primefinance

Now that the Senate has passed the financial reform bill, it's off to non-smoke-filled rooms, where it will go into a Blendtec with the version passed by the House last year. CNNMoney.com sifted through all 1,600 pages of the bill and came up with a handy cheat sheet explaining what's actually likely to change when this thing becomes a law.

Here are some of the main points:

“Dealing with 'too big to fail' firms: Creates a new process for unwinding big financial firms that reembles the powers that the Federal Deposit Insurance Corp. has to shut failing banks.

Breaking up banks: Gives regulators strengthened powers to break up financial companies that have grown too big and threaten to destabilize the financial system.

Creating a consumer agency: Establishes an independent Consumer Financial Protection Bureau housed inside the Federal Reserve. Bank fees fund the agency, which would set rules to curb unfair practices in consumer loans and credit cards.

New oversight power: Creates a new oversight council that would look out for major problems at large financial firms. The Treasury Department gains a key role in enforcing tougher regulations on larger firms and watching for systemic risk. The council also has veto power over new rules proposed by new consumer regulator.

There's a lot more, so be sure to check out the full list. Or go ahead and read all 1,600 pages, and let us know what you find.

Scott Adams, the author/creator of the Dilbert comic strip, has some very sensible things to say about asset diversification in this great blog post, World’s Simplest Portfolio:
First, let’s assume the hypothetical money is invested entirely for retirement, so we don’t need to worry about keeping any of it liquid for college or buying a house. That assumption is just to keep things simple.
Second, we’re only talking about investments up to 10 years prior to your planned retirement…
I suggest, as a starting point for our discussion, that a perfectly adequate simple portfolio for young(ish) people might involve putting 50% of your money in an ETF from Vanguard (VTI), which captures the entire Wilshire 5000 … The fees for the ETF are a low .015% per year, and because ETF managers don’t do much buying and selling within the portfolio, it doesn’t generate much taxable income to pass along to investors…
For the remaining 50% your investments, let’s say you buy the Vanguard Emerging Market ETF (VWO) with a .27% expense ratio. That gives you a play on the best companies in emerging markets around the world, at low cost, with excellent diversity, and low taxes.
Asset diversification really can be just this easy. Adams’s advice underscores how bizarre the diversification message is in E*Trade’s “Wolf Call” commercial:
What does it mean to diversify like a wolf? In a world with low-cost stock indexes, asset diversification is downright boring. Hardly something to brag about to your girlfriend.
Adams’s post, however, makes a claim with which I take issue. He says:
I picked 50% to allocate to this investment because I contend that no expert has a good reason for picking a different figure. Some experts might tell you 25% is the right allocation for U.S. stocks, and some might say 75%. I contend that most allocation recommendations of that sort are no more defensible than horoscopes.
Adams is right when it comes to traditional allocation advice. In Lifecycle Investing, we similarly criticize the “birthday rule,” which arbitrarily advises investors to allocate “110 minus your age” in stock. The birthday rule counsels 20-year-olds to invest 90 percent of their portfolio in stock, and 60-year-olds to allocate 50 percent to stock. Adams is right that such advice has become the industry consensus without the benefit of good theory or empiricism.
But Barry Nalebuff and I derive an optimal allocation rule that maximizes expected utility for an investor with constant relative risk aversion:
Samuelson share = Return/(Risk2 * Risk Aversion).
In a recent post, I showed how this allocation equation can be updated to take into account changed expectations about risk and return. Lifecycle Investing shows that this allocation equation (when properly applied to the present value of current and future savings contributions) will often lead young people to invest 200 percent of their current portfolio in stocks.
Adams’s approach still wins hands down in a simplicity contest (and in fact, before I wrote this book my portfolio emulated his advice). But we show that there are substantial gains from doing some extra work to better spread market risk across time. Historically, the Leverage Lifecycle approach can reduce risk by more than 20 percent. Or, the benefits of this new diversification technology can be channeled to safely increase your expected return by 60 percent. Until a mutual fund has the good sense to automate our system (we’re working on it), time diversification will require some additional work. But doing a better job diversifying risk across time can be worth the effort.

This is a guest post from Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool’s Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks.

Happy anniversary to…well, all of us, I guess. This post marks my one-year (and five days) anniversary of being a contributor to Get Rich Slowly. It’s been a hoot.

