My 2008 Personal Finance Report Card

The past year has been a monumental one for us, at least from a personal finance perspective. Here is a quick summary of some of the highlights and closing positions for the year.

Net Worth - our net worth is up 7% over the past year, but this is entirely due to an unexpected and substantial cash infusion from a family source. Without this cash infusion our net worth would have been down by high single digit percentages. Over all we have kept to our plan and had the market treated us nicely, this could have been a banner year. Maybe next year?

Investment Portfolio - we got completely smacked. Our investment portfolio (which does not include our cash position) is down a staggering 33%  for the year. That burns, especially since this number looks better than it actually is due to new money that we have invested in recent months. Still, we continue to fully fund my 401K - my wife is currently working part time and does not have a 401K - and we continue to make regular monthly contributions to our investment portfolio.

Spending - this year we spent about 4.5% more than we did last year, however most of this increase is on non-discretionary items, such as childcare (up %26) and medical bills (up 52%). Over all, we live within our means: in each of the past 12 months we made more money than we spent, with the exceptions of April (where we got hit with a large, unforeseen tax bill - damn you AMT!!!) and June (where we got hit with unexpected childcare expenses, and my wife was not employed).

Career - a mixed bag here. I left my previous company to take a VP level position with a technology start-up in my industry. Generally speaking, I am very happy with this move. My work is interesting, it carries a great deal of responsibility (and stress), and is clearly an important growth position from my previous job. Even more important, this position puts me in a very good spot for my future career path by giving me a great deal of exposure to high level executives in my industry as well as to a large number of venture capital firms. All in all, a good decision, but not a risk-free or stress-free one. My wife on the other hand has had a tough year at work - she was let go of one position, and resigned from another because that position required her to work too many hours. She is currently happy to be working part time, however this situation may not be a very stable one at the company she is with. We'll ride that horse as long as it runs.

Money and Such - this has been a very decent year for Money and Such. I have continued to gain RSS subscribers (thank you guys!) and traffic has been dramatically higher in October and November thanks to some high profile link-backs and a lot of search traffic. The site has also started to generate a little bit of revenue (although this is really minor for me). I have noticed that the number of posts I published this year is significantly down from 2007 - 151 this year compared to 237 last year, however, this is primarily because I did not do much writing between January and April (suffering from blogger malaise, I guess). My plan is to continue going strong in 2009, with an average of 15 to 20 posts per month. My goal is to double the number of RSS readers to 500 by this time next year. I am also thinking of joining a blogger network, so if any of you guys out there, think I am good enough for you, give me a holler. What started out as an experiment for me, has turned into a real hobby. I think that Money and Such will be around for quite a while, and maybe one day I will even try to figure out how to migrate this site to its own private domain. I am not a very technical blogger.

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Cutting My Tax Bill

In 2002, as the dotcom bubble was going through its painful deflation, I took my first steps into stock investing, and what painful steps those were. After it was already down by about 50%, I bought a sizable stake in the NASDAQ index fund QQQ. I figured: how much more could it fall? Well, it turns out the a lot more. At the bottom, my position was worth a staggering 67% less than my original investment. Worse, we never recovered those losses. At its best point - in October 2007 - more than five years after the original investment, the position was still about 20% under water. After the crash of 2008, that position is now 56% down.

Well, I have decided to make some money on that miserable investment decision. Or at least, I have decided to cut my losses. Last week I sold off enough of that position to take advantage of the $3,000 ordinary income deduction for the 2008 tax year. We typically buy and hold for the long term, but I figure it's time to admit a mistake and at least harvest some of this loss. By the way, I did not remove this money from the market, I used the funds coming out of QQQ to beef up our REIT index fund which has been badly beaten down over the past year. Rebalancing.

There is another lesson hidden in this little fiasco: no matter how much you think the stock market is beaten down, it might surprise you and fall a lot more. This lesson is not lost on me, and the comparison to the current situation may be a good one. My mistake in making the QQQ investment was to place all our eggs into one basket - investing in technology stocks. My other mistake was moving into the market in one lump sum, rather than moving in gradually over time. I have tried to learn from that mistake and we are now broadly diversified. In addition, I am now very careful about moving money into the market gradually, over time, through monthly, fixed contributions. Still, it is possible that six or seven years from now I will be selling positions I am buying today to offset a looming tax bill. Let's hope not.

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The Urge to Change

In recent days I have been getting antsy about our portfolio. I feel the urge to do something, I am not exactly sure what, but something to improve the overall safety and performance of our investments. Unfortunately (or actually fortunately), I know that there is very little a smart investor can do in this market turmoil other than stick to tried and true investment principles that will ultimately bring success: diversification, cost minimization and regular, disciplined investments and savings.

Maybe it's because my company is shut down for the holidays and I have more time on my hands than I am used to. Maybe it's because I have been spending some of that extra time reading the Wall Street Journal and other business papers. There is so much advice out there: stocks to buy, stocks to avoid, predictions of doom, predictions of a quick stock market rebound... there is a ton of advice out there and much of it is conflicting. It's just not useful.

My assessment of the economic situation is that things are pretty gloomy. The news is pretty much all bad, and while stocks dropped a precipitous 40 some percent over the past year, there is nothing that says that they can't go down further. Having said this, I believe that we are within 10% to 20% of a market bottom, and market timing is simply not something that I believe in. With that in mind, we will continue our regular, monthly contributions to our stock portfolio, and as always those investments will be in the form of index funds. Buy and hold for the long term, will continue to be the strategy.

Having said all this, there are a couple of diversification moves that I have been entertaining. One is something that I have been thinking about for a long time: build a small diversifying position in commodities (I am thinking 5% to 10% of the portfolio). Commodities have taken a major hit in recent months, and this may be a good time to make such a move. The other move I have been entertaining is diversifying into foreign currency denominated investments. I don't know about you, but the massive borrowing that the federal government has undertaken makes me nervous. In the coming years, I will not be surprised to see the value of the Dollar slide and tumble and erode the purchasing power of our savings. E*trade, where we keep our portfolio offers the option of opening an investment account denominated in Euros or other major currencies. This is something I will continue to think about and research and I will keep you guys updated.

In the mean time, I think that a good way to handle the situation is what a wise man once said: "Don't just do something, sit there"...

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Dealing with the Crisis by Ignoring It

The other day I e-mailed an old friend who I haven't seen in a long time. This guy and his wife own and operate an event planning and marketing promotion business. Naturally, I was wondering how their business was faring under the current economic conditions. He wrote me back saying, and I quote:

"We've heard about the global economic downturn, and we are choosing not to participate."

I was amused. That's the kind of guy my friend is. Now, I am assuming this guy was kidding me, but the question is whether such a response can be a legitimate strategy for coping with the situation. After all, the vast majority of us is gainfully employed and will continue to keep our jobs through the crisis. Those of us who were prudent and fortunate enough to build our cash reserves have a cushion to fall back on in time of need, and if you are willing to take a business-as-usual approach you can get some pretty fantastic bargains these days on anything from cars, to vacations, to homes, to luxury goods.

I am too conservative with my money to follow such a strategy, but I wonder if any of my readers out there are taking this kind of "business as usual" approach. Let me know.

