Wednesday, May 28, 2008
And now, to the post itself:
When you get into a great deal of debt, one of the tempting solutions is to use your home equity for debt consolidation. This can seem like a good idea, but there are pitfalls -- especially now that the housing market is struggling so much.
Advantages of home equity for debt consolidation. There are some advantages to using home equity for debt consolidation. It does make it easier to get a debt consolidation loan (if you are going that route). Additionally, you end up with a lower interest rate. An interest rate, mind you, that comes with tax benefits. So that can be a definite advantage to using the equity in your home for debt consolidation. But it may not be the best idea for you right now.
Disadvantages of home equity for debt consolidation. The biggest pitfall of using your home equity for debt consolidation is the fact that you are exchanging unsecured debt for secured debt. Unsecured debt is debt that isn't backed up by anything tangible. Creditors can try and get you to pay, and they can wreak havoc on your credit score, but that can't actually really force you to liquidate any of your tangible assets for payment. Secured debt, on the other hand, has a tangible asset to back it up. In the case of home equity debt consolidation, this asset is your home. You use the equity in your home to pay off your consumer creditors and the bank owns more of your house. This means that if you can't make payments, you lose what is likely your biggest asset through foreclosure.
Another issue is the fact that many homes are moving into the territory of negative equity, due to falling home values. You may take out a home equity loan now to consolidate your debts, but if home values fall further in the next few months, you could find yourself upside down on your mortgage. And, with home values as they are now, even a home equity loan may not cover all your debts. You may only have enough equity for 3/4 of your debt -- or less. This means that you still have multiple payments to make.
As an alternative to using home equity for debt consolidation, you can use a process of aggressive debt reduction to take care of your debts on your own (pay down the card with the highest interest rate first). Also, if you feel that debt consolidation is the easiest way, there are organizations that will help you consolidate your debt without a loan. Just watch out for high "administrative" fees and other costs. And, if you are concerned about your credit card interest rate, it is possible to negotiate a lower rate yourself. In some cases, you can even negotiate to close the account and finish paying off the balance at the lower rate.
Editor's Note: I am cetainly no expert on debt consolidation, however I do have legal training (which I have not used in over a decade). I believe that the statement claiming that lenders cannot actually force you to pay unsecured debt is not correct. The difference between secured and unsecured debt is that in the event your assets are not sufficient to cover all your obligations, creditors holding secured debt have precedence over non-secured lenders, i.e. they get paid first from their secured asset, and the non-secured lenders get whatever is left (if anything). Unsecured debt does not mean that your lenders have no recourse. They can still come after you, even though the process they need to follow to come after your assets may be more cumbersome from their perspective. Am I off on this? Anyone?
Tuesday, May 27, 2008
A couple of key insights I took from the article:
First, based on trading volume and comparing spot and futures pricing, the researchers quoted in the article come to the conclusion that commodities are expensive but are not in bubble territory.
Second, a very fascinating and counter-intuitive conclusion of the research is that in many cases, rational investors who spot a bubble would do better to go along with it, rather than try to attack it. Their recommendation to skeptical investors: if you spot a bubble, ride it to the top, get out quickly and start placing bets against the bubble, when things turn south. Interesting.
This reminds me of my business school accounting professor who is 1999 used to come to class frustrated that the stock market stopped making sense, that companies showing massive losses were achieving stratospheric valuations... and that his short positions were causing him painful losses. The market turned south only a few months later, but as the article quotes: the market can stay irrational longer than you can stay solvent... :-)
Monday, May 26, 2008
No Company Match - yup. There you have it. My company does not match any employee contributions. This is a bummer, but please understand that my company is a venture backed start-up. We have about 40 employees and no revenue yet. If the money runs out, the company will be shut down, so you can understand that we are watching our budget very carefully. Still in the mean time, this means that I will be stashing away less money for retirement.