My very first post was a report from my journey to last year’s Berkshire Hathaway annual meeting. While I didn’t attend this year’s meeting, which occurred two weekends ago, my interest in Warren Buffett’s commentary and biography hasn’t flagged. After all, I’m a Berkshire Hathaway shareholder.

The wealth snowball
This post’s Buffett lesson comes from The Snowball, the recent Buffett biography by Alice Schroeder in which she writes: “Since Warren looked at every dollar as $10 someday, he wasn’t going to hand over a dollar more than he needed to spend.” Buffett apparently was so cheap, he only washed his car when it rained so he wouldn’t have to pay for the water.

Former Washington Post heir and publisher Katherine Graham once asked Buffett for a dime to make a phone call. (Before the advent of cell phones, people had to use these things called phone booths if they wanted to make a call in public — and they didn’t even have Twitter!) Buffett only had a quarter, so the billionaire first went to get change.

Now, we all know that spending a dollar today means we won’t be able to spend it later. We may also allow that a dollar invested today will be worth more years hence, so that we not only delay gratification — we can pay for more of it.

But a dollar saved today leading to $10 someday? That’s an awful lot of compound growth, especially at rates being offered by today’s savings accounts and certificates of deposits.

Yet for Warren Buffett, it turns out that he was underestimating himself. From 1965 through 2009, Berkshire Hathaway stock returned an average 20.3% annually, turning $1 into $4,341. That, ladies and gentlemen, is how you become the richest person in America.

Compounding for mere mortals
But what about the rest of us? Is it reasonable to think an investment today could decuple? (Yes, that’s the word for something that has increased tenfold, and, yes, I had to look it up.) That depends on the return you earn, and how long you earn it.

Below are three charts, assuming different rates of return, initial investments of $100, $500, and $1,000 (which are more representative than $1 of the spending decisions we make nowadays), and the numbers of years the money is invested.

In these examples, the only amounts that have increased tenfold are the ones invested for 30 years and earning 8% annually, a return not quite as easy to earn these days as they were in the second half of the last century. Still, the numbers might be compelling, especially for younger folks.

A few additional thoughts about these tables:

• These numbers don’t take inflation into account. So forgoing $100 today doesn’t mean you’ll buy $1,000 worth of goods at today’s prices; it’ll likely be quite less. But as long as you earn a return that exceeds inflation, you’ll still be able to buy more in the future than you could buy today.
• While most of us don’t drop $100, $500, or $1,000 on purchases every day, I do find it informative (and occasionally painful) to annualize expenses. Spend $6 every workday on lunch? That’s approximately $1,400 a year. Your cable costing you $100 a month? That’s another $1,200. And that’s after-tax money. In other words, to spend that $1,200, you had to earn $1,600 and then pay $400 in federal and state taxes (assuming a 25% combined rate) to have that $1,200 to spend. If you put that money in a traditional retirement account, you can at least defer the federal and state income taxes (though not the FICA taxes — you still have to pay those).
• The numbers in the charts reflect a one-time investment, and not continual, regular investments. For example, if you invest $500 every month and earn an average annual 6%, you’d have approximately $500,000 after 30 years.
• If you’re closer to the day you hope to retire than the last time you pulled an all-nighter, you might be saying, “But I don’t have 30 years for my money to grow!” That may be true for the money you need in the first several years of your retirement, but if you live to the average life expectancy (or longer), you won’t touch some of your money until you’re a decade or two into your retirement. Unless you’re an 85-year-old one-armed chainsaw juggler who smokes, you should plan on some of your money being invested for decades.

If you, like Buffett, find thinking about future values helps being frugal, print out those charts. Put them in your wallet. Wrap them around your credit cards. Post them on your computer monitor about where the “Place your order” button shows up on your favorite e-shoppe. After all, as Alice Schroeder explained in an interview with The Motley Fool, the power of compounding is where the title of her book comes from:

The Snowball is from a saying of Warren’s about life being like a snowball. It is really a metaphor for compounding, for the way that things tend to grow at an exponential rate when they are rolling forward over time. So his money has obviously been like a huge snowball, but it also refers to relationships and to knowledge and all the different things that tend to grow and layer upon each other.

