October 15th is Blog Action Day. Many of the blogs you read today will offer a post about the environment. I have decided to join this movement, because I feel strongly that big problems need to be addressed head-on, and the sooner the better.
I have written about the environment many times in the past. You can find a couple of examples here and here, but today is special. Today, Money and Such is just one of thousands of blogs all with a single theme: the environment.
Please support Blog Action Day by letting as many people as you can know about it. If you have your own blog, post about the environment today. If you don't, comment on someone else's blog. Write your representative. Let your local newspaper or television station know about this effort. Get involved.
Look for my post on the subject first thing in the morning (California time).
Monday, October 15, 2007
Saturday, October 13, 2007
The Stock Market is Not That Safe
A few days ago I had a lively discussion with Matthew of Crazy Money about whether it is a wise thing to hold a long term portfolio consisting entirely of stock investments. I argued for a well diversified portfolio comprised of weakly correlated asset classes. Matthew argued that since the stock market provides the highest long term expected returns, the best way to go is a 100% stock based portfolio. I wanted to revisit this issue and add a little more data.
Essentially, the core of Matthew's argument is that over the long term the stock market is safe. If you have 40 years to wait, the stock market will invariably go up. In last week's The Economist, I found an article called To Infinity and Beyond, which addresses this very issue. Let me offer a few choice quotes from the article:
Now, don't get me wrong, most of our portfolio is invested in the stock market. However, I think that this article underscores the need to diversify beyond that asset class, and into assets that would not be impacted - and hopefully would even benefit from a decline in the stock market. Many would argue that the American stock market is unique and that it will not experience the kind of decades long bear market that other markets have seen internationally. They may be right, but is it wise to bet your financial well being on this assumption?
Essentially, the core of Matthew's argument is that over the long term the stock market is safe. If you have 40 years to wait, the stock market will invariably go up. In last week's The Economist, I found an article called To Infinity and Beyond, which addresses this very issue. Let me offer a few choice quotes from the article:
And another quote:"Among American financial commentators, it is almost universally accepted that shares always rise over the long run. And this perception does seem to be backed up by evidence; if you take any 20-year period, Wall Street has always delivered positive real returns. In addition, one ought to expect shares (which are risky) to deliver a higher return than risk-free assets such as government bonds.
Nevertheless, investors ought also to remember the world's second largest economy, Japan. Its most popular stockmarket average, the Nikkei 225, peaked at 38,915 on the last trading day of the 1980s; this week, nearly 18 years later, it was still only around 17,000, less than half its peak. Buying on the dips did not work either. By 1994, the Nikkei had fallen to 21,000—at which point a technical analyst, after poring over his charts, told this columnist that it had to be one of the great long-term buying opportunities."
I still have some QQQQ shares I bought in 2002 which are still about 20% below their nominal purchase value, they are much lower than that if you take inflation into account.Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School examined the record of 16 stockmarkets which were in continuous operation over the course of the 20th century. In itself, this selection showed survivorship bias by excluding the likes of Russia and China. The academics found that only three other countries could match the American record of having no 20-year periods with negative real returns.
Other investors were far less lucky. Japanese, French, German and Spanish investors all suffered instances where they had to wait 50-60 years to earn a positive real return; in Italy and Belgium, the waiting period stretched to 70 years. It was no good following the famous advice to “put the shares in a drawer and forget about them”; the furniture would not have lasted that long"
Now, don't get me wrong, most of our portfolio is invested in the stock market. However, I think that this article underscores the need to diversify beyond that asset class, and into assets that would not be impacted - and hopefully would even benefit from a decline in the stock market. Many would argue that the American stock market is unique and that it will not experience the kind of decades long bear market that other markets have seen internationally. They may be right, but is it wise to bet your financial well being on this assumption?