Awful, Awful Fund Choices - Let's put it this way: I don't think that plan administrators could select worse funds if they tried! Pretty much all of the funds are actively managed and are pretty expensive. On top of that, many of the funds selected are simply horrible performers. For example, one of our funds is the Fidelity Aggressive International Fund, with a one year Lipper Ranking of 664 out of 682 funds.... and a 1 (!!) star Morning Star rating. What kind of plan administrator in his right mind would choose this fund?
As if this weren't enough, the funds are all Fidelity funds. Not a single non-Fidelity choice is available. Can you see the finger prints of an unscrupulous sales person and a totally clueless fund administrator? Looks pretty obvious to me.
Very Weak Participation - after inquiring with the current administrator, it appears that only 12 of the company's employees are actually contributing to the company's 401K. with this kind of plan, can you blame them?
Advanced Options - forget about it. No ROTH 401K, no self directed 401K, no opt-out 401K. Nothing. Well, actually, there are a few exceptions: we do have target date funds as well as a "balanced fund" mixing stocks and bonds into a reasonable allocation, and the fund selection does cover all traditional asset classes - except for commodities.
A Shining Ray of Light - the plan includes 2 index funds: the Spartan Total Market Index Fund, tracking the Wilshire 5000 with an expense ratio of 0.1% and a 4 Star Morning Star rating; and an Extended Market Index fund, tracking the Wilshire 4500 with an expense ratio of 0.1% and a 3 Star Morning Star rating.
How I am Allocating My Funds - 70% of the money goes into the Total Market Index Fund. The remaining 30% is evenly split between Fidelity Export and Multinational - the closest I could come to a reasonable international fund (5 Star Rating and a 0.75% expense ratio); Fidelity Real Estate Investment Portfolio (3 Stars & 0.75% expense ratio); and Fidelity Total Bond Fund (4 stars, 0.45%). This asset allocation pains me - since normally I invest at least 30% internationally, but there is simply no viable international option here.
What I am Going to Do About It - I am not one to sit around and do nothing when faced with a crappy, crappy 401K plan. I have every intention to fix this plan. Over the coming weeks and months I will try to insert myself into the plan management team and then will move to implement changes. I will keep you posted.
It just goes to show you how few 401K plans out there are well run, especially at small and medium businesses. The people typically running these plans are administrators or HR persons with little knowledge and even less interest in getting this thing right. At the end of the day, a motivated and well informed employee can do a great deal to improve the situation and to help out his fellow savers. Stay tuned...
Wednesday, May 21, 2008
Without further delay, it is my pleasure to introduce Basic Financial:
Recently I posted on my site about the hydro4000, a hydrogen based fuel economy booster for your car. The biggest surprise to me in writing that post was the $1350 investment required to get the thing working, and that's if I installed it myself. It turned out that it would take 1,125 gallons at $4.00 to recover the investment, which would be around 1.5 years for me. Sure, gas prices will continue to rise for a while, but remember this is not a fuel shortage fallout like there was in the 70's when demand drastically outstripped supply. There is plenty of supply today, it's mainly that prices are skyrocketing due to increased demand in Asian countries and the weakness of the dollar. This leads me to think that the price of gas will fall below or around $3.00 a gallon within the next 3 years.
So the question remains, what time frame is OK for a return on your fuel savings costs? I prefer a 1 year ROI on just about anything I buy over $100 that is supposed to save me money, anything less I can amortize over 1 year and take it out of any discretionary income. So how much better fuel economy will I need to get to achieve a 1 year ROI. I drive a 2002 Ford Explorer Sport that gets around 20mpg I fill up 3 times a month with a 16 gallon tank. Here is my breakdown assuming $4.00 a gallon: a 5% improvement in gas mileage would save me 3 gallons, 10% would save 6 gallons, 20% would save 12 gallons and 30% would save 18 gallons.
