Archive for the 'Risk' Category
- Yesterday I was chatting with one of my company’s summer interns about his plans for the weekend. He told me that he was going skydiving. Wow! I thought, that’s awesome. I’ve always wanted to go skydiving, but never got around to it before I got married and became a parent. I explained to the intern that the second thought that went through my head after “Wow” was “life insurance policy.” I have a sizable life insurance policy in place already, but I’ve been meaning to read up on the fine points of it to figure out exactly what coverage I have. I find that I have many insurance policies, but don’t know what insurance I actually have. You always hear horror stories about people having insurance, but not being covered for some bizarre sequence of events. So back to the top of my to do list goes: Read and understand current insurance policies.
- A short phone call this week earned me about $150. I have been engaged in a kind of progressive credit card arbitrage. We got a cash back rewards credit card last summer that came with a high limit and a 0% APR on purchases for a year. We’ve been making minimum payments to the card while stashing the rest of the full payment in a high interest savings account. I had written in my credit card notes that the 0% offer expires in July. I called the credit card issuer to ask specifically when the offer expires. The answer is that the offer is good until the END of my August billing cycle, which means that I don’t have to settle up until the middle of September. I estimate that I should be able to earn about $150 dollars in extra interest on the money that is sitting in my Vanguard Money Market fund.
- We finally received our tax refund this week, which isn’t bad considering that we didn’t file until about 3 weeks ago. It took longer than expected to file this year due to some Traditional to Roth IRA conversions that we ended up being ineligible to make. So it took a while to figure out how to undo the conversion and then how to record that on the tax return.
- In case you’re wondering: this tax refund will be used to bolster our emergency funds which currently total $10,233. This is far short of 6 months worth of expenses, but we’re getting there.
Some articles that I enjoyed over the last two weeks:
- Gather Little By Little investigates the fine art of hypermiling — eking every possible mile out of a gallon of fuel for your car. We have been de facto hypermilers since 2001 when we purchased a diesel car that easily gets 45 miles per gallon. However, I have been independently implementing some of the suggestions that also appear in GLBL’s article and anecdotally seem to have improved city mileage to previously unheard of heights. I won’t know for sure until the next fillup, which may still be weeks away.
- The Boston Globe reports that People in Debt Feel Literal Pain. Wow! Debt troubles are pervasive! The lesson here: If you want to improve your health, get out of debt.
- Gametheorist writes about his children’s entrepreneurial teamwork in selling candy bars for their sports club fundraiser. What fascinated me about this was the posturing of the pricing in order to induce people to buy more. What further fascinated me is that it worked so well!
- Lastly, PaidTwice had another rough week in homeownership. Her week went from dreams about a more luxurious bath experience to a shorted circuit breaker to a major, necessary home repair. Isn’t it nearly always the case that just when we start to feel secure, comfortable, and in control of our lives Mr. Murphy comes knocking? This happens to me at work, with our finances, around the neighborhood, on the highway, etc. The best guard against Mr. Murphy is a healthy emergency fund, both in literal and figurative senses. Always try to foresee alternative outcomes and plan around them or hedge against them. We can’t foresee or prepare for everything, but a little planning can go a long way — see Point 1 at the top of this entry.
Next month ScrapperMom and I will have both maxed out our Roth IRAs for the year. Since this is currently the only tax advantaged vehicle available to us, for us to continue to save will require a new strategy of some kind. Our prior experience with saving in taxable accounts has been in high interest savings accounts. We have never purchased stocks or mutual funds outside of a retirement account.
We have a number of medium term plans, including purchasing a new home, paying cash for a new (to us) car, buying more investment properties, etc. Some of these, like the new home and car, are expected to take place in approximately five years. This leads me to start wondering again what kinds of investments make sense for parking the money which we will begin to save in 2 months.
One idea that has crossed my mind a number of times is that of using Target Retirement Funds. Target Retirement Funds are a relatively new concept that has gained ground quickly in recent years. Generally TRFs are funds of stocks, bonds, and/or other funds that are balanced by the fund manager to be appropriate for someone who plans to retire close to the year in the name of the fund. For example, the Vanguard Target Retirement Fund 2010 has an appropriate mix of stocks and bonds for someone who is just about to retire and needs to shift from growth to a more steady income with preservation of capital. The nice thing about these funds is that they automatically adjust over time so that someone who owns shares of one of these funds does not have to rebalance her portfolio periodically. The funds also continue to adjust as the date of retirement passes by, so they continually become more and more conservative.
