Archives for August 2010

Charts: College Tuition vs. Housing Bubble

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This chart from Clusterstock (via Carpe Diem) shows the cost of college tuition comparison to historical housing prices and the Consumer Price Index (CPI) over the same period. The CPI is designed to track our cost of living by estimating the average price of consumer goods and services purchased by households. Everything was normalized to 100 starting in 1978.

While housing went up 4x at its peak (~400), college tuition has gone up over 10x. Instapundit Glenn Reynolds says the higher education bubble is about to burst:

It’s a story of an industry that may sound familiar. The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they’re buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn’t.

Yes, this sounds like the housing bubble, but I’m afraid it’s also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it’s better for us to face up to what’s going on before the bubble bursts messily.

The college tuition prices being tracked in the chart was done by the CPI for US cities for “College Tuition and Fees”. According to this BLS.gov link, this tracks actual expenditures by households, and not some measure of median college tuition, which is often just the “retail price” before various forms of financial aid and/or scholarships.

Another hot topic is the rapidly rising cost of health care. Well, college tuition CPI beats that too, from this Wikipedia chart:

I know that I’m scared to imagine what college will cost in another 20 years. Dealing with this issue will be tricky, with huge amounts of easy government credit being given to 18-year-olds that are being told by everyone (including parents) that it is totally worth it. For many people, it will indeed be worth it. For others, not so much.

In my humble opinion, it also seems obvious that this trend can’t survive forever. But will it burst like a bubble? Perhaps if the government turns off the loans suddenly, but that seems unlikely. I like Reynold’s idea that there may be an educational revolution with the internet, online coursework, and changing educational standards.

How To Sue a Telemarketer (Book Summary)

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I’ve been getting an increasing number of telemarketing calls recently, so I readily agreed to a review copy of How To Sue a Telemarketer by Stephen Ostrow, lawyer and judge. I had a vague recollection that you can get $500 every time a telemarketer violates the Do No Call list, and was hoping there would be a quick form or template to fill out and slam these annoying folks. It turns out to be a bit more complicated than that, but the basic steps are outlined below.

Before you do anything else, you should confirm that your phone number is registered at the National Do-Not-Call Registry. While you can file a complaint at the same website, that doesn’t have nearly the bite of a lawsuit with financial penalties.

Step 1: Data Collection

When an unsolicited telemarketer calls and you think they are in violation of the law, don’t yell at them. In a conversational tone, try to extract as much of the following information as possible:

  • Name of telemarketer
  • Name of company
  • Company website
  • Company telephone number
  • Company address
  • What they are trying to sell you

Writing it all down is probably the most simply, having a recording is easier but you can’t tape a telephone conversation without notice in many states. (Here’s is a list of states with one-party consent.)

Step 2: Research and Lawsuit Initiation

Using this information, you can then research the legal names of either the company employing the telemarketer and/or the telemarketers themselves. Now you know who to sue. Next, you must file a complaint through your state’s Small Claims Court. The form is relatively simple to fill out and some templates are included in the book.

Here’s a list of potential violations of the Telephone Consumer Protection Act of 1991 (TCPA), each of which are separate. You can have been a victim of any one or a combination. Federal law allows for $500 per violation, which can be increased to $1,500 per violation if deemed” willful and intentional”.

  • Violation of Do Not Call list.
  • Pre-recorded messages (robocalls)
  • Failure of solicitor to identify themselves.
  • Failure to send the company’s Do-Not-Call policy within 30 days after demand.
  • Blocking a number on CallerID by a telephone solicitor

A third party must then serve the complaint to the defendant, usually via sheriff or process server. You’ll also need to file a Proof of Service to show that the accused was served.

Step 3: Your Day in Small Claims Court

Now that you have filed the lawsuit and the defendant has been notified, a court date will be set and you’ll actually face your defendant in court. The person who actually called you won’t be there, just some representative. Some tips about how to present your case to the court are given, but basically you want to document all the details of the call. Since this is a civil court, you just need to prove that it happened more likely than not.

