Dismal 401K Results. A Great Opportunity!

A colleague came to me earlier this week and commiserated that when he got his 401K statement for 2008, he found out that his 401K lost 9% in the last quarter of the year. He asked how my 401K was doing, and I admitted that I didn't know but that I could check on the spot and tell him. I logged onto the Fidelity website and checked the numbers: down 22% between October and December. My friend was shocked. How could I have lost 22% in the last quarter alone? I explained that since I have about 30 years left to retirement, I am aggressively invested and don't mind taking some risk for a chance at a higher return. My friend, who is much closer to retirement than I, was aghast.

I believe that my 401K asset allocation is appropriate for my age and risk tolerance, and besides, I manage our investment portfolio as a whole, not considering my 401K independently. My asset allocation in the plan is as follows: 70% S&P 500 index fund (this is a good fund with a 0.1% expense ratio - pretty impressive); 10% in a real estate fund; 10% in a bond fund; and 10% in an international fund. Normally my international allocation is closer to 30%, but the international fund offered by my plan is actively managed (I typically invest only in index funds) and charges a hefty expense ratio to boot.

As you would expect, all of my 401K funds have taken major hits over the past year, with the international and real-estate funds showing the biggest declines, as similar investments did in the rest of our portfolio. Nevertheless, I am unfazed. Retirement savings are the very definition of long term savings and with retirement approximately 30 years away, now is the time to take some investment risk in an attempt to grow a sizable asset cushion. It's not that I enjoy looking at these losses, but as I have previously written these declines represent an investment gold mine for those of us who will be net savers over the next couple of decades.

Hey, don't listen to me. Listen to Warren Buffet - supposedly he thinks now is a good time to be in equities.

What does your 401K look like these days?

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Enough with the Hypocracy

I don't normally write about these subjects, but I just have to comment about the whole Michael Phelps story. So the guy smoked some pot, so what? So did the President of the US once upon a time. Clearly, the "drug" didn't hurt Phelp's physical performance...  I don't smoke, cigarettes or other stuff, but I think it's time to stop this insane and self-defeating witch hunt against people who choose to pursue habits that do not harm others. At this point any half-objective observer has to admit that alcohol and tobacco are far more dangerous than pot, yet the former two are available legally on every street corner.

Yes, he broke the law. Big deal. If you never exceed the speed limit, stand up. You're looking for folks who break the law? Go after Tom Daschle and Tim Geithner, both of which did not pay taxes on substantial income for years, but that's not going to happen because those two made an "honest mistake".

What prompted me to write this brief post is Kellogg's recent announcement that they were going to drop their advertising contract with Phelps. You know what, someone needs to stand up and say: hypocrites, stop this useless, self righteous crusade. From now on, I think i'll buy General Mills cereal instead.

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Mock Interviews: an Excellent Preparation Technique

A friend of mine is about to finish her Ph.D. in economics at Stanford University. She is a highly talented individual that is coming into the job market at a particularly bad time. On the plus side, folks with her credentials and experience are always in strong demand, but this lady is leaving nothing to chance. She has taken aggressive action to prepare for her many job interviews, and among these steps, she has asked me and other business executives, academics and other friends to conduct mock job interviews with her. 

She explained her objectives to me: 

1. Get back in the game - she has been a Ph.D. student for several years now, and it has been a while since she had to interview for anything. Just like any other skill, interviewing is something that requires practice. You may be naturally talented at being interviewed, but if you haven't practiced your skill for a while, chances are you have lost some of your edge.

2. Clarify the story - my friend knows that as part of her interviews she will be asked about her academic research, and since this is a highly technical and complex subject, she wants to test the story on some of us non-academics, to make sure that her explanation is jargon free and easily understood by an intelligent, non-expert audience.

3. Get Feedback - getting input on your performance from multiple sources is always a good idea. As much as you can prepare on your own, you never truly have an objective view of your interview performance, and asking a friendly audience to interview you seriously and to later provide honest feedback, is a great way to get information that you can get in no other way.

If you are looking for more ideas about how to prepare for job interviews, take a look at this excellent post on Digerati Life. 

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Executive Salary Caps? Asinine

As far as I am concerned, President Obama has made his first major policy error yesterday by announcing  a salary cap of $500K per year for executives in companies that have received "exceptional assistance" from the government. Sure, $500K is a huge amount of money and many of us would love to earn much smaller amounts. Nevertheless, President Obama's decision is simply asinine. No, it's not that I feel bad for fat wall-street cats who have managed their companies into the ground. Not at all. But Obama's policy is a populist, over-reaction that is bound to have some serious adverse consequences. 

