I had some difficulty finding the year in which some of these indexes were first introduced, as well as some of the base values at which they were introduced. In the end, I think I got the correct numbers, but if anyone can spot a mistake, please let me know so I can correct it. Also, I would like to point out that the numbers are approximate, since I did not account for the fact that 2007 has not yet ended.
Without further delay here is what I have found:
Dow Jones Industrial Average
Year of Introduction: 1896
Base Line Value: 40.94
Average Annual Return (Sept 11, 2007): 5.35%
Year of Introduction: 1957
Base Line Value: 44.06
Average Annual Return (Sept 11, 2007): 7.27%
NASDAQ Composite Index
Year of Introduction: 1971
Base Line Value: 100
Average Annual Return (Sept 11, 2007): 9.47%
Year of Introduction: 1980
Base Line Value: 1404
Average Annual Return (Sept 11, 2007): 9.12%
Year of Introduction: 1984
Base Line Value: 100
Average Annual Return (Sept 11, 2007): 9.35%
These results are very interesting. First off, as I commented yesterday, the return on the Dow since its introduction is dismal. The S&P is the second oldest of the indexes I examined, and it too offers lackluster performance, although it is certainly more attractive than the Dow. The remaining three indexes are all substantially newer and all offered significantly better returns.
What do these results mean? Are the low returns on the Dow an artifact of the much less developed financial markets of the late 19th and early 20th centuries? Or are the higher returns exhibited by the Wilshire, NASDAQ and Russell simply the result of a fluke that has allowed them to so far escape from a protracted bear market? Am I simply making an error or overlooking something basic? Once again, I think I will continue to look at this question I stumbled across, and will keep you informed of my findings.
Tuesday, September 11, 2007
American Cotton Oil Company
American Sugar Company
American Tobacco Company
Chicago Gas Company
Distilling & Cattle Feeding Company
Laclede Gas Light Company
National Lead Company
North American Company
Tennessee Coal, Iron and Railroad Company
U.S. Leather Company
United States Rubber Company; and
I don't know about you, but the only name that rings a bell in that entire list, and the only one of the original list that is still on the Dow to this day, is General Electric.
Here is the lesson that I am taking away from this change in the Dow: given enough time, even the bluest of blue chips fail and disappear. I have to ask myself whether investors in the stocks that faded into obscurity saw the change coming and bailed out and how many of them lost a bundle by betting on these stocks.
When the Dow was first introduced it stood at 40.94. When the market closed yesterday the Dow ended at 13127. So while the index itself soared over 32,000% over its existence, many of the underlying stocks disappeared. This is not exactly a scientific case for index investing, but if you are into stock picking this should make you pause and ponder for a while.
Incidentally, in writing this post I ran a quick calculation based on the numbers I quote above, and it appears that over its entire existence the Dow averaged a return of about 5.4% per year. Does that not strike you as unnervingly low? I think I will dig into that a little bit more. I'll let you know what I come up with.
Monday, September 10, 2007
As those ARMs reset and their teaser rates expire, home buyers will be facing higher interest rates and higher monthly payments. It is clear as day that many of them will not be able to handle these higher payments. What's more, if the tightening in credit standards continues, many of these home owners will not be able to refinance their loans and may face foreclosure.
I am guessing that this potential wave of foreclosures is going to add to an already large inventory of houses on the market. In my opinion this means that a substantial decline in house prices is in the cards for 2008. It seems like the truth is even starting to penetrate the fog and haze surrounding the National Association of Realtors. Here is a quote from an article published by the organization on September 5th:
"Pending home sales, a forward-looking indicator, shows existing-home sales are likely to decline in coming months as mortgage disruptions work their way through the housing market, according to the National Association of Realtors.
The Pending Home Sales Index*, based on contracts signed in July, fell 12.2 percent to a reading of 89.9 in July from the June index of 102.4, and was 16.1 percent lower than July 2006 when it stood at 107.1.
Lawrence Yun, NAR senior economist, said abnormal factors are clouding the horizon. “It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,” he said."
But wait, there is more. In a separate study published by the National Association of Realtors, they also admit that Realtor's Confidence Index was down to 39% in August from 45.1% in July and 51.3% a year earlier. The report also contains the following sentence:
"...practitioners see more traffic from potential home sellers than from prospective buyers."
