Friday, October 31, 2008

Now May Be a Good Time to Quit Your Job

Quitting your job in this kind of dismal hiring environment seems like a horrible career move at best and as an irresponsible financial move at worst. Nevertheless, about a month ago, just before the worst of the financial meltdown hit the fan, my wife and I decided that it was time for her to do just that, and without having a back-up job offer on the table either. Why would we ever do such a thing?

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

Save More by Using Your Credit Card

While consumer confidence reached an all time low last month, it seems like Americans are finally figuring out that paying down debt and saving more is the way to go, especially in tough times. Having said this, you might be surprised to hear me say the following: my wife and I make a conscious effort to put every dime we spend on our credit cards. No, we're not debt fiends. In fact we never carry a balance and we pay down our cards every single month. The logic here is very simple: we do this for the rewards. Over the past 12 months we got approximately $1,000 in cash back from our AmEx Blue and our Citibank Dividend cards. That's $1,000 tax free, and that's also what I call one of the very few free lunches you can find out there.

I first got acquainted to rewards credit cards in 1997 when I saw my father-in-law use a card that gave him a 5% discount on his gas, provided he filled-up at Shell. "Wow, that's pretty nifty", I thought to myself (I still use words such as "nifty" sometimes in my head, never out loud though...). Little did I know that there were even better deals out there. Our current favorite card is the AmEx blue - to date, we haven't found a card that offers a better deal. Also, since we have had it for several years now, our credit limit has grown to a level where we can pretty much use the card for everything, including job related expenses and travel, and not worry about exceeding the credit limit. That makes things pretty easy.

Anyway, even today you can still hear (and read) passionate arguments about whether cash back credit cards or the humble gas credit card is superior. Personally, I'll take cash any day of the week, but the point is different. As Americans are starting to adjust their financial lives to the new and gloomier economic reality, rewards credit cards can play a major role in boosting people's savings and helping them improve their balance sheets. Of course the key is to NEVER carry a balance, or else your financing fees will far outweigh any rewards your card offers.

Monday, October 27, 2008

Is Your Life Insurance Company Stable?

This question never occurred to me in the context of the current economic tumult. When I got my life insurance policy I checked the status of my company - Protective Life - with all the rating agencies, but it never occurred to me that there might be a reason to revisit the issue in light of the market turmoil. Well, the Wall Street Journal ran an article this weekend saying that some life insurance companies are seeking federal bailout funds. Which leads me to ask a couple of important questions: (i) how would a life insurance company be impacted by the financial crisis? (ii) is my life insurance company safe?

With respect to the first question, here is a quote from the WSJ article:
"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."
With respect to the second question, I went to Protective's website and checked their current agency ratings, all of which appear to be excellent. However, when I ran a Google search on recent changes to the ratings, it appears that a couple of agencies are re-examining Protective's ratings for a possible downgrade. So, while it doesn't look like there is any imminent danger, this is a situation that I will be monitoring in the coming months. I mean, if there is one thing you absolutely want to be certain about it is that your family's financial future is 100% secure if the worst case scenario comes to pass.

Saturday, October 25, 2008

Recommended Articles

Here are some of the interesting personal finance articles I read this past week:

NPR featured a good interview with Vanguard founder John Boggle in which he reiterates his investment advice: don't panic and make rash decisions; and invest in index funds. 

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.  

Here's a good one - Moolanomy has a piece about recency bias - our tendency to look at recent history as if it is representative of reality. For example, people's tendency to assume that real estate is a sure fire investment and will never go down on a nationwide basis, back in real estate bubble times. A similar, but somewhat more insidious bias is our tendency to extrapolate current trends into the future, indefinitely. E.g. just because the stock market has been taking big hits every day for the past few days, does not mean that all stock investments are worthless...

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.

Finally, my favorite for the week: JLP of All Financial Matters wrote a post that I agree with completely - way too many people claim to be victims in this financial crisis. The vast majority of these are not victims they simply think that they should be protected from the consequences of their own financial decisions. Being an idiot doesn't make you a victim, it simply makes you... an...errr... idiot.

This week I participated in the Carnival of Money Hacks, check it out.

