A few days ago I was running my regular Quicken check-up of our finances and I noticed something strange. Our Citibank credit card was showing a $39 late fee as well as finance charges of $43, with both of those fees also showing an immediate reversal. This seemed strange, so I asked my wife about it. Her explanation blew me away:
Apparently, she paid our full balance off as we do every month. However, she paid the bill on the last day of the cycle at a few minutes after 9 PM PDT. Apparently, the billing cycle is calculated according to Eastern Time not to according to our local time zone. The good folks at Citibank, and by good I mean predatory, charged us a total of $82 in late fees and finance charges for supposedly paying our bill 7 minutes late. I think that if you were to calculate the APR on this supposed "7 minute loan" you would find that Citibank tried to charge us the equivalent of 4 million percent per year in interest. My wife, being the take-no-crap fighter that she is, called them up and gave them a good piece of her mind, at which point they relented and reversed this travesty.
Seriously, if you feel that the credit card companies are out to get you, it's probably because they are. Seems we are not alone in our battle against the evil credit card companies. Here is another post on the subject that I came across a few days ago. Jeff of Jethro's World simply escalated the fight until the credit card company (Chase in his case) cried "uncle".
It is good that some of us are fighting back against these predatory practices, but I have to wonder how many people are just paying these fees without a fight? Once again, where is Congress when you actually need them?
Friday, August 31, 2007
Thursday, August 30, 2007
The Extremes of Investing
A few days ago I wrote a post about a friend of mine that picks stocks and tries to buy shares during IPOs. Today I would like to write about one of my colleagues, who takes the exact opposite approach.
Late last night I returned from a business trip to several mid-western cities. Accompanying me on this trip was a good friend and colleague. Our trip involved a lot of driving around and so we had a lot of time to chat. If you are going to spend much time with a personal finance blogger, the conversation will eventually work its way towards the topic of personal finance. It's the nature of the beast. During one of these long drives I was commenting to my friend about the extreme volatility we have been seeing in the market in recent days, I also commented on the fact that I think that the U.S. economy is headed towards a recession. My friend very calmly responded that he is not concerned about the stock market, because his entire portfolio is invested in cash. Then, completely disregarding my incredulous stare, he proceeded to encourage me to follow the same strategy. I think I will stick with a more sane asset allocation.
My colleague is about 15 years older than I am, in his very early fifties. He is a well compensated professional at the top of his career, however, he still has many years to go before retirement, which is why I was very puzzled by his investment strategy (or lack thereof). When I asked him about it he simply said that he is very risk averse, and following this ultra-conservative strategy allows him to sleep peacefully at night.
I have previously commented about the need to understand your true level of risk tolerance. Going above this level is a sure fire way to make stupid investment decisions, such as selling at the worst possible time. However, I think that my friend's complete lack of tolerance for risk is the riskiest strategy of all. With the meager returns you can generate in the money market or by buying CDs, you would need to be a truly copious saver to sock away enough money to allow for a comfortable retirement. I think my friend is suffering from a particularly nasty strain of the fear of investing disease.
As a final comment, I would like add that even though I think that we are on our way to a recession, I am holding on to our stock positions and will continue to do so. There are two main reasons for this. First, selling my stock portfolio would immediately trigger a massive capital gains tax liability. I may lose money by staying in the market, but I am guaranteed to lose money to greedy Uncle Sam if I bail. Second, while I think that we are headed for tough economic times, I do not have a crystal ball - let me tell you a secret, neither does anyone else. So while I trust my intuition and my training, I never try to out-guess the collective wisdom of hundreds of millions of investors. I may be smart, but I am not THAT smart. Very few people are.