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Not All Lay-offs are the Same

Four thoughts about lay-offs:

1. Last week I heard that a good friend of mine was finally let go from Citigroup where he worked for the past 7 years. He had survived several rounds of lay-offs, but his number was finally up when his entire group was axed last week. I guess that there are some lay-offs you simply cannot escape. Or are there? Knowing that the risk level was high, my friend began networking internally months ago, trying to find islands of relative safety within the troubled bank. Even in badly beaten Citigroup there are groups and divisions that are doing well and making money, and those groups are still hiring. Although he does not yet know whether he will be saved by a last minute move to another group - my friend has two likely leads, and may be able to stay one step ahead of the grim reaper for a while longer. He should know in the next couple of weeks.

2. Laying people off during the holidays sucks big time. It's just not right. I know that businesses are struggling and I sympathize with management teams that are doing everything in their power to save their companies, but laying people off a week or two before the holidays should be done only as a very last resort...

3. Speaking of which, my former company also went through a 10% lay-off last week, which only goes to show you that big and mid-size companies like my former employer, do not necessarily offer employees more job security than smaller companies like my current start-up. People knew that this lay-off was coming about a week in advance, and pretty much everyone knew in ahead of time who was going to go. It just goes to show you that lay-offs are NOT arbitrary. The writing is typically on the wall long before any pink slips are handed out.

4. Not all lay-offs are the same. In this post I mentioned two companies that went through lay-offs. Citigroup and my former company - a Silicon Valley high tech company which shall remain nameless. My friend who was laid-off at Citigroup, received a 6 month severance package. He will not be out on the street any time soon (he is highly talented and will certainly recover quickly anyway, but the cash certainly helps). Some of my former colleagues fared far worse. For example, one of them, after 10 years of service was given only 8 weeks in severance pay. That's not right. It just goes to show you - it's important to know which company to get laid-off by...

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Credit Room - Site Review

These days folks looking for a new credit card have a variety of websites catering to their needs with offers for matching their lifestyle and financial objectives to the most appropriate card for them. The Credit Room is one such site and the thing that immediately struck me when I visited it was the clean graphic style and appealing layout which are clearly aimed at visitors of the female persuasion. 

I found it very easy to navigate the site and information is very accessible. Visitors can search for cards by feature (e.g. fee free cards), reward type, or the strength of their credit score. Credit Room also offers a large number of credit related articles, many of which aimed at women (I don't think that articles such as "beauty and credit" are meant for tough guys like myself), and others of more general interest - such as this article about dealing with credit limits and this article about identity theft.

All in all, Credit Room is a very nicely designed site that does what it's there for, and does it elegantly. However, one area where the site misses the mark is in the advanced search functionality. This section is meant to allow visitors to search for the right cards based on multiple criteria, such as credit history, country of residence and type of user. The problem is that the functionality simply doesn't work. I entered my country of residence as the U.S., my credit history as good, and identified myself as a consumer... the engine found precisely zero cards that matched my criteria... clearly some repairs are in order.

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Fall of a Stock Picker

In yesterday's Wall Street Journal, there was a front page article about William Miller, who I suppose is the manager of Legg Mason Value Trust, a mutual fund which according to the article "outperformed the broad market every year from 1991 to 2005. It's a streak no other fund manager has come close to matching". In spite of Mr. Miller's phenomenal run, in this latest market downturn he stumbled so badly that according to the WSJ, "These losses have wiped away Value Trust's years of market-beating performance. The fund is now among the worst-performing in its class for the last one-, three-, five- and 10-year periods according to Morningstar." The WSJ quotes an investor in this fund as saying: "Why didn't I just throw my money out of the window -- and light it on fire?", and complaining that Mr. Miller's strategy "worked for a long time, but it's broken." I would like to point out that throwing your money out the window and then lighting it on fire, is redundant. You could reduce your expenses by taking either action, but both are probably not necessary.

So what's my point? Only this: investing is not about beating the market over the short term. It's not even about beating the market consistently for 20 years. It's about generating enough returns to guarantee your financial future. Even if you think you found a star-performing fund manager, or you think you can pick stocks better than anyone else you know, you should have zero confidence that this streak will continue. Apparently Mr. Miller is a very talented investor. Either that, or he is lucky beyond belief. However, even his market beating returns were completely wiped out by a short term mistake.

What's the answer? As always, my answer is index investing: (i) trust in the long term average returns of the stock market and don't try to beat them because the house always wins, and (ii)  minimize your investment costs because that is the one element that is completely under your control. Oh yeah, and don't freak out and sell when the market turns south. Markets do that on occasion.

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Why the Worst May be Over

In these days of economic doom and gloom, I would like to be one of the first to climb on my soap box and take a big risk by saying that: I think that the worst may be over. That's a bold statement with the stock market in the pits, the unemployment rate projected to climb up to 10% by next year, and some big name companies on (the wrong side of) the brink of collapse. Still, I am getting a hunch, and its nothing more than a hunch at this point, that the worst may be behind us. Here are my reasons:

The world isn't ending - yet everyone is acting like it is. Back in September and October (seems like eons ago), it seemed like we were on the precipice of disaster. Personally, I was concerned that the banking system as we know it might completely cease to function. It looks like this is not happening. While some big name banks have gone under in a massive wave of bankruptcies and fire sales, the system is still here. I have been tracking the LIBOR rates - which show the interest rates that banks are charging each other, and rates have been progressively going down since the worst of the crisis. Is some semblance of confidence returning to the markets?

Stocks have slowed their descent - month over month my Quicken reports still show that our portfolio has lost value. However, on a weekly view, for the past few weeks the market has been moving more or less sideways, and in the past 14 days the direction has been up. Could it be that the low of 741 we saw on the S&P 500 just a few weeks ago might be the illusive bottom? Or is this a bear trap we're looking at?

Liquidity galore - the amounts of money that governments around the globe have been throwing at the economy are simply staggering. We are talking multiple trillions here. You gotta believe that all this money has got to make a dent in the problem. Now whether this is a good thing in the long run and whether we'll see rising inflation and a crumbling Dollar in the future is a different question that we should leave for another day, but all of this stimulus should be... stimulating.

The shock is gone - I talk with a lot of people. Over the past couple of months everybody wanted to talk to me about how the economy was horrible and things were going to hell in a hand basket. Over the past few weeks it seems to me that the shock has worn off. These days I don't hear a lot of chatter from folks about how they are losing a ton of money in the stock market and how the latest news will mean disaster for the economy. I think people are more or less resigned to the situation and in their own careful way, are getting back to business. I think this will eventually translate into more robust economic activity.

I don't know, I may be imagining things, but I think that the worst may be over. Don't get me wrong, things aren't going to be great all of a sudden, and if you are out looking for a job in this climate, you are not going to have an easy time. However, I think we may be going from a class 5 hurricane to a class 3 hurricane. It's still pretty bad, especially when it hits you directly, but it's just slight less horrible. Thoughts anyone?

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Where the Bail-Out Money Goes

$335B in bail-out money have been committed by the government to date as part of the so-called TARP program. The NY Times has released an excellent graphic that shows where all this ocean of cash has been flowing.

