personal finance

In all the time that I have been away over the last few months, I have spent an enormous amount of time reading up articles on market technical analysis. At this point of time (it’s a continuing effort), I feel pretty disappointed with the whole concept of so-called “technical analysis” and with the “chartists” (market technical analysts who speak the language of charts) who make universal predictions about the universe based on such technical analysis.

Generally, from the events of past few months, I have come to a conclusion that “fundamentals”, “support”, “resistance”, “pattern”, “break-out”, and “dead cat bounce” are some of the most misused words in this area of pseudo-study (look up “dead cat bounce” on Google, it’s interesting). Given a time-history of a certain phenomenon (for example, stock price), one can calculate a plethora of brain-numbing numbers and relations; but all those numbers mean absolutely nothing if one cannot interpret the meaning of those numbers in the context of present and anticipated environment (including emotions, politics, public perception, and mass hysteria).

Moreover, you would think that if market technical analysis is just a bunch of numbers derived from a common stock price history, every chartist would have the same conclusion. Keep wishing on this! Depending on whether a chartist is a bear or a bull, he/she would try to put a different spin on the exact same numbers. Some of the chartists I have been following have been predicting a total collapse of the market since March 2009 - they are still waiting hopefully for that to happen. One group of chartist is predicting a “U” shaped economic recovery; another group of chartist is predicting a “V” shaped recovery; and yet another group of chartist is predicting a “W” shaped recovery. All these chartist should get in a room and come to a common conclusion over which letter of the English alphabet they want to use.

Then there are chartist who keep harping on support and resistance levels of a stock (or the market in general) and try to predict a stock’s future behavior based on these levels. The way I see it, support and resistance levels, like most statistical measures are backward looking measures - as such, support and resistance levels don’t dictate the future price of a stock, it’s the other way around. When stock price breaks its support, it is the support that changes, not the stock price. Whether the stock will keep breaking through its support does not depend on your silly calculated lines - it depends on people’s perceptions, anticipated future growth or decline, fear, euphoria, and herd mentality (among other factors).

It’s the same thing with moving averages. Stock price does not follow a particular price target because the moving average says so - the moving average is there because historical stock price said so.

If charts predicted the future, life would not have been as interesting as it is now. All chartists would have been super rich and all others would have been super suckers.

In conclusion, to me, technical analysis charts are like opinion polls - they are interesting, but generally useless. There are no patterns. Trying to establish patterns in a stock market is like looking at clouds and imagining many various shapes (animals, mermaids, or whatever you feel like imagining).

“Smoking is injurious to health” - people still smoke.

“Past performance is not indicative of future returns” - people still draw charts.

Think about this.

Stocks tumbled Friday on worries about the government taking a bigger chunk of Citigroup and a bleak reading on the economy, again touching 12-year lows. (source)

As Wall Street slides towards a 12-year low, it’s almost like getting back 12 years on your financial clock - and a great opportunity to get to all the investing that you have been planning and procrastinating and planning and procrastinating … but never really doing anything about it.

This especially applies to people like me, who, just a few years ago, procrastinated much without actively investing, and thought that they missed the bus on making big bucks in the stock market.

The cash percentage in this portfolio will give you an idea of what I am talking about.

I now have a chance to invest some of that cash 12 years ago - with valuable diversification lessons from the past couple of years.

Well… what happens if we hit 24-year lows?

For people like me, that would be an unprecedented opportunity - assuming you believe that markets will have to go up sometime in the future. The time-frame over which this happens is not really predictable, but one can’t stay eternally pessimistic, you know.

Way forward: I am thinking dollar cost averaging and some key ETFs (having a healthy volume).

I have had doubts about dollar cost averaging in the past; but given the current situation, I have sort of started appreciating the value of investing that way - small steps at a time. Of course, the gains are small and slow, but so are the consequences of failure. I bet the slow and steady are surviving this crisis a lot better than the fast and furious.