Friday, October 12, 2007
Fortune Cookie Finance
Yesterday a fortune cookie gave me financial advice. I went out to lunch with a customer at a Chinese restaurant. When the meal was done I claimed my fortune cookie and here is what it said:
I don’t know how I feel about getting financial advice from a baked good, but I think that good advice is something you want to use, no matter where you get it. Have I been focusing too much on saving? It’s possible. I am a personal finance blogger, after all, and if I were too focused on saving that probably would not come as a shock to many. But how can I tell if the criticism is true?
Let’s start by examining the facts. My wife and I save about 17% of our gross income. We don’t go crazy spending huge amounts of money, but I don’t feel like we are depriving ourselves of anything. If I have a burning desire to buy something, I buy it. OK, there is one big ticket item that I have consciously decided to not purchase and have had some second thoughts about, but overall I feel good about our consumption to saving ratio.
Could the sage cookie be referring to the fact that I spend too much time thinking about money? That’s a good question. I read a lot of personal finance blogs, financial books, and investing articles, but does that mean that I am obsessive about the subject and may be missing out on some bigger things? I don’t know, but I enjoy personal finance. It’s sort of a hobby of mine. I don’t think that my hobby is taking away from my enjoyment and focus on the big things in life.
Could the all-knowing cookie be referring to the fact that I have been hoarding my frequent flyer miles and not spending them on an awesome vacation in Maui? Maybe that’s it. A cookie can’t be wrong can it? I think its time for a big vacation purchased free of charge by massive spending of hard earned United frequent flyer miles. Now, if I could only find someone to take care of the kids for a week while the wife and I head towards the sunset.
Late Breaking Addition: Little Miss Money Bags left a comment saying that English Major got the very same fortune cookie. Fortune cookie companies everywhere have decided to branch out into financial services, apparently. Financial advisers beware!
I also found out that my lucky numbers are 15, 10, 16, 28, 35 and 36. Hmmm.“Perhaps you’ve been focusing too much on saving”
I don’t know how I feel about getting financial advice from a baked good, but I think that good advice is something you want to use, no matter where you get it. Have I been focusing too much on saving? It’s possible. I am a personal finance blogger, after all, and if I were too focused on saving that probably would not come as a shock to many. But how can I tell if the criticism is true?
Let’s start by examining the facts. My wife and I save about 17% of our gross income. We don’t go crazy spending huge amounts of money, but I don’t feel like we are depriving ourselves of anything. If I have a burning desire to buy something, I buy it. OK, there is one big ticket item that I have consciously decided to not purchase and have had some second thoughts about, but overall I feel good about our consumption to saving ratio.
Could the sage cookie be referring to the fact that I spend too much time thinking about money? That’s a good question. I read a lot of personal finance blogs, financial books, and investing articles, but does that mean that I am obsessive about the subject and may be missing out on some bigger things? I don’t know, but I enjoy personal finance. It’s sort of a hobby of mine. I don’t think that my hobby is taking away from my enjoyment and focus on the big things in life.
Could the all-knowing cookie be referring to the fact that I have been hoarding my frequent flyer miles and not spending them on an awesome vacation in Maui? Maybe that’s it. A cookie can’t be wrong can it? I think its time for a big vacation purchased free of charge by massive spending of hard earned United frequent flyer miles. Now, if I could only find someone to take care of the kids for a week while the wife and I head towards the sunset.
Late Breaking Addition: Little Miss Money Bags left a comment saying that English Major got the very same fortune cookie. Fortune cookie companies everywhere have decided to branch out into financial services, apparently. Financial advisers beware!
Thursday, October 11, 2007
Price Gouging is a Good Thing
Last weekend we took the kids to San Francisco to see the Blue Angels perform as part of Fleet Week. The kids loved it, but that's not my story. The real story is the fact that many other folks had the same idea and the city was packed with would be spectators. So much so that parking was a nightmare. Parking lots that normally charge $10 now charged $40 and they too were quickly filled to capacity. Even if I were willing to pay that huge amount, finding a spot would not have been possible. Consequently, I dropped off the wife and kids close to Pier 39 and drove around for about an hour, until I found somewhere to abandon the car.