While searching online, I found another success story for suing rogue telemarketers. In his case, the telemarketer actually called him up before the court date and offered him $500 upfront to settle out of court. Nice.

The most depressing part of the book was the part where I found out what calls are not covered under the Act:

  • Calls from organizations with which you’ve established a business relationship
  • Call by, or on behalf of, tax-exempt non-profit organizations including political compaigns.

So if I get service from Comcast, they can still bug me. And I’ve already decided to vote against any politician who robocalls me. Grrr.

There are many more nuances in the book that aren’t covered here. If you aren’t turned off by required footwork above, then this book may be worth a read. It does try to keep a humorous edge to it, hopefully the energy will encourage you to follow through and get some justice.

Updated myFICO Coupon Codes & Twitter Tip

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Update February 2011: Use coupon code FICO25 for 25% off!

The last time I actually paid for my credit score was before I bought my house, and that was basically a fit of paranoia to make sure it was crazy-awesome before the lender pulled it. There are plenty of “FAKE-O” credit scores out there, but the only place to get your real FICO score is myFICO.com.

I’ve actually checked my FICO score several times since then for free, as promos usually pop up every couple month or so. I always try to post them here, but am often a bit late. This happened again this week, with myFICO offering free scores to the first 3,000 people. It was announced on their Twitter feed @myfico, so you may want to follow them for future opportunities. (While you’re at it, follow me @mymoneyblog too. I sometimes post smaller or short-lasting deals only on my Twitter page.)

Here are the best promotional codes out there currently: TWEET25 to get 25% off your TransUnion FICO and SW94608 to get 30% off your Equifax FICO. You enter the promo code relatively late in the buying process, right before entering your credit card information.

Whenever you do buy a score, I would recommend trying to correlate your score and the current information on your report. Then you can start to learn what changes really affect your personal score. I’ve applied for 12 credit cards and canceled 5 with almost no appreciable affect to my scores (see credit score myths) – despite all the “rules” – only to have a huge balance on my mom’s credit card (with me as authorized user) show up and drop it by 30 points.

Google Offers Free PC-to-Phone Calls To US & Canada

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

There was a lot of media coverage yesterday when Google announced that they would offer PC-to-Phone calls to US and Canada numbers for free from their Gmail interface. To try it out if you haven’t already, just log into your Gmail email account.

But wait… Google Voice (GV) has offered free US long-distance for a while already, and they’ll call your landline or cell phone so that you don’t have to sit by your PC and use a headset. Much more convenient in my opinion, even though I still love my Ooma. I primarily use GV for their voicemail transcription feature.

On top of that, let’s say you live in Texas and a big chunk of family and friends live in San Francisco that use landlines. Sign up for a Google Voice number with a San Francisco area code, and have your friends call that number. It’ll count as a local call for them, and will be forwarded for free to your existing phone.

However, this does make it more convenient to use, since Google’s service works within a web browser (plugin required) instead of a separate application. Skype might have to drop their prices as well, since they charge 2.1 cents a minute or $3 a month unlimited for the same features. Another perk is for international residents that want to call into the US for free, it appears you just need to have Gmail and have the default language set to “US English”.

Getting Organized In The Google Era (Book Summary)

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I ran across Getting Organized in the Google Era in an airport bookstore last month, and while I wasn’t enamored enough to pay the $23 retail hardcover price, I did add it to my library want list. The author Douglas Merrill was formerly the Chief Information Officer at Google, so I figured he might know something on the topic of organizing data in the digital age. Here are my notes.

First of all, this is not a detailed organizational framework like that of the best-seller Getting Things Done by David Allen. It’s actually more like a series of blog posts that ended up being stretched into a book. Merrill uses a very casual, storytelling style of writing with lots of (sometimes awkward) personal stories and song lyrics mixed in. It skips around a lot, from high-level organizational philosophies to tips on using Gmail to how his girlfriend died of cancer.