As you know, I have been an early supporter of the financial industry bail-out, however upon seeing the NY Times graphic, I have to ask myself if this is precisely what was intended. Yes, a lot of the money has gone to bail-out commercial and investment banks, however, if you examine the list of companies that have received bail-out money, you will also find American Express - a credit card company; Hartford Life and Protective Life (protective being my own troubled life insurance company); and now several cities and states have joined the list of beggars for our tax dollars, not to mention the auto industry which has been angling for a nice chuck of change financed by - who else? - the American taxpayer.

What a sham this is turning out to be. The financial industry required saving from complete collapse for the benefit of the entire American economy. The same cannot be said for the life insurance companies, car manufacturers or local governments. Seriously, if my home state of California is $32B in the hole, let us, the residents of California, pony up the cash or else give up some services. If I as a consumer selected a failure of a life insurance company, it was my mistake. I am not expecting the Federal government to guarantee my financial decisions. And auto makers? I have spoken my mind on that farce extensively already.

It should take more than the purchasing of a regional bank to allow for American Express to claim the title, benefits and bail-out money of a so-called "Bank Holding Company". Enough is enough. Not every failing business should be rescued by the government, and not every miserable financial decision needs to be rewarded. A line should be drawn, and the line should pass exactly at the point where the benefit of a bail-out accrues to specific individuals or limited groups, but the financial cost is borne by society at large. Banks needed to be saved so that our economy could avoid a complete melt-down. The logic does not apply to the other institutions standing in line for cash.

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Counting the Loot

This weekend my 6 year old son and I decided to go through the change jar and roll-up some coins. After a fair amount of work we ended up with a total of $237.50 in change all rolled up in the nice little piles you see above. This coin jar has been laying around for several years now and the coins weighed about 10 lbs when we took them to the bank for deposit.

My son really enjoyed this activity and my three year old twins also wanted to help (obviously making more mess than actually helping). While we were at it we also tackled my son's piggy bank from which we pulled out $37 in coins. He was very proud when the teller handed him several new, crisp notes for his change. I was actually contemplating opening a checking account for my son so that he could learn to manage his money, but I think we'll wait a few more years to do that. He's still too young.

Interestingly, in this huge pile of change, my wife spotted a penny from 1946. This coin has been wondering the world since the year my father was born, until it somehow ended up in our change jar. Just think of all the places it's been. Incidentally, if you are curious about where you paper money wanders off to after you use it to pay for something, you can find out by going to Where's George. I used it a couple of times with interesting results.

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Life Insurance Company Stability - More Concerns

In recent weeks I have written a couple of times regarding my concerns about the financial stability of my life insurance company, Protective Life. It seems like there may be new reasons for concern. After Protective Life was downgraded by some rating agencies recently,  it seems that the company is now seeking the status of a bank holding company, so that it can receive some Federal bail-out money... 

I have conflicting feelings about this whole thing. First, can anyone now get federal bail-out money? You simply need to be declared a bank holding company? That seems seriously wrong. However, I am concerned about the status of my life insurance policy and I am not quite sure what the appropriate response may be. Should I be out looking for a new policy from another insurer? How can I tell if the new insurer is any better? I mean, when I did my due diligence, Protective Life seemed stable enough too. Finally, I am not clear whether my life insurance policy is at risk here or not.

Life insurance policies are typically guaranteed by state guarantee associations. However, in last week's issue of Business Week, there was an article about the fact that those associations have very few assets to back-up those guarantees (sorry I couldn't find a link to the article itself). Here is a quote:

"When Executive Life went belly up in 1991, states couldn't raise enough to cover its obligations. Annuity and life insurance policyholders in California recovered as little as 70 cents on the dollar or were forced to accept modified terms with alternative providers. "I wouldn't put tremendous amount of credence in the guarantee funds," says Adam Sherman, president of advisory firm Firstrust Financial Resources in Philadelphia."

Wonderful. Another quote:

"Insurance customers need to be more vigilant. Stop focusing only on cost and service and start worrying about solvency. Check such agencies as Standard & Poor's, Fitch Ratings, Moody's and A.M. Best to find the highest-rated companies, and be alert for downgrades."

Yes, but I did all that. What do you do if there is a downgrade? I don't have an answer yet. Still trying to figure this all out.

In any case, if you would like to find out about the current strength of your own life insurance company,  the Insurance Information Institute offers detailed explanations on how to find and interpret ratings from each of the four rating agencies listed in my quote above (the links are close to the bottom of the page).

I'll keep you posted when I decide how to address this issue, but in the meantime, let me know if you have any suggestions.

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email.

People Are Not THAT Stupid

All Financial Matters posted an article yesterday commenting about a Wall Street Journal article in which Robert Rubin, a director in Citi Group essentially shirks responsibility for Citi Group's recent failure. I read the same WSJ article and I generally agree with JLP's sentiment which is that officers and executives are paid to drive their company's success,  and can't just blame the system or outside forces for their company's failure. After all, if the company succeeded, I am guessing no executive would be out saying: "oh, it's the economy", or "the competitors really screwed up" or even "we were just plain lucky".

JLP also makes a comment about the stupidity of thinking that bundling sub-prime mortgages and securitizing them would reduce the overall risk and make such securities a legitimate investment vehicle. There I disagree with him. Kitty, one of JLP's commenters also disagrees and in a detailed and well written comment explains that bundling a large number of risky securities reduces the overall risk through diversification. Sure, some of these sub-primes were bound to fail, but the chance that they would all fail simultaneously was pretty slim.  The real problem was that the risk of failure was highly correlated - in other words, the chance of failure for  each individual sub-prime loan increases as the economy falters or as housing prices start to decline. What makes one loan likely to fail also makes others in the same group more likely to fail.

This strong correlation is what folks were unable to see in advance. It's not that they were stupid - this was not a trivial matter to understand ahead of time. People simply did not realize that real estate prices could be subject to nationwide, large scale declines. In fact, as late as the end of 2006 I heard a lecture from a UCLA economics professor who made the point that real estate is subject to volume cycles rather than price cycles and that real estate prices were unlikely to drop nationwide. Of course, in retrospect it's very easy to understand how risky the whole premise was, however at the time even sophisticated investors were unable to understand the true level of risk. 

Does that excuse management who allowed such investment to made? Not really. Executives are responsible for the success or failures of their enterprises whether or not they understand the true risks they are facing. 

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Giving Thanks that October is Over

Although I am a couple of days late, and am not typically susceptible to gooey holidays, this year I have much to be thankful for, and I am extremely grateful that October 2008 is over and done with. October 2008 was the most stressful period of time in my adult life, at least as far as I can recall. Here is how it all went down:

Stock market - while the stock market slump began in September, it did not truly turn into a massive, gut churning route until early October. Yes, we all lived through that, and to be honest, while I disliked the drop I wasn't terribly concerned by losses to our portfolio. What scared me was the knowledge that the financial system was on the very brink of complete collapse. For a while there, I was seriously contemplating pulling a few thousand dollars out of our bank account, just in case the banks shut down and we needed cash for our basic needs (we do have some cash reserves available at home, but nowhere near sufficient to live off of for several weeks). OK, but we all lived through this, and I was in no way unique.

Employment - as I have previously written, in late September my wife decided to quit her job. She had the big conversation with her boss just a day or two before the economic turmoil started in earnest. And while I completely supported my wife's decision to walk away, the timing we found ourselves caught in was truly nasty. All at once the hiring environment turned from difficult to practically impossible. However, since I have a well paying job that still would have been OK but...

