Archives For August 2007

It’s been a busy day for a Friday. I have had a ton of interesting stuff to blog about. I’m afraid if I don’t post it today, I’ll forget about it!

Anyhow, my contact at U.S. News & World Report sent me links to three interesting articles regarding credit cards that I thought I would pass along to you:

Five Nasty Credit Card Surprises – These five items have been covered before but it never hurts to familiarize yourself with these tactics so that you can ask the right questions BEFORE you sign up for a card. All of these practices stink.

A Credit Card Crackdown – An interview with John Dugan, Comptroller of the Currency, about credit card companies. The interview mentions double-cycle billing. I wonder if credit card companies will do away with it?

Banking Problems? Uncle Sam Wants to Help – This article takes a look at the new government website called

Congrats to Trent!

August 31, 2007

Trent over at TheSimpleDollar and his wife welcomed a baby girl into their family today (I think). I’m pretty sure they are going to name her TheSimpleDaughter. LOL!

Anyway, as much as I ranted on Trent last week, I do want everyone to know that I don’t harbor any hard feelings and I wish Trent and his family the best! I’m pretty sure we can all look forward to a post titled “The 5 Best Ways to Change a Diaper” from Trent.

First off, I don’t normally watch financial TV. Why? Because it’s too noisy and there’s so much conflicting information that I think it does nothing but confuse people. That said, this week I was flipping through the channels and decided to check out Bloomberg TV. Believe it or not, I had never watched Bloomberg TV until this week.

I like it! In my opinion, it’s more laid back and informative than CNBC. I particularly like Open Exchange with Pimm Fox, which I highlighted earlier this week.

But, that’s just my opinion. I’d like to know what you think.

Do you watch financial TV? If so, which one do you watch and why?

Here’s a few posts from the MoneyBlogNetwork (and beyond) over this past week:

Nickel asks if using IRA funds to buy a house is a good or bad idea.

FMF with why having a budget is the first step to getting out of debt.

MBH hosted this week’s Carnival of Debt Reduction.

Jim takes a look at WTDirect, a new online bank.

Flexo highlights this month’s “The Mole” column in Money.


We’re In Debt has a question: How Much Does it Take for You to Pick up Money? – I’ll pick up a penny.

Tired But Happy tackles irregular income with a new series titled “How to Manage Irregular Income, Part 1.”

Single Ma: What $100 Can Buy.

Money, Matter, and More Musings tells us about the worst credit card he has ever seen. – LOL! One would HAVE to be short on brain cells to go with such a card!

That’s it for this week. I don’t want to make these roundups too big.

Fortune, one of my most favorite magazines, has dedicated their latest issue to the topic of risk. One of the cool features of this particular issue is their nine-page section called “Wall Street Voices – Crisis Council,” which are the opinions of some of the bigwigs on Wall Street (and Omaha, NE) regarding the subprime mess.

The one opinion that I particularly enjoyed was that of Ben Stein. I love the opening to his piece:

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

I love it! Here’s Ben’s thoughts on the subprime market:

For example, right now we are stewing over what everyone calls “the subprime mess” and going crazy, mourning all day and into the night–falling over ourselves to get all of the misery right, to paraphrase Evita. I’m writing this on Aug. 13, 2007, and in the past four or five weeks, the markets of the U.S. have lost some 7% of their value, or about $1 trillion.

But read on: The subprime mortgage world is about 15% of all mortgages, or $1.5 trillion worth, very roughly. About 10%–approximately $150 billion–is in arrears. Of that, something like half is in default and will likely be seized in foreclosure and sold. That comes to about $75 billion. Roughly half to two-thirds of that will be realized on liquidation, leaving a loss of maybe $37 billion. Not chump change by any means–but one-thirtieth, more or less, of what has been knocked off the stock market.

The piece then goes on to compare and contrast stupid investors with “smart” investors. It’s a must read for anyone who wants a bit of sanity added to the mixture. The reest of the opinions are interesting too but Ben’s was my favorite. Read them when you get a chance and then come back here and tell us your thoughts.

Take a look at this map I found on It’s a state-by-state look at subprime mortgages. The redder the area, the greater number of subprime loans. Take a look at California:


The reason this is big news is that when real estate prices were hot, people who took out subprime loans could just refinance if their payments got too high. However, now housing prices are starting to fall and lenders are getting a lot more choosy on who they lend to. This is only going to make things worse before they get better.

Did you ever think about how luck factors into saving for retirement? I never did until last night after I put together a couple of spreadsheets in Excel.

Take a look at this chart:

The reddish line represents the monthly growth of an S&P 500 portfolio using the actual monthly returns of the S&P 500, which you can download in an Excel spreadsheet here. The blue line represents what would have happened had the portfolio grew geometrically (meaning, the investments grew at the same rate each month).

When putting this illustration together I made the following assumptions:

1. I used the maximum 401(k) contribution available in each of the years. I did a little research and found the maximum employee contributions allowed since 1987:

Annual 401(k) Contribution Limits

I then simply took those annual amounts and divided them by 12 to get the monthly contribution amount.

2. To get the monthly geometric average, I simply used the geometric average function in Excel (you can read more about how to calculate the geometric average here).

Anyway, notice how the actual performance of the portfolio significantly trailed the return for the portfolio that grew geometrically. This is due to the significant drop that occured when the internet bubble popped in 2000. Notice how the drop occured after 13 years of solid growth:

Now, notice what would have happened had everything happened in reverse and the drop that occured in 2000 – 2002 occured at the beginning of the 20-year period rather than the end:

To make this chart I simply switched the returns around and made them occur in reverse order. Notice now how the portfolio performed significantly better in this example. This is because the big drop occured at the beginning rather than the end of the 20-year period. That’s where the luck comes in. If you must have a bad market, you want it at the beginning of your career rather than the end. However, even if a significant drop does occur towards the end of your career, don’t fret since the chances are good that you could be in retirment 20 – 30 years, which makes you a long term investor even though you will no longer be making periodic contributions.

So what’s an investor to do?

Nothing. There’s really nothing you can do about it so there’s no sense in worrying about it. I just wanted to bring it up to show you just how volatility can either work for you or against you depending on where you are in the investing cycle. Those who just started investing in the year 2000 are in pretty good shape since that drop occured at the beginning of their cycle.