Your Take 
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Your Take: What Futuristic Home Add-On Is On Your Wishlist?

With all the financial turmoil, let’s turn our Friday Your Take from the current to the fanciful. A recent Marketwatch article talks about crazy home add-ons that people are looking forward to now that the prices on those gadgets is coming down (the article pre-dates the financial turmoil, which has seen the value of our brokerage/retirement accounts come down).

Instead of digging through our closets to find the perfect complement for a new shirt, we may hold it up to our bedroom mirror for a computer to scan. Using radio-frequency identification technology, our electronic fashion stylist will then offer suggestions based on what’s in our closet or how the latest edition of Vogue or Teen Beat pairs up something similar.

Rosie - Jetsons Robot MaidSome of the more mundane items, things I’d actually consider getting, aren’t quite so futuristic (or trendy) are energy saving devices that talk to one another. The article discusses a phone armed with a GPS system could notify your home’s heating or cooling system that you’re getting close, then activating the HVAC system. I think that’d be pretty slick.

Something else that would be slick? Rosie. :)

What’s funny is that it’s not that outlandish an idea.

What crazy futuristic home add-on is on your wishlist?


 Investing 
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Stock Market: John McCain Will Not Be President

John McCain Not Happy With Stock MarketThat’s the proclamation of the stock market in a resounding fashion.

I always find it entertaining when pundits draw ridiculous correlation relationships between the stock market and [insert something popular at the time]. This time, it’s the winner of the Presidential election in November and the performance of the stock market three months beforehand.

What’s fun is that the CNBC article, Who’s the Next President? The Stock Market Might Know, was written on August 26th – predating all the thick of the market turmoil. The largest single day drop of 777.68 in the Dow didn’t occur until September 29th, almost a month later. The second largest single day drop of 733.08 in the Dow didn’t occur until the 15th of October! (though we did see the single largest point gain on Oct. 13th, a gain of 936.42 in between).

So, you might be wondering how the recent changes in the market have affected the chances of our candidates?

According to the article, an up market in the three months prior to an election signaled victory for the incumbent party 80% of the time, since 1928. At the time the article was written, the S&P 500 was up about 2%. As of Monday’s close, Oct. 20th, the S&P had fallen from it’s August 1st close of 1,269.42 to 985.40. -22.4%!!! Incumbents aren’t looking too good here.

“A poor stock market performance usually anticipates and/or accompanies a weak economy—and that usually leads to the ouster of the ruling party and its president (think Herbert Hoover, Jimmy Carter and George H.W. Bush).” – Heh, talk is of a recession, a bad recession in part caused by a freezing of the credit markets in a manner not seen in quite some time.

The article goes on to discuss a few other fun frivolous statistics like this one:

Since 1833, the Dow Jones Industrial Average has posted an average gain of 6.7 percent in presidential election years, with 20 up years and 14 down ones.| Even if the Dow does turn around and close higher than its 13,264.82 opening level in 2008, history shows it will be an inferior gain to the year before-election year category, when the blue-chip index has gained an average of 10.6 percent and notched 32 up years.

I’m not going out on a limb when I say the chances of the Dow closing above 13,264.82 this year is nil, I think we’re looking at one of those times when we’re in the minority of all those statistics :)


 Personal Finance 
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How Much Is That in Minimum Wage Hours?

Do you ever feel like you don’t have a good handle on how much money is worth? I mean really worth, in terms of sweat and blood, rather than how much stuff it can buy? With credit cards and electronic bank statements, the true cost of money is often difficult to truly comprehend because there are so many abstractions. Money is an abstraction of labor and effort.

You earn money through labor. Some labor is hard, like in a factory or a mine, while others are easier, shuffling papers in an air conditioned office; but both types require time and energy and both result in money. The point is, spending money, rather than bartering labor for goods and services, abstracts away the value of that money and it sometimes helps to put things back into focus.

So, why don’t we?

Let’s put things back into perspective by listing popular and common products in terms of minimum wage labor hours. Using the federal minimum wage in the United States, at $6.55, we calculated how much stuff cost in minimum wage hours.

Some of the more surprising figures? That $443k party AIG threw for their salespersons cost 67,634 minimum wage hours. Lehman CEO Fuld’s cash compensation from 2000 to 2008 was $500 million – or 76,335,878 minimum wage hours (26,142 minimum wage years, if 8 hours are in a day). Finally, that $700 billion bailout package will cost 36,599,394 minimum wage years. Yikes.


