Thursday, March 29, 2007
After many years of an iffy job market, it is finally safe to say that the job market in Silicon Valley is very strong. My wife has been with the same technology company for more than 9 years. Much of that time her compensation was handsomely augmented by stock options that she got and that we sold for respectable profits. However, when the options finally ran out, it was very clear to both of us that she was under-compensated based on her skills and experience.
Because she really liked the company and didn't want to leave, my wife has been trying to convince them to bring her salary up to market rate for the past 18 months. Finally, about four months ago, it became apparent that the company would not come to its senses, and my wife began to quietly search for a new position.
We knew that the job market was pretty strong, but were both surprised by how easy it was for her to get interviews and job offers. She got two or three interviews each week, all with solid tech companies, and took her time picking the right offer. Last week she made her decision and accepted an offer with a publicly traded tech company. In the next day or two I will write a post about the negotiation process, but the bottom line was that the final offer she accepted literally doubled both her salary and her bonus.
I have three comments about that whole story:
2. Now that the job market is hot again, employees have much more power in salary negotiations. Employers are searching for qualified candidates and are not shy about making offers. It is time to press the advantage and ask for that salary increase. It is not clear how long this hot market will last, and I think that the economy is headed for a much cooler patch and possibly even into a recession.
3. How stupid is my wife's former company? They had a very loyal employee who consistently got top rated performance reviews. The employee repeatedly complained (and showed evidence) that she was under compensated, yet they refused to bring her compensation up to market rate. Now that my wife is leaving, the company will have to hire someone at market rate and train them from scratch. Does that make any sense to anyone?
Two days ago my wife announced her resignation. That same day the VP of Marketing called my wife into her office and proposed to match her offer if she would stay... naturally my wife refused.
Wednesday, March 28, 2007
There have been many posts recently on the topic of "forever stamps". These stamps, recently introduced by USPS, are good for sending one letter regardless of the price of a stamp at the time of mailing. You could use these stamps the day you buy them, or any time thereafter no matter how the price changes over time. It seems that most PF bloggers are of the opinion that forever stamps are a bad thing, because they would facilitate more frequent stamp price increases. I am on the other side of the fence, and here is my reasoning:
By buying a stamp you are paying for service at the time of purchase. That service is the mailing of one letter. By not using your stamp immediately all you are doing is giving the post office a credit line. Generally speaking, when you give someone a credit line you expect to receive some form of benefit. For example, you put your money in a savings account, and you get interest. BUT if you give credit to the post office they punish you by charging you more when you actually want to use the service for which you already paid. If my company could get all of our customers to pay for their purchases upfront, and only take possession of their goods months later, our CFO would throw a wild toga party. Can you imagine that on top of getting our money upfront, we would try to charge customers for a price increase after the fact?
But it does not end there. The forever stamp is also good from the post office's point of view, since it would encourage people to buy larger quantities of stamps upfront. It stands to reason, that a certain percentage of stamps purchased in this manner will never be used because they are lost, accidentally destroyed or simply forgotten. By not offering a forever stamp, the post office is encouraging people to buy smaller quantities of stamps, thereby reducing the number of stamps purchased but never used. I am guessing that the value of such orphaned stamps is probably 1% to 3% of stamps in circulation. The more stamps in circulation, the more orphaned stamps.
The bottom line: customers who have paid for stamps should not be forced to pay for price increases after the fact. The post office benefits from both the unbelievable payment terms its customers are willing to furnish and from the fact that more stamps will be purchased but left unused. So, unless you are one of those who regularly loses stamps, a forever stamp is a good thing for you.
Tuesday, March 27, 2007
This is Shadox, coming to you live from the sin capital of the world, Las Vegas, Nevada. Yes, it's true. I am here on a two day business trip, and will be going out to hit the town in a few minutes. But before I do, I wanted to share a quick thought about the connection between Las Vegas and people's investment strategy, personal finances and net worth.
What is it with Gambling? Seriously, I simply don't get it. Before I left for the airport this morning, one of my colleagues asked me if I gamble. My answer was "No. I understand statistics". It's not that I am getting on my high horse again (although you can hear the sound of hoofs in the background), it's just that I simply don't get why people willingly gamble, when they know chances are that they will lose their money.
I guess that the answer to this is twofold. There are some people who gamble, knowing full well that they will probably lose money. They do so because they enjoy the process. They do it for fun. These are people willing to pay a "Dream Tax" - the fee you pay for having the opportunity to dream of breaking the bank. They are, in essence, no different than someone who pays $50 for a fun night out. OK, I can understand that rationale, but it doesn't work for me.
The other group of people, and I suspect this is probably the majority of gamblers, gambles because they actually think that they can beat the house. They think they can win big because they have a system, they are very lucky, they have skills most people don't have, or they have blue eyes. Whatever their reason, they think they are being logical in thinking they can beat the odds.
Due to statistics, some of them do indeed beat the odds and make money at the roulette table or the slot machines. Many of these consider this proof positive that their system works and that they will continue to beat the odds in the future.
So, what does all this have to do with personal finance? When you think about it, the answer is: EVERYTHING. The world is full of people that are convinced that they can beat the house, and that the odds do not apply to them. In Vegas they call them gamblers, but out in the real world they call them day-traders, stock pickers, house flippers and get-rich-quick scheme participants. In a town that was built on the premise that there is a sucker born every minute, you can see these people sitting by the video poker machines, or spending their money at the Craps table. They are easier to spot out here, but that person who was telling you about how his new stock pick is going to make millions, is as much a gambler as any of the ones playing the tables on the Vegas Strip.