The Vanguard 2010 Target Retirement Fund (VTENX) is currently composed as follows:
Top 10 Holdings
Typical TRFs have some interesting characteristics. They are passively managed, meaning that the funds or the contents seek to match some index, and are only adjusted periodically by a manager to track the index. The balance in the fund is only adjusted periodically to be appropriate for the date of retirement. Because of this, the management fees or expense ratios tend to be low. They also tend to be tax efficient since there isn’t a lot of trading so the realized gains are low. They are now available at most major brokerages. As Kevin at No Debt Plan shows, one huge advantage of a TRF is that the barrier to entry into the fund is substantially lower than inventing in each of the funds in the fund individually.
Why am I considering a “retirement” fund for medium term savings? Well, that’s what I’m trying to figure out also. If a 2010 TRF is a smart move for someone at or near retirement who needs to try to continue to earn enough to keep pace with inflation but can’t afford to lose any money, then why wouldn’t this also be ideal as a medium term savings vehicle?
Let’s look at the pros and cons:
Pros:
- Low cost barrier to entry; if I wanted to create a well rounded portfolio for this savings goal it would take nearly over $15,000 just to get started.
- More upside potential than a cash account like a CD or Money Market account
- Easy to manage
- Tax efficient
Cons:
- No guarantee on return
- No guarantee on capital; more downside potential than a cash account
- Periodic fees in the form of expense ratios
- Lack of “peer review” in concept
I’m the type of person who is generally willing to take on a bit more risk than many. While this investment is not without risk, the risks are generally low, as the fund is well diversified across several different investment classes, many different investments within those classes, and through global investment exposure. I’d like to see some real estate investment trusts in the mix, but I think this is probably as good as it’s going to get for now.
So what do you think? Am I crazy or brilliant? Is this a good strategy for a medium term (5-10 year) savings plan, or is it too risky for such a short term? Should I go for the 2010 or 2015 plan? What do you think about using the 2020 or 2025 TRF for longer term goals?
Tonight I took my dog out to his competition obedience training class, like a usual Monday night. We often arrive early since traffic can be unpredictable. I was killing time listening to Marketplace on WBUR, the local National Public Radio affiliate.
A late model Audi A4 pulled up a few cars down from me in the lot. I noticed a plume of smoke drift away from the car as it came to a stop. I thought to myself that this guy must have been driving this thing pretty hard, and had overheated his brakes. I watched for another minute or so, and then saw it: Fire! Through the wheel spokes I could see small tongues of flame coming from the bottom of the engine.
I threw open the door of my van and grabbed for my fire extinguisher. By now the driver was on his way into the pet store above the training center. I yelled for him, “HEY!!! Your car is on fire!” He turned and smiled and kept walking. “HEY!!!” I yelled again, “YOUR CAR IS ON FIRE!” He turned and took me more seriously this time. “No it’s not,” he said, “it’s just smoke.” (Just smoke?) There was smoke drifting out of the wheel well now. “No,” I replied, “I can see flames under the car.” I pointed to where the flames were.
The driver, having finally taken me seriously, scrambled to open the door again and pull the hood release. I Pulled the pin on my fire extinguisher and stood back, ready for flames to flare up as he lifted the hood. The hood came up, and the flames were visible at the top of the engine. I asked him if it was okay for me to use the chemical extinguisher on the fire. He nodded vigorously. I Aimed the extinguisher at where I thought the seat of the fire was, Squeezed the actuator, and Swept the nozzle back and forth for 10-15 seconds.
When I released the actuator, I waited to see if the flames were out. Seeing no signs of them, I moved in close again, nozzle still pointed and actuator ready. I peered down into the engine bay where the first signs of flame were. None were visible, the fire was out.
By now, a small group of people — including a few employees of the store — had gathered. “What made you think to carry a fire extinguisher?” asked one. “I’ve seen far too many cars burned up on the side of the road,” I replied. Then I explained that my former job required me to train as an industrial firefighter. I had put out a number of staged fires before, but never a “real” fire.
My fire training had taught me to keep cool around fire, but to respect the fact that fire spreads much faster than people expect. Another two minutes, and this guy’s car would have been well on its way to a total loss. Safety should always come first, as well. I learned how to effectively use a fire extinguisher by remembering the following acronym:
- P - Pull the pin
- A - Aim the nozzle at the seat of the fire
- S - Squeeze the actuator
- S - Sweep the nozzle back and forth
I have asked my wife to memorize this acronym and quiz her every now and then on it. Now that I have a partially discharged extinguisher, I can safely stage a small fire in a can on the patio and let her put her book knowledge to practice.