Using these numbers, it would take me 9 months to pay off a fuel saver that gave me a bump of 5% in fuel efficiency and that cost $100. A $500 item that provided a 20% boost would take 11 months to pay-off, and a $1,350 device would take 29 months to pay-off if it were able to provide a 20% improvement to fuel economy. This is a pretty long time. While I still have 3 years left to pay off my vehicle if I don't pay it off early, in 3 years, I'll have to reinvest. Why not pay off early, and get a car with better fuel economy? I just don't think any of it is really worth it. Besides the EPA tests a majority of these devices and they only average a 6% bump, which makes only the $100 item economical, and I don't think that even that would be worth my time. I'll stick to combining my trips and driving less.
Editor's note: in e-mail correspondence with Basic, he explained to me that he does not think devices purported to improve vehicle fuel economy really work. His post is meant to show that even if they worked as advertised, the return on your investment would not justify purchasing them. Here is a link to a CNN article debunking the idea of add-on fuel saving devices.
Tuesday, May 20, 2008
Use the simple calculator below to figure out if a hybrid is the right choice for you. Use the sliders to set the cost of gas in your area; select the number of miles you travel on average each month; drag the dials to set the fuel economy on your prospective hybrid car and compare that to your traditional gas guzzler. Don't forget to enter vehicle price for the two cars you are comparing.
The results tell you how many years it will take you to break-even, how much money you will be spending on gas each year, and how much CO2 you will be spewing on your way from A to B. Enjoy.
Latte Factor Calculator
Cross Over Point Calculator
Value of Savings Over Time
Retirement Savings Goal Calculator
Are You Diversified Enough?
Monday, May 19, 2008
I have been wrestling with the same question in reverse, namely, is it too late to invest in commodities? About two months ago I have come to the (apparently premature) conclusion that hell yeah, it's too late. We are not currently invested in commodities. I recently rolled over my 401K which had a 10% commodities position into an IRA which does not include such a position. However, I do understand the benefit of diversifying into commodities and have written about this in the past (too bad that I did not actually take my own advice at the time).
A year ago, I put about 20% of my assets into commodity related stocks as a hedge for the blazing US and APAC economy: Metal and mining ETF; Mining companies; Brazil ETF (since their economy is based on commodities); Oil company stock. Since then, most of my portfolio has shrunk while this part has exploded.
It is now about 40% of my portfolio. Now, there is talk about a commodity bubble. I have some free money and I was thinking about putting it into a commodity hedge, but I don't know what that is? Cash? Bonds? Technology? What do I do?
Also, my gut tells me Oil is peaking (my gut told me that at $80 too so I am not sure using my intestinal system is a good idea). What is an Anti-Oil hedge? You could use this for a Blog post since I am sure anyone with commodities in his portfolio is thinking the same things...."
When I think about diversification into commodities, I am thinking about a position equal to about 10% of your portfolio. However, the reader finds himself with about 40% of his portfolio dedicated to what is potentially a very risky asset class. Let me take the reader's questions one at a time.
First things first: we need to talk about portfolio re-balancing. If you are shrewed, wise or lucky enough to make a small investment whose value explodes, you should probably think about re-balancing your portfolio such that your investments in the various asset classes come back into line with your original plan. There are many reasons to do so, but let me name the most important one: regression to the mean.
Here's the idea - each asset class has certain typical historical returns. If the return on such an asset class in the short run is dramatically higher or lower than the historical average, there is a tendency for prices to return to their historical trend through a price correction (up or down). We are living through one such example right now. In recent years real estate prices have skyrocketed and returns on real-estate assets have significantly outpaced their historical levels. No more. Returns are now regressing to the mean by way of a sharp decline in house values. Tech stocks in the beginning of this decade went through the same process, and I believe that we may be in for a similar ride on the commodities side. If your portfolio is out of whack due to massive returns, take some money off the table to reduce your exposure to that asset class and re-balance your positions.
True, this is psychologically difficult to do because essentially I am suggesting investors should sell their winners rather than their losers... but, believe it or not, that's probably a winning strategy.