Late last night I returned from a business trip to several mid-western cities. Accompanying me on this trip was a good friend and colleague. Our trip involved a lot of driving around and so we had a lot of time to chat. If you are going to spend much time with a personal finance blogger, the conversation will eventually work its way towards the topic of personal finance. It's the nature of the beast. During one of these long drives I was commenting to my friend about the extreme volatility we have been seeing in the market in recent days, I also commented on the fact that I think that the U.S. economy is headed towards a recession. My friend very calmly responded that he is not concerned about the stock market, because his entire portfolio is invested in cash. Then, completely disregarding my incredulous stare, he proceeded to encourage me to follow the same strategy. I think I will stick with a more sane asset allocation.
My colleague is about 15 years older than I am, in his very early fifties. He is a well compensated professional at the top of his career, however, he still has many years to go before retirement, which is why I was very puzzled by his investment strategy (or lack thereof). When I asked him about it he simply said that he is very risk averse, and following this ultra-conservative strategy allows him to sleep peacefully at night.
I have previously commented about the need to understand your true level of risk tolerance. Going above this level is a sure fire way to make stupid investment decisions, such as selling at the worst possible time. However, I think that my friend's complete lack of tolerance for risk is the riskiest strategy of all. With the meager returns you can generate in the money market or by buying CDs, you would need to be a truly copious saver to sock away enough money to allow for a comfortable retirement. I think my friend is suffering from a particularly nasty strain of the fear of investing disease.
As a final comment, I would like add that even though I think that we are on our way to a recession, I am holding on to our stock positions and will continue to do so. There are two main reasons for this. First, selling my stock portfolio would immediately trigger a massive capital gains tax liability. I may lose money by staying in the market, but I am guaranteed to lose money to greedy Uncle Sam if I bail. Second, while I think that we are headed for tough economic times, I do not have a crystal ball - let me tell you a secret, neither does anyone else. So while I trust my intuition and my training, I never try to out-guess the collective wisdom of hundreds of millions of investors. I may be smart, but I am not THAT smart. Very few people are.
Tuesday, August 28, 2007
Recommended Articles
Another week, another carnival. Here are what I consider to be the most original posts from this week's Carnival of Personal Finance hosted by Free Money Finance.
Cheap Healthy Good has a comprehensive article about saving money AND eating healthy while traveling. I happen to be on a business trip as I am writing these lines and I can tell you that whenever I travel on business, my eating habits go down the drain. The combination of crappy and expensive airport food, dinners with clients and snacks I buy in hotel gift stores is a really horrible mix. I really should reform my ways in this category.
Million Dollar Journey is talking about how to find out if the charity you are contributing to is wasting your money on administrative expenses. This is a very important topic. There are a number of websites which help would be philanthropists to evaluate the various charity options available. These include: Charity Navigator and Give.org. As long as we are on the subject of charity, check out Heifer International. It is an innovative and impactful charity organization.
Cash Money Life is currently running a series about the process of deciding whether to pursue an MBA, and if so which school to choose. As someone who has already gotten his MBA, I find this series of posts interesting. I also put together a small website on the same topic. You can find it here.
Finally, Home Finance Freedom provides some interesting information about understanding the data contained in the Federal Reserve's Survey of Consumer Finances. This is the source for much cited numbers about what Americans' net worth actually is.
I will add additional article recommendations later this week.
Cheap Healthy Good has a comprehensive article about saving money AND eating healthy while traveling. I happen to be on a business trip as I am writing these lines and I can tell you that whenever I travel on business, my eating habits go down the drain. The combination of crappy and expensive airport food, dinners with clients and snacks I buy in hotel gift stores is a really horrible mix. I really should reform my ways in this category.
Million Dollar Journey is talking about how to find out if the charity you are contributing to is wasting your money on administrative expenses. This is a very important topic. There are a number of websites which help would be philanthropists to evaluate the various charity options available. These include: Charity Navigator and Give.org. As long as we are on the subject of charity, check out Heifer International. It is an innovative and impactful charity organization.