ETFs (by their very nature) mitigate the risk of losing a bunch of money on individual company bankruptcies, but they have their own pitfalls - read this to understand how ETFs have the potential to put you in a hole if you are not careful.

This appeared on CNN Money a couple of days ago about Americans saving too much:

Why saving is killing the economy
Saving more and cutting debt might sound like a good plan to deal with the recession. But if everyone does that, it’ll only make matters worse.

That’s probably the most misleading (almost irresponsible) statement/observation that I have come across during this unhappy recession.

I think I now understand why this country is going through a recession in the first place. Remind me, why are we currently being chased by this dark financial cloud - was it saving too much … or perhaps, was it spending too much (in fact spending too much of borrowed money)?

It is not like Americans were saving “enough” all these years and suddenly they have started to hoard every penny they have leading to an economic crisis. Consider the situation in 2005-2006 as reported by MSNBC:

Americans’ personal savings rate dipped into negative territory in 2005, something that hasn’t happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items.

The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

… “Americans seem to have the feeling that it is wimpish to save,” said David Wyss, chief economist at Standard & Poor’s in New York. “The idea is to put away money for old age and we are just not doing that.”

Now that should have been like a slap on head - those numbers were indicative of the fact that people were spending money that didn’t even belong to them (borrowing). Sure enough it propped up the economy in the short term (markets did great in 2006 ~ 2007, housing demand/prices did great, etc.), but it seems now (20-20 hindsight) that we were just heading higher up the cliff, inflating the bubble, and increasing our chances of a successful financial harakiri in the future.

It reminds me of those situations in cartoon films where the characters run off a cliff … walk in the air for a while … and then suddenly realize that the freaking ground is no longer beneath their feet.

The current saving rate is higher than in the past, but it’s not like it is way out of whack. In fact, I am not even sure that increased saving rate is going to be sufficient when extrapolated a few decades into the future.  PBS reported this about a week ago:

Amid fears of further job cuts and economic uncertainties, Americans boosted their savings rate to 3.6 percent of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8 percent in May, the Associated Press reported.

That’s saving $36 out of $1000 disposable after-tax income - nothing to write home about.

Anyways, increased savings rate,  however small, suggests to me that Americans are now coming to their senses and doing what is necessary to ensure some level of financial security over the long run.

Whatever the numbers are, here is the truth. A good economy doesn’t need consumers who spend “freely” - it needs consumers who spend “wisely” - better still, a good economy requires consumers that save and invest wisely. If Americans don’t save for their retirement now, they are going to increase the financial burden on national reserves in future - if they save now, they would be in a better position to spend later.

What would hurt the economy is “hoarding”. However, there is a subtle difference between hoarding and saving. Hoarders don’t have a reason to hoard, but savers always have a reason to save - and more often than not, the reason is to be able to spend wisely in the future on things that matter.

For those who are interested in furthering their knowledge about savings rate and its effect on the economy, this paper (pdf file) on federalreserve.gov will give you some clues.

Oh come on man! … from zero dollars Zecco has increased its minimum balance requirement for free trades to $2500 earlier and now to $25000 !

Hello Jeroen Veth… that’s an “order of magnitude” change !.. and doesn’t  really gel with your self-proclaimed objectives (source):

At Zecco we believe in complete transparency in everything we do. That means that we’ll share with you how the site makes money. You’ll know how much traffic your pages get and how big the advertising checks are that come in. We believe sunshine is the best cure for iffy investment schemes and hyperventilating stock touts. Ultimately, we believe that greater access to information helps make the investment game more fair. And we rely on members of the zecco.community to contribute to the effort. By sharing research and perspectives, exposing creative accounting and conflicts of interest and uncovering hidden and undervalued opportunity in the marketplace, we all help each other. We believe that everyone has a story and deserves a listen. In the best tradition of democracy, we’re lowering the barriers to entry in the market of ideas. By sharing, debating and testing investment ideas, the zecco.community of investors may help each other make informed investment decisions.

