Tag Archives: personal finance

Why I Ignore Stock Market Doomsayers

Posted on by
4

Doomsayer—a person who predicts impending misfortune or disaster. Mike, a good friend and running partner, is a stock market doomsayer. Routinely, like this morning, he tells me to sell. The doomsayers are certain that the mother of all corrections is right around the corner.

What Mike and his ilk get wrong is that when it comes to personal finance, the value of the Dow, the S&P, and the Nasdaq aren’t nearly as important as one’s income, investment income, expenses, and “historical risk return”.

If you asked me to help you with your personal finances, I’d want to know four things. 1) What’s your take home pay? 2) If any, what’s your annual passive income? 3) On average, how much do you spend each month? 4) If any, how much of any stock market-based investments can you accept losing in the next few days?

1) Annual income. This is straight forward. In the new economy, nearly everyone’s challenge is increasing it without working inhumane hours. That’s why people continue their education, work hard for promotions, and sometimes decide to work long hours.

2) Passive income. This is the money your savings generate. Nearly everyone’s challenge is increasing it in our zero interest rate world. Historically, cash has generated 3-5%. Today money markets and certificate of deposits earn pennies, so when adjusted for inflation, they’re slowly losing value. That’s why people invest in stocks, bonds, and real estate. Passive income includes stock and bond dividends, capital gains, and rental income. I also consider company matches a type of passive income. And social security for the 67+ set.

3) Average monthly expenses. Few people know this. Start keeping track of every dollar you spend using MINT or something similar and then read this recent blog post from Mr. Money Mustache, The Principle of Constant Optimization, for a great tutorial on managing spending. In particular, I second this suggestion:

Make a list of your ten biggest monthly expenses and tape it to your fridge, just so you know they are all there, constantly using up your money, so they had darned well be worth the resources they are consuming. If they are worth the expense, continue to enjoy them. If they are not, optimize them away. Look at your daily routine from an outsider’s perspective, and figure out if you are really getting the most value from each one of your hours.

4) Historical risk return. Where I invest, I can see my entire portfolio online. And with one link I can see a detailed analysis of my holdings including the all important “historical risk return (1926-2012)”. Right now it says the worst year an investor with my assest allocation has experienced is -17.2% in 1931. Ironically, it also says investors with my asset allocation have experienced losses in 15 of those 87 years or 17.2% of the time. So if I round up, on average, I have to expect to lose money every fifth year. Also, if I have $100,000 invested, I have to be prepared for that to turn into $82,800 overnight. That’s the price of admission to a historic stock market run up.

Here’s what the stock market doomsayers won’t acknowledge. As of May 15, 2013, the S&P 500 is up 141.5% since March 5, 2009. While they’ve been crying wolf, someone that had $100,000 invested in the S&P 500 on March 5, 2009 now has $241,500. Here’s what you won’t hear the doomsayers say, “We missed a historic rally because we we’re too afraid of the downside.”

Nor will you hear them say this truism, they’re not smart enough to time the market. Despite Mike’s dire warnings, I’m going to stay partially invested in stocks because I can accept a 17.2% historical risk return in exchange for what my portfolio analysis reveals to be my 87 year average rate of return, 7.6%.

Tune out the doomsayers and forget trying to time the market. Instead, control what you can. Most importantly, whether your earned income and passive income regularly exceed your expenses.

A Panacea for Improved Health

Posted on by
1

I have a neighbor who makes money off of his car. He carefully shops for an underpriced used one, then takes immaculate care of it, and then gets reimbursed by his employer at 50+ cents per mile.

I admire his fiscal discipline, but who wants to spend their weekend washing their car the way he does? One time he yelled at another neighbor who was washing the bottom 90% of her van. “You gotta start with the roof and work down!” Best comeback ever, “No one’s gonna see the top!” Blood pressure spike. And he routinely rips me for using the last bit of dirty water in the bucket to wash my wheels, but I tell him my goal is for my car to be 90% as clean as his in 10% of the time. And normally it is.