This is just a quick post to let my regular readers know that the new Carnival of Personal Finance (#93) is now up. In fact, it has been up since yesterday. The Carnival features one of my recent posts: Retirement Survey: The Results. The post describe the very surprising results of a recent informal 401(k) survey I held among my colleagues. This survey has implications on the way our company 401(k) will change in the future.
Other excellent posts included in the Carnival are: Ten Things Your 401(k) Provider Won't Tell You (Part I). This post describes some of the problems that are endemic to the 401(k) system. I disagree with some of the points made in the article and intend to write a detailed post on the subject in the coming days. Still the post is interesting and well written. By the way, Part II of the article is already on "My Retirement Blog".
An article posted on Personal Finance Advice titled "Forever stamp - Why It Will Cost You Money" joins similar posts on other blogs criticizing the introduction of the so-called forever stamp by the USPS. Again, excellent arguments, but I respectfully disagree. Stay tuned for my post on the subject in the next few days, as I jump head first into the fray.
Sunday, March 25, 2007
A well diversified portfolio is critical to the long term health of your investments. But how do you know if your portfolio is sufficiently well diversified? While organizing my browser bookmarks this morning I came across an excellent website that helps you do just that: RiskGrades.
To use this website you need to register, but registration is free and takes about three minutes. After you register, enter your portfolio, including ticker symbols and number of shares for your various investments, hit analyze and get ready for some very interesting information.
The website gives your protfolio a risk grade between 0 and 1000, where 100 is equal to a well diversified index of global equities, but that's just the begining. It also tells you how your portfolio benchmarks vs. the S&P in terms of risk, and shows you how diversification reduces your overall risk. Next, click on the risk vs. return chart icon (small graphic icons at the top of the risk chart) to find out if your portfolio is generating enough return to justify your current level of risk. Click on the other chart icons to find out your exposure to various asset classes; to generate charts comparing your risk levels to those of other users and much more. This is a really fascinating site that you can spend a good hour on.
So, how did the Shadox portfolio rank? The risk grade I was assigned was 62 - a well balanced investment strategy according to the site. RiskGrades also tells me that our portfolio is 95% as volatile as the S&P and that diversification reduced our risk grade by 7 points. In terms of risk vs. return, every single one of our investments generated at least adequate returns for the level of risk it generates. All in all, I interpert the results to mean that our portfolio is doing exactly what it should be doing. A big HUZZZAAAHHH!
Check out this site and tell me what RiskGrades is saying about your own portfolio.
Also, if you found this post interesting, you might also be interested in the following previous posts: Are You Diversified Enough; Asset Allocation for March 2007; and Diversifying Into International Markets.
Saturday, March 24, 2007
Don't you hate it when you buy an airline ticket only to find out a few days later that the price is now a few hundred dollars lower? I recently discovered FareCast, an interesting site that offers yet another way to save money on flights. Before you roll your eyes and move on, this site offers something special. It not only tells you what the airfare is right now, it also predicts if the fare is likely to rise, fall or remain constant in the coming days. To use it you enter a pair of cities and the date on which you wish to travel and FareCast generates a customized prediction. I used the site a few times, and it seems to be working well.
If you find a flight that you like, FareCast refers you to the airline's own website, so you can still claim any frequent flyer mileage bonus the airline may offer for booking on their own site.
The site features an excellent GUI, that is both extremely intuitive and let's you make changes quickly and easily. The only downside is that currently not all city pairs will generate a fare prediction, and you can only get a fare prediction for simple two city itineraries. That will probably change in the future, and the current offering is a great start. Be sure to check FareCast out before your next trip.
Friday, March 23, 2007
We have enough credit cards. We don't need any more. So I found it pretty annoying that credit card offers kept coming in the mail by the dozen every week. In fact, not only were we getting our own offers, we were also getting credit card offers for a couple of friends who are currently living abroad and who use our address to receive mail. Credit card offers by the boat load.
About a year ago I got fed up and decided to finally do something about it. It turns out that stopping the deluge is really quite simple. All you have to do is visit this site and opt out. You can opt out online, in which case your opt out is only valid for five years, or you can opt out via snail mail, in which case your opt out is permanent (unless you choose to opt back in for some reason).
That is exactly what we did. We opted out, and the mountains of paper stopped. Well, they almost stopped. There is still one annoying segment of the credit card industry that simply will not quit: affiliate cards. Everything from my old and much despised alma mater, to store credit cards to airline credit cards. Those just keep on coming. In fact, United Airlines are the biggest culprit of all - on average we get at least 2 offers from them per week. Sometimes I will get two addressed to me by name on the same day. My 5 year old son has received more offers for credits cards from these folks than he has received birthday presents over the years.
And so the problem remains. I don't have a clue how to stop this deluge of junk from coming through the mail. At this point, I am pretty much resigned to my fate of receiving and shredding these United credit card offers on a weekly basis, but if anyone has a suggestion on how to stop this annoyance, I'd be grateful to hear it.
I have just one question: do they think that if they send me 73 offers I might open up the next one and say, "now that I got my 74th offer, I guess it is time I apply for this card?" This strategy does not seem to make sense even from the perspective of their marketing budget, but I guess it's their money...
Thursday, March 22, 2007
Regular readers of Money and Such may know that I am a member of my company's 401(k) stirring committee. Right now we are in the process of reviewing our 401(k) plan and examining offers from several different plan providers, including ING, Fidelity, Vanguard and ADP.
