Tuesday, July 15, 2014
People Who Should Be Fired
The vice president of our local office once lamented to me that we had several employees who were not taking advantage of the 401(k) match provided by our employer. It was 50% on the first 6% of the salary we contributed. So, someone contributing $3,000 would receive $1,500 from the company as the "match." He wondered how we could inspire people to make at least the minimum contribution so they would receive this immediate 50% return on their investment. My suggestion to him was, we ought to fire them. If someone is not smart enough to put even a few dollars in an account where they immediately get a match of 50%, then they may not be smart enough to be working at the company. That's a little harsh maybe, but anyone who can contribute the money and doesn't might need a refresher course in basic math.
Wednesday, April 24, 2013
Consumer Protection
While I'm a strong believer in free enterprise, capitalism and democracy, I think we could do a better job in the consumer protection area. We recently received a catalog in the mail and I noticed the payment options showed a credit payoff chart. This is something we didn't see a few years ago. It was an item required by law to help people understand what they are paying in the way of finance charges.
Many years ago finance companies were allowed to calculate the APR (Annual Percentage Rate) using different formulas and the result was, you couldn't tell which of the rates were better. It was possible that an advertised 14% rate was actually less expensive than a 13% rate. But you couldn't tell this because of the way the calculations hid the final amount you would pay. The consumer protection movement helped bring a change about that required all companies to display the actual, final APR for all credit. This put consumers in the position of being able to compare apples to apples, which is the way it should be.
Back to the credit payoff chart in the catalog. A purchase of $3,200 required a monthly payment of $96, for 31 years. The total paid would be $15,903. If you paid an extra $50 a month, you'd pay a total of $5,321 and it would be paid off in 5 years. Having this information displayed puts people in the position of being able to decide if they want to pay $15,903. or $5,320 or just save up and pay cash of $3,200. People are free to choose, but at least they can make an informed decision.
Many years ago finance companies were allowed to calculate the APR (Annual Percentage Rate) using different formulas and the result was, you couldn't tell which of the rates were better. It was possible that an advertised 14% rate was actually less expensive than a 13% rate. But you couldn't tell this because of the way the calculations hid the final amount you would pay. The consumer protection movement helped bring a change about that required all companies to display the actual, final APR for all credit. This put consumers in the position of being able to compare apples to apples, which is the way it should be.
Back to the credit payoff chart in the catalog. A purchase of $3,200 required a monthly payment of $96, for 31 years. The total paid would be $15,903. If you paid an extra $50 a month, you'd pay a total of $5,321 and it would be paid off in 5 years. Having this information displayed puts people in the position of being able to decide if they want to pay $15,903. or $5,320 or just save up and pay cash of $3,200. People are free to choose, but at least they can make an informed decision.
Sunday, April 7, 2013
We've Always Done It That Way
In the business world it's bad form to say "We've always done it that way" as an explanation for a process, procedure or method of doing business. In general I agree. But, as an example of how this can somtimes be a good thing, I realized my wife and I don't know any of the terms, conditions or interest rates on any of our credit cards. Normally this is the type of information you need to stay on top of, but the reason we don't is because we always pay our credit cards off in full, every single month, within a few days of the monthly statement being issued. This one single habit saves us money (by not paying interest), time (we don't need to keep track of "payment due" dates) and any grief that might come about from getting behind on debt payments. Why do we do this? Because we've always done it that way!
Saturday, March 3, 2012
The One Thing You Don't Want To Do
The one thing you don't want to do is this: Learn about compound interest too late.
Using an exaggerated example, let's say you saved $1,000 a year for 40 years (from age 25 to age 65) and kept it in your safe at home. That would give you $40,000. Then, you discover the miracle of compounding and manage to double your money just at the end of that last year with a compounding rate of 100%. That would give you $80,000.
But, what if you started out knowing about compounding and had that 40 years to make it work for you? If you saved the same $1,000 a year, but compounded it each year at 10% (the rough average of the historical market over long, long periods of time), you would end up with $486,851.
Either way you're saving $1,000 a year. The difference is simply understanding how compound interest works.
Using an exaggerated example, let's say you saved $1,000 a year for 40 years (from age 25 to age 65) and kept it in your safe at home. That would give you $40,000. Then, you discover the miracle of compounding and manage to double your money just at the end of that last year with a compounding rate of 100%. That would give you $80,000.
But, what if you started out knowing about compounding and had that 40 years to make it work for you? If you saved the same $1,000 a year, but compounded it each year at 10% (the rough average of the historical market over long, long periods of time), you would end up with $486,851.
Either way you're saving $1,000 a year. The difference is simply understanding how compound interest works.