Organizational Principles

In the end, the book’s overall theme did stick to the subtitle of “How to Get Stuff out of Your Head, Find It When You Need It, and Get It Done”, and I did write down a lot of good basic principles from the book. Here they are, paraphrasing:

  • Don’t keep stuff in your head, get it out as soon as possible. Write it, type it, say it, whatever. Either paper and digital might be better for any specific task.
  • Always trying to multitask can actually make you less efficient overall.
  • Stories make it easier to remember information.
  • Don’t spend forever organizing your information, just search for what you need. Desktop searching, Google web searches, Gmail e-mail search, online calendars – use them to simplify things.
  • When overwhelmed or hitting a roadblock, break big tasks into smaller ones.
  • Try to integrate work with life instead of trying to balance them together. When people say the want a “work-life balance”, that’s usually just code for wanting to work less.

Useful Tools and Services

Another good part of the book was his list of software and websites that he found useful in organizing his life. Most are free, but some do cost money. A few are only on Mac OS X. Like I said, this seems like it would make a nice blog post… and now it is one 😉 I’m only listing the favorites.

  • Google. His favorite search engine, what a surprise. There are lots of little shortcuts in Google that help save you time. Want flight info? Just type the flight number in. UPS Tracking number? Just type it in. Here’s a cheatsheet straight from the source.
  • Quicksilver. Desktop search/application management/launcher tool. Mac only. [download, free]
  • Gmail. The best feature of Gmail is that you can quickly search through every single one of your e-mails, reducing the need to carefully organize everything. However, using some simple labels and filters can still help you group conversations and topics. Also has good spam filters.
  • Adium / Pidgin. Connects to multiple instant messages services all at once. Free. Adium is for Mac, Pidgin is for Windows.
  • Dropbox. Easy to use, online shared hard drive in the “cloud”. Good for storing, sharing, and syncing across computers. 2GB free, 50GB for $10/month. [website]
  • Things. To-Do List / Task manager software. [download, $49.95]
  • Xmarks. Put your web browser bookmarks online so you can sync across computer and access anywhere. Works with Firefox, Internet Explorer, and Safari. [website, free]
  • Google Health. Allows you to store and manage all of your health information in one central place. Even though I use a lot of Google stuff, I am still wary of sharing this type of data with Google. [website]

A related book that I also plan on reading soon is Upgrade Your Life by Gina Trapani of Lifehacker.

$4 Movie Ticket at Fandango via Groupon

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Groupon is currently offering any ticket on Fandango.com for $4 (up to $12 value including all fees and charges). If the value is over $12 (NYCers?) then you just pay any additional difference. If you don’t have a Groupon account already, please use my sign-up link. Then visit the deal link.

Only about 4 days left on the deal or until quantities run out. Over 40,000 already sold. The coupon expires Feb 28, 2011. Limit 1 per person. Not valid for IMAX or 3D movies.

Groupon is a popular group-buying site where in major metro areas you get one deal per day from a local retailer as long as enough people sign up for it, along with occasional nationwide offers.

New Marketing Trick: Short-term FDIC-Insured Bank CDs With Really High Rates

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If you still read newspapers like me, you may have come across an advertisement like this one recently touting an abnormally high 3-month or 6-month CD rate in last Sunday’s issue:

According to Bankrate, the current national average for a 6-month certificate of deposit is 0.37% APY, with their top yield being 1.25% APY. Highly-advertised Ally Bank offers less. So how can a tiny local non-bank that you’ve never heard of beat the rates of even online banks by over 2 whole percentage points?

It turns out that this is the newest version of the “free show tickets for timeshare presentations” marketing ploy. In this case, you must go into the office of an life insurance agent and listen to their sales pitch before getting the bank CD. Allan Roth over at CBS Marketwatch visited one of these offices and wrote about it. These non-bank salespeople are supplementing bank CDs from other FDIC-insured banks with their own money to reach the advertised rate. Questionable? Yes. Scam? Well, maybe not.

