Bespoke Investment Group's Blog

I came across Bespoke Investment Group's blog yesterday while surfing around the Interweb and found it interesting enough to recommend that you head over there and check it out. From what I've read, the company does small financial research projects tailored (hence the term "Bespoke," which is a term mainly used in the UK to describe customized or individually tailored clothing etc...) to a client's needs. It looks like most of the stuff they show is the type of research someone with access to Bloomberg or some other market data provider can do, but not everyone has a need for access to these tools (mainly due to cost), so Bespoke grab the info and run a report for you on a one-off basis as needed. I'm curious what their pricing is like.

I wouldn't suggest you base your entire investment philosophy off of the things you read on Bespoke's web site because a good portion of it is technical analysis and I'm not a big fan of that. However, they do have some interesting charts and comparisons that could lead to some ideas for further research. For someone like me who follows the markets, I like occasional looks at high-yield spreads and how 2006's best and worst performing stocks did in 2007. I can't talk about their service because I haven't used it, but it seems interesting.

I also liked their piece on Yale University's Endowment Fund and I remember reading the Yale Endowment Fund case study back in business school. The Yale fund's annual report, which they link to in the blog, makes for some interesting reading but don't expect them to reveal too many secrets in there.

Save For Your Kids Retirement via a Variable Annuity

I read an interesting personal finance article by Jonathan Clements in the Wall Street Journal today. He talked about a bunch of ways to teach your kids about money. Now, I'm not going to be your typical blog where I list the ways and a brief summary of each one, then put my own spin on it. Bloggers who do things like this are lazy, unoriginal hacks who are basically just stealing their work from other people.

I am, however, going to key in on one particular idea I hadn't considered before. When I read about it, I thought it was the first time I'd ever read about it, but it turns out after consulting a June 2005 Clements article on teaching kids how to save I realized came across the idea a few years ago. (As an added bonus, if you read Clements' 2005 article along with the one above, you get a better picture of the actual dollar amounts he saved for his kids, offered for allowances etc...)

The idea is investing in a variable annuity to fund your child's retirement.

You heard me right, retirement, not school, not college, not graduate school, not weddings... RETIREMENT. Saving for your kid's retirement.

For most people, this is very low on the list of priorities. However, for people who are more financially comfortable, just think about how long that compounding period is... about 60 years if you put money in when the child is born. If you invest $2,000 and earn market returns of about 9% for 60 years, your child will end up with about $352,000 for retirement. Add contributions of just $100 a year to that initial $2,000 investment and your child will end up with $547,000. Add contributions of $335 a year and the initial investment will turn into about a million dollars in 60 years.

The reason why he opted for a variable annuity rather than a Roth IRA is that his kids would need to have income in order for him to contribute to a Roth IRA and being an infant at the time, the kid probably didn't have any income. The variable annuity allows for tax-deferred growth without an income requirement. (Incidentally when his daughter got her first job waiting tables or something, he opened a Roth for her.)

Sometimes when I look at my own retirement projections I wish I had another 30 years to tack on to let the really good compounding take effect at the end. In effect, if you open an account for your kids, this is what you're doing.

Does anyone have any thoughts on this? I think it might be something interesting to look at if I'm looking for alternatives for my child's birthday money etc... Of course I think I'm going to have my hands full with saving to help them through college first, but this is always something to think about. It's also pretty clever.

Maximize Your 401(k) Contribution Before Yearend

For those of you like me looking to maximize your 401(k) contribution for 2007, you most likely only have one paycheck left to do so so this is a quick reminder to make sure you've done that. I've been monitoring my contributions throughout the year and it looks like I will have to increase the percentage withdrawn from my next paycheck in order to reach the limit. I like the 401(k) because it reduces the taxable income I report to the government (and due to my salary combined with my wife's salary, we're priced out of Roth IRA contributions).

So take a look at your last pay stub and check what your year-to-date 401(k) contributions are. Subtract that number from the $15,500 and figure out how much you'll have to contribute out of your next paycheck to max out the contribution. Then go through your company's payroll system (luckily I can do mine online) and make the necessary adjustments.

And then remember- if you contribute $15,500 a year for 23 years and get a 9% annual return on your investments (a fair assumption for the stock market, in my opinion), you'll end up with just over a million dollars.

How Much Do Your Neighbors Make?

If you're like me, you're curious about what people make. Madame X over at "My Open Wallet" has a fantastic post where she asked her readers for details on their ages and incomes. A bunch of them responded and it makes for some fascinating reading. You can read the salary responses here.

I had a few thoughts as I read through the replies:

1) Her readers have pretty high incomes. There were a good percentage of respondents who made 100K and up.
2) She must have a TON of readers. The volume of responses was pretty huge.
3) Many people who higher salaries are unhappy with all of the time they spend at work. In otherwise, they get bummed out about it from time to time. So do I.

Edit: also check out networthiq.com for a glimpse into the networths of your neighbors. Allthough some are clearly fictitious, it's worth a look.

What Should The Average House Cost?