Sunday, January 15, 2012
Index Funds vs. Hedge Funds
In 2008 Warren Buffett placed a bet, which essentially totaled $1,000,000, against a group of hedge funds chosen by the people betting against Buffett. Hedge funds are the go anywhere, do anything (almost), hotshot investment vehicles for sophisticated investors. His bet was that the Vanguard Index 500 (Admiral shares) would outperform this carefully selected group of five hedge funds over a 10 year period.
One of the big challenges for those hedge funds will be overcoming their expense disadvantage. Annual charges of 2.5% of the account balance are made regardless of performance. On top of that, generally hedge funds take 20% of any gains made. In a good year when your investments might grow $100,000, the hedge fund takes $20,000 of that in addition to the 2.5% annual charge on the total.
Here’s my thought: If Buffett is willing to make that kind of bet, that some of the best and brightest investment minds out there won’t be able to outperform the S&P 500 index, what makes you think you can find investments that will? If you agree, invest in broad market based index funds and go to the golf course or spend your days doing other things which might interest you more.
As of this date (2011) several hedge funds have closed their doors. Since “the bet” did not include releasing the names of the five chosen hedge funds we won’t know if any of the chosen have gone out of business or not. But, that’s another variable to consider in your investment selection and one you don’t have to worry about with good broad-based index funds.
The expense ratio on the Vanguard Index 500 Admiral Shares? It is .07% currently. That means on every $100,000 you pay $70 each year. For a hedge fund you could pay $2,500 each year on the account value at $100,000 (if they allowed you to invest that little). If the Vanguard fund goes up from $100,000 to $200,000, your total expense would be $140 for the year. A hedge fund increasing by the same $100,000 would charge you $20,000 for the investment increase and 2.5% on the account balance, roughly $22,500. Of course, if the hedge fund increases offset the expenses then you’re set. But, assuming non-offsetting underlying performance would you rather pay $22,500 or $140 in expenses for an investment?
Another nice thing about index mutual funds is, they won’t have a “lockup” period. Hedge funds may have a lockup period when you can’t access your money except at certain times (maybe quarterly or annually). Also, hedge funds do sometimes go out of business. For an example, search the Internet for “Amaranth Investors” or "Long Term Capital Management" and check their history.
Update: At the May 2, 2014 Berkshire Hathaway annual meeting, Buffett said the cumulative return of the S and P index fund has been 43.8%, while the hedge funds returned 12.5%.
Thursday, September 15, 2011
Numbers
Numbers
Do you trust them? Sometimes you should and sometimes not. We just had new windows installed and in the process of interviewing various companies and checking their proposals I noticed an interesting thing on the energy savings calculations.
One Financial Return projection showed that after 10 years we would have a net cost of basically minus $3,868 (Recovered Costs plus Utility Expense Savings).The windows would actually put $3,868 in our pockets. In other words, they would more than pay for themselves. That seems pretty good, doesn't it?
When I drilled down on the numbers though, I noticed they had used a utility savings of 25% a year and estimated an average annual increase of 8% in energy costs. When I checked our historical records I found our energy costs had been increasing at only a 4% rate for the past decade. So, I went back to them and asked for a revised "estimate" based on lower numbers using what I considered to me more realistic, but still generous, numbers. The cost to us over ten years would be $896. That's a swing of $4,764 in the calculations just by changing a few percentages.
I have no idea what our actual savings will be, but the point is you can play with the numbers quite a bit when you are using "theoretical projections." I asked the person doing the calculations if he had any tangible proof that anyone had experienced actual savings close to the projections he was using and the answer was, "No."
Everything was nicely printed out by a computer and the projection had impressive logos and comparisons to other project returns and all kinds of official looking information, but here's the bottom line: It was a guess.
Being the inquisitive type, I went to a local utility and asked them how to calculate energy savings allowing for the changes in temperature and utility costs from year to year. They called and said they didn't have a handy formula for that. I had received the same energy savings pitch from the furnace company, as the window company, and was amazed there was not a formula of some kind to check the projected results.
We like our new windows but we have no idea how much energy they are really going to save or what "Recovered Costs" we'll actually have, but hopefully a lot. If I ever figure it out, I'll let you know.
Do you trust them? Sometimes you should and sometimes not. We just had new windows installed and in the process of interviewing various companies and checking their proposals I noticed an interesting thing on the energy savings calculations.
One Financial Return projection showed that after 10 years we would have a net cost of basically minus $3,868 (Recovered Costs plus Utility Expense Savings).The windows would actually put $3,868 in our pockets. In other words, they would more than pay for themselves. That seems pretty good, doesn't it?