Why weren’t you guys honest enough to just declare your “free trades” deal as an introductory offer? That way people at least know that their honeymoon would be over within the next year - that way they anticipate what’s coming and don’t feel screwed.

I think Zecco would potentially completely destroy its loyal customer base by doing something as stupid as this - of course I am assuming that a lot of those customers (like me) were attracted to Zecco ONLY because it was offering “free trades” - and it seemed like a fair bargain to avail those free trades in spite of whatever other issues Zecco had at the time. It doesn’t seem to be a smart decision - especially in these times - considering the consequenses of losing business from a number of people and earning a bad reputation.

The good part of the story is that it has woken me up from my complacency and now I am researching other brokerages where I can transfer my securities. Some of the options I am considering are listed below:

1. Sogotrade: $3 per trade, no minimums.

Our online rate is just $3.00 regardless of order type with no share limit
Stocks priced below $1.00 carry an additional fee of 1/2 of 1% of principal.

2. Just2Trade: $2.50 per trade, no minimums.

We offer unlimited trades for $2.50 and 50¢ per contract.  There is no share limit per trade. There are no other fees.  No gimmicks and no surprises.

3. MB Trading: Plan A fee structure.

$0.01 per share for the first 500 shares, then just $0.005 per additional share¹.

100 shares= $1.00
300 shares= $3.00
500 shares= $5.00

(The note marked “1″ says: $1 minimum ticket charge applies.)

In the fine print it also says “SEC Section 31 and FINRA Trading Activity fees apply to all commission plans.” However, these fees are hardly significant (per MB Trading information) - SEC Section 31 fee is $5.6 per million and the FINRA charges a Trading Activity Fee is $0.000075 per share.

4. Low Trades: $4.95 per trade, no minimums.

However, these guys charge a semi-annual $50 inactivity fee.

Inactivity Fees charged for trading periods between January-June and July-December of each calendar year. To avoid inactivity fees, one executed trade must be completed during each trading period. IRAs and Custodian accounts are exempt from these fees.

5. Options House: $2.95 per trade, no minimums.

Fine print says:

The commission for stocks priced $2.00 or less is $2.95 per trade plus $0.01 per share.

6. eOption: $3.00 per trade, no minimums.

Fine print says:

Less than $2.00 per share** $29.00

7. Trade King: $4.95 per trade, no minimums.

For Stock and ETF trades, we charge $4.95 per trade. For option trades, we charge $4.95 per trade, plus 65 cents per contract. That’s it.

I still need to read all the fine print for my options in details, but this is going to happen sooner than later. I would rather stay with a brokerage firm that charges higher fees upfront (thinking of the good old Sharebuilder - more so because now its managed by ING) than a brokerage firm who likes to get sneaky on its customers.

Stupid bait and screw tactics.

I bet this whole financial mess has made everyone of you open your eyes and question your wants, question your income, question your money management (or the lack of it), question your expenses, question your investment strategies, question your job security, question your $10-per-workday lunches, question your credit card statements, question your insurance coverages ….. sort of made you question your attitude towards money.

For those of you who still have your jobs, I bet you feel fortunate (and generally crib less about being less paid, etc.) - and I bet you are putting in extra efforts to make sure that someone higher up notices your hard work before you get into the to-be-laid-off list.

It has made people question their governments, and governments question their respective policies.

On my part, I have convinced at least half a dozen young people (close friends and relatives) to open their minds about saving more and/or investing in the stock market (on the argument that it’s a good time to buy stocks, develop good money saving habits, etc.). It’s a happy feeling (almost a proud feeling) when these guys and gals discuss interest rates, stocks, ETFs, and portfolio diversification over lunches and other casual meetings.

Of course there is much suffering and stress, but hopefully most of us will come out of it with several lessons for life. Hopefully, adversity will bring out the best of our efficiency and adaptability.

