Friday, October 19, 2007

Where to park short-term cash?

I've been shopping around for a new online bank account (savings or money market). It's been a while since I've done this and even though my goal has been to simplify my finances this year, it also makes sense for me to diversify banks now that I have more than $100,000 in deposits. FDIC insurance only covers deposits up to $100,000 so I figured I would start looking for another place preferably with a higher rate than ING Direct's current APY.

Sofar, I'm going crazy. There are so many banks out there looking for your cash these days that it's hard to figure out which one is the best place. What I'm looking for is the highest yield possible, but it seems like every account has certain restrictions and introductory rates and so forth. I guess they devise all of these schemes (limit 3 transactions a month without fees, no check writing, check writing, you must pay bills through our site etc...) to try to get and retain customers.

Over the next few days im going to try to find some quiet time to sort through the noise myself. You would think there would be one easy place to find this info, but this is not the case. Even the blogosphere can't keep up with all of the latest deals, twists, tricks and traps. ( And don't get me started on I like the site but I swear sometimes it panders too much to its advertisers and it seems like one big infomercial.)

If anyone has any advice, feel free to let me know.

Sunday, October 14, 2007

Popular Fiction: The Worst Depreciating Asset of All Time

So we've all heard the old line that a new car loses about 20% (this figure varies) of its value when you drive it off the lot. If you're like me, you think that's a terrible value proposition and you would never buy a new car. I have a used car that has been running very well for about 4 years now and I paid half of what I would have paid for a comparable new car.

If you think an item losing 20% of its value is bad, how about one that loses 99% of its value when you take it out of a store?

"WOW! What kind of an item is that?" you might be asking yourself.

Answer: a book, in particular a work of popular fiction.

Let's take an example. Check out the amazon page for Stephen King's Cujo.

Side note: Stephen King is on my short list of favorite authors.

If you were to buy Cujo new in a store, or on Amazon, it would cost you about $8. You take it home, devour it in two nights because it is that good, and then say to yourself "hey, what do I need this book laying around for? I hardly have enough room as it is. Let me try to sell it."

So you go online to determine what price you'd have to list it at in order to sell it. Look back on that amazon page I linked above. There are over 200 copies waiting to be sold by other people. The lowest price listed is ONE CENT, and there are dozens of copies listed for sale at that price (another side note, the way people make money off of those sales is on the shipping allowance amazon gives them. You'll pay them like $3.99 for shipping, but it might only cost them $2 to ship it to you so they can make like $1 profit if they got the book for free or paid very little for a batch of them. I think they also get a break on amazon's seller fee if they have an amazon store open).

So anyway, when you buy a book new, chances are as long as its not a new title, an out-of-print title, or something like that, it's going to lose 99% of its value when you leave the store with it.

You might argue that the value lies in the reading of the book, but I would argue back that you can get that value for free at the library. As much as I like Stephen King, I don't see the value in buying Cujo unless you have no other choice (for example, if you're stranded in an airport for a night with nothing to read). Just get it from your local library! Trust me, they have at least one copy of that book waiting there for you right now.

Some books don't face this effect, and therefore are probably worth buying. If you're really into a particular author or subject and you want to get a new release, chances are it won't be available in your library for a while and you might want to buy it. If it's some kind of a reference book that you plan to use for years, you might also want to buy it (I have some auto and home repair books like this). Finally, if it's going to be a family heirloom you might also want to buy it.

Otherwise, I highly recommend that you don't buy the worst depreciating asset of all time and instead just go to the library for your books. You won't regret it (unless the person who previously read your copy of cujo left some food on p. 83) and when moving day invariably comes, you will be thankful that you don't have to carry those two huge boxes of yellowing paperbacks that you haven't read in years.

The Cost of Market Timing

I've come across a bunch of studies that show how costly it is to try to time the market by buying and selling stocks in the hopes of buying "low" and selling "high," and they've been very convincing. I've never come across such a clear example as what happened in my own 401(k) account not too long ago.

On September 17th of this year, the value of my 401(k) was $52,000. I had enjoyed an ok 6.6% return for the year, based on the strong performance of my international funds and the pretty good performance of my domestic equity index funds. The common stock index fund that represents 60% of my assets in that account was up 6.1% on the year.

Those of you who follow the Fed pretty closely will remember what happened on September 18th. Ben Bernanke cut the discount rate and the fed funds by 50 basis points, 25 more basis points than forecast, and the market ate it up. I posted briefly on it here.

When I checked my 401(k) balance at the end of the day on Sept. 18, it was worth about $53,330, a gain of $1,330. My return was now 10.3% on the year, as the equity index fund rose to a 10.4% return on the year (International stocks hadn't had a chance to respond to the cuts during the day so they underperformed, relatively speaking).

What a difference a day makes. If I hadn't been invested on the 18th, I would have been kicking myself. Of course, there will be days the market takes a big hit in the other direction and I would have been better off with my money in cash, but I believe the big long-term trend is higher and I'm willing to take some volatility along the way in order to build a big nest egg for my retirement. (And based on what's happening with social security, it looks like I will definitely need a big one.)

I guess the moral of the story is, yet again, don't try to time the market. You'll miss out on the big days.

Monday, October 1, 2007

Too Bad I'm Not A Sports Star

I wish I was a sports star instead of a financial analyst, but not for the reasons you might think.

Sure the money and the fame and not working in an office all day long would be great, but there's another thing that sports fame can get you- an audience with Warren Buffett, the Oracle of Omaha.

I recently read a Bloomberg piece saying that Buffett extended an invitation to chat with Yankees sensation Joba "The Heat" Chamberlain. Buffett has also met with Lebron James and Alex Rodriguez. So cheer up, those of you who don't have $650,000 to spend on a lunch with Buffett... there's another way to meet him and learn his investing secrets firsthand- practice, practice, practice.