When I drilled down on the numbers though, I noticed they had used a utility savings of 25% a year and estimated an average annual increase of 8% in energy costs. When I checked our historical records I found our energy costs had been increasing at only a 4% rate for the past decade. So, I went back to them and asked for a revised "estimate" based on lower numbers using what I considered to me more realistic, but still generous, numbers. The cost to us over ten years would be $896. That's a swing of $4,764 in the calculations just by changing a few percentages.
I have no idea what our actual savings will be, but the point is you can play with the numbers quite a bit when you are using "theoretical projections." I asked the person doing the calculations if he had any tangible proof that anyone had experienced actual savings close to the projections he was using and the answer was, "No."
Everything was nicely printed out by a computer and the projection had impressive logos and comparisons to other project returns and all kinds of official looking information, but here's the bottom line: It was a guess.
Being the inquisitive type, I went to a local utility and asked them how to calculate energy savings allowing for the changes in temperature and utility costs from year to year. They called and said they didn't have a handy formula for that. I had received the same energy savings pitch from the furnace company, as the window company, and was amazed there was not a formula of some kind to check the projected results.
We like our new windows but we have no idea how much energy they are really going to save or what "Recovered Costs" we'll actually have, but hopefully a lot. If I ever figure it out, I'll let you know.
Wednesday, May 25, 2011
10 Things Your Financial Magazine Won't Tell You
10 Things Your Financial Magazine Won't Tell You
A certain financial publication publishes articles about “10 Things” various businesses won’t tell you about how they operate. They recently did one on financial planners and I thought it would be fun to do one on them. While I caution people to be careful about hiring a financial planner myself, I just couldn't resist the opportunity to have a little fun with this particular financial magazine. For some reason magazines never publish things like this about themselves. With that thought in mind, here are my “10” for financial magazines.
1. The subscription renewal price we offer you is generally not the best price available
We offer various prices to various people at various times. If you hang on long enough sometimes you can get a better deal on our subscription. We routinely point out how people can save money but for some strange reason we never mention magazine subscriptions.
2. A lot of our investing advice doesn’t work
We have to come up with different investments for various issues we publish because we can’t survive telling you just one thing, such as, you’ll probably be better off investing in broad market stock and bond index mutual funds over long periods of time. How often could we repeat that and get away with selling you a renewal subscription?
Also, you may see in one issue where we have an article titled, “Building Your Wealth!!!” And a later issue with the title, “Rebuilding Your Wealth!!!” You would think people who followed our advice on building wealth wouldn't need to rebuild their wealth but, as Forrest Gump said, "It happens."
3. We may not have a lot of financial background ourselves
In a recent article on “10 Things,” we pointed out financial planners may not have that much background in the business. Guess what? We may not either. It can actually take less background to write articles than it does to become licensed to sell securities and insurance. Personally, I think you should check everyone out before taking their advice.
4. Our advice is generic
It has to be. When we write about something, we really don’t know the background of the person who is going to read the article so we have to be a little vague and general. While we don’t have much responsibility (see number 3 above) we do try to be somewhat careful about giving specific advice. When you don’t know anything about the people taking your advice this is just a good defensive approach. We don’t want to intentionally screw up anyone’s life, we just want to sell magazines!
5. A lot of our information is available for free on the Internet
We hope to change this in the future (cross your fingers for us) but for now you can read a lot of articles without going to the mailbox and then disposing of our magazines (hopefully through recycling) when you’re done with them.
6. Some information we provide is not only wrong, it is terribly wrong.
Whatever you do, please don’t go back five, ten or twenty years and read what we said. Even though we try to generalize in very broad terms, we sometimes have to be somewhat specific and in some cases we are so far off the mark you wouldn’t believe it. The best of us will occasionally issue a mea culpa but how long could we stay in business if we confessed to everything that didn’t work out?
7. We would really like to have your best interests at heart (BUT)
Sure we would, but it’s a close second to wanting, needing and being required to sell more copies of our publication in order to stay in business. If it’s down to the line and between you and us, who do you think will win out? We might try to be altruistic but we’re not stupid. After all, we have mouths to feed.
8. We don’t have to understand the things we criticize
The nice thing about being in print and living remotely from wherever our subscribers happen to live is, they’ll never get to know us well enough to realize we can take a very jaundiced view of financial planners and everyone connected with financial planning (or any industry, for that matter) without ever having done a financial plan ourselves! It’s probably the same thing in the medical world where amateurs criticize brain surgeons after a procedure. It just doesn’t take a lot of knowledge to criticize (thank goodness for us!).
9. We don’t measure up to own standards
We hold others to much higher standards than we could ever possibly meet ourselves. The nice thing is, we have rights under the 1st Amendment concerning Freedom of the Press. We can pretty much write (and say, for that matter) whatever we want as long as we don't libel or slander.