We’re all obsessive about something. One could argue I substitute exercise for car washing. Last week was pretty typical for April. Four runs for 28.7 total miles. Two swims for 6,000 meters and two bike rides for 90 miles. And an hour lifting weights. Total time, 11-12 hours. People like me tend to have a lot of fitness activity-based friendships and we often find the swimming, cycling, and running enjoyable in and of itself. We’d still go out and run, swim, and cycle even if there weren’t empirical health benefits tied to those activities. We’re lucky that our hobbies come with health benefits.

Some people no doubt think about my commitment to fitness the same way I think about people who obsess about the stock market’s every move and spend their days thinking, talking, and writing about money. There’s an opportunity cost to finance tunnel vision. Life passes by. Investing wisely is a means towards other more meaningful ends—like learning about other people’s interests and engaging with them.

Like extreme car washing, there’s a tipping point where a person’s fitness routine can detract from their physical, emotional, and spiritual health. That’s where “Doc Mike Evans” comes in. He asks a great question near the end of this high-speed informative whiteboard lecture—Can you limit your sleeping and sitting to just 23.5 hours a day? 

https://www.youtube.com/watch?feature=player_embedded&v=aUaInS6HIGo#!

Like my quicker, more casual approach to car washing, Doc Evans explains how you can achieve most of my health benefits in much less time. Walk 20-30 minutes a day. Even better if you integrate walking as a means of transportation by living within a mile of your work, a grocery store, and other stores. And of course driving less is good for your pocketbook and the environment too.

Forget my approach of driving to the pool and overdoing it in the form of occasional marathons and triathlons*. Instead, as Doc Evans advises, walk 20-30 minutes a day and enjoy markedly improved mental and physical health.

Maybe you’re already a walker, but wish there were even more tangible health benefits. Evans explains how you can reap additional benefits by extending the time and distance of your daily walks. But since time is most people’s greatest obstacle, I suggest picking up the intensity by choosing more hilly routes. My running teammates probably get tired of me saying, “The hills are our friends.” When I don’t feel like exerting myself much, which is a lot of the time, I sometimes commit to a hilly route because hills force me to increase the intensity. As an added benefit, when I’m running up hill, my conservative Republican Nutter friends don’t have enough oxygen to complain about the current political scene. If you’re a Florida or Texas flatlander, move.

We expect complexity today, but this isn’t. If you want to enjoy an improved quality (and quantity) of life, take a ten minute walk sometime today. And then repeat tomorrow. And the next day. Extend it to twenty minutes next week. And repeat. Every day.

* This summer I’m going to be more family focused than last year. We’re looking forward to a fair number of visitors from afar, and at the end of the summer, launching Seventeen at a still-to-be-decided college. I’m #34 on the RAMROD waitlist which means I’ll definitely get in and Danny and I plan on running the Wonderland Trail in mid-August. I may throw in a few short/medium distance triathlons on unscheduled weekends. Or maybe I’ll just take a walk.

Betrothed and I walking

Amazing she’ll still hold hands with me after all these years

February 2013 Awards

Posted on by
Reply

Improbable sentence. “Ex-NBA star Dennis Rodman hung out Thursday with North Korea’s Kim Jong Un on the third day of his improbable journey with VICE to Pyongyang, watching the Harlem Globetrotters with the leader and later dining on sushi and drinking with him at his palace.

Personal finance vid of the month. Helaine Olen, author of “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry“.

Apocalypse sign. CTA Digital’s iPotty with Activity Seat for iPad.

Noteworthy death. Mr. Matthew Crowley.

Weightroom t-shirt. “Gardening. It’s cheaper than therapy.”

Non-conformist. Photos.

Wasted talent. Professional sports division. My favorite excerpt, “Justify My Glove”.

Word—sequester.

Social media app—SnapChat. This news story gives it real cred. Maybe they’ll make a movie.

Consumer purchase, minimalist division.

IMG_0212

Nature pic—Holden Village (taken by La Fuerza)

Near Stehikin, WA

Near Stehikin, WA

Weekend get-away—Holden Village

Sitting in the bus I was flashing back to when I was a high school water polo legend traveling to away games.

