are you saving too much?

The following URL rehashes a New York Times published a couple weeks ago spotlighting some academic studies suggesting very vaguely that Americans might be saving too much. I'm including the Yahoo! article to avoid the annoying NYT request login and signup pages.

Rethinking Retirement Savings (or Not)

Apparently, this irked some individuals in the retirement planning business, who shot back some darting rebuke found here: Could You Really Save Too Much for Retirement?


My take:

If you'd read through the Yahoo! article in its entirety, you'll bump into the author attempting to raise a worthy debate, ranging from purported academics proclaiming the consequences of saving too aggressively, to rhetorical questions such as why more of the elderly can be found working after 70+ years of age, if saving too much is really what's occurring.

Understandably, the financial planning community's outrage in the second URL makes sense from their fiduciary standpoint for their clients. By answering a shocking article with their own shock-and-awe rebuttal, their intentions are good, even though the actual message, their concerns, are actually somewhat unjustified.

Beyond that, the national savings rate - the difference between after-tax income and expenditures - is actually negative, government statistics show. This is a fact.

According to "The Coming Generational Storm: What You Need to Know about America's Economic Future": (pg. 217)

What's our best bet? If you're saving less than 10 percent of your income, excluding any employer match, you're living dangerously. Twice that rate wouldn't be excessive - the worst that will happen is that you'll have the resources for an earlier retirement or expensive medical care.

Despite this attempt to stir up controversial debate after reading this material, I'm not swaying much from my own beliefs. Retirement savings will significantly determine your lifespan. Consider the ever-popular theory that Social Security and Medicare may not even exist anymore by the time today's twenty- and thirty-somethings retire. The amount of money you have when you retire will ultimately determine how much you'll have to spend for the necessities: housing, food, clothing, transportation, health care, medicines, etc. The less you have, the less you can afford these necessities, the more likely the catastrophic risk of running out of money before you run out of life, eating out of canned cat food.

It's a "pay me now or pay me later" scenario. Either we save like crazy when we can, or adapt to a much more frugal lifestyle in our golden years - you decide.

And on this note, frankly, I'd rather save more than be destitute, shivering in some back alley.

that retiree's portfolio update (also, where's my own portfolio?)

Some of you may wonder if I've been dangling the carrot regarding my explanation for the strategy and, ultimately, the implementation of my test-lab retiree's portfolio. Here's my excuse.

I've been frantically trying to wrap up my research so that I'll finally devise and implement a strategy for my guinea-pig retiree and for my own portfolio. Unfortunately, January + February of this year weren't exactly the freest of months, due to a few calamities, a few celebrations, and everything else going on.

Anyhoo, I'm falling behind because of circumstances and incomplete research. Even so, portfolio construction isn't exactly a task to take lightly, especially since, once it's constructed, like time, there really is no turning back.

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I'm testing the waters with the NetWorthIQ sidebar but don't think there's much value in it, let alone feel confident in its accuracy and ease of maintenance. I could imagine people using it for bragging rights. I guess I'm ultimately looking for a portfolio tracker "RSS feed" driven by any one of the popular investing websites. If you know of any to recommend, please comment.

these silly bubbles

If you're a young working professional (aka a "yuppie"), you've been blessed with having experienced at least 1 1/2 bubbles. The dotcom bubble has faded into bittersweet memory, and right now, the housing bubble isn't sure whether to keep inflating or to pop in many hot markets around the country. Depending on where you were when you were a kid, maybe you might've remembered the casualties and damage from the Japanese economic bubble tailspin.

We know what a bubble feels like, and when we're likely to be in one. But, how is a bubble defined? What's the quantitative description of a bubble?

I've thought about this over the last few days, and believe, for starters, I've found two ways resulting in the same conclusion.

Here's one way of describing it, based on an advanced copy of a book I've just received for review:

EXUBERANCE - How Bubbles are Formed

Stage 1: FUNDAMENTALS change in ways that increase the EQUILIBRIUM PRICE of the asset.



Stage 2: The dramatic increase in SPECULATION of FORWARD ACTUAL PRICE appreciation (as measured by the PSYCHOLOGICAL PRICE ANNUAL CHANGE PCT), that was created in Stage 1 fuels a continued large increase in ACTUAL PRICE well above any continued increases to the EQUILIBRIUM PRICE.

Click here for more examples and supporting data.

