AskDong

While not in the narrow categorziation of personal financial topics, college and college rankings certainly have a large impact on personal financial matters. They cost alot, and have a potential impact on your salary.

Some liberal arts colleges are apparently trying to boycott the annual U.S. News ranking.  I have to say I agree with them.  Now that I’m nearly 15 year removed from making a decision about which school to attend, I find the rankings less than useful. I’m not naive to think that rankings don’t have a place. They do. Where your college “ranks” does matter. It might matter less than you think, but employers do care. Graduate schools care. I’m not sure if they care specfically about the U.S. News World Report ranking however.

One problem I’v always had with U.S. New ranking is the sheer amount movement that sometimes occurs year to year. The quality of a school does not change that much year to year.  The sytem can be gamed as well. The other problem I have is that the guide is really hardly a guide. It might serve as bragging rights for kid’s parent but that’s about it. It doesn’t serve to inform. I know because I probably had against my better instincts a slavish devotion to the rankings. I like numbers. So if you’re student or a parent of a student, choose a good school, but don’t get caught up with the difference between a school ranked 10th vs. 5th.

Well not quite everyone, but it seems like a lot of personal finance bloggers just don’t like it. I’m not in that camp, nor am I in the other camp of die hard propser fans. I think it’s still to early to tell if prosper makes a good an investment. At this point, I’m going to amend my original verdict to “watch and follow” I realize my initial calculations from Earning Money Part 5: Prosper.com were not really reflective of true performance. I used the average default rate for the entire period. This is problematic for two reasons. 1) Loan volume is biased toward more current loans 2) It probably takes at least a few months for a loan to go into default. Coupled with reason one this would bias the default rates down.

Propser Haters:

• Pfoddyssey
• Blue Print For Financial Prosperity
• Miserly Bastard - He doesn’t like my take on taxes either, but that’s ok.

Prosper Lovers:

• LazyManAndMoney
• Rateladder

 Prosper Likers:

• Mapgirl

I think it’s still early in the game before we can make a decisive judgement on if Prosper.com is a worthwhile investment. Early adopters reap greater rewards and greater risk. In the end I do feel a disciplined propser investor can achieve market returns that beat out a savings account and should provide returns that are less correlated with the stock market. How much work is involved to achieve that is unclear. Is it worthwhile? Who knows. Only time will tell. Once I have a little more personal experience with prosper, I will do a more thorough analysis. I’d love to get my hands on all the actual raw data - there’s a goldmine of data there. If anything that’s one problem I have with propser is the inability to properly query data.

There’s been some press recentlyabout potential tax code that will put the hurt in the pockets of your friendly neighborhood private equity partner.  For those who aren’t in the private equity circle, much of earnings currently are taxed at the lower capital gains rate rather than higher individual income tax rate.  Not being in the Private Equity inner circle, I only became aware of this after reading an article in the Economist indicating that Washington was looking into this.  The Economist and I share a similiarly muted opinion on this matter, but before I get into that opinion, let me highlight what the issue is.   I know this probably a matter of little interest to most people given that it certainly doesn’t affect most of us, but it’s interesting issue with regards to the tax code.

Partners at private equity firms typically recieve the bulk of their compensation in what is called “carry” on top of their regular income.  They earn a good income, but it’s really this carry which can easily be millions upon millons of dollars that is their bread and butter.   I don’t have a problem with the money they earn or the work they do.  Private equity and it’s nicer half brother, Venture Capital, have an important place in the financial and economic world.  They along with their nanny, Investment Banking, do make the world go around, well at least the financial world.  We can certainly argue about if these people are excessively compensated.   Given that most of the people reaping rewards are only risking other people’s money, I think they are indeed rewarded quite lavishly.  However that’s a decision of the market.  Ulimately a investment banker or a private equity partner is beholden to how much clients will pay them.  That’s the market.  Taxes, however, are another question.  Does it stand that Private Equity partners deserve to have “special” tax treatment?

The primary purposes of taxes is to generate revenue for the Government.  The seconday purpose to encourage or discourage particular behaviors.  The 1st and 2nd purposes are often in conflict as most taxes disinventvize production.   Income taxes are a prime example of this, but in some regards capital gains taxes might be more important.  Despite what some people may believe of me, I’m very much a capitalist and the most important thing about capitalism is that capitalist are given incentive to reinvest their capital into the economy.   This is the primary reason to have lower long term capital gains rates.   The problem with profits being made by private equity general partners as opposed to limited partners is question of who’s money.  In a private equity firm a the general partners invest the money of the limited partners.   Clearly limited partners should only be taxed at capital gains rate on the profits from the investments they make.   It seems unreasonable to extend this lower tax rate to profits that the general partners earn without putting “skin in the game.”  There is a reasoned argument that the government should tax all income regardless of sourceat the same rate,  as there is an equally valid argument to go to purely consumptive tax system.   I can support all those arguments, but I cannot support giving private equity managers preferential tax treatment over ordinary americans.