In economics 101 they taught me that when there are more sellers than buyers prices tend to drop. Incidentally, the confidence index for the West was lowest in the country, at 37.3%. Another couple of interesting insights from the report: according to realtors, 20.3% of their most recent clients wanted to sell their house because "the cost of ownership has become burdensome"... in addition, 40.6% of realtors expect prices in their area to decline in the coming year. Yup, seems like that drug induced euphoria is starting to dissipate...
There is no question in my mind that the housing market has a long way to fall before hitting bottom. The only question is whether it will drag the rest of the economy with it into recession. Sadly, I think that the answer to that question may be "yes".
Thursday, September 06, 2007
Frugality for me is all about saving, living modestly and reducing waste. However, I try to focus on the big things. For example, driving the same modest car (OK, junk car) for the past eight years has saved us a lot of money and was well worth it, especially since I am very utilitarian about my vehicle. It just needs to get me from here to there. Saving a buck a month by re-using plastic forks simply does not appeal to me.
For me, being frugal with my time is just as important as being frugal with my money, possibly more so. I lead a very hectic life, with three awesome boys to raise, a high stress long hours kind of job and a blog to write on the side. Saving 30 minutes is well worth $10 to me. It's really tough to get an extra half hour to myself, and I am very willing to pay for the privilege. If that means that I am not frugal, so be it. From my perspective, there is such a thing as being too frugal. That boundary is crossed when you start to sacrifice reasonable enjoyment and precious time in order to achieve what most people would consider minute savings.
My story starts with a strange charge for $9.95 that I found on our AmEx a few months ago. Since I could not identify the charge, I asked my wife what it was and she told me that the charge was the subscription fee for Disney's dedicated preschool website. It turns out that Disney offered a one month free trial for use of their educational website aimed at preschoolers, and my wife took the offer and signed up our son. Of course, when she forgot to cancel the service after a month, we got hit with a $9.95 charge. Although she tells me that she has now cancelled the service, it took my wife three months to rid us of the free trial plague. The score: Disney - $29.95; Shadox - small hole in left pocket.
Being a marketing person, I can testify that companies that offer free trials to large groups of customers are working off of averages. They know that some consumers are going to be more profitable and others less profitable. As long as the average profit level they can achieve is reasonable, they are happy. In the case of free trials, companies know that a certain number of consumers will sign up for the service when the free trial ends. They also know that some consumers will procrastinate and end up paying for the service, even though they had no intention of spending a dime.
You know all those "cancel any time" offers you see on TV? Well, they work because people are lazy, and even if they have the best of intentions many consumers simply don't get around to cancelling the service.
So here is my advice to you: the best way to deal with free trials is to not sign up unless you think you are going to keep the service beyond the free trial period. It's not worth it. At the end of the day these free trials can cost you big bucks.
Wednesday, September 05, 2007
Festival of Frugality hosted by Bean Sprouts:
Raising Four Boys has an article about using a timer to speed up showers and reduce water waste. I only want to say: "over my dead body". There are few things in life I enjoy as much as my morning shower, and I am going to stick with it regardless of cost. Of course, they are raising four boys to my three, so maybe it's that fourth little one that tips the scale.
Queer Cents offers an excellent article titled McMansions and the Carbon Tax - apparently there is a proposal circulating for revoking the mortgage interest income-tax deduction for mortgages taken to pay for houses in excess of 3,000 sq. feet. I say, hell yes! While you're at it, why not cancel this regressive tax break entirely? Giving a tax break to home owners is blatant discrimination against renters. Here's a thought: let's tax the poor and give tax breaks to the rich... that's essentially what the mortgage interest tax break is all about.
Carnival of Money Stories hosted by Enough Wealth:
Rather be Shopping suggests a simple money saving tip: ask for a better price. It's probably true, but I have to admit that I find it difficult to go into a big box store and start negotiating a deal. I guess I am not in that kind of mind set when I go to Best Buy.
Reflection of BizDrivenLife points out that some companies improve their bottom line by getting rid of their least profitable customers. For example, his web hosting company kicked him out because he utilized too much of his bandwidth quota (without actually going over the limit). I can certainly understand why companies do this. This strategy makes a lot of sense for them. However, this means that as a consumer you cannot rely on the marketing promises you are given. This is the equivalent of an all-you-can-eat buffet that only allows you to stay as long as you don't eat as much as you can...
My article titled the Most Expensive Loan in History is also included in the carnival.