Let me address the second part of the question: what is a good hedge for commodity prices? Put in other words, if commodity prices go down, which asset classes would be unaffected or even benefit from this decline? The technical term from what reader is looking for is negatively correlated assets, or at least uncorrelated assets. The following asset classes have historically been negatively correlated with natural resources: U.S. Bonds (-0.14 correlation); cash (-0.12 correlation); high-yield bonds (-0.04 correlation). If you think about it, this makes perfect sense. Commodities tend to rise at times when the economy is strong, inflation is rising and interest rates are consequently being increased. These are exactly the times when bonds tend to do worse, and vice-versa. Stocks, especially large cap stocks, are also very loosely correlated with commodity prices (0.0 for large caps; and 0.01 for the S&P 500). A correlation close to zero indicates that the asset classes tend to act independently from each other: they are just as likely to move in tandem as they are to move in opposite directions. In fact, natural resources are very loosely correlated with pretty much all traditional asset classes. This makes them a very interesting diversifier, but not at 40% of your portfolio...
To read more about asset class correlations, take a look at this excellent article, which I have previously written about.
Sunday, May 18, 2008
I also found a couple of other interesting posts - this one talks about how GM is trying to sell us a "green story". Many businesses are green washing these days - it's simply trendy and most folks don't pay enough attention to sift the real environmental reality from the crap claims. For example, the other day I saw a BMW ad announcing that the company has a hydrogen powered car available for sale and they are now simply waiting for the world to be ready. Come on! Give us a break! We are not THAT stupid.
This other article was particularly fascinating for me given that I have never bought or bid on a house. It talks about how a realtor was able to help her customers buy a house even when their offer was not the highest one that the owners received. Apparently, it's all about convincing the owners that the bid her clients are submitting is the most likely to close. Interesting.
Friday, May 16, 2008
Last night we had our monthly company poker night. This was my first time participating (since I have only been with the company for 2 months), and it was also my first time ever playing "serious" poker. I guess I had massive amounts of beginner's luck going for me, because one by one I knocked out everyone in the game. This was a tournament style game where there can be only one winner - the last man standing. The second place winner got back his original investment of $20, which left me with a total of 1 cool C note. You heard right, $100 for hanging out, eating pizza and drinking some beer. I really enjoyed myself - winning probably helped - and this morning in the office the legend of Shadox the lucky novice spread like wild fire.
What can I say. I don't gamble. Even when I find myself in Vegas I don't hit the tables or the slots. When people ask me why, I tell them it's because I understand the fundamentals of statistics... However, spending $20 to buy my way into a game of poker with my colleagues from work doesn't count as gambling in my mind. For me this is just the same as buying a movie ticket - I view the $20 as gone as soon as I get in the door, and consider it money well spent. It is also a good way to get to know my colleagues in a social setting, when we are not all about talking shop. This time, luck was on my side - but, since I know statistics I also know that in the coming months I can expect to leave behind small chucks of change on a regular basis. For now, bask in my glory mortals. OK, I am done gloating.
Wednesday, May 14, 2008
Over the past weeks I have been trying to improve my Geo Prizm's gas mileage - not so much because I am trying to save money on gas (although that's nice too), but more because I figure I should do as much as I can to reduce emissions. OK, so I am a little spoiled and don't do much for the environment, but if it's within reach, why not?
Here are some of the tips from the article that I found most useful:
- Avoid Drive-Thrus - instead of standing in line for that burger while your engine's idling, park and go in. Also, if you are really into cutting down emissions, a vegetarian burger might be a better choice (I know, but occasionally, you just can't beat a burger).
- Use the fan instead of the air conditioner - I typically turn on the air conditioning pretty much as soon as I turn on the engine. In recent weeks I discovered that the fan works just as well in many cases, especially if you first open the windows for a couple of minutes to let the hot air escape.
- Maintain a Space Cushion - keeping a fair distance between you and the next car allows you avoid constantly alternating between the gas and break pedals. Once you get used to driving at a smooth, constant speed it's also much more relaxing.
So far my gas mileage has increased about 10% from 28 MPG to 31 MPG. I think that's about the most that I can do with the Geo without getting "extreme", but this coming week I will take a crack at throwing out a few things from the trunk and see what the impact is.
