Last week a colleague introduced me to an interesting real estate valuation website called Zillow. When you enter an address into Zillow, the site maps it and shows you some general information about the house, such as square footage and number of rooms. It also estimates the value of that property, and the values of properties adjacent to it. You can even get an estimate of how much property tax is paid on that house. As a bonus, the site also allows you to search for houses for sale and see recently closed deals and their valuations.
How accurate is the information on Zillow? Well, I am not sure, but I checked the one house I know best of all, my own. The general information, such as number of rooms, baths, and square footage, was all correct. Now for the interesting part. Zillow estimates the price of our home to be a jaw-dropping $914,000. The amazing thing is that our house is not even a house. It is a town house, built in 1972, with 3 bedrooms. Granted, we live in a very expensive part of the Bay Area in California, but still, that price is ridiculous.
Regular readers of this blog know that we don't own our home, we rent. Now get this: our monthly rent is $2,000. Granted, according to Rentometer our rent is low for our area, but still, the return our landlord is generating on equity (if all the numbers are correct) is 2.6% per year. To be honest, I think the value of the property is probably exaggerated, but even if our rent was $2,500 per month and the property is worth only $750,000 the ROE is only 4% per year, and that's before expenses, such as property taxes, association fees, insurance and many others.
To me it seems obvious that buying in the Bay Area does not make economic sense at this point. We will continue to stick with renting, at least until rental prices go up dramatically or real estate prices decline.
If you get a chance, check out Zillow and tell me if you think that the information it offers is accurate. At the very least you'll burn an hour trying to figure out how much your neighbors paid for their houses...
Monday, August 06, 2007
Sunday, August 05, 2007
From Netflix to Free Markets
Here is yet another example that free market capitalism actually works for consumers: Netflix recently reduced the price its service plans such that our 3 DVDs at a time plan now costs $16.99, about a dollar less than we used to pay. The funny thing is that we did not have to request the reduction or to take any action in connection with this change. One day Netflix sent us a notice in the mail informing us that our price has been reduced.
Have the good people at Netflix switched from being ardent capitalists to firm believers in socialism? Not really. Market economics is at work once again. Netflix is facing mounting competition from Blockbuster, who is leveraging its retail stores to offer plans that allow consumers to rent via mail or through its stores for the same price. This increasing pressure has evidently convinced Netflix executives that a price cut is in order.
Nevertheless both Netflix and Blockbuster are firm believers in bilking their customers whenever they can. I haven't forgotten that just a few years ago Netflix arrogantly raised the price of its 3 DVD plan to about $22. They only dropped it back once their customers rebelled and they started to lose subscribers to the competition. Blockbuster on the other hand was, for years, content to rip-off hoards of consumers by charging ridiculous rental and late-return fees. They too only succumbed once free market competition emerged, in the form of Netflix.
What does all this tell you about capitalism? To me it says two things. First, capitalism clearly works. If you take the video rental market as an example, prices for video rentals have come down dramatically over the past several years. Second, free market capitalism can only work if there is indeed a free market. Netflix and Blockbuster would each immediately revert back to their predatory selves if they felt that competition was no longer a barrier to raising prices. By the way, I am not singling out these two companies. I could make the very same argument for pretty much any other business on the face of the planet.
As far as I am concerned, the bottom line in all this is self evident: the role of government is to ensure that the free market is operating correctly. It needs to ensure that every business in the country feels a healthy competitive pressure. From that point forward the market will make things right. This is true of health care, it is true of power utilities, it is true of airlines, it is true of agriculture, it is true of telecommunications, it is basically true of every single industry out there. I did not pick the above industries by co-incidence, these are some of the biggest industries which enjoy government protectionism, waivers from anti-trust laws, and subsidies. We would all be better off if the government created a truly free market and at that point acted simply as a neutral referee rather than as a protector of special interests.
Have the good people at Netflix switched from being ardent capitalists to firm believers in socialism? Not really. Market economics is at work once again. Netflix is facing mounting competition from Blockbuster, who is leveraging its retail stores to offer plans that allow consumers to rent via mail or through its stores for the same price. This increasing pressure has evidently convinced Netflix executives that a price cut is in order.
