Friday, October 31, 2008
We had multiple reasons, but the biggest of these was that my wife was simply unhappy with the long hours she needed to work. We have three boys, and I am an executive in a technology company and my job too requires me to work long hours. This meant that to get her job done, my wife had to fire up her computer every night after the kids went to sleep and had to regularly work several hours every weekend, just to get by. After working about 60 hours a week, my wife's boss had nothing but complaints about the fact that my wife wasn't working enough. While the company my wife worked for has amazing prospects and is bound for greatness (once the economy turns around), they demand 100% of their employees' time. Here's an interesting example: once a month my wife was required to join an internal sales call which started at 5:00 AM pacific - the goal was to allow the East Coast sales folks a full day of work. A worthy goal, but an example of the single minded focus on work hours and productivity at this company.
The way we saw it there were really only two options: (i) work even longer hours, jeopardizing my ability to do my job, sacrificing more time with the kids and continuing to be exhausted and unhappy; or (ii) quitting. In my opinion keeping the status quo was not an option. My estimate is that the 60 hour work week was not sufficient to allow my wife to keep her job, and ultimately she would have been let go.
If you realize that you will not be able to excel in your position and attain your life goals at the same time, you must accept the logical conclusion that the position is not for you. At that point it is time to think about a graceful exit strategy.
The end of the story (or at least the story so far) has been better than expected. When my wife resigned, she gave the company an open ended advance notice, telling them that she will be glad to stay until they found a replacement. The company decided that a three week advance notice would be sufficient to find a replacement and my wife's final day at work was set for October 7th. However, when that day arrived, the company asked to extend her employment until the end of the week, and when that new date arrived, my wife agreed with her boss that she will remain at the company as a part time consultant, indefinitely.
What does this mean? About half the pay for about half the work, but with no benefits and no stock options. All in all, this is a fine arrangement for us for now. In this current economic environment finding another job is not a simple thing to do and it is likely to take many months. With this part time consulting, my wife has more time to be with the kids. She is also much more relaxed and happier, and now that her work is paid on an hourly basis, her relationship with her boss, and her boss's expectations have improved dramatically. All in all, this has probably been the right thing for us to do, and my wife's happiness is more important to me than anything else.
This has certainly been a difficult, and somewhat scary decision, but it was the right decision to make. In the long run, I am guessing that my wife's position is not secure. It is entirely possible that she would lose her consulting gig upon a day's notice. But for now, this gives us more economic flexibility and at least a little more security.
Wednesday, October 29, 2008
Monday, October 27, 2008
"Most insurance companies are financially sound but have seen their long-term investments and stock prices fall in value. Some have holdings of riskier alt-A and subprime-mortgage backed securities. Insurers have suffered losses in bond and preferred-stock holdings from the collapse of companies including Lehman Brothers Holdings Inc. Insurers also have been hit with billions of dollars in unrealized losses as corporate bonds of all stripes suffered big declines. Low interest rates have damped interest income and a prolonged economic slump could dent the variable-annuity business and even hurt sales of core life-insurance policies.Insurers would normally tap capital markets to raise money. But many are loath to attempt selling common stock because their share prices have been so battered. That's one reason many insurers have been pushing the expansion of Treasury's equity-stake program to raise capital."
Saturday, October 25, 2008
MoneyNing wrote a good post about how some mighty big investors are not panicking even though many of them have lost hundreds of millions of dollars. He thinks that the primary reason these guys aren't freaking out is that they don't need the cash in the near term. I speculate that the real reason for the lack of big investor panic is that money has a “diminishing marginal utility”. What I mean by this is that your first $1,000 a month is very important because you use it to buy food and shelter; the next $5,000 a month are also important to you because you use it to ensure you have a decent lifestyle and save some money for a rainy day… after a while… say your $10,000,000 or so (maybe its $100M - what do I know) - money sort of loses its importance… I mean, these guys couldn’t spend all their cash if they tried… so I think that the small guy who lost much of his 401k savings in the market is feeling much more pain than the tycoon who is technically losing MUCH more money…
The Digerati Life is cheering for the U.S. economy, saying that we are still #1 and things aren't all that bad. I tend to agree that things are not as gloomy as some make them seem. I mean, if you walk in the streets, folks are still out and about, dining establishments are full and most of us (still) have a job. This is, in fact the point that Frugal Zeitgeist is also making.