As a big believer in index funds, my natural inclination is to go with Vanguard. However, I recognize that I am not a typical investor, so yesterday I decided to take an informal poll among my fellow employees. My goal was to find out what their thoughts were regarding the 401(k) options that we are looking at. I discovered several very interesting facts:
1. People Don't Track Their Retirement Plan Progress - many of the people I interviewed confessed that they have only checked their 401(k) plan once. That "once" was the time that they enrolled in the plan. Whether because of laziness, because of ignorance or simply because they don't care, most of the people I interviewed expressed little interest in their plans.
2. People Either Care or They Don't Care - very few people exhibit a "moderate" level of interest in their 401(k). People tend to either max out their investments and be very involved with the plan, or they tend to invest very little and not bother with it at all. No one I interviewed spoke about a moderate level of involvement. For some reason, this appears to be a kind of all or nothing game.
3. Most People Don't Like Options - we are considering the introduction of a self directed 401(k) option, in addition to the regular menu of funds. Employees that choose this option for their 401(k) would be getting a brokerage account in which they can invest all or some of their assets as they please. To my amazement, most people said that if such an option existed they would not take advantage of it. I am guessing that the reason for this is fear. People don't know how to invest their retirement assets and are afraid to ask. Is it possible that people equate a fixed number of named options with safety?
4. Most Young People Don't Think About Retirement - almost invariably, the under 30 crowd I interviewed said that they do not invest or invest very little in their 401(k). Few, if any, even invest enough to take advantage of the company match, which is equal to 50% of the first 6% of salary.
5. No Strategy - it seemed like very few of the people I interviewed had any coherent investment strategy for their retirement assets. Some told me that they preferred investing only in aggressive, actively managed funds because they wanted to beat the market. One person told me that she basically invests in whatever her grandfather recommends, and so it didn't really matter to her what investment options we would make available.
6. Seniority is No Guarantee - one of the things that surprised me is that senior employees (Director level or above) were no more likely to have a coherent plan than were their junior counterparts. However, because they tend to be older and closer to retirement, a larger percentage of senior employees are taking an active interest in their retirement assets.
The results of this informal survey really cause a dilemma for me. On the one hand, as a relatively knowledgeable investor, I have a strong preference for index funds knowing that they would probably better serve my colleagues. Personally, I don't require a lot of hand-holding, service or training but many of my colleagues do. I also recognize the importance of minimizing investment costs.
I think that the best service I can perform for my colleagues is to ensure that they receive the training and information that would increase their odds of a secure retirement. Unfortunately, the option I deem to be most favorable from an investment perspective (Vanguard), does not offer a great deal of training and support for the employees. The option that offers the most education and hand-holding (Fidelity), is also more expensive and has limited indexing options.
I would appreciate comments, ideas, insights and suggestions from my readers. How do you think I should approach the problem?
Wednesday, March 21, 2007
Today I had my meeting with our tax preparer. The title of this post summarizes the results well. Between state and federal tax returns it appears that we owe the government a total of about $6,700. I was actually pretty shocked as this result became apparent. Our tax returns this year were very simple with only work and capital gains income, and no unanticipated items. I am still not exactly sure how this could have happened, but apparently our withholding in 2006 was substantially off.
We are taking a big hit and worse still we will need to increase our withholding for 2007, which means smaller pay-checks. Luckily both my wife and I anticipate a substantial increase in our salaries in the relatively near term. We expect these pay hikes will more than off-set the increased withholding, so not all is bleak.
Overall, not a great day in the kingdom of Shadox, but at least the stock market cooperated today and gave a nice big boost to our portfolio.
Tuesday, March 20, 2007
Cutting up your credit cards may be a good idea if you are addicted to spending, after all if you want to get over your addiction to alcohol, a good place to start would be to throw out all them bottles you have stashed around the house. However, while alcohol cannot possibly help an alcoholic recover, credit cards can help you get OUT of debt (under some circumstances). Here are three examples:
1. Free Financing - credit cards typically offer customers several weeks of free financing, provided that they pay off their balance in full. If you use a check or cash to pay for groceries, for example, that money comes out of your account immediately. If you use a credit card, you get to keep your money for an extra 25 days or so before you have to pay the piper. Assuming that your spending adds up to $3000 per month on average, if you can keep the money in a high yield savings account at 5% interest, the free financing the credit card company is giving you is worth about $150 a year. Take that $150 in interest and use it to pay down your student loans. Clearly, this only works if you do not carry a balance.
2. Cash Rewards - we use three cash rewards credit cards. Citibank's Dividend Platinum Select (we have two of those) and American Express Blue. Last year we got approximately $650 back in cash rewards. We use our credit cards to pay for virtually every expense, including childcare and even the smallest of grocery store purchases. At $650 per year in after-tax income, we are talking big bucks here. That money could go a long way towards making an extra payment on that mortgage.
3. Monitoring Your Spending - to get a handle on your spending, you must first understand what you are spending your money on. The problem with cash is that it does not leave a paper trail, so unless you keep a meticulous record of your spending it is tough to know where your money goes. Credit cards create a paper trail that you can analyze, for example by using Quicken (see: The Benefits of Personal Financial Software). Use this new found knowledge to build and enforce a budget.
Of course, the strategies I outlined above are only useful if your debts are not in the form of credit card balances. Credit cards CANNOT be used to help you get out of credit card debt. That is just common sense. However, if you have a mortgage, student loans, car payments etc. the strategies I outlined above can help give an extra kick to your debt reduction efforts.
One more thing. The three points I made above all depend on personal discipline. Some experts say people spend more when they are using credit cards, compared to when they are using cash (the pain factor). Some people cannot bring themselves to pay off their balance each month even if they can afford to do so. If you are one of these people or if you suspect that your resolve will waiver at the critical moment, forget about everything I said here. Get out your scissors and get on with the credit card cutting party.
