Seriously: Don't Use Brokers

Even before Wolf of Wall Street and now the Furman memo (first at Bloomberg but more fun read is Taibbi's). It was obvious to anyone who paid any attention that managed funds were a bad idea.  Tons of fees and most do worse than the market average (deducting fees even more are worse).  Yesterday's golden boy is tomorrow's goat--past success does not predict future success in finance.

Your best option is and has been to park your money in a couple low cost index funds (exchange traded or not) and then leave it there.  For balance split between total stocks and total bonds.  You can add REIT and international if you feel like it and the ratio of the split(s) should relate to your risk tolerance (more simply: to your age).  That's it.  Anyone who tells you differently is trying to take money from you and pocket it himself (well, maybe herself, but let's be honest: it's probably gonna be a dude).

Yes some people (and maybe you!) can get lucky and pick the right blend of stocks at the right times and make a killing: doing way better than the market.  But 00 may also come up on the roulette wheel, the dealer may not be sitting on 20 with that face card showing, and 7 could get rolled 3x in a row.  If you want to gamble, that's fine, and the stock market is as good a place to do it as any (and more respectable for some odd reason).  If you are just trying to save for retirement the best way possible, on the other hand, gambling isn't the wise choice.  You may hit the financial jackpot, but probably, you're going to be a lot poorer than you would be if you had just stuck with the simple, cheap option.

But you don't need that much!

I find retirement calculators like this one (I know, CNN's crappy Money section again) incredibly frustrating. The single biggest issue goes to methodology where (burried) you can find:

We then assume you can live comfortably off of 85% of your pre-retirement income. So if you earn $100,000 the year you retire, we estimate you will need $85,000 during the first year of retirement. For each subsequent year, we increase your income need by 2.3% to keep up with inflation...

Here's the problem: what you need and what you earn don't scale this way.  Someone making $50k/year at 35 who has a house and kids, is someone who, may be making $100k in 30 years, but who, at that time could well have a paid off house and grown kids they are no longer paying for.  No fucking way does that person need $85k/year (plus inflation) to retire on!  What you need in retirement is only a large fraction of what you earned if you still have lots of debt.  But anyone with that level of debt probably isn't a candidate for this calculator, as they probably can't afford to put away the 15%+ of their income necessary to have a secure retirement!  The whole thing is just fucked.

No matter how much you earn, if you can actually manage to put $1-2 million into retirement, own your residence, and be otherwise debt free at retirement, then that'll be plenty.  There are people who don't believe that, but they are pretty much all delusional financial types.

Game Economics

I read--years ago--an article/document/paper on the economics of the many games out there (like Candy Crush Saga or, my current addiction, Dark Galaxy).  It also dealt with the psychology of the users, and how those who do spend real money in these games do it.  The thing is that most users spend nothing, and quite a few will spend from $1 to $10, but then there are a handful that spend hundreds, and even thousands.  I am willing to purchase a game, but I won't spend anything in-game.  Still I do enjoy some of the free games, but I am occasionally mystified at why anyone would spend real money on them.  Take Dark Galaxy...

In the game you have weapons and ships that you supply allies and mercenaries.  You also have your personal stats (tactics, attributes), and when you battle and complete missions you do better or worse based on these.  If you want to be very powerful you will need to get 100 mercs, and 300 each special "LE" vehicles and weapons.  You will also need to max your tactics.  Mercs, LE items, and extra tactics points can be bought in game with artifacts (arts), and arts can be bought with real money.

But here's the thing: it takes a lot of artifacts to maximize, and artifacts aren't cheap.  $5 gets you 27 artifacts but that will only buy you 1 merc (25 arts).  LE items can cost less than 20 for weak ones on sale, but can also run to 60 arts (and those aren't the most powerful, just the best you can buy...you have to build the top ones).  There are some price breaks but not much ($10 gets you 60, $100 gets you 750).  One particular "Ultimate" LE ship requires 7 60 art ships to construct (ships which can be obtained in-game for the sufficiently dedicated and well equipped).  That would cost a minimum of $60 real dollars to obtain...1 LE ship, leaving 299 ships and 300 weapons to go.  Oh, and one really powerful ship doesn't make a huge difference.  Add to that 100 mercs which will require 2500 arts as they can't be obtained otherwise, and that would run $350.

Now there are in-game available artifacts.  A limited number from missions and extras from tournaments and bosses.  But that waters down the value of those artifacts.  If I can play the game occasionally and pick up a few hundred arts (which would cost $50 to buy) why would I purchase?  When it isn't hard to see how expensive using cash is why does anyone do it?  It's basically flushing money down the toilet.  It doesn't give much advantage unless you spend hundreds or thousands, and the game isn't nearly that entertaining.