The Wall Street Journal ran an article last week about the slew of new sites allowing you to share information on your personal wealth. Flexo over Consumerist Commentary give a good run down on the article. I’m not here to rehash the article, but rather discuss to what degree of information sharing is common and good.  Some choose to share nearly everything with everyone. While many of my fellow bloggers would certainly be listed in this group, I am not. I share many aspects of personal financial situation, and if you take the time to read all the articles, you probably have a good sense of what it might actually be. However, I don’t publish my net worth, or how much money I make. That’s too much sharing for me given this site is not exactly anonymous. People know who I am. Sometimes I even know who they are.

However on the relative scale of things I’m probably on the more open side. I’m always up for a discussion on personal finances. If I’m chatting with you over dinner and the conservations turns to 401ks, I’ll gladly tell you how much I have stashed away in blow by blow details on which funds. If we’re having a couple brews at the pub, and I learn that you’re interviewing for new jobs, I’ll tell you how much I make to better guide your own salary negotiations. I don’t do this to brag (as there’s scant evidence that I have anything to brag about), but because I believe acquiring financial knowledge starts with your family and friends (not to say that your family and friends can’t be dead wrong). It’s one thing to read about finances from a book, but it’s another to see things play out with people you know. A lesson learned from someone’s actions is so much more valuable than a lesson gleaned from a book. Personal finance is really more personal than finance.  Being able to talk openly about personal financial matters amongst family and friends is a useful excercise - everyone learns something.  Ideally it’s not about bragging or whining.

One danger of not talking openly about personal finances is that it can lead to false assumptions about family, friends, and indirectly ourselves. Not talking about money means that you only observe other people’s consumption rather than the whole financial picture. The only way to keep up with Joneses is consuming more. When was the last time most people tried to one up their neighbor by how much they put into the 401k? While, I’m personally not an advocate of trying to compete in consumption or savings for that matter (everyone needs their own plan), I would rather see people compete to save more rather than buying flashier cars. 

While I do think being open is almost always a better way to be, there are are limits as well. I doubt I would be ever perfectly comfortable discussing details of salary with coworkers. I’m completely open with my immediate family, divulge as much detail as possible to friends in the course of any discussion.  I am happy to answer most questions from acquaintances, but unlikely to volunteer my salary or networth information.  I share the outlines of my financial life (via this blog) to the entire world.

Let me first say I’m a big fan of index funds. I think every investor should have index funds as a part if not the entirety of their portfolio. However as I read some the comments I read in regards MyMoneyBlog’s contemplation of having a speculative portion of his portfolio, I can’t but think that some index fundies go too far. I agree with them on the most part, but I also believe it’s also possible to extend the argument too far. The inherent greatness of index funds is really a question of cost and easy diversification rather than any performance metric. A index fund by it’s nature has average performance. It will never beat the market nor will it under perform the market.

One of the core principlals of Vanguard Fundies, is that the market is efficient or at least that there is no way for an individual investor to recognize inefficiencies if they exist. There is a whole set of arguments to why the market may or may not be efficient. I’m agnostic on this. I don’t know if the market is efficient or not. Is it rational? The 2000-2002 Nasdaq Bubble would indicate otherwise. A market can be both efficient and irrational. Efficiency simply implies that market responds “instantly” to new information. How the market reacts is another matter - it can be rational or irrational. However, the crux of my argument against a slavish devotion to index funds is more fundamental and does not require a conviction that the market is inefficient or irational.

In some ways taking the plunge into individual stock investing is like Pascal’s Wager. Even if the market is perfectly efficient, and there is no way to pick a bad stock from a good stock, an investor who is properly diversified does not take a performance hit by investing in individual stocks versus investing in an index fund. He or she is just as likely to do better or worse than the market just as the index fund is apt to perform better or worse than an individually selected basket of stocks. For someone who fundamentally believes the efficacy of index funds to argue otherwise would be self-defeating. If individually picked stocks somehow always perform worse than the market then implicitly there’s some method to picking stocks. You can’t pick bad stocks without picking good ones. An individually chosen basket of stocks should merely perform differently from the index, but still have an expected return equivalent to the index.

So even if we believe that there’s no way to beat the index, and that any basket of stocks individually chosen stocks should perform as well as the index, why wouldn’t you invest in individual stocks? It’s like betting on God, if he doesn’t exist nothing has changed, and if he does Heaven awaits the true believer. The risk with an individually selected basket of stocks is a question of diversification. An improperly diversified portfolio will be more risky than the index. It will have wilder swings.

All said, I still believe index funds are the way to go for most individuals. They are cheapest and quickest way to diversify. Most people don’t have the time to do research and buy individual stocks. Transaction costs can quickly add up. Index funds are by far the easiest and safest way to get into the market, and ultimately that’s what’s important - investing in the growing economy. I only make the argument against because I find some people who only push index funds a little too dogmatic in their approach.

It’s hard to argue with Vanguard Fundie because I agree with them and they are right on the most part. It’s just at times I think the Vanguard Fundies take too much of a hard line sometimes.