And here's a very abridged summary, but well worth-noting, of how notable investor William Bernstein describes it in his timeless tome from 2002, "The Four Pillars of Investing":

The necessary conditions for a bubble are:
- A major technological revolution or shift in financial practice.
- Liquidity - i.e. easy credit.
- Amnesia for the last bubble. This usually takes a generation (Bernstein defines a generation ~ 30 years)
- Abandonment of time-honored methods of security valuation, usually caused by the takeover of the market by inexperienced investors.

So, keep these salient points in mind when wondering whether the current real estate market is in a bubble state.

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One last interesting bit I wanted to tack on before closing this post out. I know there are a few websites out there who've made mention of this without exactly commenting,

Housing Boom! Kenneth L. Fisher 02.26.07

"You can see right through the housing crash story by looking at the prices of housing stocks. The market knows what the economic worrywarts do not, which is that the housing sector is already making a comeback. In the last six months housing stocks are up 24%, well ahead of the overall market. If housing were destined to fall apart in 2007 these stocks wouldn't be so strong now."

"Did you know that housing sales are up in the last few months, not down, and that inventories are lower than six months ago? We're accelerating, not landing. This is true not just in housing but also pretty much across the board."

Whether the current wobbling real estate market is in a bubble or not, the least the quote above does is insult the average investor's intelligence, especially coming from someone who purports to be a leading figure in the investment financial world.

The first problem is, inferring Mr. Fisher's quote, he feels the real estate market is highly liquid, like stocks are. Any serious home-shopper, flipper, investor, and homeowner knows, *as a fact*, that real estate is very obviously illiquid.

The second farce is Mr. Fisher's correlation between homebuilder company valuation and the real estate market. Unfortunately, it seems Mr. Fisher fails to account for the large majority of real estate out there: existing, pre-owned units. I agree that homebuilders attempting to clear inventory are forced to play competitive fit and fiddle with pre-owned comparable homes, but newly-built unsold homes are not the sole, key market driver in real estate (with the exception of master-planned communities that didn't exist until recent mass home-building populated it).

Also, Fisher never specified exactly which type of housing sales are up, and not down, in the last few months? Is inventory lower now than a few months ago because of increased sales volume, demand once again crossing over its equilibrium point with supply? Or is this due to exhausted, frustrated sellers whose listings failed to garner considerable interest?

To be fair, Fisher's focus really seems to be on housing STOCKS vs. the real estate market. The two couldn't be any more different as, say, pricing oil stocks vs. used automotive stocks, for example. The average Joe may automatically associate oil and cars as related, but just because ExxonMobil, Valero, and Chevron are reporting record profits doesn't mean the sum of Toyota, Honda, GM, Ford, and DaimlerChrysler have a rosy future ahead of them.

general principle #2 to retire sooner: never forget the costs (part i)

Just as the only things certain in life are death and taxes, investing also carries its own costs and consequences that are certain and inevitable with *any* investment strategy, albeit real estate, stocks, CD's, savings accounts, mutual funds, or an equity position in your friend's startup restaurant business.

There's simply no avoiding the following four investing costs, unless you commit fraud or achieve financial nirvana:

- Risk
- Fees
- Taxes
- Inflation (which could be lumped with "taxes", since inflation = currency tax)

Some people might say they're done with "investing" for what the term's popularly known for. They'd rather be conservative, and just "save." (To confuse you even more, by strict economic definition, almost all of us are really "saving", not "investing.")

No matter, because, really, any strategy or action with the intention of, at its minimum, equity preservation falls under investing.

However, what's traditionally considered conservative investment products and vehicles may in fact be hurt by any of the four cost aspects listed above and can even perform *more damage* than other investment vehicles traditionally *viewed and misunderstood* as riskier to your long-term financial goals.

Yes, you heard that right. Being conservative may be more hazardous to your financial well-being-- depending on a reasonable set of circumstances, which I'll delve into in the future.

As time goes by, I'll touch upon these 4 costs of investing. Hopefully you'll end up understanding why you should scrutinize every investment choice against these costs, and how I will use this knowledge as advantageously as possible.

general principle #1 to retire sooner: pay off consumer debt

Principle: Pay down all short-term consumer debt first, before even thinking about investing.

In fact, paying down consumer debt actually is "investing", in some sense, as we'll see later.

As guilty as I personally am of violating this particular principle, I can't stress it enough, even if my left hand is discplining my right hand for not behaving. That kind of deal.