As it is, we have to read/hear bad news everyday … just thought I should throw in a pinch of positive out there.

When you are poor you would like someone to share your financial burdens; you want to someone to give you some tax relief; you want someone to give your kids financial assistance to get through college; you want someone to bail you out of the financial crisis; it seems logical for you that the “rich” are taxed more - you call that graduated tax; you consider it fair that there are incentives/affirmative-action for the economically and socially challenged; the growing disparity between the quality of life in the rich and the poor bothers you; the concept of “free market” doesn’t always work in your interest; you find it surprising that CEOs are paid several million dollars a year while you can barely make your ends meet; you generally don’t like that the fact that health insurance is controlled by for-profit companies; and you want the government to have some control over banks/firms who handle your retirement money; you generally envy the “capitalists”.

When you are rich you want to enjoy all your wealth by yourselves; you think “poor” people are “poor” because they aren’t working hard enough to get “rich”; you think it’s unfair that you are taxed at a higher rate than the “poor” - you call that “spreading the wealth”; for you “charity” is only a means of reducing your taxable income - you generally don’t believe that “wealth should be spread around” so the concept of “charity” doesn’t really appeal to you; you are a staunch supporter of “free market” (but you still want the government to bail you out of financial mess - I don’t know what’s up with that); you recoil in horror because some plumber who earns more than $250,000 a year will pay about $3500 more per year in taxes; you think it’s draconian to limit profits or pay of any company or individual; you don’t care about the fact that health insurance is offered by for-profit companies - because you can basically afford anything they charge; you want minimum government involvement in anything that you are associated with financially; you believe that lack of government control leads to a “self-correcting” market; you generally hate the “socialist”.

The world isn’t black and white.

It’s one of those “deep-thought” days when I switch myself into a philosophical mode. Sometimes, this results in some extreme contemplation about the things I have been generally doing in my life. This time it was all about financial contemplation. The choice of the title is obviously inspired by the book “Zen and The Art of Motorcycle Maintenance” by Robert Pirsig.

Before I start my rant, let me give you a very brief summary of what is the concept of Zen. It essentially means going back to the basic fundamentals, starting from zero, and building your way up (Robert Pirsig’s Zen, not the original Zen). This much knowledge is sufficient for the purpose of this article. If you want to read more about this concept click here and here.

Your financial life is a big machine with a lot of odds and ends thrown into it. To maintain this beast, you require some kind of financial prudence. Now, if there is a problem with this machine, the *Zen* way is to start looking at some fundamental issues. To do that, you have to take it apart and try to put it back together. In doing so, you will realize the significance of each component. This is exactly what I will attempt to do in the following.

I have listed some potential fundamental roadblocks that defeat financial prudence. Along each factor, there is a short line of description that sort of adds financial relevance (it’s deep…you could apply this to many other issues in life). Please note that these are from my personal experiences. I will encourage readers to find some peaceful time and do this exercise for themselves at least once.