Fund Raising - my company is a start-up and we were about to run out of money in the middle of November. As the executive responsible for the fund raising effort, I realized that our prospects for raising a new investment round in this type of financial climate were not encouraging. In fact, although I had to put on an optimistic spin and talk-up our chances to the rest of the executive team and the employees, I was truly worried that we would go out of business, which would leave my wife and I both unemployed in the worst hiring environment in decades. Moreover, I felt the heavy weight of 30 families' livelihoods rest on my shoulders. If I couldn't raise the money, I wasn't the only one who would be out of a job, my friends and colleagues, many of which are probably worse off than me, would be unemployed as well. Talk about stress. BUT, as they say in the infomercials, "wait, there's more!"

Sick as a Dog - for almost the entire month of October I was as sick as a dog (where does this saying come from?). I had a constant fever. Not high - hovering around 99F most of the time - but it was there and I felt like crap. I had batteries of blood tests performed ($10K worth, according to the doctor), urine tests, eye exam, even... a brain MRI. Nothing. The Dr. was planning to send me to do a full body CT Scan - which I seriously fought against. What can I tell you. It was pretty bad. Normally, I would probably take a few days off and hide in bed until I got better, but I couldn't do that. Not with our funding round so close to failure and the company so close to going out of business. So during that entire time, I had three meetings a day with venture capital funds, and countless other phone calls and follow-ups. Incidentally, the illness itself was bad, but the fact that the doctors couldn't figure out what the problem was for over three weeks was the really scary bit.

October was a really, REALLY bad month, BUT it is over and here is how it all turned out so far:

I am healthy - one of the many blood tests showed up some faint traces of infection. Ten days and one aggressive course of Cipro later and I am as good as new. 

Wife employed - it's contracting work, and it's only part time, but it pays the bills and my wife is happy and so am I. She is out looking for a new full time position, but we are realistic. It's probably going to take several months to find the next gig. Fine with us.

Money in the Bank - last week we closed a $12 million dollar investment round with two new venture capital funds. This means that we have enough money at least until April 2010. My CEO gave me a lot of credit for the fund raising and praised me to our board of directors. This is a major achievement for me and my reward is that I get to have a steady pay-check in this economy, and so do my colleagues.

The stock market? Well, that's still in the pits, and probably will be for a while, but that's OK. As long as the system itself continues to function (and it looks like it may be stable for now), we can ride it out.

I am extremely thankful that October is gone. While it has been the most stressful month in my adult life, I think I can honestly say that I am better for having gone through it and thrived. Things have worked out as well as could have been expected. 

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Getting Economic Good Data

When economic markets are reeling and major news developments happen several times a day, it is important to stay well informed. However, bad information is even worse than no information at all, so making sure that your news sources are reliable and trustworthy is key. In the spirit of information sharing, I thought I would share some of the economic news sources from which I gather my data.

WSJ - I have a subscription to the Wall Street Journal, and while I don't have time to read that paper in full every day, I make it a point to scan the headlines for 10 minutes every morning when I get to the office. I also read a couple of articles in the evening. This is an excellent and very detailed source of economic information.

The Economist - In my opinion, The Economist is by far the best source of detailed and clear economic analysis. While my subscription has elapsed a couple of weeks ago, I shall renew! The only down side: there is no way to "scan" this weekly magazine. I always find myself dragged into to hours of reading, and its not unusual for me to have 5 - 10 previous issues on my night stand waiting for me to finish reading them.

 

NY Times - again, in my humble opinion, the best daily newspaper in the country. I don't subscribe, but I buy it periodically (especially before getting on flights). I do visit the website every day.

Business Week - as a source of detailed information and analysis this one is pretty weak, however it is a great overview which I scan on a weekly basis. If I find anything interesting, I do a deep dive on my own.

Kiplinger - recently I have started reading Kiplinger's online. I really dislike the website itself, but they do have some interesting information about personal finance, a topic which I have... a passing interest in...

NPR - I am not a member, and shame on me, but I listen to NPR practically every minute I am in the car. Market Place and All Things Considered are two excellent programs that cover financial and economic issues in depth.

Personal Finance Blogs - although us PF bloggers don't tend to break any major news stories, we do provide a lot of opinion and analysis which I find useful. Personal finance blogs also do a far better job of analyzing in depth personal finance issues than practically any news outlet out there. You can find a partial list of my favorite PF blogs in my blog-roll, but my top two choices are The Digerati Life and Frugal Zeitgeist, both written by lady bloggers and both offering excellent, fun content.

Check for Myself - whenever I hear of an important news development that involves a publicly available source of information, such as a government report or interview, I often go and check the source for myself rather than rely on the summary created for me by some news organization. I find that the picture becomes much clearer that way - this however takes a lot of time, so I do it judiciously.

I would love to hear about the news sources you use to gather your data. Sound out in the comment section below.

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Thriving through Lay-Offs

As lay-offs continue to roll across corporate America, many of us may soon find ourselves bidding goodbye to some of our colleagues who are laid-off. Many folks who survive a round of lay-offs find themselves suffering from survivor's guilt or becoming demoralized or disillusioned by their company. Those are exactly the wrong reactions. Although a round of lay-offs is tough for everyone, there are some things you can do to improve the situation and there are even some silver linings:

Take on More Responsibility - layoffs in your company can be an opportunity for major career advancement. Think about it: there is more work for fewer people. There are bound to be orphaned projects, programs and areas of responsibility, and guess what? Your boss would be delighted if you offered to take over some of them. Find a project that takes you in the career direction you are trying to go and make a bid for it. Moreover, remember that the more responsibility you have and the better your performance, the more likely you are to keep your job through future rounds of lay-offs (if there are any).

Stay in Touch with Former Colleagues - believe it or not, layoffs in your company mean a major boost to your professional network. Knowing people in your own company is good. Knowing people in other organizations in your industry is excellent, and there is a good chance that many of the colleagues that just left your firm will find new places of employment within your industry. If you stay in touch with your former colleagues your network will become much more powerful. Remember, your colleagues are your assets.

Help Out - losing one's job, whether expected or not, is a traumatic event, but you are in a position to help your former colleagues land their next jobs. Be proactive in offering contacts to headhunters, potential job leads and other resources that your former colleagues may find useful. Giving folks a call every week or two to find out how they are doing is also not a bad idea. One thing that I like to do for former colleagues is to write a recommendation for them on LinkedIn. Of course, I only provide a recommendation if I mean it, but such recommendations can both improve the mood of the recently laid-off and help them to find their new position.

Be a Cheer Leader - lay-offs are serious morale killers, and while you may be tempted to come to the office and hide in your cube, now is a great time to step up and take a leadership position. Don't participate in downer water cooler conversations, be optimistic and be vocal about it. Optimism is infectious and greatly improves results. Moreover, even though you may not realize it, lay-offs are extremely tough on management as well. Management will notice and appreciate your cheer leading. Hell, being optimistic really improves your day, give it a shot.

Pat Yourself on the Back - it is very much OK to stop for a minute, breathe a sigh of relief and pat yourself on the shoulder for keeping your job. Somebody in management knows you are doing a fine job. Somebody there has probably put up a fight for you when the decisions were being made. You are doing something right. Good job.