Monday, March 19, 2007
A few months ago, before I started this blog, I got an e-mail from my old alma mater. I get much junk mail & e-mail from them, so I didn't think much of it. Unfortunately, this time the e-mail was a serious one. I was informed that my social security number and other personal information were stolen from university records, along with those of tens of thousands of other alumni. You may have heard of this incident, it was a big one.
The question that immediately came to mind was "why?" Not why my information was stolen, that much was clear. The question was why would my school retain my social security number and other personal information more than five years after I completed my MBA? I still don't have an answer to that question.
There are probably many other institutions that retain possession of my personal records. Many of them probably do so under dubious conditions and lax security. Every doctor I ever visited, every financial institution I used, my CPAs, past landlords, former employers... the list goes on and on. Thanks to California's SB1386 if your information is stolen from an organization, that organization must inform you of the breach. Of course, once you are informed the problem is yours to deal with. You are the one that will be trying to protect or salvage your credit. The irresponsible organization that caused the problem to begin with suffers no damage. Is that screwed up, or what?
So here is what I did:
1. I immediately stopped all donations to my alma mater. My new philosophy is: not a dime for the bums.
2. I put a fraud alert on my credit report. To place a fraud alert on your credit report, visit any of the three credit reporting agencies. Here is one.
In one of my coming posts I will suggest what you CAN do to prevent your information from falling into the wrong hands, but as you can see, even with diligent care there are no guarantees.
The new Carnival of Personal Finance is out. Check it out here. I am proud to say that my article titled "What is Your Market Value", won an honorable mention. Another great couple of articles you can find in the new Carnival are: "The Mistake of Market Timing" shows you with numbers why buying and holding stock is a good idea, and this article titled: "Vanguard Study on 401(K) activity" compared active vs. passive rebalancing of your portfolio. I should look into that - I admit, I don't re-balance my portfolio at all. Probably a good idea to start.
Sunday, March 18, 2007
Don't look now, but it looks like bonds are finally begining to generate some reasonable returns. An index investor such that I am, I hold the bond portion of my portfolio in Vanguard's Total Bond Market Index (NASDAQ: VBMFX).
The sad news is that over the past few years, with interest rates on the upswing, returns on this investment have been dismal. To be more specific, the average annualized returns before taxes on distributions was 3.47% over the past 3 years. The technical term: URGGHHH, comes to mind.
It looks like there may be some light at the end of this tunnel. In the past year, the fund has returned 5.93%, which is still below its 10 year average annual return, but is at least respectable. Much of this increase in returns has happened in the past two months (1.42% year to date), and with people now talking about the Fed cutting interest rates, are bonds getting ready to stage a big rally?
Who knows? Quite frankly, who cares? I am an index investor that follows a strict asset allocation straetgy. I am not buying, selling or timing the market. So why am I talking about this? Well, while I don't trade, it's still fun to think about these things and to observe the market. While I control my urge to trade, controlling my urge to talk is somewhat more difficult.
Friday, March 16, 2007
In continuation to my post from a few days ago regarding how Your House May be a Bad Investment, I would like to point out that this morning flexo publised an excellent article on Consumerism Commentary, titled "The Cost of Buying a Home Over 30 Years". This post offers a sobering look at the true value of a home as a real estate investment. Those costs are seldom looked at seriously.
I would also like to add the following clarification to my previous post. It's not that I am against real estate investments in principle. That would be a strange position to take. In fact, approximately 7% of my own portfolio is in real-estate investments (REITs).
Investing in a house (or other real estate) has certain advantages which are very hard to match for other asset classes. For one thing, it is one of the only investment types in which the average Joe can invest other people's money, through the use of a mortgage. Investing in equity through margin lending is a possible exception to this rule, but carries a higher risk profile.
In addition, for some strange reason the government is choosing to subsidize investments in real-estate over other types of investments. They are doing so by allowing individuals to take tax deductions based on their interest mortgage payments, and sheltering large amounts of capital appreciation from capital gains tax for most people selling a house. Those advantages are material to investment decisions, and should be taken into consideration.
In short, I am not saying real estate investments are necessarily bad. What I am saying is that your house is primarily your home. If it has some appreciation potential, fine. But that is not a good enough reason to make it your exclusive or even your primary invesmtment vehicle.
Thursday, March 15, 2007
I am a big fan of personal financial software, such as Quicken or Microsoft Money. Such software can make it a breeze to get your financial life in order. Here are 5 great things you can easily do using personal financial software:
- Get a complete financial picture - if you have multiple investment accounts, brokerage accounts, 401(k), 529 and so forth, getting a complete picture of your investment portolio can be a challenge. By using software such as Quicken, optimizing your portfolio as a single unit becomes a simple matter, and asset allocation becomes much easier to do.
- Create a budget - Financial software can help you to develop a budget and make sure that you stick to it, by letting you know if you deviate from your plan.
- Make Sure Your Retirement Plan is on Track - an excellent feature of Quicken is its retirement planning functionality. The software not only tells you if you are saving enough for your golden years, but can tell you how long you can expect your assets to last, and even show you the results graphically.
- Track Your Spending - how much do you spend on groceries? utilities? dining out? Quicken can tell you. AND show you a picture. Would you like to compare last month's spending on gasoline to your spending in any previous month? Easy as pie.
- Track Your Net Worth - consolidating your assets and liabilities from multiple accounts to figure out your net worth has never been easier.