1. Greed: This is foremost cause of most financial troubles. We want more, and we just don’t want to stop. Our greed not only puts us in the holes but also makes other people’s life miserable.
2. Lack of self-control: Sometimes we acknowledge our greed, but we just can’t stop spending any how. Credit cards don’t swipe themselves, we swipe them.
3. Lack of foresight: Greed also blinds our foresight. We buy stuff, but we simply fail to estimate how much it is going to cost us in the long run. Don’t buy an elephant just because it’s being offered for zero down and no payments for 12 months.
4. Underestimation of consequences: Sometimes, we have all of the above, but we grossly underestimate the financial repercussions of our decisions. You can also term this as too much optimism or lack of proper judgement.
5. Ignorance: Ok, people don’t like to acknowledge this, but this is true. How many of us really know how credit card payments are calculated? Whether your card is a charge card or a credit card? Whether not paying telephone bills affect your credit score? What is the grace period on your credit cards?
6. Inability to recognize a problem: Sometimes we don’t realize that we have a problem. At times we don’t recognize the *right* problem. If you earn $120K a year and still live paycheck-to-paycheck, low income is not your problem, it is something else.
7. Inability to learn from previous mistakes: Ok we made that late payment once and paid for it with heavy fines and increased APR. What did we do about it? did we make changes to the way we do things to avoid making the same mistake again?
8. Lack of organization: Oh ! I forgot to make the minimum payment. Oh ! forgot to mail in the rebate. Oh! I thought this due date was for the other card that I have. Oh ! I thought I had more money in my bank when I wrote that huge check for that expensive television.
9. Sheer laziness/carelessness: Ah!..what’s the hurry, I will do it later. I have seen countless people not willing to check out more than one store for some of their large purchases…the reason: “I am bored already”. Here is another one I have heard recently, “I don’t know anything about what kind of 401K plan our company offers. I have been planning to talk to HR about it, but I find it very boring to discuss this financial stuff”. What?!
10. Overconfidence: This is really dangerous when coupled with ignorance. Leads to situations like “I can make this mess and then I will easily bluff my way out of it”
11. Circumstances: This one is tricky. There are two types of circumstances. Type 1: self-inflicted; these are due to some or all of the above reasons. Type 2: sheer bad luck; these are just out of your control: medical expenses, car trouble, job loss, failure to garner enough votes for the economic bail-out package, etc.,

Except “Type 2″ circumstances, there is a scope for improvement in all of the above. We just need to look into ourselves before point fingers for our financial mess. Once you do that, you will be an expert in the art of financial prudence, and hopefully stay out of trouble for a long time to come. This is more philosophy than practicality, but you can give it a try..it may work for some of you.

In all humility, I am guilty of some (almost all) of them at some point or other, but I am learning.

Since reading some comments on my last post, I had been thinking about what this whole deal with “personal finance” is about; is it about making the most amount of money? or is it about saving the most amount of money? or is it about spending the least amount of money? or is it about reducing stress due to money matters? or is it about this obscure concept called “financial freedom”?

The more I think about it, the less specific I get about possible “correct” answers to that question. In fact, looking back at my life, it seems that at different times, a different answer suited me depending on my financial and personal situation at that time.

What came out of this thought process was the realization that personal finance is not just about “maximizing money” - as I used to think earlier - and like most people probably think about it.

It’s not about maximizing. It’s about optimizing.

Given a financial situation, personal finance is about making the best of that situation. Sometimes it means trying to make as much money as you can, and at other times it means trying to make your money work to make you more efficient by reducing your stress, and at some other times it means that you save every penny to make sure that your children don’t inherit your burden of debt.

There is nothing wrong in trying to “maximize money”, but it is important to realize that, depending on your personal situation, there are costs (in terms of stress and time) associated with trying to do that.

Examples are numerous (but vague and difficult to explain) in this area, but a simple one would be to think of a job in which you are paid overtime. Every extra hour you work might mean that you will become richer than the previous hour, but it does not mean that you would be stress-free - or that you would be able to devote enough time to your family. If you overdo it, it wouldn’t be too hard to make yourself and your family feel miserable even with the extra money you earn.

Working your ass off for a few extra bucks might be a good idea when you are a bachelor with hardly any cares in the world, but if you are a family man, then you might be better off by working a little less in lieu of spending a little more time with your family. Now, just because you gave up that little extra money to spend time with your family or to reduce your stress, it does not mean that you are careless or frivolous with your personal finances. In other words, just because you chase every penny, it does not mean that you are an epitome of financially astute people.

In general, for the sake of the betterment of the whole universe and your own self, try optimizing your money instead of maximizing it. It also helps to reevaluate our understanding of “personal finance” in perspective of our changing personal situation and revise our money-chasing efforts accordingly.

Duh!

