Monday, December 03, 2007

2 Ways to Save that Shouldn't Work

Here's two ways to save that are counterintuitive. At first glance it seems like they'll cost you more money, but in the end they end up helping to build your savings:

  1. Spend part of your windfalls. We've all heard that we're supposed to immediately put into savings any irregular or unexpected income such as bonuses. The problem is that if our cash "diet" is too strict, we inevitably end up cheating anyway. We end up giving in and getting that flat panel TV and then fall off the bandwagon and lose our savings discipline. If we give ourselves permission to spend a small part of windfalls we get to immediately enjoy part of the fruits of our labor and yet not feel deprived in saving the bulk of it. It can also give us more incentive to earn extra income, since the feedback is more immediate than something like retirement 30 years down the road.
  2. Don't continually shop for the best deals at the mall,, etc. I have a lot of friends who are great at finding the best bargains on the latest computer, car, electronic gadget, etc. The problem is that even if you're saving $300 on a new $1000 computer, you're still spending $700 on something that you bought mainly because it was a 'great deal.' I'm not saying that you shouldn't seek out a good deal when you really 'need' something. The problem is that continuously shopping for good deals can fool us into thinking that we're saving when we're really just spending less (which is a big difference). The other problem is that the more we shop, the more we want things. It's insidious and something we can't help, so it's best to avoid shopping if we're not looking for something that we really need.

Thursday, September 27, 2007

Investing Advice from David Swensen

The Wall Street Journal gave Yale's David Swensen an 'A+' today. He's managed Yale's top performing endowment over the past 20 years and the WSJ reported that his 28% return (for the fiscal year ending June 30th) again topped all other $1billion+ endowments that have reported their results thus far.

Swensen is known for his pioneering use of alternative investments, that is, alternatives to traditional stocks and bonds, such as commodities, private equity, and hedge funds. That's why it's so notable that his advice to us individual investors is to invest in index funds.

Fortunately for us, Swensen doesn't seem to be motivated mainly by money (he made $1.7 million last year, a small fraction of what he could make at a hedge fund) so he's written a book for us little guys, Unconventional Success, in which he lays out his investment recommendations. For more of what he recommends, check out this post from last year about his interview with NPR last year.

Monday, September 24, 2007

Peerflix No Longer

About a year ago, I wrote about how I was using Peerflix instead of Netflix to save money.  What I liked about it was that there was no monthly fee and I could keep a DVD for as long as I liked.  I felt it was better than Netflix in that regard, since on a couple of different occasions I signed up for Netflix, paid the monthly fees, but never got around to watching most of the movies.

Now, however, I find that I almost never use Peerflix anymore.  The problem is that demand for my DVD's has been so low, that I almost never get requests for them, so I can't earn any trade cash.  At first, I thought it was just my selection, but I've been reading that others have had the same problem.

I wouldn't recommend trying them anymore, it's just not worth the hassle, unless your focus is on new releases and watching them quickly so that you can sell them before the demand drops off.  In that case, though, you're better off just using Netflix or Blockbuster.  For someone like me, who doesn't watch multiple movies a month, Peerflix just isn't useful anymore.

I realize that I've now had to change two of the 25 Ways I Save Money (the other one was realizing that I don't really save money by shopping at Costco) from a year ago.  Looks like I'll have to update the list soon.

Tuesday, July 31, 2007

Best Posts from the 111th Carnival of Personal Finance

Thanks to Plonkee for hosting this week's Carnival of Personal Finance. He adds a nice British flair to it with his Glastonbury Festival theme.

My contribution was When Less is More, a reminder about keeping in mind the purpose of money and why more isn't necessarily better.

My picks for best posts from the carnival are:

  • Money and Happiness at My Money and My Life. She writes about Jean Chatzky's book You Don't Have to Be Rich which talks about how, after a certain point, money doesn't really make us that much happier.

  • Lifestyle Inflation by Amy Fontinelle at It's about how lifestyle inflation can easily sneak up on us. She has a few pointers on how to avoid it.

  • Personal Rate of Return at The Financial Buff. He talks about the difference between Time Weighted Rate of Return and Dollar Weighted Rate of Return and how they should be used for different purposes.

Wednesday, July 25, 2007

When Less Is More

The other day, I received a newsletter with a story that some of you may have read before:

An American tourist was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.

Inside the small boat were several large yellowfin tuna. The tourist complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, "Only a little while."

The tourist then asked, "Why didn't you stay out longer and catch more fish?"

The Mexican said, "With this I have more than enough to support my family's needs."

The tourist then asked, "But what do you do with the rest of your time?"

The Mexican fisherman said, "I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life."

The tourist scoffed, " I can help you. You should spend more time fishing; and with the proceeds, buy a bigger boat: With the proceeds from the bigger boat you could buy several boats. Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor; eventually opening your own cannery. You would control the product, processing and distribution. You could leave this small coastal fishing village and move to Mexico City, then Los Angeles and eventually New York where you could run your ever-expanding enterprise."

The Mexican fisherman asked, "But, how long will this all take?"

The tourist replied, "15 to 20 years."

"But what then?" asked the Mexican.

The tourist laughed and said, "That's the best part. When the time is right you would sell your company stock to the public and become very rich, you would make millions."