Item Price Hours Days
Private 4-Year College Tuition $94,848 14,480.61 1,810.08
Public 4-Year College Tuition $24,740 3,777.1 472.14
Public 2-Year College Tuition $9,444 1,441.83 180.23
Average Wedding $30,000 4,580.15 572.52
2008 Toyota Prius $21,500 3,282.44 410.3
2009 Lamborghini Gallardo $198,000 30,229.01 3,778.63
An Ounce of Gold ~$900 137.4 17.2
6.2 carat Diamond (G, VS2) $384,500 58,702.29 7,337.79
Xbox 360 Console $259.99 39.7 4.96
Garmin nüvi 670 GPS $327 49.92 6.24
Gallon of Gas $3.15 0.48 -.–
Gallon of Heating Oil $3.38 0.52 -.–
One Million Dollars $1,000,000 152,671.76 19,083.97
$500/mo. Rent $500 76.33 9.5
$1,000/mo. Rent $1,000 152.66 19.1
Two Movie Tickets $20 3.05 -.–

We made some assumptions in compiling this list. One is that a day consists of eight hours. Another is that while the cost is in post-tax dollars, minimum wage is in pre-tax dollars (i.e. the employee still has to pay tax on the $6.55/hr wage), so things really cost more in terms of hours than what is listed.


 Investing 
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How To Invest Like Harvard & Yale

I’ve had asset allocation on the brain lately (it’s hard not to with all this volatility), it doesn’t hurt that the stock market has seen some tectonic shifts these last few weeks, and so I turned to an article published earlier this year looking at the asset allocations of college endowments. Specifically, this article looked at Harvard’s exceptional 15% return per annum over the last ten years and Yale’s mind-blowing 17.2% return over that same time period. While I’d be curious to know how they’re doing nowadays, the fact remains that their returns are still laudable and worth investigating.

Harvard & Yale Asset Allocations

Harvard & Yales Investment Allocations

The chart above was pulled from the article and it shows a very simplified view of a very sophisticated portfolio. The first thing that probably jumps out at you is the fact that, in both portfolios, there’s only a mere 12% held in domestic equities – that’s the stock market. Chances are you have more than 12% in equities.

Another significant factoid from that chart is that the largest holding they have is in real assets such as real estate and commodities. Again, chances are you don’t have much invested in real assets (unless you count your house, which is less an investment decision as it was a living decision).

Finally, both have a huge piece in private equity (like hedge funds) and absolute return (assets that are supposed to yield a return in good and bad markets).

How Can You Do This?

Smart Moneys Ivy League Replica Investment Allocations

This one is again from Smart Money and it shows how you can replicate the holdings (or at least get as close as possible) of Harvard and Yale through various funds. Want some absolute growth? PIck up some Hussman Strategic Growth (HSGFX). Want a taste of private equity? PowerShares Private Equity ETF (PSP) will get you into that game.

Worth a shot right? Or go with something simpler like a lazy portfolio. :)

A League of Their Own [Smart Money]


 Devil's Advocate 
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Failure Is Good

Devils Advocate Logo
This is a Devil's Advocate post.

Cant Fail CafeThis Devil’s Advocate post is really borderline Devil’s Advocate because it’s not entirely in the spirit of taking a position against something that’s considered prevailing wisdom. You could say that the prevailing wisdom is that failure is bad, success is good; but as the advocate I’m not advocating that you should try to fail. I’m merely saying that failure itself is not a bad thing, much like success itself is not always a good thing; it’s all in context.

(Click to continue reading…)


 Taxes 
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$3,000 Capital Loss Deduction

At the end of last year I wrote a few articles about stocks and taxes, the most important of which was the concept of deducting capital losses against capital gains. One sentence in the article talked about when you have an excess of capital losses, an idea I wanted to expand upon given the recent blood letting in the capital markets. Given the combination of a slowing economy and some unrealized losses sitting on the books, consumers might want to realize the loss and take the $3,000 deduction from their regular income.

For example, if I bought $10,000 of stock in Company ABC and that stock was now worth $7,000 – I would be realizing a $3,000 loss. I record the loss on my tax return (Form 1040, Schedule D) and then transfer it to my regular form to deduct from my income. That limit is reduced to $1,500 for those married filing separately. If your losses exceed $3,000, then you can keep carrying that over year to year indefinitely.

Why would you want to do this? Your tax refund will be larger because you’ve reduced your income by $3,000. If you’re in the 25% tax bracket, your tax return would increase by $750. You’ve already lost the money, you simply haven’t realized it yet. :)

Why WOULDN’T you want to do this? The wash rule states that you can’t claim a capital loss if you buy back into the investment within 30 days. You can buy back in after the 31st day but anytime before that and you’ve realized a loss without the tax deduction.

It’s neither a smart move or a dumb move, just a move that is made smart or dumb based on your situation.


 Personal Finance 
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Second Stimulus Package

Money Money MoneyBack in June, Democrat Presidential nominee Barack Obama suggested that a second stimulus check was necessary. I wrote about it because this was hot on the heels of the first stimulus check and it appeared as though Obama was catering to the masses. In reality, he was running point on a proposal House Democrats were pushing because so many of their proposals were left out of the first stimulus package.

With the credit freeze only now thawing, with both consumer borrowing and spending down, and with the prospects of a weak retail holiday season and rising unemployment, a second stimulus package designed to give our economy a shot in the arm looks pretty appealing now. Even Fed Chairman Ben Bernanke, in testimony given before the House Budget Committee, endorsed the idea of a stimulus package. More importantly, the White House said it would consider additional spending measures; it’s not an all-out endorsement of a second package but it’s better than flat out rejection.