I find most "free" games with in-game purchases to be similarly worthless.  You get so little for the $ you put in, that I feel ripped off for the people who do buy (and I know people do).  In most games the money you spend essentially buys you time: you don't have to wait for recharges or things to finish.  But for games like these, I appreciate the time.  It's a built in "you're done playing now" point; "go do something else" (like loading up another game).

Mostly, however, games like this seem to me to be further proof that we are not rational actors when it comes to how we spend money.  If we were then companies relying on in-game income like this would all be bankrupt.

Yes, Student Loan Debt is a Problem [Part the Infinity]

Another article, and another day that nothing is going to be done about this.  I still think that a student loan forgiveness by the Fed buying up all the debt and torching it and free college going forward would be the best fix.  One quick note that was in there was about mortgage requirements:

especially under new mortgage rules that limit total debt for a would-be borrower to 43 percent of their annual income.

I did not know that.  I'll be getting married this year, and apparently we wouldn't qualify for a mortgage after that due primarily to student loans (boo debt!).  Good thing I've already got one (hooray debt!?!).

Actually, You Kind of Do...

In David Atkins' post "Serfdom Either Way" he references the report discussed here about the wage gap between college grads and high school grads.  He doesn't say much about it, in fact most of what he does say is:

Do I really need to comment here? The insanity speaks for itself.

I think I know what he is talking about: either go into massive debt or get a shitty job.  But you really do need to comment about it, because the implication of the price premium for college grads is that it is, in fact, worth it to go to college, even when it means incurring debt.  Now I certainly think that college should be much more affordable--in fact free to everyone--but so long as we have this capitalist fantasy about everything, it not only makes sense that college tuition has gotten high, this report clearly implies that the high cost is entirely justified.  Because the gap has been spreading it also implies that the value (and the cost) should grow faster than GDP.

If a college degree means an extra $17k/year (for life!) then it sure as hell is worth paying $30k/year for 4 years to get one.  Now this isn't the math that most students (or their parents) do, and the nature of student loans is borderline predatory, but it isn't "insanity" it's perfectly rational capitalism.

(Note: I hope this isn't a trend of him becoming increasingly irrational, because this follows a post of his from yesterday, that was mostly fine but that very oddly stated "Bill Gates isn't exactly an innovator"...I'm not sure what he would call Bill Gates, but innovator, at the least, is pretty damned appropriate.)

No More Brand Loyalty

I think the article should have made clearer that this is really only true of consumer goods, and maybe small businesses--large corporations/businesses have lots of brand loyalty on the items they buy (sometimes for good reason, other times not so much).  Still, broadly, this is a good thing for society.

It's Called Social Security

What a weird proposal this is.  Mandatory 6% savings of workers going into a retirement account.  Weird because we already have this thing and it's called Social Security.  Up the percentage from 6.2 to 9.2 (and matching employer--also, too, eliminate the cap) and then adjust SS payouts accordingly.  That has the potential added benefit of immediately boosting current SS recipients' incomes.

The Harkin proposal, on the other hand, is a pretty crappy not-even-second best.

I Hate CNN Money

Their personal finance is slanted so heavily to advice for people in much better shape than the general populace that I get pissed every time I read anything on it (which is very rarely).  This article on advice to a couple wanting to retire early is a fair example.  The couple sounds like a normal couple--early 40s, middle class jobs, couple kids--but they have $50k cash (seems like ~$150k in other investment), a $2000 monthly surplus and pensions (pensions!).  These are people who don't need advice.  They are so far ahead of the curve that most people should be asking them.  They don't have financial problems.

Most of the advice is fine, so far as it goes, though I'm a bit disgusted with the idea that anyone would think that $300k set aside to send kids to college was reasonable (actually, there's at least a fair chance the adviser doesn't find it reasonable, just necessary, but since they thought publishing advice to people who don't need it was a good idea, I'm not so generous here).

So few people in this country have pensions, that giving this couple advice in the personal finance section of Money is kind of like giving a millionaire advice: even if it's good, it doesn't really help real people.  If they really wanted to help out people then they would advise people in their mid-to-late 50s without pensions, with $80k in 401k's, and with $200k+ left on a mortgage, or people in their 20's and 30's with $60k of student loan debt, no assets, and income of $30k/year.  There's a lot more of them, and they need a lot of help.

...I suppose that, if I'm going to be fair, a fair chunk of readers of that site have a level of financial security more like the one in the article.

Waiting for a "Let Them Eat Cake" Response...