Balancing tomorrow and today
Despite Buffett’s famed frugality, he doesn’t recommend forgoing all of life’s pleasures. As Schroeder explained in another next segment of her Foolish interview, even Buffett recommended that you have to strike a balance between enjoying today and investing (your bucks or your brains) for tomorrow:

He said to me one time, if there is something you really want to do, don’t put it off until you are 70 years old. … Do it now. Don’t worry about how much it costs or things like that, because you are going to enjoy it now. You don’t even know what your health will be like then.

On the other hand, if you are investing in your education and you are learning, you should do that as early as you possibly can, because then it will have time to compound over the longest period. And that the things you do learn and invest in should be knowledge that is cumulative, so that the knowledge builds on itself.

So instead of learning something that might become obsolete tomorrow, like some particular type of software [that no one even uses two years later], choose things that will make you smarter in 10 or 20 years. That lesson is something I use all the time now.

J.D.’s note: While I realize that much of the discussion about compounding involves theoretical, it’s still fascinating. If you start early enough and are disciplined (and things go according to plan), you really can use the power of compounding to build great wealth. But, as Buffett points out, it’s not just money that compounds. Knowledge does, too, as do relationships and experience. The more you do to improve your life today, the better it will be tomorrow.

Source:http://www.getrichslowly.org/blog

It’s been a long time since I share links to other sites. That’s a shame, because there’s a lot of great stuff out there. Lately, I’ve been impressed with some articles from some of your fellow GRS readers.

For example, Tim at the Seattle Bubble blog just posted an article on misguided ethics and walking away from a mortgage. We’ve had several discussions around here about the morality of defaulting on a mortgage. There are a lot of GRS readers who think that defaulting is reprehensible. Tim lays out the case in favor of intentional default. “A mortgage is merely a legal contract, not some sort of sacred vow,” he writes. It’s a fascinating article, with 181 fascinating responses.

In February, Erica Douglass shared a controversial guest post with us about outsourcing life when you’re financially secure. She argues that if you can afford it, it’s actually very sensible to pay other people to do things for you. Over at her own site, Erica has just written an article to answer the question, “Is outsourcing worth the effort?” This will be of interest to a very small portion of GRS readers, but I think some of you will find this helpful.

Finally, Trent at The Simple Dollar posted several great articles recently, including:

• Why you shouldn’t buy gold as a hedge against devastation. Trent believes — and I agree — that gold will be useless in the event of a financial apocalypse. History and reason bear this out. I’ve been meaning to write a post on this subject (and probably still will), but this is a great intro.
• The myth of the tax deduction. A tax deduction is no reason to get a mortgage. Trent writes, “You’re far better off having a small debt load and perhaps missing a deduction or two than having a high debt load and getting those deductions.”
• Never co-sign a loan unless you want to pay for it yourself.
• Separating your goals and choices from those of other people. This is an awesome post with great advice: Don’t base your goals on the goals of other people. Make you own decisions based on your own preferences and priorities.

That’s it for this afternoon, folks! Time to enjoy some of that rare Oregon sunshine

Source:http://www.getrichslowly.org/blog

Consumer Reports is out with the latest edition of its economic-health tracker, the CR Index, and the news is generally positive, with gains in jobs and consumer spending, and declines in stress. But that doesn't mean it's time to break out the bubbly: “We are seeing modest improvements across our indices since April, which demonstrate that consumers are starting the long slog out of this historic recession,” said Ed Farrell, a director of the Consumer Reports National Research Center. “But a full recovery will require a substantial period of growth for consumer confidence to fully take hold.”

According to CR:

“

The personal financial status of the American consumer is on the rise, according to the latest results from the Consumer Reports Index. The most significant improvement is in the job market. The Employment Index stands at 50.6, up from 50.4 the prior month. In the past 30 days, 6 percent of Americans have started a new job, up from 5 percent in April and 4.6 percent a year ago. The proportion of Americans who have lost their job in the past 30 days is 4.9 percent, well down from the recent high of 7.8 percent in October, 2009.

Americans also faced fewer financial difficulties in April. The Consumer Reports Trouble Tracker Index has improved significantly, falling to 53.0 from its spike in April of 63.5. Fewer people had problems paying their medical bills, had negative changes in their credit card terms, or had trouble paying major bills (excluding mortgages).

Source:http://consumerist.com/2010/05/youre-buying-more-less-worried---unless-youre-in-the-south.html

Ron Leiber writes the "Your Money" column for the New York Times. On Saturday, he, along with his party, was ejected from a restaurant by the chef. Mr. Leiber wrote about it on the Times food blog and now the restaurant is getting crank calls according to Gothamist.