Friday, October 24, 2008

Economics from the Coffee Shop

The other day I went with a couple of colleagues to grab a cup of coffee at Starbucks - actually, they went to grab some coffee and I tagged along - for one thing I am not a big fan of coffee, for another $4 coffee seems even less tasty to me - but I digress. I didn't know this, but apparently Starbucks is now in the publishing business and they had a little free hand-out titled "Good - The Economy", which offered a whole bunch of factoids about the economy. I figured it would be fun to bring up a few of those factoids and comment on them a bit, so here goes:

"In 2000, the median American family made about $61,000. In 2007 it made $60,500 (both numbers in inflation adjusted 2007 Dollars)" - this brings up a couple of interesting points. First, the George W. Bush years have been really grand for the typical American haven't they? Note that the statistic is talking about the median, not the average. I have no doubt that on average we are better off, it's just that the economically weaker members of society have been getting a real lousy bargain from the current administration.

"In 2007, the median annual income for Americans aged 65 and older was $16,770." - do you need a better reason to start planning for retirement?

"43% of Americans households spend more than they earn annually" - wow! Surprisingly, this statistics is very well correlated with the fact that 43% of American households are complete financial morons... before you judge me harshly, I am sure that there are some folks who have it really rough, and that due to circumstances beyond their control must move deeper and deeper into debt to survive. But 43%?! Most of these folks simply feel that they deserve a richer lifestyle than they can afford. It's those Venti Lattes and fancy cars. Here's a thought: if you don't have it, don't spend it...

"The average American household has $8,565 in credit card debt, which is 15% higher than it was in 2000" - the really scary thing about this statistic is that there are many of us responsible adults who do not carry a credit card balance at all, so those that do carry a balance have, on average, an even bigger debt load that they are serving.

"Approximately 42% of American households lack enough liquid assets to support themselves for three months" - I have a feeling that the current downturn is making many people re-visit their lack of financial preparedness. Let's hope that they are able to get themselves in financial shape before economic disaster strikes.

I don't know about you, but I find these statistics to be really discouraging. It seems like folks either don't know what they are doing, don't care about consequences or are simply unable to get themselves in shape. I believe that ignorance is the most probable culprit, but I am not sure most people even realize that their financial situation is a problem. Read personal finance blogs people!

Thursday, October 23, 2008

Market Volatility: What to Expect?

There's a lot of talk these days about market volatility and one measure that is frequently mentioned in connection with this volatility is the so-called VIX index. So what is this VIX index? Yesterday I grew tired of my ignorance and I went online to do some research and educate myself, and this is what I found:

According to Wikipedia:
"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 genius of the VIX is that they take all these options contracts and figure out what risk or what volatility we are each expecting to see in the market over the next 30 days. They can do this, because this perceived risk is implied in the price we set for the option. I gotta tell you, I am amazed at the sort of thing people can figure out.

So what what can we tell by using the VIX? Once again, from Wikipedia:
"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."
Or to use the numbers from this morning: the VIX stands at about 65 so the implied volatility of the S&P over the next 30 days is 18.7% up or down... yowza! I don't know if we are going to have a good month or a bad month, but one thing for sure is that we are not going to have a boring month...

Can anyone add more insight on this subject? I would love to learn more.

Tuesday, October 21, 2008

Voting with my Money

U.S. democracy is flawed. Yes - I know that the automatic reaction of most Americans is to yell down anyone that says anything even mildly critical of our country, but hear me out. In the coming elections, unless you live in just a handful of states such as Ohio and Florida, your vote means absolutely zero. For example, if like me you live in California and you vote Republican, you might as well be tossing your vote in the garbage. Obama is going to win here. Pretty much ANY Democratic candidate would win here, regardless of his or her identity. If you are voting democratic, why bother? The Democrats win by such a large margin in this state that any individual vote is simply meaningless. You could tell exactly the same story in reverse about Texas. Reality is that the results for most political races in this country are known well in advance of election day. In fact, they are known years in advance. 

Which brings me to the main point of this post: in this country elections are not won, they are purchased. They are purchased through advertising, mass mailings and paid staff on the ground. The Party that raises more money, wins (at least it stands a much better chance to win). Even though my vote for President counts for nothing in my home state of California, my political contribution to Barak Obama goes a long way to buying influence in other parts of the country where votes do count for something. So, in lieu of any real political influence by ballot, I resort to casting my true vote by contributing to my political candidate of choice. He can then spend my donation on convincing the few whose votes mean anything to vote for him...

A sad state of affairs this is. One way to eliminate this foolishness - at least as far as the Presidential elections go - is to do away with the electoral college. I mean, why should my vote count for any less than one cast by a voter in Colorado, Ohio or Pennsylvania? How is it possible that in this day and age we are still willing to accept the possibility that a candidate who gets more votes actually loses the election (Bush v. Gore) because of some anachronistic political device? Isn't it about time that we got a real democracy in this country?