I think one of the things that a national income could very conceivably do is increase (not decrease) wages for lots of folks.  Think about the protesting fast food workers.  Now imagine that they all got $15k/year national income (roughly the equivalent of $7.50/hr).  On the one hand, it may seem like they would be fairly happy with only $5/hr for working, but that isn't quite right.  We have placed a value on non-working life of $7.50/hr, and have given those people the opportunity to reject working for wages that are insufficient.  Many people, could now afford to look into better opportunities, including going into business for themselves.  The pool of individuals willing to work for the current $8/hr mentioned may actually go down, while the number of customers, and the need to fill slots goes up.  This would mean that McDonald's would need to pay higher salaries in order to fill enough spaces to deal with their business.

Amazon

I have actually wanted to get some Amazon.com stock for some time, but I really, really can't figure out it's price point so I haven't (current P/E is 1200!).  It is a scary company in a lot of ways but there are not many things that I don't look there first when I want to buy, and in most cases: that's where I do buy.  I really like that they exist, but they are a danger to lots of businesses in ways Apple and maybe even Google never will be.

Student Loan Rates: Meh.

Lots of noise about the Senate bill passing (Bipartisan! Helping Students!), but it just mostly is not helpful.  There are two somewhat separate student loan problems: current and future.  The current problem is with people who have [recently] graduated into a crap economy with a mortgage worth of debt to pay off.  These people, who might be helped somewhat with lower interest rates, are not addressed, because--unlike pretty much every other type of debt on the planet--YOU CAN'T REFINANCE STUDENT LOANS.  People "lucky" enough to have 2, 3, 4% interest: good for you.  Those who have 5, 6, 7% interest: tough shit.

The other problem is the level of the debt (not the interest on it), and low interest rates, if they do anything, will make that worse.  If you make the price of money much lower for a specific activity (going to college in this case) then people will over-consume that good, and so the price of college will rise faster than it would otherwise.  So lowering student loan rates going forward may actually lead to higher debt levels for future students while doing nothing for current graduates with lots of outstanding debt.

We need low cost or free college education available to everyone, and we need to address the outstanding debt of [recent] graduates.  All this fucking around about the student loan rates is more distraction than help.  Yes, it may help quite a few current students, but at the expense of future students, and to the detriment of our nation, if education is in fact a driver for economic growth.

Interesting

It's mostly, probably good that younger people are increasingly eschewing credit cards, and I'm actually glad that the article didn't make these next points.

Credit cards are a tool, and a very useful one: having a couple/few, but not using them or paying them off every month increases your credit rating.  They are helpful if you are tight for cash or have an emergency.  They are generally more secure than debit cards...a big deal if you do lots of travel or online shopping.  And, for "responsible" users, you should recoup some bonus (cash back being my preference) that is not available from debit cards.

Now, if having credit cards changes how much you spend, then it is probably a better idea to go without (or to have them for credit purposes/emergencies but keep them locked up day to day), but if you are going to buy something anyway, doing it with a credit card that provides some reward is the better way to go.

Studen Loan Interest Rates

There has been a lot of writing lately about the student loan rates about to double, and how bad that is for future grads (it is a non-issue for people already out of school, since their rates are already locked in).  As much as the interest rate is a bit of a help the problem, however, is not the rate going up, but that the debt level is increasing so fast.

There are two different problems that student loans create: one is the immediate payment of a large balance means money out of pocket right when recent grads are starting new jobs and would, if debt free, be spending lots of money for new "grown-up" things, like housing and furniture.  The other is the long time payoff which means recent grads are not going to have their full income for 10+ years (and it is nearly impossible to forgive any of it). 

Lowering the interest rate kind of helps with both things as it means your payment is lower and/or your payoff term is shorter.  But lower interest rates also, according to economic theories, lead to larger loan balances, and so in the end would likely change nothing.

Three constraints would help alleviate loan debt: a cap on the percent of total income paid (say 10%), plus a cap on the total time to payoff that wasn't so long as to seem daunting: I like 5 years, but would settle for 10 with complete forgiveness of the balance remaining at that point.  The third constraint is for private loans only: they are treated like credit card debt for most legal purposes. 

Interest rates for private loans would skyrocket past credit card rates, and they would quickly become almost non-existent.  Interest rates would almost be irrelevant, as most recent grads paying at the 10% level for the time limit most often would not pay off their loans entirely. 

Pay for it by eliminating the student loan interest rate deduction (well, at least for everyone who could be expected to benefit from the program), as well as the deduction that parents get for contributing to education savings plans (which, I believe, are just another give away to well off families). 

Really, I think college should be free for anyone who wants to attend.