Sitting in the bus I was reminiscing about when I was a SoCal high school water polo legend traveling to away games wit da’ boys. Lake Chelan water visibility, easily 25′.

Most widely read post. The Link Between Walking or Cycling to School and Concentration.

10 Ways to Save Money Today

Posted on by
5

Off to Canada for a little swimming, cycling, and running this weekend. One loyal Pressing Pauser asked if I was going to tweet or blog the event. No plans to blog until returning next week. Tweeting is a good idea. Better start following me on twitter to see if I survive the day. Then again, the social media adverse can just wait to see if any new posts begin appearing here next week.

Now, back to regular programming. Miscellaneous ways we’ve recently reduced our overhead.

1A-1E are biggies because auto insurance is a recurring payment. 1A. Cancelled comprehensive and collision insurance on our 2006 car with 86,000 miles on it. 1B. Took an online driver safety course. 1C. Faxed daughter’s driver training completion certificate to insurance agent. 1D. Faxed academic transcripts for good grade discounts. 1E. Informed auto insurance agency that I’ve gone half time at work and therefore will be commuting only half as much.

2. Charge daughters for portion of cell phone service, Netflix streaming, and car use. Shrewd readers may protest this is less about “savings” and more about “redistribution”.

3. We’ve been eating out less. Maybe once a week at nice, moderately priced restaurants.

4A. Betrothed had to form a small business back in the day when she started teaching Spanish to elementaries in a before-school program. Biz license cost something like 25-30 dollars. Then we got a Costco business American Express card. Meaning a 4% discount on gas. 4B. Use the simple, free, and excellent “GasBuddy” app to find the cheapest gas around. Here’s the web-based version. We have two Costcos within ten miles and I was perplexed at why their prices varied by 14 cents recently until a friend informed me that they are committed to being the cheapest within a five mile radius.

5. Buy movie tickets in advance at Costco. Ocho dollares per. And NEVER buy popcorn, candy, or coke at the theatre. Scratch that. Never say never. Bought some very lightly buttered organic popcorn at the hippie theatre awhile back. Thought my wallet and ticker could handle that. Even went crazy and splurged on a coke for my date. Yes, of course that turned her on (even more than normal).

6. Except for Sunset magazine (promotion price was $10 or 12/year), we’ve let most of our subscriptions expire. Tend to read on-line periodicals and papers.

7. My running shoes cost $130, but I hunt for previous models (all that’s different is the color) on-line and can usually find them for 50% off. I recently bought six pairs for $65/per. No taxes and free shipping. I’m covered for a few years even in the case of economic apocalypse.

8. GalPal has a garden with beans, lettuce, and we have lots of wild strawbs around the yard. Haven’t taken the time to calculate the cost of seeds, soil, etc. Labor is free because she enjoys it.

9. I use a few coupons at the grocery store. Takes almond milk from sup expensive to just plain expensive. Used a Fred Meyer coup. yesterday. Two half gallons of Dreyers ice cream for $5. I had planned to wait til after Iron-person Canada to dive into those babies, but you know what they say about the best plans.

10. Decided not to buy the new Lebron James shoes even though I could probably slam dunk in them, catch the eye of an NBA general manager, and make a little more than I do teaching.

$315. At that price, I should be able to do a 360 degree dunk in them.

I Recommend

Posted on by
1

• My new personal favorite money blog—Mr. Money Mustache. MMM started in April 2011 and he’s killing it. The DIY (Do It Yourself) Colorado bicycle riding blogger writes well and employs a nice mix of confidence, humor, disgust at the status quo, and personal finance insight. His alternative approach to life is resonating with lots of readers. Recently he’s added case studies based upon readers’ lives. Check this recent one out. Favorite excerpt, “Every young adult should be able to comfortably sleep on somebody’s floor, drive an old manual-transmission car with rust holes to a concert, and eat leftover pizza for breakfast. Without complaining.”

• Groovy post by The Minimalist Mom.