What's short-term consumer debt? Basically, any account or balance whose interest is largely non-deductible, severely hinders equity growth or accumulation, and ultimately subtracts from your total asset is considered short-term debt.

The following are usually considered short-term consumer debt, in order of priority:
- Credit cards (which can be viewed as a "short-term loan")
- Personal loans
- Auto loans

Consumer debt encourages to borrow against your future earnings. You're short-term borrowing today, but you'll need to pay it back tomorrow. The later you pay back, the larger the interest penalty.

Obviously, the decision to draw these types of debt differs on a case-by-case basis. For example, if personal loans are secured to execute and start up a sound business plan, then the return (and its corresponding risk) of profits from that business more than offsets the risk incurred of accruing interest.

But, ultimately, think of paying off credit card debt as a way of earning indirect interest. If credit card interest is fixed at 15%, then paying off that credit card effectively yields a 15% interest *after-tax*, because you'd be using after-tax money to pay the balance. So, in a rather real and reasonable sense, paying down a credit card balance fixed at 15% interest is equivalent to the balance money actually earning *more* than 15% from stocks or mutual funds! That's impressive in its own right!

You may argue why car loans are considered short-term consumer debt. In many places in the world, a car serves pretty much as a necessity. However, it isn't *necessary* to buy the latest and greatest car that your bank account can stomach. Ideally, cars should be purchased in cash.

Additionally, there are many ways to trim the fat off your credit card balances, such as by balance transfers, or making mini aka micro aka partial-balance, intraperiod payments.

With balance transfers, however, do keep in mind the issuing bank's gotcha's such as promotional low or 0% APR's, transfer fees, balance transfer balance limits, overage fees, interest rate increase date, etc. Balance transfers only benefit if you discipline your financial house to pay off the balance transfer before the promotional APR's increase. Furthermore, if you find yourself sequentially conducting more than one balance transfer for a particular balance, take this as a red flag that perhaps your debt-to-income ratio, along with your spending habits, needs a good, hard look.

Regarding micro/mini/partial-balance payments, submitting multiple payments throughout the month to the credit card issuer before the monthly bill arrives reduces the finance charge / interest amount you would've ended up paying, even if the total amount of the micro-payments equals the one payment submitted at the end of a billing period. Since most credit cards nowadays allow you to either manually pay or set of periodic, scheduled payments online, micro-payments are one easy way to keep dollars in your wallet vs. giving them to a corporate bank.

That's it for Principle #1. Follow the included link to find out more ways to make your credit card debt more manageable, giving your better nights of sleep.

Please provide your comments and feedback on exactly how valuable, or how obvious and mundane, this post was for you.

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Next week will be a momentous one in my recent history: my credit card debt will finally decrease from 5 digits to 4! I'm so excited. Two weeks after that, I should witness nearly zero credit card debt for the first time in a year!

car purchase

Sometimes I overanalyze, and spend so much time researching and shopping for something, I feel as though I should be paid for my spent efforts.

Here's an example: I've changed hands with 4 cars, just in the past 6 months alone. Not that my intention was to be a private car dealer or anything-- but with the good number of pink slips I've seen lately, I sure as heck appear to be one.

This huge car dance will (hopefully) soon see its end, though. I'm finalizing paperwork in purchasing yet another car, for the folks. So now, I'll technically be burdened with 2 cars' worth of debt.

For this last and final car (a 2004 Lexus RX330 w/ 22K miles), I'm taking advantage of 2 significant discounts:

- The vehicle is a used vehicle. It was the first-year model of the current RX model design, so I get a discount for a car that looks almost brand-new. I would give the interior an 8/10 score, accounting for 2 years' worth of wear.

- Being previously driven as an internal company vehicle, I avoid paying any middleman and take advantage of any discounts that go along with this. I can rest assure all maintenance was duly performed (and maybe over-aggressively so), and that the car was washed weekly (this is mandatory for internal cars lest the driver is assessed fines).

Hopped with options, including the Premium Plus package, the KBB low / high retail value ranged from $30K to $35K, according to my financier. My contract purchase price: $26,667.18. I don't take into account other used-car pricing guides because KBB is my financier's guide of choice.

If the vehicle is appraised midway between its KBB estimated range, I'm saving $5800, which translates to an 18% discount. Not mind-blowing, but you won't see me complaining about saving nearly $6,000. Unfortunately, I'm forced to finance this vehicle for now. There's no sense in temporarily depleting short-term reserves without any regard for cash flow disruptions.

