Carnival of Personal Finance #111
Carnival of Personal Finance #111 is up at Plonkee Money. My entry in the carnival is Personal Rate of Return: Dollar Weighted Or Time Weighted. After a quick glance, the following articles in this carnival are my favorites:
* Choosing a 529 Plan at Lazy Man and Money. The 529 plan field is insane. Every state has its own plan. Some states have multiple plans. Who can keep all these straight?
* Absolutes at Financial Security Quest. This is the first time I read something from this blogger in Canada, who also writes long posts. I subscribed to the feed.
Avoiding the Worst Days and Missing the Best Days
Two readers commented about avoiding the worst days on my post about the meaningless stats on missing the best days. The stock market had some bad days since then. I think some might be interested in reading about avoiding the worst days.
First I want to emphasize that the whole point of my previous post was that it’s IMPOSSIBLE to miss the best 10 days in 10 years. The odds are 1 in 2.8 billion billion billion, which is like winning the Powerball jackpot with a single ticket purchase back to back to back. By the same calculation it’s equally IMPOSSIBLE to avoid the worst 10 days. But since they asked, I compiled some numbers for avoiding the worst 10 days in 10 years. So here you go, more meaningless stats.
The rewards for avoiding the worst days are equally as impressive as the penalty for missing the best days. Look at this chart:
Movie Review: Barbarians At The Gate
Private equity buyouts are in vogue these days. It feels like almost every week there is an announcement that another company is bought by private equity firms. What’s going on? What makes them so prevalent and how will these buyout end up? I know there was a wave of leveraged buyouts (LBOs) in the 1980s. I want to find out what happened back then. What triggered the LBOs in the 1980s? What made the activities stop? What happened after the companies were bought? Did the buyout firms make money?
The climax of leveraged buyouts in the 1980s was the purchase of RJR Nabisco by Kohlberg Kravis Roberts (KKR). Two Wall Street Journal reporters wrote about it in their book Barbarians At The Gate. It became the #1 bestseller on New York Times. Later it was made into a movie by the same name for HBO.
Because it takes less time watching a movie than reading a 600-page book, I opted for the movie from Netflix. The movie told the story of the fight for RJR Nabisco between its CEO F. Ross Johnson and KKR’s Henry Kravis. After seeing how others made a ton of money doing LBOs, Johnson wanted to do one himself by taking RJR Nabisco private. He pissed off the LBO king Henry Kravis because although Kravis gave him the idea of doing an LBO, Johnson wanted to do it himself, not with Kravis, but with his buddies at American Express and Shearson Lehman. A bidding war ensued. Johnson first bid at $75 a share. Kravis topped it at $90. A few more rounds went by. Finally Johnson bid $112 a share and Kravis bid $109. The board of directors took the bid from Kravis because they despised Johnson after they learned that Johnson made secret deals with his bidding partners Shearson Lehman and Solomon which would give a big piece of the ownership to Johnson himself (Time, Dec. 5, 1988: “If I Fail, I’m on the Hook”).
Rebalancing In Action: Bought More REITs
The stock market had a good year this year. Despite the 2% drop yesterday, the S&P 500 index is up 7.5% since January. When I looked at all the Vanguard index funds, everything is up, except REITs. REITs are Real Estate Investment Trusts, which invest in commercial real estate like office buildings, shopping malls and what not. The Vanguard REIT Index Fund is down 9.8% year to date as of July 24, 2007. Moreover, it’s down 20% from its peak in early February. One of the benefits for investing in REITs is their low correlation with the stock market. This is exactly how diversification is supposed to work. Something goes down when everything else goes up.
I bought more REITs yesterday, specifically the Vanguard REIT ETF (VNQ). I bought more not because I think REITs have hit a bottom, but because they fell out of my rebalancing range. While we all like to buy at the very bottom and sell at the very top, there’s no way to predict either the bottom or the top. I have a rebalancing range for every asset class in my portfolio. If the percentage fluctuates within the range, I do nothing. If it falls below the trigger line I buy more. It’s all mechanical. I don’t try to predict whether it’s going to go down further or it’s going to rebound. What if it drops another 20%? Then I will have to buy more. That’s how rebalancing works. Buy the losers.