• Provocative and timely essay on Chronic Traumatic Encephalopathy (CTE) and what the end of football might look like.

• “Glee is an Immoral Television Show and It’s Time to Stop Watching It.” Trenchant critique by a young, smart, prolific blogger.

• Errol Morris documentary film, Tabloid, about Joyce McKinney, an unstable woman with a criminal disposition. Sex, religion, crime, all mixed together. The one Netflix viewer who wrote, “ She does not need a movie made about her. She needs some real help” is correct. On the other hand, deviance is often interesting because it provides contrast. See Grizzly Man and Take Shelter. I found the most fascinating character to be a minor one, a British tabloid journalist whose total lack of conscience was harrowing.

• Badass video—6 minutes.

Women Make Better Money Managers

Posted on by
Reply

If you’re of the male persuasion, slowly step back from the check book or computer, and find a woman to take over your financial decision making.

According to Ronald T. Wilcox, a growing body of research reveals distinct differences in how married men and women approach money and investing. Because men tend to be overconfident, they trade stocks and bonds more actively because they think they know what the next market movement will be. As a result, they incur various transaction costs associated with trading but don’t pick assets any better than women. They’re also less likely to listen to financial advice.

Women are less confident than men about their financial abilities, switch investments less often, and are more likely to listen to financial advice. As a result, they generate risk-adjusted returns superior to those of men.

The Wall Street Journal summarizes Wilcox’s findings thusly, “Men may think they know what they are doing when it comes to investing but often do not. Women may think they don’t know what they are doing but often do.”

Truth be told, you can plug in anything you want for “investing” in the last paragraph. Now if you’ll excuse me, the market is about to close and I have some trades to make.

Bonus link—a couple that has figured out how to enjoy a better quality of life despite making considerably less money.

My “not motivated by money” award nomination double bonus link—and favorite 2012 US Olympian and favorite youth sport parents—Missy Franklin, Dick Franklin, and D.A. Franklin.

Housing Prices

Posted on by
Reply

The conversation turned to real estate on a recent Saturday run when I shared my opinion that many sellers in our community were slow to grasp the correction as evidenced by their overpriced houses languishing on the market for six months to a few years.

You would have thought I suggested we extend our 10 miler another 16.2 just for the fun of it. The right wing nutters immediately jumped on me for assuming I knew more about free markets and home values than the actual homeowners themselves. And more importantly, who did I think I was, homeowners have the right to price their houses however they want.

Of course they do just like they have the right to be irrational and waste money more generally. Check out this chart:

credit—Jodi Ashline Newsletter

In the end, the average “priced right” and “priced reduced” home sell for the same price, but the “price reduced” home is on the market an extra 162 days. If “price reduced” homeowner has $100k in equity, and that equity was invested for 162 days @ 5%, they passed on earning $2,219. That’s the cost of exercising your constitutional right to overprice your home.

Around here at least, it appears that the larger and more expensive the home the greater the tendency to overprice it. That’s counterintuitive if one assumes, on average, the most well-to-do homeowners are the most business savvy, but I digress. We can also assume a much smaller pool of prospective buyers (I know it only takes one) and therefore the “average days on market” I suspect is far greater than 197, but for consistency sake we’ll stick with that.

Let’s consider a waterfront home that is four times the average at $1,317,392. Ultimately, after 197 days, overpriced sellers have to reduce their price $251,008 ($62,752 x 4). Let’s compensate for the too short “average days on market” by assuming that our waterfront sellers own their home outright. If “expensive price reduced” homeowner has $1,066,384 (the final sale price) in equity and had invested that for the too short 162 days @ 5%, they passed on earning $23,665.

To which the nutters might say, “That’s waterfront sellers right.” Which again, of course is right, just irrational.

Since I’m on math fire, and the nutters are down for the count again, one related thought. One oft repeated housing axiom is that housing corrections don’t matter if you’re buying and selling into the same down market. That’s only true in one of three possible scenarios—buying and selling similar priced homes. It doesn’t hold for buying a more or less expensive home than sold.