Since a little more than seven months ago, I made some adjustments to the path in which my career was taking me and took up a job instead of pursuing PhD. One of the main reasons for going that route was that I was so narrowly focused for so long that I forgot why I was doing PhD in the first place (of course, there is more to that story that just that, but I won’t go into that with this post).

Anyways, our household income increased by about four times after I took up the job. Initially, things were taking a deflating turn for the first couple of months - I guess this was in part because I was a relatively “newly employed” and was undergoing training without any major responsibilities (plus,  I apparently hadn’t discovered new ways of spending the increased income). However, our spending took a turn for the worse right after I published this post in early February.

Additionally, I have now started paying a lot less attention to our financial details (”details” is the key word here). There are only two fundamental concepts that I have been keeping in front of me: 1. to not spend more than what we earn (look at #7 in the linked post), and 2. to not time the market. Everything else is just falling in its place automatically.

The rest of our life is now governed primarily by convenience. Here are just a few changes in our spending habits and financial attitudes that occurred over the last few months.

1. Paradigm shift in the way I manage credit cards: I no longer have the time or the patience to follow those balance transfer offers and research/keep track of how our income would be increased by juggling such offers. I don’t care about optimizing the rewards anymore, and just use credit cards for the simple reason that I get an itemized list of where we spend our money at the end of the month.

As such, I am not using all my credit cards anymore. The fact that I have so many of them seems a bit ridiculous to me at present (this is an interesting development). Plus, I have discovered other practical problems in having too many credit cards (more on this later), so I am down to using just two credit cards at present.

2. Preferences for schedules rather than prices. We have flown thrice since February and every time, we went for flights that were more “convenient” instead of flights that were cheaper. On one of those three occasions, we had the option to drive (which would have been a whole lot cheaper), but again, the time spent in driving didn’t seem worth money saved. Interestingly, in the past, we have driven to that very location twice and at that time, the money saved seemed a lot more worth than amount the time spent in driving.

3. Buying what we “like” rather than buying what is “cheap”. Affordability is still in our minds but we don’t kill ourselves trying to save a few cents (or even a few dollars at times). For example, earlier, for cereals, it was usually “Great Value” from Walmart - now, it’s Kellogg’s or whatever brand that seems better - from a store that is closest to home.

4. Outsourcing clothes for ironing. Ironing is one activity I hate - it may be because I never ironed my clothes (over several years) when I was a student. It either took 10 minutes of my time every morning, or about an hour every weekend. Now that’s replaced by 5 minutes of detour every other week and $25.

5. Eating out more. This is again a product of optimizing convenience rather than costs. If we are too tired or not in a mood to cook, we just eat out without worrying too much about it. And, when we eat out, the choice of restaurant is usually dictated by time (and sometimes by what we feel like eating) rather than by how cheap or expensive it is.

6. Using toll roads instead of regular roads. I tried using regular roads (read as traffic-light-infested-roads) for the first couple of months. However, as the stress at work started growing, I started using toll roads more frequently. The toll costs me a lot more than I would like, but using toll roads has reduced a lot of stress in my life. I am now happy when I reach my workplace in the morning, and I am happy when I reach home in the evening, and I don’t have to bitch about how horrible my luck is to catch all the red lights on the way.

Also, the drive that used to take me 30 minutes via regular road now takes about 10 minutes via toll road. That much time saved everyday is just priceless.

7. If the market bothers me, I just don’t look at it. Out of sight, out of mind is what probably works with me in this case. I have some set investing goals this year (in terms of how much I should invest and where) and I just stick with that without really worrying too much about what the market is doing at any given time.

Come to think of it, the increased income is working towards making our lives a bit easier. Call it lifestyle inflation or improvement in the quality of life, or call it just sheer laziness (I am sure there will be different perspectives), or whatever. All we care about is that there is a lot less stress in our lives by spending a little more  money.

As long as we avoid these problems with lifestyle inflation, I think we are okay.