Wall street pays its employees outrageous amounts of money. You can argue about whether these sums are well deserved or even rational. Personally I think that if someone brings in a deal worth hundreds of millions of dollars for his firm he should be VERY handsomely compensated. Compensation should be tied to the value that you create for your firm. Be that as it may, this has nothing to do with the argument at hand - the real problem with the salary cap is that it hobbles firms that have received government assistance and puts them at a disadvantage compared to firms that did not receive such assistance.

For example, assume for a minute that I am a killer rain-maker for Citigroup. I bring in deals worth hundreds of millions of dollars a year, and I have been accustomed to getting obscene amounts of money for my services. Now, due to no fault of my own, my firm is in tough shape and has asked for government assistance. It is now subject to salary caps and cannot pay me those crazy amounts. As a rational employee - who is trying to protect his own interests - the first thing I do is pick up the phone and call recruiters at competing banks that did not receive such government assistance. I ask for a job, explaining that I could bring in huge deals with me. Do you think that Citigroup will be able to retain fictitious me for a "paltry" $500K when Credit Swiss, HSBC or some boutique bank somewhere will pay me 10 times that amount? Nope. Obama's populist decision has just doomed banks that have received government assistance to mass defection of all top talent. It's like telling only one NBA team that they must recruit no-one over 5'10". 

Well, "damn those banks" you say. They deserve to lose their talent. They deserve to go out of business. That may very well be the case - but if so, why bail them out in the first place? What's more, here something truly stupid: we are dooming these banks to further loses AFTER we have put tax payer money at risk to save them. Could there be a more counter-productive policy?! We are now large shareholders in these banks and we have just decided to handicap only our team...

I am as outraged as the next guy at the mess we're in. However, policy of this nature creates much bigger problems than it pretends to solve. If you want salary caps, they have to be implemented industry-wide, or else you are simply squeezing a balloon: you press one end and the air escapes your hands and flows to other parts. You want real results? Let shareholders, rather than the board of directors, have the authority to approve the compensation packages of senior executives. You want to punish poor performance? Outlaw golden parachutes for executives fired from corporations that took government aid. Don't penalize tax payers by screwing up companies we just spent billions of dollars to rescue. This is exactly why government should not be running businesses. There's no common sense there, only pandering to rightfully outraged voters. 

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A Move into Municipal Bonds

We have been making regular investments into the stock market throughout this downturn, both by maxing out my 401(k) - my wife no longer has a 401(k) since she has gone part-time - and through monthly scheduled investments in our portfolio. However, late last year we got some cash that we were not expecting, and this money has been laying in a money market account ever since. Sure, money markets are a safe investment, currently insured by the government, but with interest rates practically at zero, there can be no meaningful talk of yield. It is also clear to me that this is not a long term solution.

Having said this, while I am very optimistic about the long term prospects of the stock market, I have no intention of jumping into the market with a large amount of cash in a lump sum. We are moving into the stock market slowly and in a measured way that will hopefully blunt the trauma of any sudden or dramatic additional decline in stock values. With that in mind, I have decided to make a move into municipal bonds, and I have done so by investing about 25% of the windfall Vanguard's VCAIX. Here is a description of the fund's investment strategy:

"The fund invests primarily in high-quality municipal bonds issued by California state and local governments and regional governmental authorities. It may invest at least 80% of assets in securities that are exempt from federal and California taxes."

California bonds? Isn't California's credit rating really crappy and isn't the state in a huge deficit? Yes, to both questions. However, I don't believe that California will default on its loans. At the end of the day, this is a state with the power to tax the population or to cut services to balance the budget. I think that muni bonds are a pretty safe investment, well in this environment nothing is really safe, but you understand what I mean. Besides, we live in California.

There is also the important matter of the tax exemption. This fund invests in bonds that are tax exempt federally as well as at the state level. And since our account is not a tax sheltered account (such as a 401K or IRA), a regular bond fund would generate a substantial and recurring tax hit. We are in a high tax bracket, so a regular bond fund would need to generate much better taxable returns to match the net yield that is likely with this tax exempt investment.

The way I look at it, munis are a pretty safe investment which offer a substantially better return compared to money market funds, CDs and such. Hopefully, I don't come to regret this decision, but no risk - no reward, right? Right?  :-) 

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