Carnival of personal finance hosted by Advanced Personal Finance:
Talk about original (and funny). Saving Advice has an article about whether you can save more money by turning nudist. Seriously, this is one of the most unusual personal finance posts I have ever read. I think I'll keep my clothes on, thanks for the offer though.
Penny Closer looks at Five Myths that Can Hurt Your Credit Score. He makes a good point about not closing old credit accounts. The article is well worth a read.
Fire Finance offers a detailed article about how much money you need to save for retirement. The post includes detailed charts - by age and income level - that can give you a sense of whether you are saving enough to replace your current income in retirement.
My article warning IPO Investors to Beware is also included in the carnival.
Tuesday, September 04, 2007
However, very much like big business, when left unchecked labor unions can turn into an economic and political nightmare. Let me give you just a couple of examples to demonstrate my point: A friend of mine used to work for General Electric. He tells me that if he needed to move a computer monitor from one office to another, he would have to wait for the designated union employee to do the job, and he was not permitted to make the move himself. When there was no choice he resorted to posting lookouts at both ends of the corridor to ensure that no labor union representative saw him doing the unthinkable... actually moving his own monitor?!
This week's Business Week had an article about the dismal state of the U.S. air transportation infrastructure. According to the article, the technology exists to vastly improve this infrastructure, however one of the reasons for the delay in implementing this technology (among many other reasons), is that air traffic controllers are fighting hard against the implementation of this new, more efficient technology for fear it may make some of them redundant. The fact that the technology is both safer and more efficient is, apparently, of little consequence to them.
I have to admit that my position on the labor movement is ambivalent. On the one hand, there clearly is a need for a balance of power between workers and employers. Without this balance there is little doubt that employers would take advantage of their power (in certain industries) to drive down employment cost and boost the bottom line. On the other hand, I am firmly and completely against work rules and contract terms that prevent companies from operating more efficiently. That is, if the port of Oakland can install technology to more cost-effectively and quickly load and unload ships, it should be able to do so, regardless of whether some people may lose their jobs as a result. If my friend wants to move his computer monitor to the next office on his own, he should be allowed to do so.
This is not a selfish consumerist argument. It is an economic argument: in the long run, efficiency and progress will always triumph. By trying to prevent, for example, the adoption of a new technology that might make some union members redundant, the union is only giving business an incentive to undermine the union, or even worse, if the union is too successful they may even make their firm uncompetitive in the global market place, thereby threatening the very existence of their company. Think I am exaggerating? For years auto companies have been moving plants from Detroit to the Southern U.S. Labor busting is one of the main reasons for this trend. Unions in Detroit have been so successful in pushing for their aggressive labor agenda that auto companies are simply moving away. In fact, as they teach it in business school, one of the main reasons GM started its Saturn brand and built its auto plants in the South is its attempt to move away from the constrictive unions it deals with in Detroit.
Bottom line: keep the unions fighting the battles that they must fight: minimum wage increases, paid vacation and health care, non-discrimination battles. Let management make decisions that impact the efficiency and competitiveness of the business. While unions may see some short term gains by fighting to stave off efficiency and technology, in the long run they are only undermining their own cause.
Someone once told me that the only reason we have cars in the U.S. today is that horses and ponies did not have their own labor union. It's a joke. Well, mostly anyways.
Sunday, September 02, 2007
Here are a few free websites that my kids really enjoy:
Play House Disney - this website offers a wealth of activities based on Disney Channel shows. Everyone from the venerable Mickey Mouse, to the Wiggles and the Little Einsteins is there. There is also a for-pay section of the website called Preschool Time. More about that last website some other time.
Nick Jr. - another great website for kids is Nick Jr. The site does have a few ads sprinkled here and there, but if you don't feel too strongly about the issue, it's a wonderful site for your little ones. My son spends hours playing the Diego games, which are pretty impressive and highly educational.PBS Sprout - Bob the Builder, Barney, Dragon Tales and many more are all featured here. The site also allows your kids to upload art projects and birthday cards to share them with the world. Yet again, PBS rocks.
Thomas & Friends - every boy I have ever met, including my own 3 are hooked on Thomas. A zero cost way of feeding that addiction is to visit Thomas online. It's certainly cheaper than paying $10 for a single, Chinese made, lead painted Thomas toy.
Enjoy these free websites, and if you have any others that you can recomemnd, please let me know.