Carnival of Personal Finance #110
Carnival of Personal Finance #110 is up at Fat Pitch Financials. My entry in the carnival is Out of the Market and Meaningless Stats. The following articles in this carnival stood out for me:
* Car-free Living Is the Path to Financial Independence by A Canadian and Her Money. Owning and operating a car is expensive. By my calculation it costs about 40 cents per mile if you include all vehicle operating costs.
* How Dumping TV Allowed Me to Quit My Job, Create an Online Business and Fund My Retirement Account by SavingAdvice.com. I didn’t realize how much commercials take up in a typical TV hour until I watched TV in a hotel when I traveled on vacation. I cut my cable subscription 2 years ago and I never regretted it.
Personal Rate of Return: Dollar Weighted Or Time Weighted
After reading my post about estimating overall personal rate of return, a reader Brian asked:
“I have a Fidelity serviced 401(k) and I had always wondered about how they calculated the personal rate of return. Do you know how/if other providers calculate personal rates of return? If I were to open a brokerage account, is there one company that does this better than others?”
Rates of return fall into two major categories: Dollar Weighted Rate of Return and Time Weighted Rate of Return. They measure different things and they should be used for different purposes.
Settle for Good Enough
I came to know the book The Paradox of Choice: Why More Is Less by coincidence when I read an article on New York Times on a plane. I wrote about that article in Opt In or Opt Out: The Power of the Default Option. After a long wait I finally got this book from the public library. I can tell you it’s well worth the wait.
The author Barry Schwartz is a psychology professor at the prestigious Swarthmore College in the suburb of Philadelphia. He wrote about how the abundance of choices actually makes us unhappy and how to deal with choice overload. We live in a world of choices. When the author shopped for jeans, there were 6 different fits. Buying a car? There are perhaps hundreds of different makes, models and trims, plus new versus used. Plethora of choices are supposed to make us happy. Everybody can get what they want. If someone doesn’t care about the additional choices, they can just ignore them. No harm done. Not true. Instead, the choices overwhelm us, forcing us to become experts on everything.
In the personal finance area, we are confronted with all sorts of savings accounts, money market funds with different tax treatment, credit cards with different rewards structures, different types of mortgages, all kinds of stocks, bonds, mutual funds and ETFs, different types of workplace retirement plans, different types of IRAs with different tax rules, different types of educational savings plans, … … You get the picture. There are all kinds of traps everywhere. You read articles about “7 biggest mistakes …” and “Beware …” How does an average person cope with all these? The financial “advisors” come in and say “It’s too complex. You can’t deal with it. Let me handle it for you [for a handsome fee].” Now we have even more traps. We have to figure out whether the “advisors” are screwing us.
Carnival of Personal Finance #109
Carnival of Personal Finance #109 is up at Mint. My entry Canceled Oldest Credit Card was included as an Editor’s Choice. Woohoo! It’s great to see posts from both frequent contributors and many new bloggers. My only gripe for the carnival is that it’s getting too long. If the quality of my entry isn’t as good as others, I’d rather not see it included.
Out of the Market and Meaningless Stats
The stock market had a field day last Thursday (7/12/2007). The Dow rose 284 points, its biggest point gain in nearly five years. It reminded me of the stats about the risk of being out of the market. It goes like if you missed the best X days in Y years in the stock market, your return would’ve been cut in half or something like that. Let me tell you those stats are meaningless.
There’s a chart like this in a recent issue of Schwab’s On Investing magazine (sorry, no online link):
ESPP: What’s In It for the Company?
After reading my post about ESPP, a reader David sent me an e-mail and asked
I’ve read a bunch of stuff about ESPP and while everyone talks about what a good deal it is for the employees who are able to participate, or the tax consequences of the various ways to sell the shares, no one talks about what is in it for the company offering the plan. Any ideas?
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