It's all about finding the right balance when push comes to shove, to make things happen.

personal thoughts on los angeles real estate market

A recent comment from an earlier post reads as follows:

How are things in the california real estate market these days? Is it as horrible as I have read? What do you think if the economic predictions they are forecasting for the next couple of years? Such as the coming recession or maybe even another depression.

My anecdotal take on the immediate greater Los Angeles market: Because median home prices have risen only <10%>10% annual rate between, say, 2001 until 2005, some homeowners, speculators, and shoppers believe that the market is shaping up to tank (although most disagree how long and how hard the "landing" would occur). Yet, due to the most recent month-over-month figures, you have people like the National Association of Realtors declaring perhaps prematurely that the housing market has bottomed out. Many precursors that do point to the beginning of a down market exist: slowing sales, more days listed for many properties, multiple downward asking price adjustments, larger incentives, homebuilder inventory buildup, increasing foreclosures, ARM resets, and the list can drone on indefinitely.

Do remember that all these factors *might* simply be reverting to the long-term mean-- that, since, we experienced one of the most over-inflated bubbles in history, that, maybe these "doomsday" factors aren't necessarily that bad at all. For example, although foreclosures have increased, apparently the foreclosure rate is still lower than the historical mean. An outright ban on non-traditional mortgages would most likely trigger a larger number of foreclosures than the mean. I believe other additional posts are warranted to examine the the real estate bubble and its possible negative consequences.

In any case, for the here and now, as has the term been used to describe general stock market movements, more than anything, I personally feel the real estate market seems to be moving "sideways." San Diego, Orange County have reported 10% drops from list prices of properties, but Los Angeles itself experienced anywhere from a -2% to a 7-10% change, depending on what you read.

One thing to keep in mind is if rate of value descreases gradually snowball and bring prices further downward, the momentum could be somewhat devastating.

It's now cheaper to drive cheaper

Hybrids become more of a tough sell

For the frugal car owner, you've got significantly lower gas prices (year-to-date lows), significantly more mileage, and now, the entry cost is incentivized. Car shoppers: this sounds like a winning combination to me.

retiree portfolio update

Today, Retiree and I finally wrangled his money from Brokerage2. Retiree seemed puzzled regarding why I stubbornly insisted to be on the conference call with him and Brokerage2. When I saw Retiree's equity positions with Brokerage2, each one had the word "Margin" next to it.

Retiree definitely is in no condition to be playing around with margins. Really.

Upon asking the Brokerage2 CSR who was helping us what the "margin" label now indicates, especially since Retiree insists every position was placed using his own cold cash, she replied that it was purchased via margin monies at some point in time. Therefore, the "margin" label stayed. Huh??

Plus, each transaction cost $15. Talk about a relic from the dotcom days. Talk about a crack outfit.

Anyhow, we're now expecting a check in the amount of nearly $6000 to arrive at Retiree's doorsteps within the next couple weeks.

The only significant capital left sits in a CD that will mature by the end of this month.

arnold and his humvee

In California, apparently all 85,000 HOV (high-occupancy vehicle a.k.a. carpool) stickers have been distributed, with a few hundred applications still pending.

I thought the 85,000 HOV application limit was an annually reset one, not a historically cumulative total limit. Apparently not so-- no new hybrid cars are getting new stickers until the year 2010 (or until someone votes for a change before then), from my sources. I'm fully prepared to stand corrected.

So, that relieves initial HOV congestion concerns.

A couple things of interest:
- Any current hybrid + HOV sticker owner must be happy as a clam today, even if, according to one Prius owner, the true federal tax benefit of Prius ownership isn't as significant as initially believed.

- Any near-future new hybrid vehicles which may potentially obtain even more significant gas mileage and far lesser emissions cannot obtain HOV stickers. Only their previous generation models, which are today's models, will have them.
(Which brings up an interesting policy point: why not have a staggered phase-out schedule for today's hybrid HOV stickered cars so that, say, after 2-3 years, they need to re-apply, thus freeing up some slots for future, significantly more fuel-efficient vehicles? What if fuel-cell / ethanol-based vehicles hit the mass market before the 2010 limit? For instance, what must Honda R&D be thinking, considering there are a few clean-n'-quiet diesel models in their pipeline for 2008? Oh right, political vision rarely isn't myopic or provincial.)

- The stickers remain with the car, regardless of title transfers.

- I wonder how much higher of a percentage of the original purchase price that current-gen hybrid resale values will command.