Tuesday, May 13, 2008
What are you waiting for? Got an old 401K? Roll it over. There are many good reasons.
Now, all I need to do is get my wife to Roll over her old 401K from Charles Schwab to her E*Trade IRA. We'll see if the process is as smooth. I think that the fact that my roll-over was so easy will inspire her to make the move. I'll keep you posted.
I think this qualifies as my shortest post ever.
Monday, May 12, 2008
Yesterday I decided to do something about it. My son really loves his Wii console and every few months I buy him a new game for it. Well, a really fun game just came out called Mario Kart Wii - the game comes with a plastic wheel and you can race your car by steering the wheel (I am telling you those Nintendo guys are geniuses). Long story short, I bought my son the game and when I came home and he saw it he got extremely excited. He asked: is this for me? I said, actually, I bought it for myself, but I am willing to sell it to you for $5. It took my son all of about one micro-second to say "deal". He then rushed upstairs and got $5 in exact change from him cash box.
For the past 24 hours he has been proudly announcing to everyone how he bought his new game from dad. I think this approach will help my son learn what you can and can't do with money and will also educate him to the value of saving. I think I will continue along the same lines by asking him to purchase - for much reduced costs - things that I would otherwise simply give him.
Any opinions about this strategy?
Sunday, May 11, 2008
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Saturday, May 10, 2008
Cable & Internet - I could probably save about $40 a month by choosing a slower Internet connection and giving up HBO, but I use the Internet a lot and really enjoy my premium channels. That's $480 a year that I am very willing to spend.
Books - in my town we have a great public library and I take my sons there every once in a while, but I enjoying buying books at my local bookstore, and once I am done reading the books go up on the shelf and stay there. For me, it's fun to be surrounded by books. Call that $15 a month or $180 a year well spent.
Video Games - last year I got my son a Wii for his birthday. Since then, about every three months I bought him a new game. Call that about $200 a year spent on one very excited and happy kid. For me, seeing how excited my son gets when I tell him I have a surprise for him is worth every red cent.
Vacations - we are a family of five, and every time we go on vacation that involves flying anywhere, you can bet that it's going to be very expensive. Yes, we do our best to minimize the cost by carefully shopping for flights and by being flexible on when we take those vacations, but there is only so much you can do to reduce the cost when you are traveling by air. We also have family abroad and we make it a point to visit once a year. Call that $6000 a year spent on vacation & travel.
Chocolate - I love, love, love my chocolate. No, not that crappy, waxy brown stuff most Americans content themselves with. I have an expensive chocolate addiction to the tune of... wait for it... about $50 a month or $600 a year. Now that's what I call expensive, but delightful.
Small Items & Treats - if I am out and about and see a small item that I want, I get it. I do this within reason and I am probably talking about $15 a month or so, but there is something to be said for impulse shopping: as long as you do it within reason it's fun.
When you add it all up the total comes to about $7640 a year. That's a big chunk of change. Wouldn't we be better off squirreling it away in our investment portfolio or saving it up for a rainy day? I guess the question comes down to what you mean by better off. We have an emergency fund sufficient to carry us through a full year of unemployment. We are religious about maxing out our 401K's and every month we contribute more money to our brokerage account. We are also 100% debt free - no mortgage, no credit card debt, no student loans or car payments. We live well within our means.
Sure, if we chose to do so we could probably save another $10,000 a year. We could probably save even more if we made some real sacrifices, but that doesn't make a whole lot of sense to me. You see, I am in favor of lifestyle inflation. I hope my lifestyle continues to inflate indefinitely - so long as you are not sacrificing your future to meet your current consumption, what's wrong with that? Bottom line, I consider myself fortunate to be able to afford spending $7640 a year that I do not absolutely need to spend.
Friday, May 09, 2008
Being the devoted index investor that I am, I rolled my 401K money into my traditional Vanguard IRA. The process itself was smooth and painless. First, I logged into my 401K account online. There I chose to terminate my account and to take my money in the form of a direct roll-over. Note that if you choose to withdraw your cash instead of rolling it over, you may be subject to a 10% tax penalty, and to an immediate 20% withholding. ADP - my now former 401K plan provider - asked me to enter the name of the institution into which I will be rolling over my account, and presto - a week later a check arrived in the mail made out to Vanguard, for the benefit of your humble blogger.