As for the other problem of student loan debt outstanding among current graduates?  The ability to refinance those at lower rates would be a real boon, and would make a larger difference.  It isn't ideal (some form of forgiveness or flat payments would be) but it really would help in a way that it doesn't for future grads.

Go Sign It

Counter the austerian nut-jobs, and sign onto this petition for Congress to cosponsor a bill to strengthen Social Security.  I like it.  My favorite part is this:

• Improve the Long Term Financial Condition of the Trust Fund: Social Security is not in crisis, but does face a long-term deficit. To help extend the life of the trust fund the Act phases out the current taxable cap of $113,700 so that payroll taxes apply fairly to every dollar of wages.

It would be nice if they also severely restricted or eliminated the tax breaks for 401k's and to a lesser extent IRA's, and used that to make SS even more generous, but that's asking for the stars when you're offered the moon.

Inflation vs. Investments

As I was reading through this critique of Feldstein, I was once again struck by how clueless the "inflation is coming" nuts are.  It's not just that they are supposedly smart but keep being very wrong.  It is incongruous wrongness.

Just to note: if inflation is coming, then there isn't reason to fear what you think is a bubble (asset prices, stocks) other than, perhaps, bonds.  The reasoning is pretty simple: if we are about to have 10% inflation then expected price increases and cash flows will all be expected to go up pretty quickly.  This more than justifies higher prices today than you would expect otherwise.  If, on the other hand you think that things are very overvalued, then you are implicitly arguing that there is not going to be inflation (or, for that matter, much growth) over the coming few-several years. 

[Federal government] bonds are kind of a weird one, in that, while a high price may come down, the only way to lose value is to inflation.  This means that in order to justify any attempt to short them you have to have expectations of some serious inflation around the corner, but if that would really be the case, you should see many other asset classes as being at least as good if not better, and without the problematic shorting issues.

Also, too: hedge funds are really crappy places to put your money.  

House is to Savings...

Buying a house is like keeping cash in a savings account.

Renting is like paying to keep it in a safety deposit box.

...Buying gold is like living in a van down by the river.  (You may make out quite well, but you're still crazy.)

Adding to MMM

A couple things to add to the MMM post:

1) Given complete ability to chose your own spending level, how much you spend per year is inversely proportional to how much you value money.  There are some one-off things that MMM comments on (if you really like bicycling, and that saves you money on gas then that is not a value of money trade off), but someone who spends ~$25k/year for their family actually places a pretty large value on money.  He would rather put forth effort to cook, clean, repair things than pay others to do the same, so he values money more than his time and effort to do those things...Yes, he may also enjoy those things, and that does get back to the not-exactly aspect, but essentially, and somewhat counter-intuitively, money has higher value to savers than to spenders. 

(Note: we may not value other persons' lives the same, but everyone pretty much places the exact same value on their own life, so if you chose to spend $80k/year on your living, then it isn't because you value your life more, but because you value money less...well, and you have it, this analogy requires a person be able to set their spending more or less without constraint.)

2) Living debt free is all and good, but it shouldn't be an end to itself.  At one level MMM clearly understands this (he had a mortgage when he bought his first house), but it isn't clear from the conversation that he really buys it.  Sometimes you are better off taking on debt to buy a large thing now rather than wait until you can pay cash.  Houses are an obvious thing here, and for most people cars are as well.  It does go beyond that, however...

If you have money tied up in investments paying 7%, and you want to buy something that would require dipping into those investments, but you can get a loan that charges 5%, then you will be better off, in the end, getting the loan, and keeping your investments in tact.  There are other reasons that go beyond total dollars.  If you want to renovate your house, you could save up and pay cash, but that may take years, and how much would you value the years of enjoyment of the renovated house vs. the interest you would pay to get a loan to cover it?  What if an emergency taps you out for the month, but something you need/want badly is on sale/about to be gone?  It could well be worthwhile to you to buy it on credit and pay it off in a month or two (or, really, even a year).

Debt--like alcohol, cheese, and bacon--is a really good thing that only becomes bad when it is indulged in too much.

Retiring at 30

After doing an interview with the Washington Post, Mr. Money Mustache has gotten quite popular.  Retired at 30 due to lots of heavy saving, and very low debt (no student loans, buying used, cheap cars, buying fixer-upper houses and doing the work themselves...he does seem to be advantaged by being very smart and capable).  This is certainly possible--though it would be very hard with a median family income--but it is only possible for a very small subset.  The thing is, if everyone tried to do this, the economy would crash and nobody would be able to get the jobs necessary to get started.