Don't Take Anything for Granted - it is not unusual for companies to go through multiple rounds of lay-offs, and even if you don't think that another round is coming, being prepared for losing your job is always a good idea.

The good days will come again, but until then hang in there and continue to do your best.

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Day Care Price Increase

Last week we received notice that the price of our child care was about to increase from $1,132 per child per month to $1211, a 7% increase starting January 1. Since we have three kids going to this day care center (our oldest participates in the after school program), we are about to take a $300 a month hit to our budget, with the total monthly cost of day care going well above $3,000. Our rent has also increased recently from $2,000 to $2,100. Not a dramatic rise, but together with the day care, our non-discretionary spending has just increased by $400 a month or almost $5,000 in after tax spending...

While I make very decent money as a VP in my small technology company, my wife is currently contracting part time after quitting her previous position. It goes without saying that in this economic environment, the chances of either my wife or I getting a raise are practically non-existent. This means that the proposed increases are going to come directly out of the amount we were planning to save.

The day care price increase is not yet finalized. Our day care is city owned (one of only a few such facilities in our area), and the city council must approve the increase in a council session scheduled for tomorrow. Many parents are planning to show up at the session to plead our case that in such bad economic times raising prices is really unacceptable. Based on research conducted by one of the parents we believe that the price increase is meant to allow for raises to the day care staff, and while we would certainly like to see this dedicated team make more money, we don't think that this year such raises are legitimate.

Recommended Articles & Commentary

Here are some of the personal finance articles from around the blogosphere that I have enjoyed over the past week. There have been quite a few of them, actually:

All Financial Matters wrote a post about the economic role of government. In particular, one quote from the article rings true: "Unless restrained by constitutional rules, special-interest groups will use the democratic political precess to fleece taxpayers and consumers." Couldn't agree more. However, that's not to say that government should stay on the sidelines in this economic tsunami. Government should continue to take some pretty dramatic measures to prevent this serious recession from turning into something worse. Yes, there will be an economic price to pay later, and taxpayers will no doubt be fleeced, but the alternatives are worse.

Blunt Money is advising his readers to worry about their own darn economy - he thinks that when making economic decisions one should focus on his own economic situation and disregard the economic environment as a whole. I disagree. When making a large purchase, it is wise to consider the possible impact on your finances in case you lose your job. When making a decision to leave your current job and take a new offer, it is wise to consider the economic situation: do you want to be the new guy in the office if your new company starts laying people off? 

Boston Gal is commenting about the drop in household electricity usage in recent months. She is wondering whether the reason is the economic downturn or folks starting to save. I am really hoping people are consciously saving, but I am willing to bet that the recession is to blame (or credit). Some of the commenters seemed to suggest global climate change is the culprit.

My blogger friend Frugal Zeitgeist is out to defend her frugal street cred after making some big purchases recently. In my opinion, frugality is not about living like a beggar. It's about making smart purchases, living below your means, and most importantly not robbing your future self to pay for your current wants. Don't worry Frugal, your street cred is intact, at least from this bozo's perspective.

Millionaire Mommy posted a really cool inspirational photo essay telling folks to get off their "buts". That's not a typo. That's the specific point of the essay. I laughed myself silly. However, while I am a big believer in self-help, I don't believe that a simple shift in attitude can solve all problems. There are some objectively very difficult problems that will not yield to a simple desire for change - here's one example I wrote about earlier this week.

Finally, Mrs. Micah is going through some job interviews and offers good advice to fellow job applicants. 

Finally, this week I participated in the Carnival of Personal Finance which was hosted by Money Ning, with my call for no bail-out of homeowners.

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Life Insurance Company Stability: More Info

A few weeks ago I wrote about about how I was starting to become concerned about the stability of my life insurance company - Protective Life. Last week I got more information on the subject. It appears that Protective Life was downgraded by a couple of credit rating agencies, however according to the language of the downgrade the situation appears to be stable. From the downgrade announcement: 

"This rating action reflects Fitch's view that the risk-based capital level of PL's primary life insurance subsidiaries has deteriorated in 2008 and will continue to be pressured over the near term due to investment losses and reserve strain associated with the company's term life insurance business. The ongoing turmoil in the credit markets has limited PL's financial flexibility and put pressure on its ability to access funding to improve its capital position...

...Importantly, Fitch believes that PL's liquidity position is sound. The company has no significant debt maturing until 2013 and has cash and liquid assets to meet maturing obligations at the holding company and operating company levels. Further, PL has below-average equity market exposure given the company's relatively modest variable annuity business and negligible exposure to unaffiliated common stock. Equity-adjusted leverage remains within expectations, and interest coverage, while down from prior quarters, is reasonable."

The way I read this, my life insurance company is hurting because their portfolio is down, but they are not under any imminent threat of insolvency or any burning need to raise cash. 

I will continue to monitor the situation, but it looks like there is no cause for immediate alarm.

Not Everyone Can Quit Their Jobs...

A couple of weeks ago I wrote a post about how and why my wife quit her job in this difficult environment. Late last week, one of my readers posted the following comment in response to my post, which I wanted to share with you:

"I guess it all depends on where you sit. I was married for 14 years then divorced and have been raising my 3 children for the last 10 years on a single income (30K per year)with no child support(blood from a stone thing). I worked for 19 years for a major industrial supply company before suffering some disability. The company does not want to provide me with a position that I can survive on . The disability insurance will soon end and if I can't find a job that will allow me to pay bills me and my kids will be out on the street in a one to two months. You can serve your country in the military, work hard all your life, try to do all the right things and still end up on the trash heap. One thing people may not realize is that many people in such situations as mine are stuck working in positions without promotional opportunities because the company realizes they have you by the balls. You have to feed your kids etc so you just have to take it. Good luck to you all, god bless and consider all things. I hope you find this world a better place than I do at the moment. "

Wow. That was powerful, moving stuff. How do you respond to such a statement. Clearly, my reader is under a lot of stress and feels that she doesn't have too many options. 

It is pretty humbling to hear of a person facing such profound challenges. After all, my wife and I are extremely lucky. We are financially secure. We are both healthy. Our kids are all healthy. We have everything that we need. We have the luxury or resigning a well paying position because it does not allow us to maintain the work-life balance we desire. 

Any advice, insight or commentary would be appreciated.

"Big Three" Bail Out: Good or Bad?

Yesterday afternoon I got an e-mail from a PR firm obviously hired by GM to mobilize grass roots support for a government bail-out of their customer (and presumably of other US car manufacturers). One of the things I enjoy about personal finance blogging is that all of a sudden you get all these solicitations from a variety of parties trying to push an agenda, a product or an idea - imagine what it's like to be a member of Congress - but I digress. Anyway, since this is a hot topic, I figured I would put in my two cents on the issue. So, is a bail-out for Detroit a good idea?

Let's examine the proposal: a $25 billion government capital infusion into the "Big Three", presumably with some sort of government over-sight and government ownership stake. It looks like the government is seriously contemplating an active role in the management of these companies. According to automakers, about 3 million jobs are at stake and supposedly $150 billion annually in personal income will disappear if GM is allowed to go bye-bye. Seems like the stakes are big. Now for some opinions:

I went and did some digging. According to Department of Transportation statistics (chart 1-16) the number of domestically produced cars sold in the US was about 5.4 million in each of 2004, 2005 and 2006. No later data is provided. This is a total of about 16.5 million vehicles over the period. Assuming that the number of domestic cars sold last year is roughly the same, the requested $25 billion bailout is equal to a taxpayer subsidy of about $1500 for every domestic vehicle sold over the past 3 years! 