I've been trying to talk about my view that home prices need to fall further, but seekingalpha.com did it better than I could. Check out this discussion of home prices. They argue that the price of the average home should be somewhere around 3.2 times median household income, where it has been for the past 30-40 years. Put in today's terms, they argue that the median home price should be 3.2 times the estimated 2008 median annual household income of $52,134, or $166,829. This represents a 40% drop from the current levels just above $200,000.

I agree with that math.

Of course, you could make the argument that home prices don't necessarily need to have a correlation with household income, or that the ratio of around 3 times income no longer applies. However, I think you'd be kidding yourself.

How Many Ounces of Gold Does It Take to Buy the Average House?

Investmenttools.com has some pretty interesting housing price graphs. One of them shows how many ounces of gold it has taken to buy the average house over the years.

Another shows how many shares of the Dow Jones Industrial Average it takes to buy the average house. It's interesting to note that chart looks very different from how many US dollars it takes to buy the average house. Back around 1980, it looks like it would have taken about 110 shares of the DJIA to buy the average house, whereas now it is more like 22 shares. This shows how much stock price increases have outpaced housing price increases over the past 25 years or so.

As a side note- amid all of the doom and gloom, the index fund that 60% of my 401(k) contributions are going into has returned 8.7% this year. It seems like the sky was falling for some reason or another every week this year (primarily because of subprime headlines). All of the resets, the foreclosures, the dollar falling etc... and yet a stock market index fund still quite handily beat returns on most other financial products such as CDs and savings accounts. Thanks to my modest allocation to international and emerging markets funds (up about 16% and 50%, respectively), my overall 401(k) portfolio is up 11.3% on the year. Not too shabby.

Online Banks: Stop With The Ridiculous Savings Account Rate Comparisons

I got a flyer in the mail from eTrade financial today, advertising the "complete savings account". It showed a chart that has become all too familiar to me as I've been shopping around for another online bank recently.

On the left was a big bar the size of the empire state building, it had 4.70% in HUGE PRINT at the top of the bar. This is the rate on E*Trade's Complete Savings account. Next to it was this tiny little bar that said 0.50% at the bottom, in tiny print. This was labeled "National Average."

For years, online savings and moneymarket accounts have been making this ridiculous comparison. They compare the rates on their high-yield accounts to this puny "National Average," which the E*Trade footnote says comes from Informa Research Services, Inc.

To put it simply, this is a ridiculous apples-to-oranges comparison, but it seems like every single online bank does it.

What if BMW started running commercials where it raced its newest model against a 1997 Buick Regal, then proclaimed victory when it won the race? We would all laugh at that, because it's a ridiculous comparison.

The "National Average" includes rates that almost nobody in their right mind should be accepting on savings deposits. It includes all of the brick and mortar accounts like my Chase savings account, which currently yields a paltry 0.7%. Do you want to know how much cash I keep in that account? Practically zero.

If you're promoting yourself as a high yield savings account, don't compare yourself to a different category (the broad universe of savings accounts). Compare yourself to your peers just like any consumer with half a brain will do. For example, JD at Get Rich Slowly has a great survey of 12 online high yield savings accounts with rates current as of December 3, 2007. Taking an average of these rates gets me 4.66%. Want to guess why E*Trade isn't using this average in its marketing materials? That's right. It's hard to make .04% look sexy when you put two columns next to eachother in a chart.

Sorry to go off on a rant, but online banking industry, it's time to stop this. I'm calling you out!

In fact, I propose (if it hasn't already been done) that bankrate.com or some other high-visibility banking organization come up with a more appropriate standard average against which online banks can compare their high-yield savings account yields against. I know the banks must be doing this internally already. I think it's time for it to catch on in the consumer world so crazy comparisons like the one I got in the mail today stop getting sent around.

Plan to Bail Out Subprime Mortgage Holders

You might have read about plans to prevent certain subprime mortgage rates from "resetting" to higher rates in the next few years in the papers lately. If you have, you fall into one of two camps. The first camp is people who have subprime loans and are terrified of the reset that's coming up because it will push your mortgage payments up to unaffordable levels. If you're in the second camp, you're angry that idiots who took out bigger mortgages than they could afford to buy homes they couldn't afford will be bailed out, preventing them from being forced to sell and allowing home prices to come back down to more reasonable levels.

If you've read my prior posts about buying a house, you probably know that I'm firmly in the second camp. As I talked about in "The Subprime Mortgage Default Opportunity," I thought these painful resets would force people to sell and help the housing market to correct.

Don't get me wrong, I'm in favor of helping the needy. People whose homes were destroyed by a natural disaster deserve to be bailed out. People in other unfortunate circumstances deserve to be bailed out. However, people who bought houses they couldn't afford do not deserve to be bailed out.

So where are we in the bubble/bust cycle? I've been following some interesting posts in a blog called "Misha's Global Economic Trends Analysis" and I think he has a good illustration where he overlays the US housing market on a graph of Japan land prices during that country's bubble and bust from 1980-2004. According to that chart (and most experts), we're in the early stages of a decline. I don't know for sure what to believe, but I sure hope it falls a lot further so that honest, hardworking people can afford to buy a decent house to live in.

By the way, my current favorite source for housing market related news is Patrick.net's Housing Crash News. Its updated daily with stories around the web about the overinflated housing market in the United States.