For example, consider the case of buying a more expensive home. Imagine you could sell your existing home for $300k or $100k less than its peak 2007 valuation. You buy a home for $1m or $250k less than its peak 2007 valuation. Had you made that move in 2007, it would have cost $1,250,000-$400,000 or $850,000. Today, the equation is $1m-$300,000 or $700,000 for a savings of $150k.

The opposite is also true. As a result of the correction, it’s more expensive to move down. Imagine you could sell your existing home for $600k or $200k less than its peak 2007 valuation. You buy a home for $300k or $100k less than its peak 2007 valuation. Had you made the move in 2007, you would have pocketed $400k, $800k sale price-$400k purchase price. Making that move today you would only pocket $300k, $600k sale price-$300k purchase price.

So assuming one has the resources, it makes more sense to move up in down markets and down in up markets.

School’s out nutters. Do they give out Economics Nobels for this stuff?

The Intrapersonal Conundrum

Posted on by
Reply

Recently I advocated accepting and adapting to people’s irritating behaviors rather than trying to change them. But what about our own irritating behaviors? How do we know when to accept them versus when to commit to trying to change them?

Of course, not everyone is introspective; as a result, some people lack self understanding. Ask them which of their behaviors most irritate the people they’re in relationships with and they draw a complete blank. I’m probably too reflective for my own good, regularly engaging in self-assessment. One limitation I’m keenly aware of is an aversion to personal networking. Closely related to that, I suck at self-promotion.

Among other ripple effects, this blog has a small readership and my professional successes exist mostly within my classrooms. A colleague of mine is the opposite, a brilliant networker and self-promoter. A mediocre teacher, she’s developed a national reputation as an expert in a very specific sub-category of education. She travels all the time and speaks to large groups for lots of money.

Am I envious? Not on a personal level, but maybe professionally. I would enjoy more consulting opportunities than the one or two a year I average. But not enough to change. I understand that there’s a perfect correlation between my lack of networking initiative and the number of consulting gigs I get.

Even though social and professional networking skills are more important than ever, I’m perfectly content not being a networker or self promoter. In fact, I don’t want to get better at networking or self promotion. I’m an educator, so I’m not anti-social, I just have no patience for the phoniness on which so much of it seems to rest. “Here’s my card.” “Who cares.”

Another limitation I’m keenly aware of is a deeply rooted counter-cultural propensity for saving. My dad grew up during the Depression, and it left an indelible mark on him, and so I blame his hyper-frugal modeling. But unlike my aversion to personal networking, this is a limitation I want to change.

Here’s one of millions of examples of my often irrational economic behavior. One day in Chengdu, China I argued at length with a Carrefour manager about socks I purchased. Despite being on sale, the socks were rung up at the regular price. Our language differences, the store’s employee hierarchy, and my stubbornness made for a combustible, and in hindsight, hilarious combination.

In this area of my life, I want to act more rationally, so I’m working on loosening up.

What explains my markedly different way of thinking about these two personal limitations?

I’m not sure.

Winning Personal Finance 2

Posted on by
Reply

I’ve been successful for several reasons: 1) most importantly, my parents’ work ethic, saving habits, and frugality have been deeply imprinted in me; 2) second most important, I chose to marry someone who wants to live a similar lifestyle as me; 3) I’ve educated myself reading and studying lots of material; 4) I found Vanguard early on which has saved me a lot in investing costs; 5) I’ve come to enjoy managing money so I set aside a few hours every week to continue learning and make decisions; and 6) I almost always avoid impulse purchases.

What might one and two mean for you? When it comes to family history and partner, I’m a personal finance +/+. The gal pal and I have probably had as many financial arguments as the next couple, but they’ve ebbed in number and intensity over time, and ultimately, our personal financial values are very similar. What if you’re a personal finance -/+ or the dreaded -/-? While it’s impossible to completely undo a “losing personal finance” family history, financial counselors can help minimize the damage and your time and resources are probably best spent working with them on minimizing the effects of negative role modeling before turning to asset allocation, minimizing taxes, and the like. Similarly, if your partner and you aren’t in sync, financial/couples counseling is probably more important than technical financial advising. Proactively, the more premarital counseling focused on each person’s financial history, values, and goals, the better.