Cash Money Life is currently running a series about the process of deciding whether to pursue an MBA, and if so which school to choose. As someone who has already gotten his MBA, I find this series of posts interesting. I also put together a small website on the same topic. You can find it here.
Finally, Home Finance Freedom provides some interesting information about understanding the data contained in the Federal Reserve's Survey of Consumer Finances. This is the source for much cited numbers about what Americans' net worth actually is.
I will add additional article recommendations later this week.
Monday, August 27, 2007
Of Retirement & Dwarves
A few weeks ago I came across this interesting website on Get Rich Slowly. The website offers a tool for calculating your cross-over point: the point at which the income from from your investments exceeds the amount of money you spend on a monthly basis. Theoretically, from that point forward you are financially independent and would no longer be required to work to maintain your living standard.
I found the notion intriguing and played around with the numbers a little bit. Here is what I came up with: assuming we spend 80% of what we make (which is pretty close to the mark), achieve a return on our invested capital of 8% per year, inflation averages at a rate of 3% per year and we gain a pay increase of 4% per year, my wife and I will be achieving our cross over point in... wait for it... 12 years. Financial freedom, here we come! Or, maybe not so fast.
Here's the rub. While the crossover theory is sound in principle, it fails to take into account a number of parameters:
1. Inflation - say we were to get to our cross-over point and then stop working. At that point our income from investment would equal our expenses and we would no longer be adding to our savings, nor would we, in theory, be diminishing them. However, inflation is a nasty beast. Just because we stop saving and investing, doesn't mean that prices will remain fixed. In fact to the two eternal truths (death and taxes) we should probably add a third: inflation. With time inflation would erode the purchasing power of our investment income, and back to work we go (with very few hi-hoes).
2. Market Fluctuations - while our portfolio can reasonably be expected to return 8% annually over the long term, there are no guarantees that we will not be hitting any short term bear markets. Assume we stop working at our crossover point, and the very next year the market tanks and goes does 20%. If at that point we continue to draw down our investment income at the previous rate, the value of our portfolio will erode very quickly. Once again if you listen carefully, you can hear seven dwarves singing a much too cheerful song in the background.
3. Additional Expenses - if indeed we reach our crossover point in 12 years and choose to retire, we will be many years away from qualifying for medicare. Right now our medical insurance costs are largely covered by our employers, but if we need to pay for medical insurance ourselves, that crossover point is probably a little bit farther into the future. Will someone shut-up those darn dwarves already?
4. Asset Allocation - while we are young, both working and have no immediate need of our retirement assets, we can reasonably expect our investments to yield something like 8% a year on average. However, as the time comes for drawing down on those assets to support our living expenses, a more conservative investment strategy will probably be required, and the more conservative your investment the lower the average return you can expect. Once again, our crossover point just got a bit farther away.
So, is there no hope? On the contrary, there's big hope. As we close in on the cross-over point, we will have amassed a substantial asset base, and this asset base will be compounding at a pretty impressive rate. We may not be able to wave our bosses good-bye quite yet, but we will be well on our way and with just a few more years of hard work we will be able to kiss the corporate life good-bye.
Interestingly, I actually enjoy my work and as of today I am not in a rush to leave it behind me. Still, it would be nice to know that the option is there, if I choose to use it.
For a detailed discussion of the cross-over concept, be sure to visit The Simple Dollar.
I found the notion intriguing and played around with the numbers a little bit. Here is what I came up with: assuming we spend 80% of what we make (which is pretty close to the mark), achieve a return on our invested capital of 8% per year, inflation averages at a rate of 3% per year and we gain a pay increase of 4% per year, my wife and I will be achieving our cross over point in... wait for it... 12 years. Financial freedom, here we come! Or, maybe not so fast.