American Consumer News had a post this week warning folks to watch our for nasty health benefit cost increases as their health insurance plan comes up on its annual "open enrollment" season - also known as "let's screw the consumer annual fiesta". With changes effective in November, our medical plan is going to have much higher co-pays for most procedures. The really annoying thing: my company is not the one cutting benefits - they are still paying just as much for coverage, but the cost of health care coverage in this country is inflating out of control. This is definitely something the next President should address as a high priority.
Friday, October 24, 2008
Thursday, October 23, 2008
"The VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange. It is a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of the S&P 500 index over the next 30 days."So what does this gobbledigook actually mean? Let's talk about options for a second. An option is a contract between two entities to buy or sell a certain security, for a certain price, a certain amount of time in the future. Now, let's say that the value of the S&P Index today were 1,000 (we wish), and the two of us make a contract that will allow me to buy the index from you 30 days from today at a value of 1,200 points. Clearly, this contract is not good for me today, since I could buy the index on the open market for 1,000, but maybe I am thinking that the value of the index could be at 1,300 next month and at that point buying it from you at 1,200 would be a discount that would allow me to make money. Now, you are thinking the same thing. You know that there is a chance you will lose money on this deal we are making if the value of the S&P will rise too much, so you demand a price for selling me this "option" that compensates you for the risk you are taking, and naturally, you will demand a higher price if you are thinking that you are taking a larger risk.
"The VIX is quoted in terms of percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, on an annualized basis. For example, if the VIX is at 15, this represents an expected annual change of 15%; thus one can infer that the index option markets expect the S&P 500 to move up or down over the next 30-day period."
Tuesday, October 21, 2008
Sunday, October 19, 2008
Friday, October 17, 2008
Thursday, October 16, 2008
A colleague sent me the following investing strategy yesterday, and I figured I would share is with the world. Seems reasonable to me:
If you needed an excuse, you got one now...
"If you had purchased $1,000 of AIG stock one year ago, you would have $42 left. With Lehman, you would have $6.60 left. With Fannie or Freddie, you would have less than $5 left.
But if you had purchased $1,000 worth of beer one year ago, drank all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have had $214.
Based on the above, the best current investment advice is to drink heavily and recycle.It's called the 401-Keg..... "
Wednesday, October 15, 2008
We are all familiar with the old cliche: "give a man a fish and you feed him for a day, teach a man to fish and he will eat for a lifetime". That's all nice and well, but the man still needs to acquire a fishing rod to do his fishing. Without capital, impoverished individuals, be they the most enterprising and entrepreneurial individuals in the world will find it very hard to lift themselves and their families out of poverty. Enter capitalist charities. The goal of these amazing organizations is to lift people out of poverty permenantly by giving them or helping them to get their own "fishing rods". Here is a spotlight on three of these amazing institutions:
Grameen Bank - the first and most famous of these institutions, Grameen Bank specializes in micro credit. Lending tiny amounts of money to the poorest of the poor, who use these loans to start and grow businesses. Grameen Bank (or actually, I believe it was its founder, Muhammad Yunus), won the Nobel Peace prize for its work.
Heifer International - what if instead of giving money to the poor, we gave them a producing asset? That is the philosophy behind Heifer International. This institution gives its recepients livestock - for example, a cow or water buffalo, and they, in turn, must give the off-spring of the animals to other recepients.
Kiva - this organization allows individuals to get into the micro financing business. You can make micro (and I really mean MICRO) loans to individuals in need around the world, after reading their stories and plans for the money they receive. My wife has been using this site to contribute money to several projects in multiple countries. None of the loans has defaulted so far.
Who says capitalism and social causes don't mix?
Tuesday, October 14, 2008
Monday, October 13, 2008
Investor A - my brother in-law - an MBA, executive in a large (and stable) bank, and an extremely conservative investor. After years of holding their entire portfolio in money market accounts and short term CDs, my sister and brother-in-law have decided to put their money into the stock market... and now, of all times. My brother-in-law feels that the stock sell-off is way over done, and that this is a very good point in which to finally get into the market for the long term.