Sunday, October 19, 2008

Recommended Articles

Here are some of the personal finance articles I enjoyed this week:

The NY Times posted a column by Warren Buffet telling folks that he believes the stock market is a good investment and that he is putting his own personal money heavily into equities. Naturally, this was big news round the PF blogosphere with many bloggers, including Consumerism Commentary and Five Cent Nickel, dedicating posts to this item. Me? I am just glad to be on the same side as the oracle on this one. On the 15th, when the market was taking a major tumble, I made our monthly investment into the stock market. 

Lazy Man wrote a post this week about the good things that are happening in the economy, among them: buying stocks on the cheap (I guess he too is a Buffet fan), and cheap gas. Well, actually, I am not a very big fan of cheap gas. Although expensive gas is painful, it causes folks to burn less of it, and conservation and energy efficiency are in our long term best interest. Still, I won't lie, paying less at the pump is nice.

Another excellent one this week came from Moolanomy who basically published the beginner's guide to frugal living. He covers useful concepts and ideas and gives a whole bunch of suggestions and resources for those of us who are trying to cut expenses in a tough economy.

My final recommendation for the week is an article Plonkee Money posted on the impact of the real estate bubble on her home price and her economic expectations. This is a remarkably sober and level headed assessment of the situation and is a great example of the excellent material Plonkee publishes. If you don't yet subscribe to Plonkee's blog, you should consider doing so.

Also this week, I participated in a number of blog carnivals and events. The Festival of Frugality was hosted by Aridni; and my article about Using Credit in a Tough Economy was Editor's Pick at the Carnival of Debt Reduction, hosted by Gather Little by Little. I am honored.

Friday, October 17, 2008

Dealing with a Tough Economy

Do you notice the pervasive doom and gloom everywhere you go? It seems like people only want to talk about how much money they have lost in the stock market, how bad the economy is and how the sky is falling (or is about to fall). OK. I'll admit it. These are scary times, but the good news is that there are things you can do to adjust, prepare and mitigate. Here are some ideas:

1. Keep your job - let's face it, your investment portfolio losses have a far smaller impact on your financial well being, than does a potential job loss.  If you think about this rationally, your long term savings will come back, given enough time. What really matters is your monthly cash flow and keeping your job is the number one priority in a tough economy. Next week I will have a detailed post on the subject, but for now keep this in mind: work hard; deliver stunning performance; don't be a trouble maker. It may not be 100% within your control, but there are many cases in which you can do a lot to avoid a possible lay-off.

2. Cut your spending - I hate to break it to you, but if you are stressed about the economic times, drinking fewer of those $4 lattes is a very good place to start the budgeting process. Clothing? You can probably put off your purchases. Vacation? How about a stay-cation instead or simply a cheaper destination? I am not saying you should go into bunker mode, I am merely suggesting that you should adjust your spending to give yourself a cushion for potentially difficult times.

3. Find new sources of income - others have written about this extensively, but you may want to think about potential new sources of income. "Money and Such" generates ridiculously small amounts of income, but I have given some thought to taking more advertising, and I have even put out some feelers regarding possible part time consulting opportunities. Developing a safety net for yourself BEFORE you need it is the general idea here.

4. Prepare your emergency plan - if you don't have an emergency fund which covers - at the very minimum 3 months of living expenses - start building one immediately. Our emergency fund covers more than 12 months of living expenses. Call this a lesson of living through the very lean times of the dotcom bust in Silicon Valley. Put some money away for a rainy day, because it is very possible that one is coming your way. Although it is not fun to contemplate, start planning for how you would deal with a job loss or other economic hardship. Better to be prepared than to have to figure these things out in the middle of the emotional roller coaster that often accompanies financial difficulty.

5. Smile - the sky is NOT falling. Let me repeat this in a calm and reassuring voice: the sky is not falling and the world is not coming to an end (everyone knows that the end of the world is scheduled for August 2029 when vacuum cleaners will stage a revolution and turn on their human oppressors). Just re-lax. Yes, times suck. I know, I am here too. We lost more money in the last three months than we made in the whole of last year. So what?! Look around you. The sky is still blue (yellow if you live in LA), kids are still playing in the streets. De stress a bit. In five years this will all be a distant (if nauseating) memory. Smile. Your friends, co-workers and random folks in the street will appreciate the gesture.