Wednesday, March 14, 2007
Don't you just love it when companies pull the bait and switch on you? I mean, is there anything that makes you want to come back for more than a nice big serving of the ol' switcheroo?
This morning I went to get an oil change for my car, a 1997 Geo Prism. Yes, I travel in style. I have had this wonder machine for 8 years, and it has faithfully served me for 80,000 miles and has never seen the inside of a shop. However, now that the odometer is showing 110,000 miles this car is certainly showing it's age. It is banged and bruised, missing the front left hub cap, and sports an elegantly cracked wind shield. It is a vehicle fit for a king.
Anyway, the oil change place next to my office has an early bird discount of $8 if you bring your car in before 11:00AM. Being the stingy bastard that I am, I am always there in time to claim my discount. This morning after the mechanic finished servicing my vehicle, he did not give me the advertised price. When I complained, he told me that he was missing his "magnetic card" and therefore could not give me the $8 off. I told him that I couldn't care less, and there was no way I would pay full price. After thinking for a moment, the guy then offers me a $4 discount. Now I am really steaming. How can he offer me a $4 discount if there is a "magnetic card" problem? Long story short, I got my full discount, but the story reminded me of the countless times companies and small businesses have tried to pull a fast one on me.
Think of all the denied rebates, declined insurance claims and fine print that you have experienced, and I am sure you will agree that there is a method to the madness. Companies are knowingly and deliberately trying to deceive their customers. Sometimes they try to do so by using legal language, fine print and undisclosed terms and conditions, and sometimes they try the brute force tactic of flat-out lying, like my mechanic friend.
I have also concluded that almost invariably, if you call those deceptive companies to account, and you do so aggressively enough and loudly enough they will acquiesce and give you what they promised in the first place. Unfortunately, the problem is that often calling out these offending companies is a bigger hassle than the benefit you would get after winning the fight, and so we give up. I have been guilty of this myself on occasion. That is exactly what these crooked business people are counting on: consumers' simple hassle to benefit analysis. All they are trying to do is make it a little bit too hard to claim the prize in the hopes you will go away. Well, no more. From now on, I am making it a matter of principle to fight the good fight.
Once more unto the breach, dear friends!
Tuesday, March 13, 2007
Before you ask for a raise you must be able to answer one critical question: what is your market value? While you think the place would fall apart without you, your boss is probably thinking of you as something akin to a commodity, and as a commodity you have a market price. Figuring out what your boss perceives this market price to be, will allow you to negotiate from a position of power and to get the highest raise possible.
Here are some tools for identifying your market value:
1. Online Salary Comparison Tools - the easiest and fastest way to get a good idea of your market value is to check-out sites such as Salary.com and Payscale.com these free sites provide a great deal of information regarding salaries in your specific industry. They let you compare yourself to others working for similar sized companies, with similar background, title and responsibilities. Salary.com also offers a paid service which supposedly provides you with even more customization. I did not use this paid service so I cannot recommend it. Starting at these sites you will not only be able to benchmark your salary, but also compare your bonus, benefits and so forth to those typical in your industry. Both of these sites not only provide the average salary for someone in a position similar to yours, but also the bottom and top of the salary range.
2. Industry Salary Surveys - if you work for a company big enough to have an HR department, be aware that those groups often make salary decisions based upon industry salary surveys which they purchase from specialized consulting companies. I was recently able to get my hands on a salary survey for the Silicon Valley and boy, was that survey enlightening. Getting your hands on such a survey may not be easy. The best way may be to reach out to friends and acquaintances who work in finance or HR positions in other companies in your industry to ask if they have access to such data. This data is likely the same data that your employer is using to make salary decisions and as such it is invaluable.
3. Friends & Acquaintances - it is never easy to speak to people directly about your salary. BUT, if you have contacts you can trust in your industry (especially if you work for different companies) consider confiding in them and asking for their input on your market value. One method that I find particularly effective is reaching out to former bosses (who already know your past salary as well as your background) and asking them to estimate your market value. Another method that may work is reaching out to former colleagues from your company, and asking them what they had previously earned when working for the company. Since this is not current data, some may be willing to share the information.
4. Headhunters - headhunters are an excellent source of information, and many of them will be glad to speak with you, especially if you can do something to help them. For example, a few weeks ago I got a call from a headhunter that was looking to fill a certain position. I referred the headhunter to a great contact I knew, and then asked if she could return the favor by giving me some information. She was only too happy to oblige.
5. Interviewing - yes, this one is resource intensive and risky, but the best validation of your market worth is what someone else is willing to pay for you. If you get a written offer from another company, that is the ultimate testament to your value. Nevertheless, I don't recommend this strategy unless you are really interested in exploring opportunities with another company. For one thing, it is unfair to take up the time and resources of this new company. For another, by taking this approach you may be creating a bad reputation for yourself in the industry by needlessly interviewing. Lastly, there is always a risk your employer will find out you interviewed with another company and will react badly to this information.
Instead of guessing what you are worth and brazenly asking for a raise, base your request on facts. Find out what your market value truly is and you'll be able to negotiate from a position of power, while understanding your full range of options.
Monday, March 12, 2007
A colleague recently told me about ProShares Ultra S&P500 (AMEX: SSO). The goal of this investment vehicle is to provide investors with double the return of the S&P500 on any given day. When the S&P goes up 1% SSO is supposed to go up 2%. On days when the index drops 1%, SSO should decline by 2%.
This is an interesting concept for long term investors. Based on historical returns, the S&P can be expected to yield about 8% per year. If you believe that this trend will continue an investment in SSO or in something similar could potentially yield much higher returns.
