Opportunity Cost and Paper Loss
Is an opportunity cost a real cost? That’s the question I have been pondering.
I was deciding whether to buy an air ticket a few weeks ago. I saw a good price when I did the search in the morning. I was at work at that time and I decided to make the purchase that evening. When I searched again in the evening, the good fare was gone. The price had gone up by $70. I paid $70 more than I could have.
According to Wikipedia, an opportunity cost is "the next-best choice available to someone who has picked between several mutually exclusive choices." The opportunity cost of waiting until the evening is locking in the low fare right then and there. Its economic value turned out to be $70. This example shows an opportunity cost is every bit real. It cost me real money out of pocket.
In the world of investing, opportunity cost is present at all times. The opportunity cost of investing in bonds is investing in stocks that turn out better, or vice versa. The opportunity cost of investing today is investing on a different day when the price is lower. The opportunity cost of holding on to an investment is selling it before the price goes down.
TFB Invitational Update – March 2010
Back in January I created a virtual trading game on Investopedia called TFB Invitational. 13 other people joined me in this game.
Two months into the game, I’m surprised to see that I’m currently in first place. My virtual portfolio is up 3%. I made two purchases, both profitable (so far), one for a US stock ETF, another for an international stock ETF. Right now I’m 50% in stocks, 50% in cash.
How to Shop for Furniture?
The furniture I bought during the New Year’s holiday finally arrived. By the time they arrived, I almost forgot what they looked like. I’m so used to comparing products online. Buying furniture proved to be an entirely different experience.
Although many stores sell furniture, there is actually very little information online. Many furniture stores don’t put their inventory on their website. Those that do omit meaningful information. They give the furniture a nice-sounding name: a “Madison Park” collection or a “San Marco” dining table. Who makes it? They don’t tell you the name of the manufacturer. What’s it made of? “Select hardwood and veneer.”
When I buy shoes from Zappos or Endless, I see them in six different angles. When they show furniture that costs many times more, I only get to see one picture. How tall are the drawers? They don’t tell you.
The Need for a Consumer Financial Protection Agency
Lately I received some comments on two related old posts: $10,000 Lesson On Variable Universal Life (VUL) and What Is WFG and What Does It Do? I’m pretty sure most of you don’t monitor the comments on old posts like I do. I’m using these to lead a discussion on the need for a consumer financial protection agency.
From Jaymz on Variable Universal Life insurance (VUL):
Refundable and Non-Refundable Tax Credit in Charts
One thing I’d like to learn to do a better job of this year is to communicate more effectively with visuals. A good picture is worth 1,000 words. In some of my old posts, I wrote 1,000 words but people still keep asking the very question I attempted to address. Clearly I wasn’t effective in getting the point across with 1,000 words.
The post Refundable Tax Credit and Non-Refundable Tax Credit is one of those posts. Let me try again with some charts.
PSA: Beware of Job Scams
This is a public service announcement from the FTC.
"It’s hard to believe someone would steal money from a person looking for a job. But unfortunately, no matter how bad the situation, scammers see opportunity. Many people looking for work have been ripped off by scam artists who promise a job, access to special job listings, interviews, or a way to make a big income working from home – that is, if they just pay a fee or turn over their credit or debit card information. In the end, they’re left with no job…and some are robbed of hundreds of dollars."
Low-Minimum Index Funds and Commission-Free ETFs for Small Investors
The deal for small investors is getting better. If someone wants to invest in index funds and ETFs with very low cost, Vanguard is no longer the only choice. Competition is really good for customers.
Schwab has 5 index funds that require only $100 minimum initial investment. The lineup is not as extensive as Vanguard’s, but it’s adequate for a small investor. Although Schwab doesn’t have a bond index fund, customers can buy Treasury bonds at auction or buy new-issue CDs, all for free.
Schwab customers can also buy 8 Schwab ETFs without commission. Because these ETFs are new, my first choice would be the index funds unless the asset classes can’t be covered by the index funds. Here’s an example of a simple portfolio using Schwab index funds and ETFs: » Read more …
New Tax Forms and Schedules for 2009 Tax Year
Form 1040 for 2009 tax year has two new schedules.
Schedule L is used for claiming (a) the additional $500 or $1,000 tax deduction for property tax paid, (b) the sales tax paid on a new car purchased between Feb. 17, 2009 and December 31, 2009, and (c) a net disaster loss (together with Form 4684).
Schedule M is used for claiming the Making Work Pay tax credit. Making Work Pay tax credit is the $400/$800 tax credit added in the economic stimulus law.
While we are at it, here’s a list of the tax forms you will need for the various new tax incentives for 2009 tax year. » Read more …
Overhyped: The Smartest 401k Book You’ll Ever Read
I wasn’t so impressed by Dan Solin’s previous book, but I was willing to take a second chance on his The Smartest 401k Book You’ll Ever Read because it got endorsements from John Bogle, founder of Vanguard, William Bernstein, whose books I like, and Taylor Larimore, a co-editor of The Bogleheads’ Guide to Retirement Planning, to which I contributed a chapter.
I don’t know what’s wrong about publishing these days. Or maybe it’s always been this way. It seems you have to make an outlandish claim in order to grab people’s attention. The book isn’t necessarily bad but it’s way overhyped. The back cover has these in large bold colored font:
Everyone is telling you it’s a “no-brainer” to invest in a 401(k) or 403(b) plan because of the employer match.
Spending Other People’s Money
Someone bumped into my car in a parking lot but wasn’t decent enough to leave a note. The hood of my car was damaged. I went to two reputable body shops. One quoted $850; the other quoted $740. As body work goes, it’s a small job. Because the bill isn’t much more than my deductible, I decided to pay out of pocket and not bother with an insurance claim.
Both body shops told me if insurance is involved, the repair bill will be over $2,000. They will have to fix it "the right way." Instead of just repairing the hood, they will have to replace the hood and repaint the fenders to match the color. Both also told me I will not notice any difference with my untrained eyes if I only have them repair and repaint the damaged area. Since I’m paying the bill, I chose the lower-cost option.
What if the driver who caused the damage gave me his or her insurance information? Guess which option I will choose? Fix it the right way, of course, however marginal the quality difference may be. I don’t have to care if I’m spending other people’s money.
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