Rent seeking (which can be owning rental properties, or living off investment returns) is a strategy that works very well so long as only a very small subset of the population attempts it.  If everyone buys a house, then you won't be able to rent out properties to anyone.  Similarly, if everyone tried to by used beater cars, then no new ones would be produced (and those companies would go under, and lots of jobs lost and...).  This works at just about every level.  If you want to invest in anything and get any return, then whatever you are investing in needs customers.

Our economy needs for lots of people to dine out more often than MMM, and to buy new things (cars, bikes, furniture) and to pay for other people to do work on their houses, and to rent, and on and on.  There is certainly some subset of jobs/careers/companies that would continue to exist in a high saving world (e.g. we would still need food, shelter, education and transportation) but even that still wouldn't be a world where people could, in large numbers, live off their savings.  The more people try not to work, the more things produced by work would need to cost.  Someone needs to produce the food.  The other alternative would be for all people to become much more autonomous, but that isn't retirement, that is just doing lots of jobs and not sharing/trading the fruits of your labor.

So good for them, and good luck to people who try and do something similar, but most will fail, and that is good.  It is good for the whole economy but it is particularly good for MMM.

Also: please note that in most ways that matter, MMM is a 1%er.  His income is not necessarily that high (though higher than the $25k/year they spend), but he has far more wealth than most people.  For the 9 years of work that he and his wife put in they likely combined to have quite a high income (to 10% at least).

Housing as Investment Myth

I'm still a bit pissed about MattY's housing post from a few days back, mostly because of this weird recent notion that housing is a crappy investment (usually accompanied with comparisons to stocks).  It makes me want to bang my head against a wall.

Let's get around the first issue about housing as an investment: what could that even mean?  There are three ways to see housing as an investment.  The first is as a rental property.  The second is as a flip (buy, maybe renovate and sell).  The third, and most common is a combination of inflation hedge and forced saving mechanism.  The "value" of a house is relevant to the first one only for the initial purchase.  Once the house is owned and being rented, fluctuations in housing price are irrelevant. Similarly, once you've bought a house you plan on living in for many years, you shouldn't really care if it's theoretical value moves around any.  In both of these two cases your investment relates to rent vs. purchase cost.  If you are renting to someone else that is easy: ($ in rent - costs)/purchase price is the approximate return.  Yes, at some point you may want to sell the house, but mostly you are looking at a simple calculation for investment return that has nothing to do with changes in valuation.

If you are living there, then you are actually looking at the same math.  Note: having a mortgage is largely irrelevant in either case (it goes to costs but reduces your purchase price so you tend to end in the same place).

About the only person for whom value matters (after purchase) is the flipper, and in that case the investment issue is far more complex, and, frankly, more random.  This is the high risk/high reward category of housing investment.

If you insist on making a direct comparison, then housing as investments should be compared to [inflation protected] bonds rather than stocks: mostly holds its value and provides a steady stream of "income" (real income in the rental case, forced savings in the owner occupied). In this comparison housing is probably the better investment.

Really, though, for the owner-occupied housing as investment, the value is much greater.  This is because, again, you have to live somewhere, and there is a cost for that.  Yes, you can live in some dirt cheap flat and save lots of money over buying a (most) house(s), but most people--and pretty much anyone who is concerned with investing--don't do this.  For most people the choice is between buying a house and renting a house/apartment with similar amenities.  In all but a few select locations in this country there isn't a huge gap in the monthly cost for the two.  Housing is more upfront, but grants both forced savings and inflation protection.  Renting is low to zero cost upfront, but provides $0 in terms of investment return.  The only reason to rent instead of buy is if the cost difference is enough to offset the rather large lifetime return of owning a house.  In San Francisco and NYC that may well be true long term.  For short terms (up to a max of maybe 7 years) that may also be true.  For most other people and places...not even close.  Some places it is cheaper to buy a house live for a year and sell that it would be to rent something comparable. 

Rubes

I still don't know why hedge funds are invested in by anyone.

Investing, whether for a huge pension fund or for an individual is really not hard: stock index fund (or 2 if some international is desired) for a fraction dependent on risk/reward--for pension funds, say 60%, for individuals start at 80-90% when younger and taper down to maybe 40-50% at retirement--and bond index fund for the rest.  Pension funds may also want to consider adding a broad REIT (all US, again, maybe a Global too), individuals may buy a house (though adding some REIT could be fine as well).

And that covers the vast majority of investors: people and companies saving for retirement [funds].  Anyone who wants to get more in depth, to try and beat the market, can, but even for them, hedge funds are a bad bet.  Those people should be doing their own research and picking individual investments.  Going to hedge funds to try and beat the market is a sucker's bet.