How It Works…

  1. You respond to the newspaper ad, and the terms always require you to physically come over to their office.
  2. After dealing with varying levels of life insurance and/or annuities salesmanship, you maintain your desire to open the account.
  3. You write the check for the CD directly to an FDIC-insured bank, with which the sales office is not officially affiliated with. This CD has a realistic rate, say 1% APY or similar.
  4. After a week or two, enough to make sure your funds cleared, the insurance people will cut you a check which together with the bank’s interest, add up to the advertised APY (assuming they are still in business).

How Much Extra Interest?

But really how much money are they losing on this? If you buy a six-month CD with an annual percentage yield (APY) of 3.35% and commit $25,000, you’ll earn approximately $418. With a APY of 1.25%, that is $156. The difference is $262. That’s basically the “bonus” that they are paying to get you into the door.

The article by Roth was initially published more than 8 months ago, so that would suggest that this marketing ploy is working and the word is spreading amongst insurance salespeople. Now, I’m sure some people will call about the CD and either not have the $25k or otherwise decided not to go for it, so that improves their bottom line. I am pretty certain that their ad targets those with large cash balances looking for income-type investments, so that they can pitch annuities with seemingly safe and high yields.

Warnings

If you still want to invest in one of these bank CDs + incentives, you should be prepared to be presented with annuities that will actually seem to yield even more that their advertised 3-month CDs. They will be carefully packaged to look like a good deal. They will be described as “insured” and “safe” because they will be backed by an insurance company. The actual yields will be computed by a formula too complex for most math PhDs to fully understand.

Next, you should check if the extra interest is really worth it due to the fact that you’ll have to deal with paper checks. If you are writing a check from a bank account that isn’t earning interest, that is some lost days of interest right there. Since you’ll be receiving the CD funds as a check as well, that’s another few business days of potential lost interest. Use my handy Ultimate Rate Chaser Calculator to see your net interest boost.

Finally, you should be sure to only write the check to an FDIC-insured institution. You should interact with them directly to ensure safe transfer of funds and proper opening of account. Double-check the CD renewal guidelines, so you are not stuck rolling the CD over for another 3 months.

Here’s a list of other companies that I found offering similar ads. Some are pretty shady in my opinion, and pretend to be an elite broker supplying high-yield bank CDs. Others are actually pretty transparent about the fact that they are offering a carrot for you to listen to their pitch. If you know of any others, please leave a comment below, and I’ll add it to the list.

  • Sun Cities Financial Group (http://www.scfg.com)
  • First Fidelity Tax & Insurance (http://www.firstfidelityamerica.com)
  • American First Assurance (http://americanfirstassurance.com)
  • Integrifirst USA (http://integrifirstusa.com)

I personally wouldn’t trust any of these guys with a $9.99 cut-n-paste GoDaddy website and a rented office with any of my personal details.

Consumer Reports Car Reliability Charts

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The auto review issue of Consumer Reports is always very popular, due in part to the fact that they can be more impartial by actually buying all the cars they test anonymously and not accepting any outside advertising. (This is not the case with any other car magazine.) Here’s a few charts and graphs from Consumer Reports summarizing their car reliability data by brand.

Long-Term Reliability

This chart below shows a graph of problems vs. age of vehicle for 8 major automakers. The data is from their 2008 Annual Auto Survey, which had more than 1.4 million responses. A typical eight-year-old Volkswagen has almost three times the number of problems as a typical eight-year-old Toyota. [source]

Overall Test Scores and Reliability Ratings

This second chart, released in 2009, plots major automakers on two scoring scales: those from road tests by CR staff and predicted-reliability ratings based on surveys. Being in the top right corner is best. [source]

If you know of any more recent versions of these charts, let me know!

