This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Wednesday, July 16, 2008

What you can learn from the banks.

Posted By Paul

I am always interested when a business article makes the front page of the paper, so I couldn't pass up reading an article about how banks in the northwest were on shaky ground.

What intrigued me most was how several points made in the article were mistakes that the banks made that people could learn from:

Banks' Mistake 1: Jumped into the housing boom like it would never end
I know that the current housing boom is over, but this lesson applies to any investment boom. I learned this lesson from my experiences in the dot-com boom. During that time you were hearing stories every day from people becoming overnight millionaires by pouring all of their money into the dot-com company that was the next big thing. You seldom heard the stories about the people who put all of their money into an IPO, only to have the company go nowhere. There was so much fervor about getting rich and so much certainty that the investments couldn't fail that people got carried away. Whenever there is an explosive boom like this I try to keep in mind that super accelerated growth can't last forever, and when a boom ends it usually ends quickly and dramatically. There is no harm in trying to get your piece of the dot-com boom, or the housing boom, but if you go in too deep you could lose it all when the boom finally ends.

Banks' Mistake 2: Too much debt, not enough cash.
In the banks' case this was from approving crazy no down payment mortgages to people who couldn't afford them, but the people who signed up for these mortgages aren't without blame. When I was shopping for my first house the mortgage company wanted to sign me up for a BIG mortgage with a monthly payment that I could swing as long as I never lost my job and never had a financial emergency. Don't let yourself be one of those people living in a big beautiful house but eating peanut butter and jelly three meals a day because you can't afford anything else.

Banks' Mistake 3: Went too deep into a single investment.
When the housing market cooled the banks that had all of their money invested in crazy mortgages and property development loans were hit the hardest. This is no different from putting all of your financial eggs in one basket. I don't just mean tying up all your money in your house, but in ANY single investment. Just think of the people from Enron who lost most of their nest eggs when the scandal broke.

It just goes to show that financial institutions are susceptible to the same greed and poor judgement that people are when faced with a financial boom.

Friday, July 11, 2008

Government publishes tax returns; millions panic

Posted by Matt

Today's post was inspired by an article I read in USA Today a few weeks ago while on vacation. It starts like this: "Every year, Sweden publishes everyone's income tax returns. So do Finland and Norway. And nobody really cares."

So, what makes the Scandinavians so well adjusted? A deputy economic minister in Italy tried publishing tax returns online earlier this year, but apparently had to take the information down quickly due to the fuss that Italians raised. In the U.S., "Federal law prohibits the release of that private information," but imagine the panic if it leaked somehow?

Americans are relatively uptight about a lot of things, but (as Paul posted about previously) it is hypocritical to be so secretive about our financial lives while simultaneously flaunting our possessions. It probably results from the fact that many people's possessions do not accurately reflect their true financial standing, e.g., they have more shiny metal in their garages than they do in the bank.

The article indicated that Scandinavians have a very different attitude:
Making the data public demonstrates the Scandinavian tradition of jantelag, which translates roughly as nobody is better than anyone else, says Veera Heinonen, spokeswoman for the Finish Embassy in London.

This reminded me of "tall poppy syndrome" that you sometimes hear about in Australian or Canada; essentially "no one likes an overachiever." However, I've read that people (or maybe just corporations) in these countries are realizing that competition drives growth. The United States is a perfect example; here, everything is a competition. Everyone wants to be a "success". The problem? We typically measure that success with dollar signs. Why? Because it is an easy and mostly objective scale.

How else are we to measure success? Does being a good parent count? If so, how can we measure that? I don't know of any type of parenting score that I could plot on a chart. How about being a valuable member of your community? The best I can think of there is public service hours, but that tracks effort more than result. What to do?

This line of thought lead me to one of my favorite quotes from Albert Einstein: “Not everything that can be counted counts, and not everything that counts can be counted." I'd apply it in this situation to mean "don't tie up so much of your self worth in your income level."

So, back to the question at hand...do we want our tax returns published? Consider that home selling prices are already available online (for Washington County, OR) and I've used this information extensively when evaluating new home purchases and pricing houses for sale. We might get similar value from being able to browse salary information. Personally, I feel pretty satisfied with my salary, but I DO occasionally wonder how it compares to the salaries of others with similar jobs. I wonder "Should I be negotiating harder at annual review time or clinging to this job for dear life?" Looking at other people's tax returns might help, though it would probably have the same limitation of sites like Salary.com, namely the difficulty of finding a job description that exactly matches mine. The only real argument that I can make for doing things like publishing tax returns (and this disregards any discussion of whether it is worth the costs, by the way) is that people are more likely to behave as they feel that they should ("do the right thing") when under scrutiny.

And we should just get over ourselves! ;)

Thursday, July 10, 2008

The Dark Side of the "Set and Forget" 401k

Posted By Paul

Yesterday I was checking my various investment accounts, and (no surprise) everything had fallen in the last month.

It was annoying, but it also made me realize how important it was to be careful with your major investments. I realized that if I were near retirement age then to have my investments drop like this would drastically change my plans for retirement (and by change I mean postpone).

So this was a good hypothetical lesson into the idea that as you get closer to retirement age you need to move away from the higher risk/higher potential return funds into the less lucrative but safer investments.

This doesn't mean you have to reevulaute your fund choices every month, or even every year, but I think that every 5 years it's worthwhile to look at your funds and make sure that you are comfortable with the level or risk that you are experiencing. The classic wisdom is that as you get closer to retirement you start putting more and more of your money into the less lucrative but less risky funds to protect your nest egg.

How horrible would it be to be a month from retirement when the stock market crashes and suddenly you have 10% less money than you did a week ago? If you are young enough then this is no big deal because you have time to ride out the crash, but if you plan on needing that money really soon, you should take steps to make sure it's there when you need it.

So even though 401k's have the advantage of being able to set them up and leave them alone, it is important to periodically check your account to make sure that your money is going into investments that match your needs. If I'm still invested in the same aggressive funds 25 years from now it means that I've taken the 'hands off' approach to my 401k too far.

Wednesday, July 2, 2008

Article: 6 Things You Should Never Tell A Car Salesman

Posted By Paul

I've always been interested in the psychology of buying and selling, so articles like the one I found on CNN Money fascinate me. Here is the link to the article:

6 Things You Should Never Tell A Car Salesmen

It reminds me of the first new car I ever bought (which I'm still driving now by the way). I was fresh out of school and was starting work in a week so I had a week to buy a car and find an apartment (and of course driving the car was how I planned to find the apartment).

It was so long ago that I don't quite remember the process, but I do remember that I definitely broke some of the rules the article mentions. Specifically:

Thing not to say #2: I need to get a car by tomorrow - I was pretty close to this, since I made no secret of the fact that I was fresh out of college, and had a week to get a life set up before starting my job. I think that for a time I rented a car, so I'm sure that showing to a car lot in a rental car shouts "I'm in a hurry to find a vehicle."

Thing not to say #5: I don't know anything about leasing - Talking to the salesperson, I'm sure it was pretty obvious that I didn't know anything about ANYTHING.

Though it didn't apply to me, I was especially intrigued by:

Thing not to say #4: My trade-in's outside - The idea of taking your keys as a way to hold you hostage during the sales process strikes me as very clever. I could totally see myself falling for this. (Has anyone out there ever had this happen to them?)

If you are like me and are interested in the more subtle ways to manipulate the sales process, then this article is definitely worth a read.