Nevertheless both Netflix and Blockbuster are firm believers in bilking their customers whenever they can. I haven't forgotten that just a few years ago Netflix arrogantly raised the price of its 3 DVD plan to about $22. They only dropped it back once their customers rebelled and they started to lose subscribers to the competition. Blockbuster on the other hand was, for years, content to rip-off hoards of consumers by charging ridiculous rental and late-return fees. They too only succumbed once free market competition emerged, in the form of Netflix.
What does all this tell you about capitalism? To me it says two things. First, capitalism clearly works. If you take the video rental market as an example, prices for video rentals have come down dramatically over the past several years. Second, free market capitalism can only work if there is indeed a free market. Netflix and Blockbuster would each immediately revert back to their predatory selves if they felt that competition was no longer a barrier to raising prices. By the way, I am not singling out these two companies. I could make the very same argument for pretty much any other business on the face of the planet.
As far as I am concerned, the bottom line in all this is self evident: the role of government is to ensure that the free market is operating correctly. It needs to ensure that every business in the country feels a healthy competitive pressure. From that point forward the market will make things right. This is true of health care, it is true of power utilities, it is true of airlines, it is true of agriculture, it is true of telecommunications, it is basically true of every single industry out there. I did not pick the above industries by co-incidence, these are some of the biggest industries which enjoy government protectionism, waivers from anti-trust laws, and subsidies. We would all be better off if the government created a truly free market and at that point acted simply as a neutral referee rather than as a protector of special interests.
Saturday, August 04, 2007
How Is My 401K Doing?
As I perviously mentioned, EBRI just released their 401K survey for 2006. A couple of days ago I wrote a post about how lifestyle funds are becoming more popular in 401K plans. Today, I want to take stock of my own 401K situation and compare my performance with the data provided in the report.
I joined my company a little over 2 years ago and my current 401K balance is approximately $41,000. According to the EBRI report, my 401K balance is higher than about 65% of plan balances out there. This is where I pause, and pat myself on the back. Now it's time to get a bit more detailed, and compare my balance with that of my peer group.
I am in my mid thirties. Of people in my age group, 29% have less than $10,000 in their 401K accounts; 27% have between $40,000 and $50,000 and 11% have over $100,000. Interestingly, about 0.5% of employees in their 20s have 401K balances in excess of $100,000. Good for them. On the flip side, about 6% of employees in their 60s have account balances under $10,000. I guess some people are simply aching to become Wal-Mart greeters in their golden years.
Of people that have a tenure of 2 to 5 years with their employers, the group into which I fall, about 26% have account balances below $10,000; 15% have balances between $40,000 and $50,000; and about 4% have account balances above $100,000. Folks with 2 to 5 years of tenure who have over $100,000 must have either rolled over an old 401K plan into their current employer's plan; have been contributing aggressively for 4 or 5 years; or have been investing in something on steroids. In any case, good for them. Once again, it is interesting to note that about 8% of employees who have been with their employer for over 20 years still have less than $10,000 in their 401K plans. Repeat after me: "Welcome Wal-Mart Shoppers!".
Finally, according to the report, people in their 30s, who have been with their employers 2 to 5 years have on average $22,368 in their 401K plans. This is my specific peer group, and compared to this group, my 401K is doing spectacularly well. Steady as she goes, then.
To compare your own performance to that of the correct peer group, go to the EBRI report and take a look at figure 13 (page 18).
I joined my company a little over 2 years ago and my current 401K balance is approximately $41,000. According to the EBRI report, my 401K balance is higher than about 65% of plan balances out there. This is where I pause, and pat myself on the back. Now it's time to get a bit more detailed, and compare my balance with that of my peer group.
I am in my mid thirties. Of people in my age group, 29% have less than $10,000 in their 401K accounts; 27% have between $40,000 and $50,000 and 11% have over $100,000. Interestingly, about 0.5% of employees in their 20s have 401K balances in excess of $100,000. Good for them. On the flip side, about 6% of employees in their 60s have account balances under $10,000. I guess some people are simply aching to become Wal-Mart greeters in their golden years.
Of people that have a tenure of 2 to 5 years with their employers, the group into which I fall, about 26% have account balances below $10,000; 15% have balances between $40,000 and $50,000; and about 4% have account balances above $100,000. Folks with 2 to 5 years of tenure who have over $100,000 must have either rolled over an old 401K plan into their current employer's plan; have been contributing aggressively for 4 or 5 years; or have been investing in something on steroids. In any case, good for them. Once again, it is interesting to note that about 8% of employees who have been with their employer for over 20 years still have less than $10,000 in their 401K plans. Repeat after me: "Welcome Wal-Mart Shoppers!".