Investor B - President and General Manager of a $50M Silicon Valley high-tech company. As of Tuesday of last week, this high powered executive does not have a single red cent in the stock market. He fears that the economy is completely disintegrating and that additional steep declines are in the cards. He thinks that the damage to the stock market which will happen in the next few months will take five years of investing to undo. So far, this week, he certainly lost less money than I did.
Investor C - a former colleague and mid-level marketing manager. This gentlemen is going "all-in". Not only is he continuing his investment strategy, he is upping the ante and investing in a fund that is supposed to double the returns of the S&P, both up and... down. ARRRGGHHHH... the sheer terror of it...
Three investors, three very different approaches all with one thing in common - they are each responding to perceived market conditions. These investors each changed their strategy based on the precipitous drop in the market. In each case the motivation is either fear or greed.
I have chosen to stay the course. So far, and especially this week, this has been a gut wrenching experience. However, I gotta believe that if the strategy is fundamentally sound, there is no reason to change it. Once again, I will stick to the plan. Come the 15th of the month, I will make my regular monthly contribution to our stock portfolio, while keeping a barf bag close at hand.
Saturday, October 11, 2008
First up, take a look at this very interesting presentation from Sequoia Capital - one of the most respected venture capital firms in Silicon Valley. The presentation explains the causes for the economic crisis as well as some of the likely outcomes and possible impacts on technology companies. Very well done.
My Financial Journey came out of semi-retirement to say that if the world is coming to an end, he is going out fully invested... :-) I share the sentiment. I think there are at least 8 of us left, worldwide.
Five Cent Nickel wrote a post about one of my favorite topics these days: reducing debt. Seriously, if at this point you are carrying much debt, and you are not working for a completely recession proof entity, such as Uncle Sam, than you must be out of your mind. Living below your means is rule #1 in tough economic times.
My friend Frugal Zeitgeist is wondering about second order economic problems - what happens when parents or kids get into financial trouble, just when you are facing the squeeze yourself. My philosophy is that families should always stick together and help each other out in tough economic times.
Plonkee has some solid tips for career development. At this point most people are just thinking about not getting laid off, but Plonkee's ideas about developing new skills and making sure that you are marketing yourself correctly are useful for those who want to avoid the ax as well as for those seeking growth.
Hey - it turns out that some people are writing about things other than the economic meltdown. I didn't know that this was still legal... well, Lazy Man has a great post about the worst gifts he had ever received. Our worst gifts have got to be some of the things we got for our wedding. Someone got us an oil painting that they did themselves and which was pretty abysmal. You know what? It is NOT only the thought that counts, people.
Finally, Lynnae of Being Frugal had a great post about how to be frugal while traveling. These days, with airlines nickel and diming you for everything, planning ahead can save you a lot of cash.
Friday, October 10, 2008
Which is why, for the first time since 1999, credit card borrowing is down. Take a look at this CNN article on the subject, but here is the punch line:
That's actually quite impressive. You see? It looks like when it comes right to it, the American people can actually reduce spending. However, under the circumstances I am not clear whether this is folks being fiscally responsible; people simply running out of cash; or credit card companies reducing credit limits. The outcome appears to be positive, but I am not quite sure if the motives are completely healthy or not.
"The annual rate of consumer borrowing fell 3.7% last month. Credit card borrowing decreased at an annual rate of 0.8% while non-revolving borrowing, including student and auto loans, contracted by 5.4%."
The news is not all good though... (actually, there is very little good economic news these days, but you get my meaning). With two thirds of the economy powered by consumer spending, the fact that people are reducing spending will no doubt reduce growth and will hit the economy that much harder. However, if that's what it take to make us realize that we have to live within our means as a nation, than it's probably about time that we learned the lesson.
So what's the right way to deal with credit cards in a time of crisis? Actually the right method remains the same in good times and in bad. Here are the rules my wife and I live by:
1. Pay it off - every month, no exceptions!
2. Essentials Only - If you know you'll have trouble paying off your card, buy exactly zero non-essential items (and that new computer or sofa are not essential).