Thursday, October 16, 2008

Running a Small Business in Difficult Times

During the previous recession, a.k.a the dotcom bust, I was running my own small business (a business development consultancy), and let me tell you something: running a small business in a recession is not an easy thing to do. Here a few of the lessons I learned as a business owner during those rough years:

1. Fight for Every Customer - in a tough environment no project is too small, and no customer should be allowed to escape. If that means being flexible on price, so be it. Of course, taking projects that would lose you money is never a good idea.

2. Repeat Business is the Best Kind of Business - getting your old customers to come back for more is key to success in a tough market. In a difficult economy customers are apprehensive about hiring new vendors, and are less inclined to take risks. They spend their money with the people they already know. All of which means that the first place to look for new business is with your old customers.

3. Prepare for Lean Times - big businesses all over the country are laying off employees, cutting spending and generally tightening their belts. They have the right idea. What works for big business is doubly true for a small business with much more limited reserves and resources. Cut all unnecessary expenses and push back any capital spending. However, there is one exception to the rule: sales and marketing efforts should be maintained or even increased. It makes no sense to save a few dollars on advertising, for example, if those savings will cost you thousands in lost projects.

4. Develop Financial Flexibility - in tough times you can be sure that customers will pay you late, that you will suffer some bad debts and that there will be some lean months. You can make sure that these expected set-backs don't kill your business by developing some financial flexibility. Get to know your bank manager (actually, being on a first name basis with your bank manager is something every business owner should do regardless of the economy), make sure that you have a credit line that is sufficient for your needs, and just in case, make sure that you have a couple of good Business credit cards that you can use in case of an emergency, and if you find yourself in financial difficulty, it may not be a bad idea find some good Transfer Credit Cards if you need to move a balance.

The good thing about tough economic times - if there is anything good about them - is that if your business emerges intact on the other side, you know good times are bound to follow.

High Return Investments

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 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..... " 
If you needed an excuse, you got one now...

Wednesday, October 15, 2008

Getting Out of Poverty

In honor of Blog Action Day, today's post is dedicated to poverty, or more specifically to getting out of poverty. Readers of Money and Such know that I am a free market capitalist at heart, I believe that business and entrepreneurship are the path to economic growth and prosperity. However, capitalism requires... capital.

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

Manic-Depressive Markets

Yesterday's 10% pop in the indexes is not a sign that the market turmoil is over. It is a sign that people are reacting hysterically to any shred of positive or negative news. A piece of bad news: help! The world is ending! A piece of good news: all is well, break out the Champagne! This is not the behavior of healthy markets. This is a sign of extreme nervousness.

My thinking is that we are close to the bottom but may not quite be there yet. There may be another 15% for these markets to fall. Who knows? Maybe more. Or maybe I am completely wrong. Maybe this IS the bottom. It doesn't matter, I don't know and neither do you. Reacting impulsively in this stock market is nothing short of gambling.

Today is the 14th, which means that tomorrow is the day of the month in which our monthly contribution to our stock portfolio gets executed. If you ask me, that is the only rational way to deal with the economic craziness that is surrounding us. The only thing I know for sure is that the turmoil isn't over. Not by a long shot.

Monday, October 13, 2008

Erratic Behavior in Crazy Markets

This economic meltdown is causing people to change long held investing strategies. Some times in a good way and often in ways that are bound to have some negative consequences down the line. These days pretty much every conversation I have with people devolves into a discussion of the markets and the sharp decline in stock prices. It seems like everyone always wants to talk about their portfolio... This post is about three investors I spoke with last week, and about how each of them is handling the situation:

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

Recommended Articles

Here are some of the interesting articles I have been reading this week around the personal finance blogosphere and throughout the web.

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

Credit in Tough Times

Here is an interesting thought: in tough times, spend less and save more. I know that my wife and I have been watching our spending much more closely in recent months, and it appears that we are not alone. Finally, it looks like the American people are getting the message.

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:

"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%."

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 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

Curb-Side Freebies

We've all seen them standing at the curbside, sometimes with signs stating "FREE" attached to them. These are curb-side freebies. Old discarded items whose former owner couldn't bring himself to toss in the garbage and was too lazy to haul over to the nearest Salvation Army donation center.

Some of these things disappear within a matter of minutes. One of our neighbors moved out recently and when she left some office supplies and furniture as curb-side freebies, they were gone before the hour was out.

Sometimes, like in the case of the chest of drawers pictured to the left, these items can hang around for days without anyone taking any notice - or until garbage day comes along and they are hauled away.

While I've often seen some interesting items left as curb-side freebies, I have never actually taken any. Interestingly enough, I've also never seen anyone else take any of these items. It's as if they de-materialize and disappear on their own. Is it that people are ashamed of taking them? Are folks lurking around to make sure that no one is looking before swooping in and grabbing the loot?