The fire extinguisher that I used to put out the fire was about $25 at Home Depot. This is a very small insurance policy that saved some random guy $20,000 tonight. I have one of these on every floor of my house. Tomorrow I will be shopping for a replacement, as these are single use items. I will also buy one for my other car, which does not yet have an extinguisher.
All in all, I feel somewhat vindicated since now I can tell all the people that have ridden in my van and asked about the fire extinguisher that I have finally put it use. Yet at the same time, it’s a real bummer for this guy, who was still on his cell phone an hour later when I got out of dog class, to have had his car catch fire. I suspect that the car has not been properly maintained and that caused the fire. Lastly, I’m a bit disappointed that the guy never thanked me (even though the store employees did…), and that I’m out $25. 
ScrapperMom gets paid every other Thursday, and I get paid on the first of every month. ScrapperMom’s paycheck is directly deposited into our Money Market account at Everbank via a 3rd party payroll service. This past Thursday was a payday, and I was especially interested in seeing what the take-home portion was. This would have been the first paycheck since her raise, and I wanted to see how accurately Paycheckcity.com’s NetPay Calculator predicted take home pay.
I logged into my bank’s website to check on the payment and didn’t see it. I didn’t panic, since I know that while direct deposits often post the night before, or in the morning of the day they are supposed to, it’s not unusual to see them post later in the day. So I checked later, and still no payment. I checked on Friday, and the payment was still not there.
At this point, many people would have had a very serious problem on their hands, namely one of an empty bank account. This, however, was not, and is not the case for us. We don’t live paycheck to paycheck, and therefore usually have the equivalent of 2-4 times ScrapperMom’s biweekly paycheck amount in our account.
I told ScrapperMom that her check had not posted. She told her boss who started to look into it. Fast forward to yesterday: I finally had a chance to check again from the hotel room here in Ottawa where I am on business. There was still no check. ScrapperMom asked her boss about it again, and here’s where it gets interesting: The payroll service apparently had the person who handles this, and a number of other accounts, leave with no notice, and “mess up” the accounts on her way out.
So while this may be an interesting story, it once again points out how frequently we are at the mercy of any number of financial world mistakes, market conditions, and various other ways in which we can be wrongly separated from money that is rightly ours. If we were living paycheck to paycheck we would be in serious trouble by now, and so the lessons learned here are:
- Realize that factors beyond your control can and will put you in a pickle from time to time
- Make reasonable attempts to mitigate the consequences of these factors — not living paycheck to paycheck can cover a wide range of potentially detrimental factors
- Don’t panic. It’s likely that eventually everything will get worked as long as you can weather a short term storm
We have been told that the next paycheck will be issued on this coming Thursday and will cover 3 weeks. Now I’ll have to adjust our forecast slightly, as well as our calendar. This also makes me want to find out when the next bonus 3 paycheck month will be…
ScrapperMom and I eat out together at “expensive” restaurants only a few times a year: once on our anniversary, and once on each of our birthdays. The last few times that we have been to expensive restaurants I have had the following experiences:
- I got into an argument with our waiter who refused to run my credit card to pay the balance of a ~$109 bill after I had already given him a $100 bill (a gift from my in-laws) to cover the better part of the bill.
- I got a dish at a very nice restaurant near our house that was way overcooked (seafood…). I am the suffer-in-silence type (ask me about not seeing a doctor for 3 days after I broke my thumb) and didn’t mention anything to the waitress until dinner was nearly over. She rightly pointed out that I should have said something earlier so that she could bring me something more to my liking.
- We were given the bum’s rush through a meal at a restaurant in Vegas at which the cost was over $100 per meal.
After these experiences, I am inclined to believe that I can have just as bad of a time for much less money somewhere else. And yet, I don’t have that many bad experiences at less expensive restaurants. Perhaps my expectations are simply that much lower when dining at a local brew pub than at Chez Moolah. Conversely, when dining at a nice place, my expectations are much higher and maybe I set myself up for failure.
And yet when good, expensive restaurants are good, they’re really good. These places treat you like king for a day, serve up a wonderfully presented and flavorful meal, and attend to your every culinary need.
As a result of these bad experiences, I have become a bit gun shy about returning to some of these expensive restaurants. Some will never see us again, but my experiences have also shown that we can have good and bad experiences at the same restaurant, which by extension means that any restaurant on any night is a roll of the dice. The only question is: What are the chances that tonight is going to be a bad night, and am I willing to take that chance with my hard earned and closely guarded money? Or should we just stick to lower expectations and lower risk, even when celebrating a birthday or anniversary?
photo figure credit: ctsnow