10. We reprint the same stuff over and over again
It’s called recycling in the real world. In the print world it’s called brilliant resource management. Why put the time and effort into something new when it's easy to just move a few paragraphs around and print it again? Over and over.
So, as the old quote from Leave It To Beaver Goes:
Beaver: Gee, there’s something wrong with just about everything, isn’t there Dad?
Ward: Just about, Beav.
And thank goodness or we would not be able to put these lists of “10 Things” together and earn enough to be able to afford a really good financial planner. But then, there really isn’t such a thing as a good financial planner, according to us, is there?
A certain financial publication publishes articles about “10 Things” various businesses won’t tell you about how they operate. They recently did one on financial planners and I thought it would be fun to do one on them. While I caution people to be careful about hiring a financial planner myself, I just couldn't resist the opportunity to have a little fun with this particular financial magazine. For some reason magazines never publish things like this about themselves. With that thought in mind, here are my “10” for financial magazines.
1. The subscription renewal price we offer you is generally not the best price available
We offer various prices to various people at various times. If you hang on long enough sometimes you can get a better deal on our subscription. We routinely point out how people can save money but for some strange reason we never mention magazine subscriptions.
2. A lot of our investing advice doesn’t work
We have to come up with different investments for various issues we publish because we can’t survive telling you just one thing, such as, you’ll probably be better off investing in broad market stock and bond index mutual funds over long periods of time. How often could we repeat that and get away with selling you a renewal subscription?
Also, you may see in one issue where we have an article titled, “Building Your Wealth!!!” And a later issue with the title, “Rebuilding Your Wealth!!!” You would think people who followed our advice on building wealth wouldn't need to rebuild their wealth but, as Forrest Gump said, "It happens."
3. We may not have a lot of financial background ourselves
In a recent article on “10 Things,” we pointed out financial planners may not have that much background in the business. Guess what? We may not either. It can actually take less background to write articles than it does to become licensed to sell securities and insurance. Personally, I think you should check everyone out before taking their advice.
4. Our advice is generic
It has to be. When we write about something, we really don’t know the background of the person who is going to read the article so we have to be a little vague and general. While we don’t have much responsibility (see number 3 above) we do try to be somewhat careful about giving specific advice. When you don’t know anything about the people taking your advice this is just a good defensive approach. We don’t want to intentionally screw up anyone’s life, we just want to sell magazines!
5. A lot of our information is available for free on the Internet
We hope to change this in the future (cross your fingers for us) but for now you can read a lot of articles without going to the mailbox and then disposing of our magazines (hopefully through recycling) when you’re done with them.
6. Some information we provide is not only wrong, it is terribly wrong.
Whatever you do, please don’t go back five, ten or twenty years and read what we said. Even though we try to generalize in very broad terms, we sometimes have to be somewhat specific and in some cases we are so far off the mark you wouldn’t believe it. The best of us will occasionally issue a mea culpa but how long could we stay in business if we confessed to everything that didn’t work out?
7. We would really like to have your best interests at heart (BUT)
Sure we would, but it’s a close second to wanting, needing and being required to sell more copies of our publication in order to stay in business. If it’s down to the line and between you and us, who do you think will win out? We might try to be altruistic but we’re not stupid. After all, we have mouths to feed.
8. We don’t have to understand the things we criticize
The nice thing about being in print and living remotely from wherever our subscribers happen to live is, they’ll never get to know us well enough to realize we can take a very jaundiced view of financial planners and everyone connected with financial planning (or any industry, for that matter) without ever having done a financial plan ourselves! It’s probably the same thing in the medical world where amateurs criticize brain surgeons after a procedure. It just doesn’t take a lot of knowledge to criticize (thank goodness for us!).
9. We don’t measure up to own standards
We hold others to much higher standards than we could ever possibly meet ourselves. The nice thing is, we have rights under the 1st Amendment concerning Freedom of the Press. We can pretty much write (and say, for that matter) whatever we want as long as we don't libel or slander.
10. We reprint the same stuff over and over again
It’s called recycling in the real world. In the print world it’s called brilliant resource management. Why put the time and effort into something new when it's easy to just move a few paragraphs around and print it again? Over and over.
So, as the old quote from Leave It To Beaver Goes:
Beaver: Gee, there’s something wrong with just about everything, isn’t there Dad?
Ward: Just about, Beav.
And thank goodness or we would not be able to put these lists of “10 Things” together and earn enough to be able to afford a really good financial planner. But then, there really isn’t such a thing as a good financial planner, according to us, is there?
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