This morning I called Vanguard - whose service center closes at 5 PM Pacific for some strange reason. The representative was very friendly and informative and simply asked me to identify myself, which account the money will be rolled into and how I would like my money invested. I chose to invest my hard earned $46,000 as follows: 15% Total REIT Index (VGSIX) - I have been beefing up my investments in that fund recently to offset declines over the past year; 40% in Total International Stock Index Fund (VGTSX); 35% in Total Market Index Fund (VTSMX) and the remaining 10% in Vanguard's Extended Market Index Fund (VEXMX). The whole process took me about 10 minutes. I mailed the check to Vanguard today, so with any luck my money will be back in the market within a few short days.
On a (little) sad note, when I left my employer after almost three years, I left behind 50% of my employer matching funds, which were not yet vested. This amounted to a few thousands of dollars, but if you get a good career opportunity, you don't give it up for some short term gains. Still, I am never happy when I need to leave money on the table.
Saturday, May 03, 2008
Let Everyone Know - It is really hard to overstate the important role that your personal network can play in helping you to get a new job - to underscore that point, I got my last two positions through friends and acquaintances. Even though you may be feeling uncomfortable about your job loss, letting everyone know that you are on the market will greatly improve your chances of landing your next job in a hurry. A simple way to do so is to compose a brief e-mail to your acquaintances letting them know that you are searching for new challenges.
Make a List of Target Companies - a great way to start the search is to identify companies that you would love to work for. Make a list of such companies and then talk to people in your network who may be able to introduce you to some hiring managers in those companies - whether or not those companies are advertising any open positions. Frequently companies will create positions for people that impress them and in other cases open positions may not have even been advertised yet.
Talk to Old Colleagues - Former colleagues are an excellent source of job leads. After all, your old co-workers know and respect your professional skills. They are also likely to be in the same industry and can provide an instant reference to a future employer. For example, my wife reached out to some of her colleagues that still work for a company she worked for in the past. The result: an informal interview is scheduled for next week to see if any interesting positions can be created for her.
Don't Trust the Job Sites - if you are sending an e-mail resume based on a job posting in one of the online job sites or in response to an ad on the company website, your chances of landing an interview are remote. Hiring managers are typically inundated with dozens or hundreds of applications, most of them completely irrelevant. Hiring managers don't have a lot of time to spend reviewing applications and consequently chances are that your application will simply be ignored. Want to dramatically improve your chances? Apply online, but also find somebody you know that can bring your resume in person to the hiring manager and preferably even give you a personal recommendation at the same time. A great way to find folks in a company you are targeting is through a site such as LinkedIn.
Prove Your Worth - you know how most candidates in a job interview are all talk? I mean everyone can come in and answer some questions. How can the hiring manager know if you are any good? Well here's an idea: if you are interviewing for a job that has some definitive work product, you will look like a star if you bring to the interview a portfolio of your past accomplishments. For example, my wife who is a marketing programs manager assembled a portfolio of past marketing campaigns she led. Three jobs ago - the last time I interviewed for a job "cold" - I brought with me a copy of several articles which I published in professional magazines. Instant credibility.
Reach Out to Headhunters - if you are looking for a professional position, get in touch with some headhunters in your industry. If you don't know any, ask your colleagues to recommend some. Ideally, your connection with headhunters should start long before you are out on the job market. Periodically, I get phone calls from headhunters about this or that position (yesterday being the most recent example). Even though I just started a new position and am certainly not searching for a job, I never blow-off a headhunter that calls me. Instead, I listen to what the headhunter is offering and I propose the name of a candidate or two that I think would be a good fit for the position. Guess what - headhunters really appreciate the help. That's how you build a relationship, and when its time to look for that new gig talking to those headhunters will be much easier.