The nonsense began when the chef started yelling at an employee. That the yelling occurred neither man disputes.

Here's how Mr. Leiber describes the incident:

“

And without much forethought, I pushed back my chair and walked through the open doorway of the kitchen.

I don’t remember exactly what I said, though I did not raise my voice to the point beyond where people in the kitchen could hear it. I told the chef that his behavior was making me and others uncomfortable. I let him know that I thought it was mean. And I asked him to cut it out. I don’t remember exactly what he said in response, but whatever it was, I found it irritating enough that I reminded him that I was paying to eat there and told him again to stop berating his staff at that volume.

Maybe 20 seconds after I had returned to my seat, he approached the table. He apologized, barely, and then let me know that he thought it was incredibly rude of me to come into his kitchen and tell him how to do his job. I repeated the fact that he had been ruining my dinner. But his yelling was all in the interest of maintaining quality, he said.

“I think it’s time for you to go,” he said.

“Are you kicking me out?” I asked.

“Yes,” he replied.

”

And now the chef, who did not know Mr. Lieber was a reporter, tells his side to Gothamist:

“

The picture that people are getting is that of me standing over a helpless animal screaming and kicking and [Lieber] comes into the kitchen and prevents all this from happening and saves him. That's not what was happening at all... While I was yelling I slammed my hand on a kitchen table and the rack that holds the tickets was loose and came crashing down, which probably made it more dramatic. Then he came in to tell me to keep it down because I was bothering him, not because he was trying to protect anybody. And he's turning into a martyr here. And I just want to make it clear that I am not a bully. I am not a psycho or a bully. Am I passionate? Yes.

”

And now Lieber again:

“

When I called him on Monday to tell him I was writing this post about the evening, Mr. Forgione, in fact, said that I had scolded him like a child on Saturday night. “First and foremost, you came into my kitchen and spoke to me very disrespectfully in front of my cooks,” he said. “The kitchen is a sacred space.” He told me that my reply to his attempts to explain why he was yelling, while I was in the kitchen was, “We’re not interested.” That sounds about right, since we hadn’t come to the restaurant to listen to him yell repeatedly at his staff about whatever it was that he thought they were doing wrong.

That wasn’t what got us kicked out though, according to Mr. Forgione. He claimed that he didn’t decide to ask us to leave until he explained to us tableside that his yelling was all in the interest of making everything perfect. “Well you aren’t,” he remembers me saying. “And then,” he continued, “you waved a hand in my direction as if I was an annoying bug. Someone who acts like that in my restaurant, I would never serve.”

”

Gothamist asked the chef if he would apologize:

“

No way... He just decided it was okay to come into the kitchen. It has nothing to do with it being "sacred." It's just employees only, it's a kitchen. He stuck his head into doorway, waved his finger at me, and told me to keep it down because he wasn't interested. And I've never heard my kitchen so quiet! Everybody just kind of looked at each other like, 'What the hell was that and who the hell was that guy?' It was the most bizarre thing, just like six seconds of silence, like a record screeching. I took a deep breath, calmly walked to the table, and politely tried to explain why I was so upset. And he waved his hand at me and said, 'Whatever you're doing in there it's obviously not helping.' I apologized to all three of his guests and said, because of him, all three of you have to leave. I did not apologize to him and I will not apologize to him.

”
Source:http://consumerist.com/2010/05/what-happens-when-you-eject-a-ny-times-reporter-from-your-restaurant.html

By the time someone hacks into your Facebook account and sends all of your friends plaintive messages about being mugged in London, it's too late to do anything about it. However, Facebook does have an early-warning system of sorts. Using a security setting, you can have the service alert you whenever your account is accessed from another location, giving you a chance to (hopefully) force the intruder out and change your password.

The somewhat buried feature (it's under Account Settings, not Privacy Settings) lets you register your computer, and any other devices you use to access Facebook. After that, any time someone logs into your account via an unauthorized device, you'll get an email and/or text message. Of course, it would be even better if you could simply block access from any unauthorized computer, but then you'd never be able to check your wall from a friend's house or borrowed phone, and who wants to live with limitations like that?

source: http://consumerist.com/2010/05/facebook-can-warn-you-when-someone-else-logs-into-your-account.html