To be precise, assuming an upwards trend of the S&P, SSO would yield more than double the return of the index due to compounding. Or at least, that's the theory, if you believe it. Here is an example: assume you invest $10K in the S&P. On day one the market goes up 1% and the market repeats this performance on the second day. At the end of day 2, you would have $10201. Assuming SSO works as billed, the first day it would go up 2% and the same performance would repeat on day 2. At the end of the second day you would have $10404. So, by investing in the S&P you gained $201, while by investing in this new vehicle you would be gaining $404. Notice that SSO gained more than double the S&P gain due to compounding. Unfortunately, the same is also true on the downside - if the market tanks, your investment will plummet like a rock.
A number of questions come to mind. First, is SSO real? Can it deliver volatility that is equal to 2X that of the S&P? This chart comparing SSO to the S&P for the past year shows that SSO clearly has more volatility. I could not easily find the beta value for SSO. Second, what does this investment vehicle cost? The prospectus (see page 8) describes an annual expense ratio of 1.5%. Pretty darn steep for an index investor like myself. The third question is how can SSO do what it claims it can do? The answer is: by using leveraged, aggressive investment vehicles. It uses futures contracts, options and a variety of other straetgies to achieve its objective. Could such strategies deliver the promissed results? Possibly.
So, what's the bottom line? Such investment vehicles are not for me. While the concept is very interesting, and could work in principal, I am going to stay out of this one. My three main reasons are: 1. This vehicle is still unproven from my perspective; 2. If you happen to start investing at a time when the market is about to decline, even modestly, you can basically kiss your assets goodbye; 3. By investing in something like SSO you are taking on MUCH more risk, for supposedly higher returns. My tolerance for risk is not THAT high, so I am going to sit this one out.
Still, I will be monitoring this asset class and will talk to my colleague to see how his investment is doing over the longhaul. For now, it's simple, boring index funds for Shadox.
My recent article on why Your House Can Be a Bad Investment was featured in the Carnival of Personal Finance #91 on The Sun's Financial Diary.
Other great articles featured in the Carnival include: this great primer on index investing from Surfer Sam, and this article suggesting ways to deal with denied health care claims.
Sunday, March 11, 2007
Daylight savings time is a great thing. I love the fact that I can pick up my kid from preschool at 6:00PM and still be able to play with him outside for a couple of hours. The benefits of daylight savings time are many, and I don't know too many people that object to the concept. However, what I do object to is the fact that this year DST came almost a month early.
I love sunlight as much as the next guy, but the amount of money and effort that went into shifting to DST early this year is crazy. For example, in my small office, I received at least three separate e-mails from out IT department informing the team how to download and install patches to adjust the clocks on both Outlook and XP. I also received a call from AT&T, my cellular operator, explaining how I should download and install a patch to adjust my smart phone. On top of that, I heard on the radio that many hotels use automated systems to send wake-up calls to their guests, and that such systems, if not updated in time, would wake guests an hour late. Think how much it must have cost us collectively for all these changes to be made. That's not even counting the cost of all the missed meetings, missed flights (for lack of wake-up calls) and frayed nerves that will be suffered in the next few days.
If this is the last time DST is changed, so be it. As I said, I like the extra month of evening sunlight, but we all know that Congress cannot let things be, so I say to our big wigs in D.C.: pick a date and stick with it.
Slightly off topic, but I thought this needed to be said. Tomorrow we are back to good ol' personal finance.
Saturday, March 10, 2007
Periodically, I will be posting our portfolio's current asset allocation. Here is how we are investing our portfolio as of today:
This allocation does not include our emergency cash reserves, and does not include our 401(k) plans. However the allocation in our 401(k) plans is similar to that of the rest of our portfolio from an asset class perspective.
Note that our exposure to international markets is currently approximately 20%. My goal is to increase this exposure to about 25% within one year. This added exposure will come from the current cash allocation in the portfolio. See my previous post "Diversifying into International Markets" for a discussion of why I believe this is the right strategy for us.
Our exposure to the real estate market is about 7% of the portfolio. While this asset class has yielded impressive returns over the past 3 years, and I think it is due for a downturn, I will keep exposure at current levels since as a percent of the overall portfolio this asset class is properly weighted in my opinion.
The total return on this portfolio since March 2006, was 11.4%.
Thursday, March 08, 2007
My personal asset allocation goal is to keep approximately 25% of our assets in international stocks. With the recent correction in many of the international markets, I think that now may be a good time to slowly increase exposure to this asset class.
To make it clear, I don't advocate playing the Chinese stock market, nor dumping your nest egg into Brazilian penny stocks. While I believe that emerging markets offer some attractive opportunities in the long run, many emerging market stocks have seen oversized returns in recent years, and may be ripe for some bumps and bruises. No, when I talk about investing in international stocks, I am talking about indexing. My chosen international index is Vanguard's Total International Stock Index (NASDAQ: VGTSX). I picked this fund for its broad diversification: it holds shares in Vanguard's European, Pacific and Emerging Markets indexes, which together give me exposure to much of the global economy.
I am a proponent of international investing for a number of reasons: first, international diversification helps to mitigate single country risk. For example, if the U.S. economy falls into recession, it is likely that other global economies will continue to chug along, thus dampening the impact of U.S. stock market declines on our portfolio.
Second, it is well established that emerging market economies tend to grow at a faster rate than those of developed countries. Companies that invest in those economies have a better chance of seeing a faster profit growth and faster stock price appreciation. Of course, emerging markets are a higher risk investment as they are more prone to cycles of boom and bust (remember the Russian default? the Thai economic meltdown? etc.)