For the record, I think that there is nothing wrong with adopting curb-side freebies. In fact, I consider such adoption a noble act of environmental consciousness (OK, maybe that's a little bit of an over-statement). After all, why not re-use an item that is perfectly fine, instead of sending it to the garbage heap. 

Which brings us to the poll below:

Monday, October 06, 2008

The Retirement Gold Mine

If you are early on in your career, say your 20's or early 30's and you are starting to develop your retirement savings strategy, the opportunity of a lifetime may just have materialized for you! A bear market...

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


Now, it's time to: (i) implement the emergency rescue package approved by Congress - no doubt a major challenge - and to correct any flaws as we find them; (ii) have Congress start some serious hearings about the causes of this incredibly dangerous fiasco.

We are not out of the woods. Not by a long shot. But at least we are now on a path instead of aimlessly knocking our collective heads on every tree trunk in sight! 

At Least Your Money (and Such) is Doing Well...

With the economic system in turmoil, at least you'll be happy to know that Money and Such is doing well. For the first time ever, this blog has made into the Top 100 personal finance blog list. Yes, it's only in spot #99... but still, it's in there! Rejoice! 

September has also been my best month ever in terms of both individual visits and page views.

So, while your portfolio may be in the dumps and your job may be on the line and your Schnauzer may be in poor health, and there is a realistic chance that Sarah Palin will become U.S. President at some point in the next 4 years, at least you know that one of the personal finance blogs on your reading list seems to be doing better. Huzzah! (do people still say that or does it make me look like John McCain?)

Thursday, October 02, 2008

Why We Absolutely MUST Get this Bail-Out

Congress is acting like frightened children, once more worried about public sentiment rather than leading it. Much of the public simply does not understand the magnitude of the economic problem and is calling this plan a bail-out for Wall Street fat cats. In recent days we have heard over and over the meaningless cliche "let's help main street, not wall street". I am here to tell you that there is no difference between the two. This is all a single economic entity, and just like you can't get lung cancer and ignore it because its a localized problem, you can't ignore the this massive economic damage assuming that it is limited to Wall Street. So, let me give you a few of examples to illustrate my point:

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?

Let me give you another example. This one comes directly from my own high tech company. We are currently raising another round of venture capital financing to fund our operation. Where do you think venture capital funds get their funding? Much of it comes from financial institutions, who invest in these funds in the hopes of seeing high long term returns on their money. We are also financing some of our operations through bank loans, like many other companies. A company needs to buy raw materials to build its products and it needs to pay for these before it gets paid by its own customers. With no one lending money, how long do you think that companies like ours can survive? We have about 25 employees working in the company. What do you think will happen to them? Main street enough for you?

Not convinced? Here's yet another example. Yesterday, Warren Buffet invested $5 billion dollars in shares of General Electric. Buffet got an great deal for his money. Why is it that titans of industry, such as GE, get pressed into panicked deals of this sort? I mean, this is a company that makes locomotives, wind turbines, light bulbs and yes, it does have some financing activities. Does it get more main street than General Electric? 

So, before you bitch and moan about how we are rescuing fat cats, stop and think for a second. Is your company safe? Is your job safe? How about your 401K, is that safe? Stop listening to the ignoramuses that are stirring public sentiment against this economic rescue package, like the ever shrill and populistic Lou Dobbs of CNN, and start listening to the people who truly understand what is going on in this economy, including Warren Buffet who called our current crisis an economic Pearl Harbor. 

Yes, this economic rescue package is not perfect, and I am not against making some changes to improve it, but not passing the bill is simply not an option. We have been duly warned and we will pay dearly if we don't listen.

Wednesday, October 01, 2008

Reader Question: Expense Ratios

A reader wrote to me a few days ago with the following question:

"Hi Shadox,

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."

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:

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).

To Florin's specific question, the expense ratio is paid as a percentage of assets, and you pay it regardless of whether your fund makes money or loses money in any given period. As an example, if you have $1000 invested in a fund with a 1% expense ration and the fund returns 10% in that year, your holdings are now worth $1100 and the fee you will pay that year will be $11. If the fund lost 10% that year, your fees would be 1% of the remaining $900, or $9. Make money or lose money, you still need to pay your fund's expense ratio

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.

I love answering reader questions, so if you have any, please send them to me via e-mail (you can find my address on the left column of this page) or simply leave a comment with your question on one of my posts.