Let me get to the point here - and my point is not going to be a popular one. Do you know how after a natural disaster hits everyone starts complaining about price gouging, law suits start flying and everyone gets on their high horse? Well, so called "price gouging" is just a natural market reaction to a shortage in supply. The price mechanics are very similar to the ones we experienced last weekend in San Francisco. When demand for a previously abundant resource shoots up dramatically, and new supplies are not available, price spikes. In the case of our parking situation, parking spiked by 400%. That's a good thing.
Why are price spikes a good thing? They mean that the free market is operating correctly. The laws of supply and demand dictate that an increase in demand without an offsetting increase in supply leads to an increase in price. The alternative to allowing a price spike is to institute rationing. Both of these are acceptable systems in a crisis, but a price spike offers the added benefit of encouraging new supplies to come online. Price spikes also ensure that the people that end up getting a given resource, are the ones who value it the most, not the ones that happen to be standing first in line. Rationing is a surefire way to guarantee the development of a black market. Those individuals who received a ration for a price that is lower than the true economic value of the resource, will simply re-sell that resource for a higher price on the black market.
Rather than complain that vendors are price gouging, consumers and the government need to plan in advance to ensure an adequate supply of all necessary commodities, or to prepare adequate substitutes for those resources. In our case, I did not have to pay $40 for parking. I had several options: (i) not go; (ii) take the train instead of the car (which is what we should have done); (iii) substitute time for money by driving around until I finally found a spot. All three were valid options. Railing against price gouging was not one of them.
Let me get to the point here - and my point is not going to be a popular one. Do you know how after a natural disaster hits everyone starts complaining about price gouging, law suits start flying and everyone gets on their high horse? Well, so called "price gouging" is just a natural market reaction to a shortage in supply. The price mechanics are very similar to the ones we experienced last weekend in San Francisco. When demand for a previously abundant resource shoots up dramatically, and new supplies are not available, price spikes. In the case of our parking situation, parking spiked by 400%. That's a good thing.
Why are price spikes a good thing? They mean that the free market is operating correctly. The laws of supply and demand dictate that an increase in demand without an offsetting increase in supply leads to an increase in price. The alternative to allowing a price spike is to institute rationing. Both of these are acceptable systems in a crisis, but a price spike offers the added benefit of encouraging new supplies to come online. Price spikes also ensure that the people that end up getting a given resource, are the ones who value it the most, not the ones that happen to be standing first in line. Rationing is a surefire way to guarantee the development of a black market. Those individuals who received a ration for a price that is lower than the true economic value of the resource, will simply re-sell that resource for a higher price on the black market.
Rather than complain that vendors are price gouging, consumers and the government need to plan in advance to ensure an adequate supply of all necessary commodities, or to prepare adequate substitutes for those resources. In our case, I did not have to pay $40 for parking. I had several options: (i) not go; (ii) take the train instead of the car (which is what we should have done); (iii) substitute time for money by driving around until I finally found a spot. All three were valid options. Railing against price gouging was not one of them.
Wednesday, October 10, 2007
Recommended Articles
Here is my recommended articles post for the week. As always I try to choose the more original and novel articles out there.
Ask Mr. Credit Card hosted this week's Carnival of Personal Finance, which included my article "Advanced Portfolio Building". I also wrote two additional articles on the same topic this week. You can find them here and here.
Tezza from 4EvaYoung wrote an article titled Buying is for Suckers (she is referring to houses). I wouldn't go as far as the title of this post suggests, but you may remember that my article Rent is not Waste was selected editor's pick in last week's Carnival. I agree with practically all of the arguments Tezza is making. Tezza also adds a couple of excellent points, including the following: renters do not typically over-extend. Buyers of homes have a nasty tendency to buy more home than they need, thinking that they will either grow into it, or sell it for a profit. Talk about locking up valuable capital in bricks and mortar.