Before anyone gets all giddy, most experts are saying nothing would happen until after the November 4th election. As it stands, most reports are saying that most of the proposals being pushed for the second stimulus package involved measures that were dropped from the first stimulus package. Those proposals included infrastructure improvements and extension of unemployment benefits & food stamps, all told costing about $150 billion or more.

Specifically, Speaker Pelosi wants to bring back a $61 billion House-passed bill:

  • $37 billion in public works spending (infrastructure)
  • $6 billion for jobless benefits (unemployment)
  • $15 billion to help states pay for Medicaid bills
  • $3 billion in food stamp assistance
  • A stimulus check (tax rebate) of some kind, though no details

I am not a fan of the “stimulus check” concept (is it really spending if we are just borrowing from the future?) and I don’t see how all the other spending is going to stimulate the economy (it’s said that the public works spending could be implemented very quickly, thus producing jobs… but it’s public works, that just sounds like it would take a long time). Jobless benefits and food stamp assistance will lessen the pain but they don’t stimulate the economy. Finally, in most states you already get twenty-six weeks of unemployment, that’s six months, isn’t that fair?

I guess we’ll have to see what gets proposed.

(Photo: Tracy O)


 Banking 
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Certificates of Deposit: Pros & Cons Weighed

Hiding Piggy BankFor the last ten years, certificates of deposit have gotten a terrible rap. Interest rates were low compared to the blockbuster returns of the stock market and you were locked into that CD for 12-, 24-, 60- months, all making it an unappealing investment option. For many, CDs only ever came up in financial conversation when you were talking about laddering an emergency fund because protecting your principal was your number one goal.

Well times have changed and CDs, with their FDIC insurance, have once again come into vogue as investors have plowed hundreds of billions of dollars into the CD market in recent weeks. I personally use CDs to help increase the rate of return on my savings, specifically in laddering my emergency fund, and below I will list three good reasons you should save with CDs and three reasons why you shouldn’t.

Three Good Reasons

Certificates of deposit are safe. They are FDIC insured up to $100,000 ($250,000 through December 2009) which makes the principal safe from loss. With the stock market as volatile as it has been the last several weeks, protection of principal is almost as important as appreciation. With the markets down double digits, earning what was once a “measly” 4% APY on a CD really looks good right now since it beats the market by a considerable margin! The best CD rates are now in the mid-4% APY range so they are at least competitive with other options.

As I mentioned earlier, the stock market is volatile and there’s certain comfort in knowing your money is safe and earning a little bit of interest. While I’m not worried about my retirement savings, as my retirement is forty years away, I would be hesitant to put any money I’d need in the next five or ten years into the stock market right now simply because it spikes and craters so easily. Would you be surprised if the market jumped 700 points? I’d be a little happy but the reality is that it might drop 700 points the next day, with seemingly no rhyme or reason. CDs? They just go up… slow and steady, but I hear that wins races.

Lastly, the rate of return isn’t bad. 4.65% APY, which was the highest CD rate as of this writing, is pretty good. It probably beats your bank’s savings account rate. If you have an online bank account, the best high yield savings account rates are pretty good too so they’re worth checking out as well. All in all, 4.65% APY isn’t 10%, the typical number used to talk about the stock market but I think you’d be hard pressed to make that argument given our environment.

Three Bad Reasons

Despite their relatively high, and safe, returns, inflation will eat your lunch. Inflation is going at a pretty good clip these days, 4.9% as of September CPI numbers, and it is the biggest problem you run into when you save with CDs. If you save at 4.65%, you’re losing 0.25% of your purchasing power each year and that’s before taking taxes into account. If you’re in the 25% tax bracket, 4.65% APY is really 3.49% APY, which means you’re losing 1.41% of your purchasing power each year. That being said, the alternatives aren’t too spectacular either.

With CDs, you’re locked into a set period of time. The shortest CDs are usually 6 months and offer the least amount of interest. The sweet spot right now appears to be the 12 month and 18 month CDs, though if you’re willing to lock it in for 60 months (5 years), you would be handsomely rewarded (in today’s terms). Fortunately with CDs, you’re totally locked in. You can often liquidate a CD if you surrender a number of months interest (often it’s 3 months, but it varies). That’s a nasty pill to swallow if you need your money though.

Finally, there are some better options if you are willing to put your money in a little bit of risk. Tax exempt money market funds are a good place to store money and get a much better rate of return. I recently looked at the Vanguard Tax Exempt Money Market and it had a tax equivalent yield of around 6% APY. It invests in municipal bonds to earn that higher interest but it’s not FDIC insured.

There you have it, three good reasons why you should and three reasons why you shouldn’t save using CDs right now. If you have any thoughts on them, maybe a point I missed, please share them in the comments.

(Photo: corrieb)


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