What about reasons three, four, and five? How much time do you set aside each week to educate yourself about saving, investing, minimizing taxes, and related personal finance topics, not counting paying bills and balancing your check book? Put differently, how much time do you spend thinking about the forest that is you or your family’s financial well-being? My guess is, on a weekly basis, the average person spends very little time thinking about where they’ve been, where they are, and how to reduce expenses. Quiz. What was your net worth, assets minus debits, on 12/31/09? Will you recalculate it at the end of this month and then every quarter? If my assumption is right, is it any surprise that so many people are unsatisfied with their personal financial situation?

Reason six leads to tip five or experiment one, don’t buy anything that hasn’t been on your “To Buy” list for at least a week. Personal example. Three plus years ago I bought eight pairs of $120 running shoes for $60 a piece. Running shoe companies “update” their shoes regularly, every year or so. As far as I can tell, “updating” shoes means “we changed the colors”. If you’re savvy, you can pick up the “old” model at half price. When the big box of eight shoes arrived, it blew the daughters away. “Dad, you saved $480!” “Tru dat.” Fast forward, I’m halfway (250 miles) through pair eight so I’ve started to shop for a similar deal. No luck until last week. I found my Mizuno Wave Creations, model 10, for $65. Model 11, $135. Only two sizes were available, one was mine. Darn if the website would only let me buy two pairs, so I called them. They said they’d investigate and get back to me. Long story short, they found a third pair and all three are in transit. Normal cost for three pairs at $135 and 8.5% taxes, $439.42. After thanking the salesperson I said, “I saw something on-line about a Costco or Triple A discount.” “Yes, what’s your Triple A number?” Cost went from $201.50 ($6.00 shipping) to $181.50. Let’s see you do that on your fancy pants iPhone with the barcode application.

Now my $9,000 loss is a mere $8,742.08.

Winning Personal Finance 1

Posted on by
Reply

Everyone is hocking financial advice so how does one decide whose to follow? For example, why on earth should anyone pay any attention to the personal financial advice I offer below? What makes one advisor more credible than another, credentials, their popularity, their marketing savvy, something else? Credentials are nice in that they create a floor with respect to technical knowledge, but they don’t tell you much about the person’s ethics, integrity, or track record. Ultimately all credentials tell you is they succeeded in passing exams.

If I was looking for a financial advisor I’d look for someone that managed their own money well and emphasized saving, investing simply, and had other values that jived with my own. But how do you know if someone manages their own money well when we’re loathe to talk about our personal finances?

Tip one. Ask anyone wanting to manage your money to prove that they’ve managed theirs well. That will probably reduce the pool from which to choose in at least half. Take me for example, I have managed my family’s money well, but for privacy reasons, I won’t provide details except to say that for every ten financial decisions I make, I tend to make seven or eight good ones. Were I in the biz, I would completely understand if that lack of specificity caused potential clients to walk away.

Tip two. Ask any potential financial advisor about some of the mistakes he or she has made and what they learned from them. Last year I made a $9,000 mistake. I repeat, last year I made a $9,000 mistake. It was a brutal, self-inflicted wound that took time to shake. My goal is not to be perfect, but to consistently make more good decisions than bad. Look for a humble advisor who acknowledges complexity and doesn’t over promise. That will probably reduce the pool of potential advisors by at least another half.

Tip three. Even if you find a financial advisor that meets all of those criteria, don’t decide to work with him/her without first looking at yourself in a mirror and repeating several times, “No one will ever care about my financial well-being as much as me.”

Tip four. Never accept any financial advice passively. Instead educate yourself and recognize that no one will ever care about your personal financial well-being as much as you. More specifically, become your own financial advisor. That’s the best financial advice I’ll ever offer. Become your own financial advisor.

Well, the best advice until Part Two.