The so called "Big Three" have been losing money for years. Readers may not remember or know this, but it was the Carter administration who had to bail-out Chrysler back in 1979. At the time, Congress "merely" guaranteed loans by the company. Now we are talking an outright cash infusion. Is it impossible to make money in this industry? Hell, no. Toyota and Honda seem to be doing very well, thank you. So why would we be thinking of throwing away a perfectly good $25 billion of tax payer money into a company like GM who burned through $7 billion in cash in the last quarter alone?

I do not underestimate the possible macro-economic implications of a failure of these behemoths. Clearly, an uncontrolled implosion of such large organizations would have a devastating effect on the economies of Michigan and surrounding states, and I am not advocating that the government allow such an uncontrolled implosion. However, the clear path to a successful resolution of this fiasco goes through bankruptcy court.

If GM cannot continue to fund its operations, it should file for bankruptcy protection. In such a case, a bankruptcy judge could release the company from the ridiculous constraints of its UAW union contracts, could sell off the company's assets to interested buyers who could continue to operate the factories and even take over some of GM's more popular brands. The company could try to raise new private capital and re-organize its operations. GM may or may not be able to make it out of bankruptcy court, but that is none of the taxpayers' business. 

As a society, we should care for the "Big Three's" employees, by offering them extended unemployment benefits, retraining services and actively encourage more capable owners to take over the operations of these companies. However, we have no obligation to guarantee that perennially inefficient and money losing operations continue to exist.

In fact, by allowing these zombies to continue their half-life existence, we are delaying the recovery of the entire auto industry, as healthy and well run auto companies are forced to face hail-Mary, market destroying moves from dying companies. How can we honestly say that we have a free market if we bail-out these companies at the expense of their competitors and, more importantly, at the expense of the taxpayers?

There is one more charge that I need to answer. I have previously argued in favor of a bail-out for the financial industry. Why do I oppose this one? Is my position inconsistent? I believe that my position is completely consistent. In the case of the financial sector, we were facing a classic case of market failure. The market was simply not functioning. People were not lending or trading simply because they had lost confidence. Moreover, the financial industry was in such shambles that the very basis of the capitalist system was being threatened. In this case, the situation is completely the reverse. In the case of the "Big Three" the market has spoken. It is not that all car companies are facing bankruptcy, it is that those big, lumbering, inefficient ones whose products the consumer no longer wishes to purchase that are facing failure. Others car companies, while suffering from the economic downturn, are still profitable and are doing fine. 

I am not quite sure if this was the reaction that the "Big Three" PR person was seeking to provoke from me, but there you have it. I am firmly against a government bail-out of the "Big Three", and my opinion appears to be diametrically opposed to that of the President Elect. I call this mistake one for Obama, but we shall see...

Insurance You Need, Insurance You Don't

The post I wrote last week about reducing your car insurance bill got me thinking about other kinds of insurance, and how useful they are. As I have written before, insurance should be reserved for potentially devastating costs - as a way to reduce your risk to manageable levels. If the risk is something you can handle without a third party (who makes money by charging you more in premiums than they pay-out in claims), you should handle that risk on your own.

With that in mind here are some of the types of insurance that I think are well worth the money:

Life Insurance - that's a big one. If you die, you want to make sure that your loved ones are well taken care of. However, even here it is important to understand that if you don't have dependents, you probably don't need life insurance.

Disability Insurance - possibly even more important than life insurance (although, I must admit I only have the inadequate coverage offered by my employer). You want to make sure that if you are unable to continue doing your job, you are still able to maintain a decent standard of living.

Home Insurance - unless you are a multi-millionaire (and I mean MULTI), losing your home to a fire or hurricane without insurance could completely devastate your financials.

Health Insurance - if your employer does not offer health insurance, you should make every effort to buy your own. If you can't afford a complete plan, at least get catastrophic coverage with a large deductible, to make sure that you have some backing in case of a major illness.

Car Insurance - we can argue about collision damage, but making sure that you have enough liability coverage is key. Getting sued for all you are worth by someone injured in a collision with you is really something you want to avoid...

There are many other types of good insurance, but the important thing is to understand that what they all have in common is this: they protect you from risks that while relatively small, would devastate you financially if you don't have sufficient coverage.

Now, let's talk about some types of insurance that are useless in my opinion:

Extended Warranties - every time I buy anything at Best Buy, the sales clerks try to convince me to get an extended warranty. But why? Very simply: the company makes money on the policies they sell. Conversely, the cost of the insurance is higher than what they expect to pay me in repair costs. I don't know about you, but if my iPod dies, I don't expect to be devastated financially. Worst case scenario, I'll need to live without portable music for a while.

Life Insurance for Children - your kids do not need life insurance. No one is depending on them for income (unless your child happens to be a famous movie star or fashion model, I guess). If the unthinkable happened and your child passed away, your income would not be effected. In fact, although it is sad to say, your expenses would actually go down. The risk here is not financial, it is emotional, and that cannot be off-set by life insurance.

Vision Coverage - if your employer did not provide vision coverage, would you get it yourself? I wouldn't. Again, the same logic applies: your vision coverage covers the cost of your annual exams and purchasing prescription glasses and such. Most people would probably be better off foregoing the insurance and buying the glasses on their own. Remember - the insurance company needs to make money, so they are charging you more than they expect to pay for your check-ups and prescriptions.

Vacation Insurance - unless we are talking about your dream vacation that you have been saving for for the past decade, insuring your vacation makes very little sense to me. If your vacation gets cancelled for some unforeseen reason, worst case scenario, you get no vacation that year. You are not financially devastated. Your life continues along its normal course.

Again, there are many other types of insurance that do not make economic sense, the common denominator is that even if the worst case scenario occurs, your financial condition is largely unchanged. In such cases, it is best to save your money rather than spending it on buying unimportant coverage.

You can also check out my previous article about buying insurance in your 20's.

Recommended Articles & Commentary

Here are some of the personal finance articles that I enjoyed this past week, with some opinion thrown in for good measure: 

Have you recently tried to use the free annual credit report website? Changes that have been made by the credit reporting agencies have made this website largely impossible to use. I have a post planned for this topic based on my recent experiences, but it appears others are having the same horrible customer experience. 

Saving advice wrote a good post comparing how saving small amounts of money is much more effective, and easier to do than making additional small amounts of money. This is probably true to a point: there is a given point beyond which saving is probably no longer easy to do without a major impact on lifestyle. 

All Financial Matters published an article about a proposal to eliminate the 401K approach to retirement, and replace it with a $600 tax credit and a government managed retirement account which will be funded by a mandatory retirement tax. Talk about a crappy idea! Yes, I agree that there are big problems with the 401K plan system as it currently stands, one of which is the fact that a 401K is tied to an employer and the investment options it offers. Another is the fact that most individuals are simply unequipped to make reasonable retirement planning decisions. However, this does not mean that I want to turn over my retirement planning to a government agency or to accept their investment decisions on my behalf. 