Free Money Finance has a post about strange and unusual job interview questions. I have had a couple of strange interview questions in my time. One interviewer put a batman action figure in front of me and asked me how I would market the masked crime fighter. In another interview, I was asked to suggest ways to prove that the light in the fridge does not stay on when the door is closed. In yet another interview I was actually asked to estimate the weight of a Boeing 747. Believe it or not, I actually heard of this question before, and had a good idea of how to approach the problem. People that are interviewing with me these days get some unusual questions that they can blog about. I tend to ask people to perform tasks that they would be faced with on their first day on the job. Just last week I asked several candidates to solve some Excel problems for me. The way I look at it, if I expect you to perform the task on your first day, I want to know you can do it, before I hire you. Am I crazy?
Chief Family Officer has a post about sending her boys to private school at a steep price. Her readers responded to the article with some fairly vile comments. I am amazed that she let some of those comments stay published. In any case, I can certainly understand the dilemma. My oldest started kindergarten this year and he is going to public school. The schools in our neighborhood are very highly rated, so I am very comfortable with that decision. However, I can certainly understand the desire to give your kids the best education possible. Education is the one investment that is better than any portfolio. In my humble opinion, that is.
Quest for Four Pillars has a post explaining how he decided how much life insurance coverage his family needs. My life insurance coverage is enough to replace my annual base salary 6.4 times. I am not sure whether this will be sufficient on its own should fate take me away from my family before my time. It's probably pretty close given that term life insurance payments are not taxed, and that the money can be invested as soon as it is paid. I may need to re-evaluate my coverage.
As always, I will add a couple of more recommendations later this week.
Ask Mr. Credit Card hosted this week's Carnival of Personal Finance, which included my article "Advanced Portfolio Building". I also wrote two additional articles on the same topic this week. You can find them here and here.
Tezza from 4EvaYoung wrote an article titled Buying is for Suckers (she is referring to houses). I wouldn't go as far as the title of this post suggests, but you may remember that my article Rent is not Waste was selected editor's pick in last week's Carnival. I agree with practically all of the arguments Tezza is making. Tezza also adds a couple of excellent points, including the following: renters do not typically over-extend. Buyers of homes have a nasty tendency to buy more home than they need, thinking that they will either grow into it, or sell it for a profit. Talk about locking up valuable capital in bricks and mortar.
Free Money Finance has a post about strange and unusual job interview questions. I have had a couple of strange interview questions in my time. One interviewer put a batman action figure in front of me and asked me how I would market the masked crime fighter. In another interview, I was asked to suggest ways to prove that the light in the fridge does not stay on when the door is closed. In yet another interview I was actually asked to estimate the weight of a Boeing 747. Believe it or not, I actually heard of this question before, and had a good idea of how to approach the problem. People that are interviewing with me these days get some unusual questions that they can blog about. I tend to ask people to perform tasks that they would be faced with on their first day on the job. Just last week I asked several candidates to solve some Excel problems for me. The way I look at it, if I expect you to perform the task on your first day, I want to know you can do it, before I hire you. Am I crazy?
Chief Family Officer has a post about sending her boys to private school at a steep price. Her readers responded to the article with some fairly vile comments. I am amazed that she let some of those comments stay published. In any case, I can certainly understand the dilemma. My oldest started kindergarten this year and he is going to public school. The schools in our neighborhood are very highly rated, so I am very comfortable with that decision. However, I can certainly understand the desire to give your kids the best education possible. Education is the one investment that is better than any portfolio. In my humble opinion, that is.
Quest for Four Pillars has a post explaining how he decided how much life insurance coverage his family needs. My life insurance coverage is enough to replace my annual base salary 6.4 times. I am not sure whether this will be sufficient on its own should fate take me away from my family before my time. It's probably pretty close given that term life insurance payments are not taxed, and that the money can be invested as soon as it is paid. I may need to re-evaluate my coverage.
As always, I will add a couple of more recommendations later this week.
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