Up-selling At The Doctor's Office
If you went out to buy something and came home with something more expensive than what you originally planned, you've been up-sold. According to Wikepedia (link),
"Up-selling is a sales technique whereby a salesman attempts to have the consumer purchase more expensive items, upgrades, or other add-ons in an attempt to make a more profitable sale."
More On Missing The 10 Best Days
Blogger Nickel at fivecentnickel.com made some great comments to my post about missing the 10 best days in the stock market. I showed in my post that the probability of missing the best 10 days in 10 years is one in 2.8 billion billion billion. Nickel disagreed. Because the comments require a long response, I'm making a new post as opposed to burying it in the comments. First, the comments from Nickel:
"While you're correct that this overstates the problem in that people won't miss just the 10 best days of the market, you're forgetting that the biggest days often come in the earliest stages of a recovery.
"For example, looking over the past 25 years, three of the 10 biggest days came in the week and a half following Black Monday, and two more of them occur in close succession at the very tail end of the dot bomb debacle. Thus, these days are concentrated into periods when people are especially likely to have bailed on the market and not gotten back in.
Carnival of Personal Finance #114
Sorry about the late announcement and lack of posts this week. I've been busy with back to back business travel lately. While I was traveling, the stock market stabilized a bit after the Fed made a gesture. Countrywide got a lifeline, at least for now. We will see which shoes drop next.
Carnival of Personal Finance #114 is posted at The Simple Dollar this week. My submission was What Happens When Your Mortgage Lender Goes Out of Business. I also enjoyed the following articles in this carnival:
How Low Can It Go?
The stock market keeps dropping. The Dow closed under 13,000 yesterday. The recent decline tripped another wire for my rebalancing. This time it was for the small cap value asset class. I bought more iShares Russell 2000 Value Index Fund (IWN). This fund was down 8% since the beginning of this year. It was down 15% from its peak in early June.
I was early when I bought more REITs in July. The Vanguard REIT ETF (VNQ) was down another 7% from the price I paid 3 weeks ago. I'm probably early on small value as well. The "best" strategy for rebalancing is waiting until the bottom to buy and waiting until the top to sell. The problem is that nobody knows where is the bottom or the top. A run can quickly turn to the other direction or it can extend beyond anybody's imagination. Here's a rough recap of the greater-than-10% downturns in the last 20 years using S&P 500 data (not including dividends):
| Date | Change | Duration | Next Leg |
| 7/07 - ??? | -9% and counting | 4 weeks and counting | ??? |
| 11/02 – 3/03 | -15% | 3.5 months | +94% |
| 3/00 – 10/02 | -48% | 2.5 years | +21% |
| 7/99 – 10/99 | -12% | 3 months | +22% |
| 9/98 – 10/98 | -10% | 2 weeks | +48% |
| 7/98 – 8/98 | -19% | 6 weeks | +11% |
| 10/97 – 10/97 | -10% | 2 weeks | +35% |
| 2/97 – 4/97 | -10% | 7 weeks | +33% |
| 7/90 – 10/90 | -20% | 3 months | +176% |
| 1/90 – 1/90 | -10% | 4 weeks | +14% |
| 8/87 – 12/87 | -34% | 3.5 months | +61% |
What Happens When Your Mortgage Lender Goes Out of Business
Since we had the subprime problem, many mortgage companies went bankrupt. The largest mortgage lender in the country Countrywide Financial (CFC) announced today that they drew down their entire $11.5 billion credit line. The analogy for this move in personal finance is like a person who normally uses credit cards only for convenience all of sudden maxing out ALL of their credit cards. It's a signal of distress. The credit lines are supposed to be a backup. They are there but you are not supposed to use them unless there's something seriously wrong. There's talk of bankruptcy. Usually before someone goes bankrupt, they draw down all their credit lines. WorldCom did the same to their $2.65 billion credit line in 2002, about 2 months before it filed for bankruptcy. The credit line draw down from Countrywide today is more than 4 times as large as what WorldCom did.
I'm not saying Countrywide will go bankrupt. I don't know that. But one can't help but ask what happens when your mortgage lender goes out of business. I wrote about what happens when a bank goes out of business in February. That was from a depositor's point of view. What if you are a borrower?
First the bad news. You will not be let off the hook on your mortgage. Even if the lender goes out of business, you are still responsible for paying your mortgage. Someone else will take over the bankrupt company's assets (the loan to you) and demand payments from you. If you don't pay, they will take your house. Sorry, you are not going to get a reprieve. » Read more …
Risks in Money Market Funds
Reader Kim asked, referring to my post Which Vanguard Money Market Fund? in April,
"In light of the current sub-prime meltdown, some people are questioning whether they should move out of Vanguard Prime MMF into something safer, like Vanguard Treasury MMF. Your blog helps calculate return under different scenarios but leaves off the risk aspect. Would it be of interest to you to add in some additional calcs. to quantify the risk v. return aspect to give a better picture on each fund? I am very interested in this issue because it is often neglected. Thanks!"
When Charts Lie
Charts are good ways of presenting data. But sometimes they lie, or shall I say create a wrong impression.
I was at a Barnes & Noble bookstore the other day looking for new finance and investment books. I picked up The Smartest Investment Book You'll Ever Read by Daniel Solin. It's from a new author I haven't heard before. The book is actually not bad. I will do a review later. But this post is not about the book. It's about charts.
In the book there is a chart showing that even over a long period of time, sometimes stocks would return less than bonds. The period chosen was 1965-1984. This is true. During 20 years from 1965 to 1984, stocks returned less than bonds. The chart looks like this:
Credit Card Dispute Against Priceline
This is an update to my credit card dispute against Priceline. When I went on vacation a few months ago, Priceline gave me a bad hotel. I'm usually not very picky. But this time it was bad enough for me to file a dispute with my credit card company against Priceline. It was the only dispute I ever filed against anybody. Just as I predicted, my dispute was denied. I received a form letter from my credit card company, which said:
"We have thoroughly reviewed the details of your dispute, and based on the information we have received, we are unable to issue a credit for the disputed amount(s). We understand that you were not satisfied with the outcome of the service provided by the merchant. Unfortunately, the merchant has the right to receive payment for services that were rendered. At this time we consider this dispute closed and the full amount now due."
Magic Formula Investing: Will It Work?
Today I'm reviewing the idea of Magic Formula Investing (MFI) as introduced in the book The Little Book That Beats the Market by Joel Greenblatt.
The author Joel Greenblatt (Wikipedia bio) is a hedge fund manager. In this book he offered a "magic formula" that beats the market, or so he claimed. The underlying principles for the magic formula are very simple:
- Buy good companies
- Pay a bargain price
APR or APY, It Doesn't Matter
It's very strange. I see a lot of people reaching my blog when they search for information on converting APR to APY or vice versa. They end up on my post last year Interest Rate: APY and APR which mentioned two Excel formula: EFFECT which converts APR to APY, and NOMINAL which converts APY to APR. While it's nice to know that 5% APR is 5.13% APY and 5% APY is 4.88% APR, I think they are missing the big picture. The difference between APR and APY is not a big deal.
If someone is carrying a car loan at 4.99% APR and the interest rate on an online savings account is 5.30% APY, is this person better off keeping the money in the savings account or paying off the car loan? Do I need to convert one to the other and compare the numbers? Not really. The difference between APR and APY is so small you can pretty much ignore it. What makes a much bigger difference is taxes. You have to pay federal and state income taxes on the interest earned in a savings account. There is no tax deduction for the car loan. Therefore, before taxes, 5.30% APY and 4.99% APR are about equal; after taxes, 5.30% APY is much smaller than 4.99% APR.
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