The NY Times published an article this week comparing the cost of health care in various countries around the world, taking into account each country's GDP. There is a very tight correlation between per capita GDP and spending on health care, with most countries located more or less on a straight line on a graph. However, the U.S. is dramatically outside this line with spending per individual much higher than would be expected given our GDP. What's more, our medical service (as judged by medical outcomes) is not better than that of other industrialized nations. This is mandatory reading to anyone who thinks the health care system requires reform.

Moolanomy has a post about investing in tough markets, highlighting the importance of asset allocation, diversification and continuing to invest when the market is down. I am a big believer in regular contributions - in fact, Friday was our regularly scheduled monthly contribution into our stock portfolio. I was very happy that the market declined 5% that day. I love discounts.

This week I also particiapted the Carnival of Personal Finance which was hosted by The Digerati Life this week. My article Avoiding Getting Laid-Off was my weekly submission.

Don't Bail Out Homeowners

Talk is increasing about a government bail-out for home owners who cannot handle the burden of their mortgages. This annoys me no end. My regular readers know that I have previously written strongly in favor of the government bail out of financial institutions. Why then do I object to a bail out for individual home owners and how can I justify this seemingly inconsistent position? Here goes:

No Win for Taxpayers - when bailing out financial institutions, government, for the most part, received an equity stake in the banks or received other assets that once the markets stabilize will become more valuable and may actually provide tax payers with a substantial return on their investment. The proposed bailout of homeowners will not provide tax payers with any upside or assets in return for their gracious intervention. It will simply make the problems of overwhelmed home owners go away by a wave of the magic wand, at our expense.

Picking Winners and Losers - I am a renter. My wife and I made the decision to rent for a combination of reasons, the most important of which is that we simply cannot afford to buy a house in our town, nor did we think that stretching to buy one would be a good or safe investment. On the other hand, many other folks have made a financial bet on the supposedly permanently rising prices of real estate and decided to gamble their life's savings to buy a house.

A specific example I have in mind is one of the people that worked for me in my previous company, who bought a million dollar house in San Jose, California, even though his household income was dramatically lower than mine, and who did so through an aggressive ARM with a 5 year teaser rate.

Why would government take my money, to reward those homeowners who made bad financial decisions? Not only does such a decision hurt me and millions like me directly by wasting our tax dollars, it also penalizes us by artificially putting a price floor under the housing market, thereby keeping houses out of our reach while letting those who made irresponsible decisions reap financial rewards for their financial recklessness.

By bailing out homeowners, government would be making winners out of irresponsible home buyers, and doing so by penalizing responsible renters and (to a lesser degree) responsible home owners.

Moral Hazard Galore - even though we have all taken to calling it a bail-out, financial institutions were not really bailed-out in the common sense of the word. AIG shareholders were completely wiped-out in the government take-over, BearStearns share holders were very nearly wiped-out. Banks who are now receiving equity infusions from the government are receiving this cash infusion in exchange for shares which dilute the value of shares held by other shareholders and which will hopefully yield a profit to tax payers in the long run. What I am trying to say is that the government may have bailed out the financial institutions themselves, but shareholders have been duly penalized.

However, the government is now proposing a true bail-out of homeowners. It is not talking about wiping out the equity of home owners and turning them into renters or of letting them walk away from their loans without going through bankruptcy, it is talking about improving the terms of their loans so that they are better off. Seriously?

The System is not at Stake - With all due respect to home owners, the financial sector was on the verge of complete collapse, one that would surely have dragged down strong industrial companies and small businesses along with it. This was not a question of saving Wall Street, it was a question of saving all of us. The boat was sinking. The same is not true of individual homeowners. Yes, collectively homeowner losses are a drag on the economy, but no one is even claiming that this will bring a complete meltdown of our economic system. The situations are simply not comparable.

Worried about the economy? Let's talk economic stimulus. Let's talk tax cuts, let's talk public works and infrastructure improvements. Hell, let's even talk a second stimulus check to individual tax payers. BUT don't go and reward exactly the sector of the population whose financial irresponsibility and greed is a major reason for the current economic trouble!

Saving Money on Auto Insurance

In times of economic crunch, we all look for ways to save money, whether it's by curbing our shopping habits, or just making sure we have the most affordable auto insurance available. While changing insurance companies to take advantage of new-client specials is one way to knock down that premium, there are other methods of lowering your monthly insurance bill, as well. Here are a few:

Bundle Up: Whether you own or rent your home, you can save money by bundling your homeowners or renters policies with your auto policy, under the same insurance company. In fact, most companies discount both policies a little bit, rather than only giving you a discount on one or the other. As well, while those new-client deals at other insurers may seem attractive, they may not entirely offset the hassle of moving your policies around. Instead, ask your existing insurer about loyalty discounts – they're often available for customers who've stuck around for as few as two years.

Be Good: Good drivers and good students both qualify for discounts from many insurers. For the former, you need a clean driving record going back three years; for the latter a B average or better, and/or presence on the honor roll or Dean's list at your school. Parents of teen drivers take note: if your child is on your policy, their grades count toward this discount until they reach the age of 25 or are no longer full-time students, whichever comes first. Want to maximize your discount? Consider taking a defensive driving class. Doing so often nets you a significant (up to 10%) discount that lasts up to three years. Parents and students can take such classes together, and better yet, when those three years are up, you can repeat the course to reinstate the discount.

Be Safe: Even small safety measures, like parking your car in a locked garage instead of leaving it in the driveway, can help reduce your premium in some cases, but for significant savings, make sure that your vehicle is equipped with an anti-theft device. These include tracking devices, like LoJack, audio alarm systems, and less passive measures, like engine immobilizers. Just make sure that any aftermarket safety equipment is approved by your insurance company before you install it. Safety devices like airbags, and certain kinds of seatbelts that make driving your car less risky, may help you save money as well.

Raise that Deductible:  If you have a solid driving record, as well as enough money in savings to offset a higher deductible should you be in an accident, you can lower your premium by raising the amount you pay out of pocket. Think of the deductible as the equivalent of a medical co-payment. The more you pay up front, the less you're billed later.

Join a Club: Members of auto enthusiast's groups, job-related unions, and professional organizations often have access to discounts from affiliated insurance companies, and even some owners clubs are offering deals now, too. Ask around, and check with your benefits coordinator at work.

The five things listed above are just some of the many ways you can save money on auto insurance. When you're shopping for a new policy, or re-negotiating an existing one, remember to ask if there are any discounts you don’t already have. You may be able to save money because of your age, job title, or zip code, as well as the age of your car.

We all need auto insurance, but we need to watch our finances as well. By being a savvy shopper, you can save money without sacrificing coverage. 

Preparing for a Layoff

Last week I wrote a very popular post about how to avoid getting laid-off. However, recognizing that in some cases whatever you do will not spare you the pink slip, this article is all about preparing for the worst case scenario. If you get wind of an upcoming lay-off, know that your company may be in trouble, or simply want to take some precautionary measures, here is a series of steps that you should think about taking:

Update Your Resume - whether or not you think that you are at risk of losing your job, keeping your resume up to date is a good idea. You never know when you'll get a call from a headhunter or come across an opportunity that you want to respond to immediately. The idea is being ready to hit the ground running. Even though I feel very secure in my current position, my resume is up to date and ready to go.