Third, with the growing trade deficit and with the Federal budget deficit, I think it likely that the dollar will continue to decline against world currencies. By investing in foreign stocks, or at least in companies that obtain much of their income in foreign currency, I am protecting us against the adverse effects of a weak dollar. As the dollar falls, an investment denominated in foreign currency will be worth more in USD.
I believe that any well balanced portfolio should contain a healthy dose of international diversification. However, it is important not to over do it, since with the potential for higher returns come bigger risks and a potential for some additional sharp corrections after the rapid stock price increases in recent years. Additionally, if you are thinking of investing in international markets, make sure you are doing it for the right reasons. That is, do not try to chase hot international funds in the hope (or delusion) of striking it rich. Rather, if you invest internationally, do so for the added benefits of diversification and exchange rate risk protection, and be prepared for what may be a bumpy ride.
Wednesday, March 07, 2007
I have been a loyal Netflix (NASDAQ: NFLX) customer for several years now. During some months we rent our money's worth in movies, other months we have three unwatched DVDs lying by the TV screen. Many times I thought about cancelling the subscription and saving about $250 per year. All this changed recently when Netflix introduced their "Watch it Now" Feature.
This new feature allows subscribers to watch high-quality streaming video on their computers. Even better, the service is free to subscribers. You simply go to your account, click on the appropriate tab, select the movie you want to watch and voila. At this point, many readers are probably thinking I am out of my mind. Who wants to watch a movie on their computer when they can pop a DVD into the player? That's exactly what my wife said. Well, the trick is that you can watch streaming Netflix movies whether or not you are at home, and whether or not you have access to a television.
Yes, I am cheap. Always looking to save a buck when I can, especially when very little pain is involved. As someone who travels on business fairly regularly, I often find myself bored out of my mind in some hotel room somewhere, and until recently my options were few. One of those options was to rent an over-priced movie from a very limited selection on the hotel network. Well, no more. Now if I have my laptop (which I always do) and I have a high-speed Internet connection (ditto), I have a huge library of movies to choose from. I figure I probably save $20 per month on hotel video rentals. This means that Netflix just paid for itself.
The service is not perfect. While Netflix has a fairly wide selection of movies on the service, the library is limited compared to Netflix enormous film library and few new releases are made available for streaming. Still, there is plenty to see and I am sure new content will be added to the service over time. In the meantime Netflix is saving me money and in the process they are retaining a very satisfied customer.
Tuesday, March 06, 2007
It is widely known that paying the sticker price on a new or used car is for suckers. Haggling is the norm. Haggling can get you a better rate on your credit card, on your long distance rate and on your cable bill. Recently my wife and I got a 30% discount on our new mattress by haggling. The sad news is that we could probably have gotten an even lower price, darn it.
BUT, and I may be the only sucker left on the planet, I never realized that you could get a lower price on your flights by haggling with the airline over the phone. I am writing this post from South Carolina where I am currently on a business trip. Earlier this afternoon one of my colleagues needed to change his flight itinerary. After checking Orbitz and finding a price of $1,050 for a one way flight back to California, my other colleague suggested that he give United a call to check his options.
I was amazed when after a brief call with the customer service agent my colleague was able to get the same flight, with the same connections for $700. That's a 33% discount, just for making a call. My colleague that suggested this wildly successful tactic says that he successfully used it many times in the past. Granted, we are all Premiers and Premier Executives on United, and my friend told the United agent that a similar flight on Delta was much cheaper, but still... 33%? And here I am buying on Orbitz, Travelocity and Expedia for years and thinking I am getting the best deal.
My colleague also suggested that if calling the airline does not work, you should simply hang up the phone, dial again and try your luck with a different agent. According to my colleague, two or three calls usually do the trick...
The conclusion: no price is ever fixed. From now on I intend to start asking for a discount wherever I go. I am not quite sure this strategy will be successful at the local supermarket, but hey, I thought there was no chance to get a discount from United either.
Monday, March 05, 2007
Like it or not, your house is a bad investment. "Heresy!", you say. Maybe, but here are my reasons for making what many would consider an outrageous claim.
1. A House is a Large Undiversified Investment - most sane investors would shudder at the idea of investing 80% of the portfolio in a single stock, even if that stock is the bluest of blue chips. Yet many Americans have absolutely no qualms about not only investing all of their assets in a house, but also taking on large, often excessive amounts of debt. Many do so because they believe that their house is the best and safest investment available. Wrongo. If it's not yet clear, housing prices can and do go down. You may have seen this graphic from the NY Times, but I think it makes the point that investing in a house has not been a great strategy over the past century. You want to invest in real-estate? Diversify and buy a REIT index (NASDAQ: VGSIX).
2. A House is not a Liquid Investment - If a stock disappoints you, you sell it. The whole process takes you 30 seconds and costs a few dollars in fees. However, as many people around the country are currently finding out, selling a house can be a long, arduous and expensive process.
3. You Never Really Cash-Out of a House - if a stock has a nice run-up, you can easily realize your gains and walk away. If you live in your "investment" you never really cash-out, and so the higher value of your asset will not increase your standard of living. In fact, if you want to increase your standard of living by moving to a bigger, nicer place you will probably find that its price has also increased and more so than your own house (since the new house was more expensive to begin with). Conclusion: for most people house appreciation does not translate into real wealth.
Of course there are exceptions to this argument. For example, if you are willing to move to a smaller house, or you are willing to sell your house and rent, your house's price appreciation will translate into a real increase in your standard of living. Similarly, if you move from a high cost market, such as California or New-York, to a lower cost market, such as Texas, you can also gain from price appreciation. However, that is not the case for most people.