Here's the rub. While the crossover theory is sound in principle, it fails to take into account a number of parameters:
1. Inflation - say we were to get to our cross-over point and then stop working. At that point our income from investment would equal our expenses and we would no longer be adding to our savings, nor would we, in theory, be diminishing them. However, inflation is a nasty beast. Just because we stop saving and investing, doesn't mean that prices will remain fixed. In fact to the two eternal truths (death and taxes) we should probably add a third: inflation. With time inflation would erode the purchasing power of our investment income, and back to work we go (with very few hi-hoes).
2. Market Fluctuations - while our portfolio can reasonably be expected to return 8% annually over the long term, there are no guarantees that we will not be hitting any short term bear markets. Assume we stop working at our crossover point, and the very next year the market tanks and goes does 20%. If at that point we continue to draw down our investment income at the previous rate, the value of our portfolio will erode very quickly. Once again if you listen carefully, you can hear seven dwarves singing a much too cheerful song in the background.
3. Additional Expenses - if indeed we reach our crossover point in 12 years and choose to retire, we will be many years away from qualifying for medicare. Right now our medical insurance costs are largely covered by our employers, but if we need to pay for medical insurance ourselves, that crossover point is probably a little bit farther into the future. Will someone shut-up those darn dwarves already?
4. Asset Allocation - while we are young, both working and have no immediate need of our retirement assets, we can reasonably expect our investments to yield something like 8% a year on average. However, as the time comes for drawing down on those assets to support our living expenses, a more conservative investment strategy will probably be required, and the more conservative your investment the lower the average return you can expect. Once again, our crossover point just got a bit farther away.
So, is there no hope? On the contrary, there's big hope. As we close in on the cross-over point, we will have amassed a substantial asset base, and this asset base will be compounding at a pretty impressive rate. We may not be able to wave our bosses good-bye quite yet, but we will be well on our way and with just a few more years of hard work we will be able to kiss the corporate life good-bye.
Interestingly, I actually enjoy my work and as of today I am not in a rush to leave it behind me. Still, it would be nice to know that the option is there, if I choose to use it.
For a detailed discussion of the cross-over concept, be sure to visit The Simple Dollar.
Sunday, August 26, 2007
IPO Investors, Beware!
For the past several months, a close friend of mine has been salivating about the upcoming IPO of VMware (NYSE: VMW). He thought that it would be a great investment opportunity. He even tried, unsucessfully, to get some shares at the IPO. VMware finally went public earlier this month in a wildly successful offering. Turns out that my friend was right. The IPO was an excellent investment opportunity. My friend invested at $55 a share, so as of Friday evening his investment certainly paid off (the stock closed at $71.30).
However, not all IPOs have a happy ending. In fact, a number of academic studies have shown that for the first 3 to 5 years after an IPO, shares of newly public companies tend to underperform the general market. See for example this article, and this excerpt. This is such a well known phenomenon that I first heard about it when I took my very first finance class in business school.
My friend did very well for himself, but I am not clamouring for a share of that pie. In fact, I am going to stick to my tried and true indexing strategy and not try to outperform the general market. While my friend seems to have beat the odds so far, on average he is playing a game that is stacked against him. Remember, some people also win money at the slot machines, at the roulette table or by playing their state lottery, but that doesn't mean that playing those games is a prudent investment strategy.
Thanks for the offer, but I'll take my equity investments slow, steady and well diversified.
However, not all IPOs have a happy ending. In fact, a number of academic studies have shown that for the first 3 to 5 years after an IPO, shares of newly public companies tend to underperform the general market. See for example this article, and this excerpt. This is such a well known phenomenon that I first heard about it when I took my very first finance class in business school.
My friend did very well for himself, but I am not clamouring for a share of that pie. In fact, I am going to stick to my tried and true indexing strategy and not try to outperform the general market. While my friend seems to have beat the odds so far, on average he is playing a game that is stacked against him. Remember, some people also win money at the slot machines, at the roulette table or by playing their state lottery, but that doesn't mean that playing those games is a prudent investment strategy.
Thanks for the offer, but I'll take my equity investments slow, steady and well diversified.
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