Finally, according to the report, people in their 30s, who have been with their employers 2 to 5 years have on average $22,368 in their 401K plans. This is my specific peer group, and compared to this group, my 401K is doing spectacularly well. Steady as she goes, then.
To compare your own performance to that of the correct peer group, go to the EBRI report and take a look at figure 13 (page 18).
Thursday, August 02, 2007
The Allure of Lifestyle Funds
EBRI has just released its 2006 survey of employee 401K plans. I plan to use a couple of posts this week to review some of the most interesting findings. Today I would like to talk about the topic of balanced or lifestyle funds in 401K plans.
One of the points that come through very clearly in this new report is that more and more employees are opting for lifestyle or other balanced funds. According to the report (figure 33 and figure 34), depending on age group, about 45% - 47% of newly hired employees hold such funds. In addition, in 2006, of those employees that held balanced funds, a large minority (about 40%) held more than 90% of their assets in these funds.
For those of you that are not familiar with the concept of lifestyle funds, these are funds that have a pre-determined allocation of stocks and bonds. This allocation shifts and becomes more conservative as the investor ages.
What is the draw of balanced funds? The greatest asset of lifestyle funds and other balanced funds is that they are simple. They are easy to understand. They are not scary. I mean, let's face it, the vast majority of American workers are not personal finance bloggers, and investing is not a mandatory class in high-school or even college. Many people are scared of investing. They don't know anything about it, and they don't know where to get the information. The promise of the lifestyle fund is the allure of simplicity, and if there is anything people like it's ease of use.
Lifestyle funds, offer investors an easy way to achieve diversification and a reasonable ratio of risk and reward, without requiring them to become master investors. This is a great example of the direction 401K plans should take. While offering more sophisticated options for those us who feel comfortable investing our own money, 401K plans should strive to simplify investing for the average worker. The less scary those plans seem to the novice investor, and especially to young employees, the more people will invest for their retirement and the better off we will be as a society.
So, kudos to whoever invented the lifestyle fund. You are hereby awarded the Shadox Prize of Personal Finance (the "Shpefi"). The Shpefi is slightly more prestigious than the Nobel Prize, however it does not involve any monetary compensation, medals or meetings with royalty. I am working on those aspects of the program, and will keep you posted.
One of the points that come through very clearly in this new report is that more and more employees are opting for lifestyle or other balanced funds. According to the report (figure 33 and figure 34), depending on age group, about 45% - 47% of newly hired employees hold such funds. In addition, in 2006, of those employees that held balanced funds, a large minority (about 40%) held more than 90% of their assets in these funds.
For those of you that are not familiar with the concept of lifestyle funds, these are funds that have a pre-determined allocation of stocks and bonds. This allocation shifts and becomes more conservative as the investor ages.
What is the draw of balanced funds? The greatest asset of lifestyle funds and other balanced funds is that they are simple. They are easy to understand. They are not scary. I mean, let's face it, the vast majority of American workers are not personal finance bloggers, and investing is not a mandatory class in high-school or even college. Many people are scared of investing. They don't know anything about it, and they don't know where to get the information. The promise of the lifestyle fund is the allure of simplicity, and if there is anything people like it's ease of use.
Lifestyle funds, offer investors an easy way to achieve diversification and a reasonable ratio of risk and reward, without requiring them to become master investors. This is a great example of the direction 401K plans should take. While offering more sophisticated options for those us who feel comfortable investing our own money, 401K plans should strive to simplify investing for the average worker. The less scary those plans seem to the novice investor, and especially to young employees, the more people will invest for their retirement and the better off we will be as a society.
So, kudos to whoever invented the lifestyle fund. You are hereby awarded the Shadox Prize of Personal Finance (the "Shpefi"). The Shpefi is slightly more prestigious than the Nobel Prize, however it does not involve any monetary compensation, medals or meetings with royalty. I am working on those aspects of the program, and will keep you posted.