4. Opportunity Costs - many say that renting a house is like throwing away money. After all, at the end of the month you have nothing to show for your payment. This argument is false. By paying rent and not investing in brick and mortar you are able to take your investable assets (such as those you would have used for a down payment) and invest them in alternative investments, e.g. the stock market. Given that mortgage payments tend to be higher than rent, the opportunity cost of investing in a house is considerable and grows over time. Tax considerations may change this equation, especially for people in higher tax brackets whose mortgage deductions can translate to larger tax savings.
So, do my arguments mean that you should not buy a house? Far from it. A house is an investment, of sorts, but it is much more than an investment. It is a place to live and a place to call home. Humans are emotional animals and we need to be emotionally invested and attached to a physical location. My real point is that the cult of real-estate investment and home-ownership is over-zealously promoting itself. Sure, for many it makes financial and emotional sense to buy a home. For many others it would make more sense to invest their money elsewhere. Your house is your home, not an investment, and that's the right way to think about it.
Saturday, March 03, 2007
I don't. I hate tax season. It's not so much that I am worried about whether we will need to pay outstanding taxes, although this year there is a good chance we will find ourselves caught in the AMT net, it's more the hassle of it all. I am a fairly organized guy, and I have all of our financial records but there is always SOMETHING.
Last year for example, E*Trade sent us 3 separate 1099s. This year they sent us none, and it's only today that they finally posted a digital copy of our 1099 on the web. If it's not E*Trade it's something else, but there is always something. Somehow, I always get to the beginning of April before the whole tax situation is straightened out. On occasion, I have been known to stand in the huge line at the post office on April 15th. Seriously, I hate tax season.
Every year I consider doing our taxes myself. In the past we had some tax complexities that required a professional, and so for the past 8 years we have been using an accountant. These days the situation is pretty straight forward (minus the possible AMT fiasco) and I could probably handle the task myself. However, I will probably give our good ol' accountant a call.
The way I see it, I am a business professional. I deal with complex business issues, manage a team, own a budget. That's my specialty. I don't know nearly enough about taxes to make me feel like I am the best man for the job. Yes, I could save $300 but I could probably save that much money every year by cutting my own hair. Thankfully, so far I have chosen to go the more expensive route there too.
I guess it is a combination of apprehension, laziness and the comfort of knowing that I am paying someone else to keep me out of trouble that make me go back to the accountant every year. This year will doubtless be the same. But you know what? For $300, it's totally worth it.
Would love to hear from you on this issue. Am I being a wuss?
Friday, March 02, 2007
Yesterday I got a check for $87 from my credit card company. This was my cash back reward for using my CitiBank Dividend Platinum Select card. I just love to have the credit card company paying me for a change.
This card gives you 2% cash back on supermarket purchases, gas, utilities and the like, and 1% cash back on everything else. My wife and I both have one of these cards, and for the past two years we maxed out the rewards at $300 per card annually. That's a total of $600. Pretty nice for doing our grocery shopping. Payment is delivered via check in increments of $50 or more, upon request, at any time. As an added bonus, I use this card to pay my reimbursable business expenses, which adds a nice little kicker to those expense reimbursement checks.
Believe it or not, this card used to be even better until last year. It used to be that the card paid 5% on supermarket purchases...
We also carry an American Express Blue card, which has some cash back features, and no limit on the amount of the cash back you can earn. Unfortunately, that card only gives cash back once a year and then in the form of a credit to the account. I like checks better.
These cards work very well for us. Of course, we never carry a balance. Carrying a balance on these cards would be pretty expensive and not a very wise move.
Thursday, March 01, 2007
The stock market has been jittery in recent days. If you are investing for the long term that should mean very little to you, but of course no one that has a sizable stake in the market can resist the temptation to check the daily stock quotes and fidget when a nice chuck-o-change disappears in a puff of smoke. Myself included.
It's days like these that remind us all of the importance of portfolio diversification. I remember well the days back in 2001 when I bought into the NASDAQ 100 ETF (NASDAQ: QQQQ) and considered myself well diversified. Well, I have learned the error of my wicked ways: the fact that you own an index or two does not mean that your portfolio is adequately diversified, especially if said index covers only one sector or industry.
Incidentally, my ill timed purchase into the QQQQ was at $67 per share, and came after the NASDAQ dropped from its fictitious 5,000 point level all the way to 2,700. I thought I was getting a bargain for sure...
The benefit of diversification comes from the fact that different assets and asset classes tend to not move in complete lock-step, i.e. when one stock goes up, another may go down, thus off-setting the gain or loss and reducing overall portfolio variability and risk. If you were in the market on Feb 27, 2007 you could not help but notice that virtually ALL stocks went down that day. So much for diversification? Nope. It turns out that it is not enough to be diversified across multiple stocks or even stock indexes. You also need to be diversified across asset classes. While stocks crashed down to earth on Feb 27th, bonds soared.
Stocks and bonds are not the only asset classes out there. For example real-estate and commodities are other asset classes into which one can diversify. These too do not move in tandem with the market. In fact, for much of recent history, investments in real-estate had little correlation with the over-all stock market. To see for yourself, compare the performance of the Vanguard REIT Index (VGSIX) to that of the S&P500 Index.
In addition to diversifying across asset classes, diversification across geographies is also key. Since U.S. equity markets tend to act in unison, investing in foreign markets can reduce risk even further.
Of course, there are some days when everything across the board, whether U.S. or international, whether gold or real-estate all come tumbling down. Those days are known by the technical term "really crappy days". These days are the exceptions that prove the rule: diversification is the corner-stone of every good portfolio.