Awesome Space-Saving and Multi-Tasking Furniture

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Thinking about simplifying your life and living in less space? Perhaps you already live in a small space. If you haven’t heard of Resource Furniture, you should definitely check out this video of space-saving and transforming furniture from their store in New York City, land of the 250 sf studio. These are way beyond your standard Murphy beds.

I love the innovation here, although I have a feeling this stuff comes at a relatively steep premium. Their website doesn’t show prices (must ask for quote), but I’ve read around $8,000 for a bed/sofa combo. I wonder how long it will take to these designs to trickle down to mass market stores. Via Reddit.

LendingClub P2P Loan Investment Returns Update 2010 Q3

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

LendingClub.com is a website that securitizes person-to-person loans so that you can lend money to other people in as little as $25 increments, and you collect the interest after some fees. The idea is to replace banks and credit cards as the major middlemen used for lending. “Investors earn better returns, borrowers pay lower rates.” I’ve been investing some money with them since they started in 2007.

Last time I wrote about LendingClub in May, I expressed concerns about their historical performance data living up to their marketed 9.65% returns and then LendingClub responded on why they thought things weren’t that bad. It’s been 3 months, so I figure it’s a good time for another update.

The first part of their argument is that they think that loan performance over time will go like this, with a drop and then significant recovery near the end of the term:

However, I don’t see that behavior happening. As you can see below, the older the loans, the lower the overall performance. Returns just keep dropping for loans going from 1.5 to 3 years old. There is no rise or recovery at the end of the three-year term. Data was taken from actual LC loans with observation date of August 17th, 2010.

Loans Originating Second Half of 2008 (about 1.5-2 years old)

Loans Originating First Half of 2008 (about 2-2.5 years old)

Loans Originating 6/1/2007 to 12/31/2007 (about 2.5-3 years old)


Note the change in the y-axis scale

Now, the next part of their argument was that all the loans that originated before they changed their credit requirements and interest rates at the end of 2008 weren’t a valid data set to be analyzing. (That doesn’t make me feel much better because as an early adopter, I hold a lot of those loans.) While improved underwriting may make the average returns higher, I don’t see why it should affect the overall performance behavior over time.

2009+ Loans Only

Okay, so the newer vintage loans that originated after January 1st, 2009 take into account their current lending criteria. In the end, we’ll just have to see if people really get higher returns. From now on, I’m going to try and track the performance every quarter. Here is the performance of loans originating in the first half of 2009, as of August 17th, 2010. Since it a loan has to be late for 4 months to be actually considered in default, this means the loans only have effective ages of 1 to 1.5 years.

So far, not too bad at about 8% return. Here is the performance of loans originating in the first quarter of 2009 with two observation dates (May 2010 and August 2010) overlaid on top of each other. You can see that the loan performance has decreased slightly over the last 3 months. I hope that I am wrong, and that the performance does start to improve.

You may call me a LendingClub basher, but I still consider myself an active investor and supporter. I want them to have awesome returns, but the data simply doesn’t support the likelihood of earning 9.5% annually. Investors should go into it with realistic expectations, and ideally an interest in P2P social lending. Despite this, if LendingClub can average, say 6% returns going forward, that would still be quite an accomplishment for this new business model. I know I’d be happy with that.

To Prospective Borrowers
Honestly, LendingClub is more attractive as an option for borrowing money and/or credit card debt consolidation. You can borrow up to $25,000 and you can know your rate before actually applying for the loan. If the rate quote they give you can be beaten elsewhere, then just walk away with no obligation. When writing your loan application, try to include as much applicable information as possible (reason for loan, how will you repay, monthly budget breakdown) and answer all lender questions promptly for the best results.

Morningstar Admits Fund Expenses More Important Than Star Ratings

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A funny thing happened when Morningstar performed a study on whether expense ratios or Morningstar “star” ratings are better at predicting higher future mutual fund returns. Expense ratios won. Russel Kinnel, Morningstar’s director of mutual fund research and study author, wrote about the study results on Morningstar and these quotes sum it up:

If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. […] Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.