Stay in Touch - its a cliche in job hunting circles that most people find a job by networking. Forget for a minute about formal networking - be sure you renew your contacts with old friends, colleagues and acquaintances. I have previously written that your colleagues and former colleagues are important career assets - so be sure to stay in touch or reconnect with some of your former colleagues who have moved on to other companies. This is not only good advice for prospective job hunters - it's also nice to reconnect with old friends. 

To get started, make a list of people you need to reconnect with, and make it a point to give a call or shoot an e-mail to one person a day. This will also make transitioning to formal networking or job hunting mode much easier to do when the time comes, because your relationships will already be fresh and up to date.

Spread Your Name - being easy to find by prospective employers and headhunters is a good strategy in good times and in bad. Your action items here are limited only by your imagination - have a prominent profile on major social networking websites, give talks at industry events, write papers for your industry publications, write white papers or presentations that can be published on your company website etc. The important thing is to have your name attached to some impressive professional achievements and to make sure that these are easy to find online.

Make Discreet Inquiries - don't wait for the pink slip. If you think you are likely to be let go, start looking for a job preemptively. However, be sure to do so discreetly, because if your employer finds out that you are looking, it is very possible that you will find yourself on the lay-off list even if you were previously safe. In this context, I never felt secure about putting up my resume on the online job boards, since I am always concerned that my employer will somehow find out about this in spite of my precautions. Instead, I prefer more discreet job hunting avenues such as very specific headhunters, and job referrals through LinkedIn. 

Emergency Fund - others have written extensively about the need to build an emergency cash fund for use in case of financial emergencies, so I will not belabor the point. However, if you suspect a lay-off is imminent, and you don't have a sufficient emergency stash built up, move quickly to correct the problem.

These are tough economic times, but luck favors the prepared mind, and much can be done to avert the worst consequences of a lay-off. The important thing is to actively engage the situation, rather than to wait passively for events to unfold. Make a plan, and start executing today.

Dividends? They Don't Matter

Many investors swear that dividend yielding stocks are better investments than other stocks. Some fellow personal finance bloggers like the Div Guy believe in dividends so much that they dedicate their entire blog, not to mention their investment strategy, to the idea that dividend stocks are simply superior. This idea does not make any economic sense to me, and here's why:

Money is money - the value of shares is determined by the value of a company's income stream and the value of its assets - which includes its cash hoard. A company that pays out $1 in dividends now has 1 fewer dollars in its bank account, and therefore the value of its shares should decline accordingly. As an investor, it should not matter to you whether you have received a payment of $1 from the company, or whether the company keeps that $1 and your stock is now worth an extra buck. Money is money, wherever you hold it. Claiming that dividends create money is equivalent to saying that using an ATM to withdraw money from your bank account somehow makes your over all net worth improve... all you did is simply move the money somewhere else.

Taxes - dividends are subject to tax. When a company pays you a dividend, it automatically triggers a tax liability for you. Unless the dividend is being paid into a tax sheltered account, you would have been better off keeping that money in the company and having it compound without taxation until such time that you decided to sell your stock.

Liquidity? No Thanks - Some say that a company generates liquidity for its shareholders by paying them dividends. Shareholders can hold onto the same number of shares and get some of their money out of the company. But why is that a good thing? If I want liquidity, I can sell some of my shares myself, without the company deciding how much and when to make me liquidate.

Efficiency? I don't Think So - a common claim is that by paying out dividends, management in a company is not tempted to use its extra cash on non-productive investments or waste the money. Well, maybe, but if they have extra cash on hand, couldn't they achieve the same objective without creating a tax liability for investors by purchasing back some of their own shares? That would make share prices go up. On the flip side, what about companies who could use the cash they pay out to make some wise investments, but instead pay dividends and then borrow money or sell more stock to support their investment objectives? That's a worse proposition for the company who will now pay interest expenses or share its income with more shareholders.

Nope. This whole idea of dividends simply does not make sense in a highly liquid market. Now before you wag your finger at me and say that I don't know what I am talking about, I did not invent these arguments. These are arguments that I have been taught in business school finance classes and in my corporate law courses in law school. Not enough for you? Someone actually won a Nobel Prize for making these claims - you can read more about the Modigliani-Miller Theorem for yourself. If you are interested in more reading on the subject, see this easy to understand short paper by a Chicago Graduate School of Business professor. This paper also explains why folks make the mistake of believing that dividends actually do matter.

Now, having picked a fight with a bunch of well respected bloggers, let me stand back and wait for the angry mob to assemble its responses in the comment section... Let the battle begin.

Recommended Aricles & Commentary

Here are some of the personal finance articles I enjoyed over the previous week. To be honest, this week I did not have much time to roam far and wide, as I normally do, and instead mostly stayed with my favorite PF blogs. Here are my recommendations for the week:

Plonkee wrote a wonderful piece about gap years - a common practice in Europe where people take a year off work - often before or after college, and go travel the world. Personally, I did this twice - once before college and once after my first year as a lawyer. Those were some of the best times of my life. Those two 6 month periods also helped to define and mold who I am today. Sadly, very few Americans make travel a major part of their early adulthood.

On the Digerati Life this week, there were two articles I particularly liked. One dealt with not buying a new car - a topic which I wrote about myself a while back. The other had to do with signs of a stock market bottom. I want to comment briefly about both posts - first, the car purchase. It appears that Americans in general have decided to forgo buying new cars for now - as evidenced by the complete meltdown of Detroit auto sales, and that's a perfectly rational decision in tough times. However, let me tell you a story - my company has been going through a fund raising process in this horrible financial environment (I will write a long post about this about 2 weeks from now), and as a consequence, I have been meeting many venture capitalists. The vast majority of these arrive in our office driving Porches or BMWs, but just last week I met one venture capital partner who drives a Nissan Altima. I immediately took a liking to the guy. Here's someone who spends his money wisely, even though he is obviously very well off financially.

Regarding the signs of a stock market bottom, I have this general advice: don't look for them. Trust that the laws of economics, much like human nature, have not and will not change. As long as we remain a capitalist nation and a huge asteroid does not collide with the Earth, stock markets will, over the long haul, yield about 8% a year. Some years will be better, some will be worse. You can save yourself a lot of anxiety and heart ache if you accept this and continue to invest in a disciplined manner regardless of what the market happens to be doing that specific year. Easy advice to give, tough advice to follow (even for me).

Five Cent Nickel this week started to entertain the notion of a second stimulus check- yeah, I don't know that this would be a viable long term strategy for stimulating the economy. In fact, I am not even sure if throwing even more federal money into the battle is a good idea or not. I am concerned about the mounting deficits and debt load. Someday soon we will have to pay the piper in the form of substantially higher inflation, a potentially steep decline in the value of the US Dollar, or both. I am keeping an open mind though, and don't pretend that I know what the right answer here is.

This week I participated in a couple of blog carnivals, including the Carnival of Personal Finance where Sun awarded me the honor of Editor's Pick for my post about leaving your job in a tough economy. I am honored. The post seems to have stuck a cord, since it was also taken up by many other bloggers. I also participated in the Carnival of Money Stories and in the Festival of Frugality. Finally, this week my blog was flooded by traffic when MSN Smart Spending featured my article about how to avoid getting laid-off. Hey, welcome new readers and RSS subscribers!