"Millions?...Then what?"

The American said, "Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos."

I found it to be a reminder that sometimes we have our priorities mixed up. If our goal (whether conscious or not) is to make more money to be able to afford a better lifestyle, we shouldn't forget what we're giving up in order to get there.

Thursday, February 01, 2007

How Rich Are You?

I saw an interesting link today in a post in the Wall Street Journal Wealth Report Blog. It highlighted the Global Rich List.

Using World Bank income data, it lets you put in your income and find out how you compare to the rest of the world. Granted, it does so based on income rather than assets, but it's illuminating nonetheless. Out of curiosity, I played with the numbers until I found out what the top percentile would be. At aboout $47,500/yr, you'd be the 60,000,000th richest person in the world and would in the top 1% of all people.

According to the website:

We are obsessed with wealth. But we gauge how rich we are by looking upwards at those who have more than us. This makes us feel poor.

We wanted to do something which would help people understand, in real terms, where they stand globally. And make us realise that in fact most of us (who are able to view this web page) are in the privileged minority.

We want people to feel rich. And give some of their extra money to a worthwhile charity.

It certainly helps us to put our relative wealth into perspective.

Saturday, January 27, 2007

The Costco Effect

A few months ago, I had mentioned in my post about "25 Ways I Save Money" that I saved by buying in bulk at Costco.  A couple of weeks later, I wrote a "retraction" saying that I end up not saving money when I go to Costco because I end up buying stuff I didn't originally intend to buy.  I thought it was interesting that in this Sunday's New York Times, Julie Bick wrote about this, dubbing it the Costco effect.

In the article, she quotes Joel Benoliel, a senior VP at Costco:

We try to have hundreds of items that are different each time a customer comes to the warehouse, to create a treasure-hunt atmosphere.  We’ll always have the same staples — the cereal, the detergent — and then we add in the ‘wow’ items.

She also cites a typical shopper who says that he goes every month or two to get household supplies and while there, usually ends up throwing in some books, DVDs, and baked goods.  Looks like I'm not alone in being tempted by all the goodies at Costco.

Thursday, January 25, 2007

How Did You Really Do Last Year?

Chances are pretty good that your investments did well last year since the markets were up overall. The question is, what should we consider "good" performance?

In order to be able to answer that question, you first need to look at how you really did. If you have an investment account that you didn't put any money into or take money out of last year, then the answer's fairly simple. Look at the balance at the beginning of the year and the end of the year and calculate the percentage difference. (We'll have to look at the more complicated cases where a significant amount of money was going in and out of your investment account over the course of the year in another post).

Some people make the mistake of just looking at their current unrealized gains on the stocks they hold. For example, if you keep track of your portfolio on something like Yahoo Finance, you can instantly see how much the stocks you hold have gained. The problem is it doesn't tell you how it performed over a particular time period. So, the gains could have come from a couple of years ago, and your stocks could have stagnated last year, but you can't tell that from just clicking on your portfolio on Yahoo (or most other popular portfolio sites).

So, you've calculated your gain for 2006. Say it was 12%. Is that good? On the surface it sound good, but the questions should really be how did you do compared to the market overall? If the market soared 20%, then getting 12% in that year isn't very good. So how did the market do in 2006? Probably the most popular benchmark is the S&P 500 index. It's an index of 500 large U.S. companies picked by a committee at Standard and Poors. So, it isn't really the whole market, or even the whole U.S. market, but since it represents a large slice of the total U.S. market cap, it's a decent proxy.

Last year, the S&P gained 15.79%, so you can see that 12% isn't anything to brag about. Furthermore, there are other broad indexes that performed better. A GREAT chart to look at is this one by Callan Associates. This chart shows how different indexes have performed over each year since 1987. The color coding helps you to see how different categories vary considerably in relative performance from year to year. It highlights the uncertainty of investing in various segments.

For example, you can easily see how from 1995-1998, the S&P 500 Growth Index (a subset of the S&P 500 that focuses on growth stocks, such as Microsoft, Cisco, etc.) came in first every year (remember the Internet bubble?). Then, ever since 2000, it's come in second last every year. This illustrates the danger of looking at past years' performance and extrapolating it into the future. Back in the late 90's, it looked as if S&P 500 Growth stocks would continue going up for the long run. As the last 6 years have shown, that would have been a costly assumption.

Getting back to the question of how you really did last year, you should also consider how you would have done compared to other benchmarks. For example, how would the 12% have compared to MSCI EAFE (a index of International stocks from developed countries)? The MSCI EAFE went up 26.34% last year. So, without picking individual "winning" stocks internationally, you could have had close to 26% gains buy going with a mutual fund or ETF that tracked the MSCI EAFE (I say close to 26%, because there are some fees and transaction costs that cause index funds and ETFs to generally trail their benchmarks buy a small amount).

To sum it up, to really gain an understanding of how you did last year (are you really a stock picking genius?), you need:

  • Accurately calculate your performance investment for the period in question (taking into account cash inflows and outflows).

  • Compare that gain to a benchmark rather than an arbitrary figure (like 10%).

  • Compare that gain to other benchmarks as well, to consider whether you would have done better had you been diversified into other categories of the stock market.