The study didn’t look very far back, but it probably couldn’t because Morningstar keeps trying to tweak its rating system into something that… um… works. 😉 So they looked at the star ratings and expense ratios from mutual funds from 2005 through 2008, and then tracked their progress through March 2010. Funds were categorized into five broad asset classes: domestic stocks, international stocks, balanced, taxable bonds and municipal bonds.

The Morningstar rating system didn’t do awful. But considering that expense ratios are one single number, and Morningstar has millions of dollars available to make their rating system work by crunching historical data and take into account whatever multiple factors they want, it must be pretty depressing for them.

Heck, one of those recent tweaks was specifically to factor in expenses as part of the rating system. In the end, Morningstar ratings are still primarily based on past performance. Another quote from the article:

Perhaps the most compelling argument for expenses is that they worked every time–because costs always are deducted from returns regardless of the market environment. The star rating, as a reflection of past risk-adjusted performance, is more time-period dependent.

Is it just me, or does “time-period dependent” sound a lot of like “it works sometimes, except when it doesn’t”?

Investing based solely on past performance is as someone said, “like driving down a winding road using only your rear-view mirror”. Using the same driving analogy, I feel that investing with very low costs is like racing with a constant breeze at your back. (Or more accurately, all your opponents are driving into a constant headwind.) Over time, this relentless advantage will lead to above-average returns.

Next time you see an mutual fund ad touting their 4-star or 4-star ratings, just ignore it.

More media coverage: Associated Press, NY Times, CBS MarketWatch

Portfolio Manager Rick Ferri Shares Personal Portfolio and Asset Allocation

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

In a recent post on the NY Times Bucks blog, portfolio manager and author Richard Ferri shared his own personal portfolio. As a proponent of low-cost, passive investing, it was not surprising to see mostly index funds in his portfolio, but it was interesting to see that his overall asset allocation is 80% stocks and 20% bonds. He is quick to note that he does have a pension and defined-benefit plans which balance out his overall financial picture. Wouldn’t you like to know what all those financial advisors out there actually own?

Asset Allocation

Here is his asset allocation broken down into stocks and bonds separately using pretty pie charts:

Stocks

Bonds

Here’s the overall 80/20 breakdown with ticker symbols (based on this Bogleheads post):

34% Vanguard Total Stock Market ETF (VTI)
10% S&P SmallCap 600 Value Index Fund (IJS)
5% Ultra-Small Company Market (BRSIX)
8% Vanguard REIT ETF (VNQ)

6.5% Vanguard Pacific ETF (VPL)
6.5% Vanguard European ETF (VGK)
5% DFA International Small Cap Value
5% DFA Emerging Markets Core
—- [alternative: Vanguard Emerging Markets ETF (VWO)]

12% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
4% Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
4% Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)

Reading his book All About Asset Allocation was very helpful in creating my own portfolio. (Also see Model Portfolio #3 taken from that book.) I haven’t been updating my own own portfolio asset allocation as diligently as I should, although I have been keeping track of it. Here’s the last snapshot I took:

Pie Chart of Investment Portfolio

I’ve had some asset allocation drift for sure, although I have been countering this by rebalancing with new funds. I really need an update…

Emergency Funds

It’s also interesting to note that he keeps an emergency fund of two years’ living expenses, and that he uses the Vanguard Short-Term Bond (BSV) with a current SEC yield of 1.08%. Very simple and almost no-maintenance.

I prefer using a mix of high interest savings accounts and longer-term CDs/rewards-type checking accounts. I figure that index fund investors get so excited by saving 10 basis points (0.10%) on mutual fund, but with a bit of work you could beat a short-term bond fund by 100 basis points (1%) with what I would call less risk.

Bond funds still have risk to principal, meaning you may have to sell for less than you bought in for, while FDIC-insured bank accounts do not. Money market funds are currently averaging less than 0.10% yield.