Wednesday, August 01, 2007
A Big Pay Day for Shadox
I got a 16.6% raise yesterday. That would make yesterday a very good day on any personal finance blogger's scale. Since I joined my company slightly more than two years ago, my salary has increased by 55%. That's pretty impressive, but this large percentage increase is mostly because I was grossly under-paid when I first joined my company. If the information I have been gathering is correct, I am still about 15% below the market rate for my title, responsibilities and experience. I hope to erase this gap within the next year. How about that for an ambitious goal?
You may be wondering why I took a lower paying job to begin with. You readers always ask such great questions. I took the job because it allowed me to switch to a new industry which I really wanted to break into. In addition, my company is a major player in its field, and by taking my position I was able to join this company in a very influential role. Bottom line, I thought it was a good long term career move.
When negotiating my offer, I made a conscious decision not to negotiate my compensation and instead very aggressively bargained for my title and responsibilities. I gambled that this would pay off later down the line. This gamble seems to have worked, and if I play my cards right my title and position in this specific company could be highly marketable when hunting for my next job at some point in the future. I was also gambling that I would be able improve my pay in relatively short order. Well, it has taken me over two years to achieve this pay increase, but I think that I have made the right decision.
Before I end this post there is one more lesson that I would like to share. This lesson is all about how to avoid snatching defeat from the jaws of victory:
This salary increase has been in the works for a couple of months now. My boss has previously hinted at this, asked me what I thought my fair compensation level should be and even told me that I would be getting a raise. However, she did not tell me when the raise would come through, nor did she tell me the exact magnitude of this raise. Well, like any red blooded human, curiosity got the better of me and I tried to find out more information about this impending raise. To do so, I consulted with our VP of Finance. A few days ago he told me that my raise was approved and that I would be receiving 100% of what I had asked for.
It turns out that he had the wrong information. My actual raise was lower than what I had asked for. Since my company did not give me formal notice of my raise and its magnitude, I found out the specifics only when I opened my pay-check yesterday. Even after opening the pay-check I had to manually calculate my new salary based on my pay stub. And here is the punchline: I was actually disappointed that I got a 16.6% raise. What should have been a big happy moment for my relationship with my company turned out to be a little disappointing, because the company did not set my expectations in advance and because I obtained some erroneous information from a source that turned out to be unreliable.
The lesson of the day is this: if you are going to give someone a raise, set their expectations in advance. Surprises are highly over-rated, especially when they... don't come as a surprise. I think that this is a life lesson that goes well beyond salaries and personal finance.
You may be wondering why I took a lower paying job to begin with. You readers always ask such great questions. I took the job because it allowed me to switch to a new industry which I really wanted to break into. In addition, my company is a major player in its field, and by taking my position I was able to join this company in a very influential role. Bottom line, I thought it was a good long term career move.
When negotiating my offer, I made a conscious decision not to negotiate my compensation and instead very aggressively bargained for my title and responsibilities. I gambled that this would pay off later down the line. This gamble seems to have worked, and if I play my cards right my title and position in this specific company could be highly marketable when hunting for my next job at some point in the future. I was also gambling that I would be able improve my pay in relatively short order. Well, it has taken me over two years to achieve this pay increase, but I think that I have made the right decision.
Before I end this post there is one more lesson that I would like to share. This lesson is all about how to avoid snatching defeat from the jaws of victory:
This salary increase has been in the works for a couple of months now. My boss has previously hinted at this, asked me what I thought my fair compensation level should be and even told me that I would be getting a raise. However, she did not tell me when the raise would come through, nor did she tell me the exact magnitude of this raise. Well, like any red blooded human, curiosity got the better of me and I tried to find out more information about this impending raise. To do so, I consulted with our VP of Finance. A few days ago he told me that my raise was approved and that I would be receiving 100% of what I had asked for.
It turns out that he had the wrong information. My actual raise was lower than what I had asked for. Since my company did not give me formal notice of my raise and its magnitude, I found out the specifics only when I opened my pay-check yesterday. Even after opening the pay-check I had to manually calculate my new salary based on my pay stub. And here is the punchline: I was actually disappointed that I got a 16.6% raise. What should have been a big happy moment for my relationship with my company turned out to be a little disappointing, because the company did not set my expectations in advance and because I obtained some erroneous information from a source that turned out to be unreliable.
The lesson of the day is this: if you are going to give someone a raise, set their expectations in advance. Surprises are highly over-rated, especially when they... don't come as a surprise. I think that this is a life lesson that goes well beyond salaries and personal finance.
Subscribe to:
Posts (Atom)