3. Track Your Spending - make sure you know where every penny went and why.
4. Get the Right Card - since we pay off our cards every month, it makes sense for us to carry cash-back reward cards - which last year generated about $1,000 in income for us. If you are going to carry ANY balance at all, you should probably find the card with the lowest interest rate available. Forget about rewards.
5. Keep Some Credit Cards - some personal finance bloggers are dead set against credit cards. They maintain that there is no such thing as a good credit card. I disagree. At the very least, a credit card can serve as a last line of emergency access to capital, when more reasonable options are unavailable.
If you are looking for a new credit card, fair credit cards may be a good place to start your search:
Wednesday, October 08, 2008
Monday, October 06, 2008
The thing about retirement savings, 401(k)'s, IRAs and their ilk is that you only draw down on your savings in... retirement. And in your case, retirement is decades away, while all the stocks you will be buying just went on a very big sale (and may even go on clearance in the near future).
Yes, the market is down, but if your investment horizon is truly far in the future, that is completely irrelevant for you. When thinking how to allocate your savings, don't worry about what your stocks may do tomorrow, next year or even five years from now. All you need to care about is the very long term.
The bottom line is that if I were now starting to plan my retirement savings strategy, I would go pretty aggressive and put 100% of my money in stocks - at least for the first few years. Even now, although I am 37, my investment horizon is still far in the future. I don't plan to retire until I am about 60 and so my investment stance is still very aggressive. My 401(k) asset allocation is 80% stocks (of which approximately 50% are international stocks), 10% real estate and 10% bonds.
What I am trying to say is: rejoice young folk! The stock market is on sale! Come in droves and bring your friends! You'll thank yourselves later.
Friday, October 03, 2008
Thursday, October 02, 2008
Yesterday the Auto manufacturers, including GM, Toyota and Ford announced massive drops in their year over year sales (16%, 32% and 35% respectively). Why is that? Partly because sensible folks who are worried about their jobs don't want to spend large amounts of money in a tough economic environment. Another reason for the decline is that many who wanted to buy a car could not get credit to do so, because our credit markets have ceased to function. Now let me ask you a question: how long do you think that car dealerships without sales remain in business? Are car dealerships main street enough for you?
Wednesday, October 01, 2008
I have responded to Florin's question in a private e-mail, but I think that this is an excellent question that is probably of interest to other readers, so here is a more detailed version of the answer I sent him:
I've recently come across your blog and I'd like to say that I enjoy it very much. I do not work in the finance / accounting field so I am not very knowledgeable when it comes to personal finance. I am trying to correct this by trying to read as much as I can about it and usually I rely on the "... for Dummies" kind of books.
Anyway I'd like to ask you about a topic which still seems very confusing to me.
It's about expense ratios.
I read one of John Bogle's [founder of Vanguard - shadox] books on investing and I am totally sold on investing in low expense ratio index funds. So low expense ratios are good - that I know. But what exactly is an expense ratio? Is a 12b-1 fee included in an expense ratio?
You give an example in one of your posts: "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!
The question I have is, what happens if your fund's yearly average return is negative: does money still come out of your fund to pay the expense ratio? If yes, how much? Thank you very much for your help."
First of all, most of us aren't investment advisers and don't work in the financial sector. Since personal finance is not typically taught in school most of us are left to fend for our selves and come up with our own ways of getting the information we need. Your strategy of educating yourself by reading books is certainly an excellent way to go. I do the same.
So, what are expense ratios anyway? The SEC defines expense ratios as follows:
"Expense Ratio — the fund's total annual operating expenses (including management fees, distribution (12b-1) fees, and other expenses) expressed as a percentage of average net assets."OK... so what are 12b-1 fees? From the same source:
"12b-1 Fees — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing shareholder services. "Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. "Shareholder Service Fees" are fees paid to persons to respond to investor inquiries and provide investors with information about their investments."So to put all this in plain English, a fund's expense ratio includes all expenses paid by an investor to the mutual fund including any associated marketing expenses (but you may still be paying other fees to your broker or financial firm - for example, for buying and selling your fund shares).
Unfortunately, the only entity who is guaranteed a return on your investment is your mutual fund company... :-)
Still, that's not a reason not to invest. It is a reason to minimize your costs.