The volatility of volatility
Posted by Mike
An article in the Wall Street Journal today talked about how markets closed at the end of the second quarter this year - exactly as people hadn't predicted. Overall, US stocks fell and European stocks outperformed them.
As usual, the markets made a monkey out of anyone who had been certain about what had to happen next.
What's interesting, though, is the discussion that follows about volatility, and whether it can be used to predict anything:
[W]hile volatility provides a close mirror image of current returns, it is a poor forecaster of future returns. Robert Engle, a finance professor at New York University who shared the 2003 Nobel Prize in economics for his research on volatility, warns that "there really isn't any predictability in that direction." He explains, "Even though volatility tends to be high in bad markets, that doesn't mean the market is going to keep going down—it just means the market has been going down."
Despite Rob Engle's opinion, he's worked on an interesting project called VLab, which can be used to look at the volatility of certain stocks over a period of time. I'll admit that I don't fully understand the application yet, but I'm going to play with it a little more and try to fill in some more details tomorrow...
UPDATE: Ok, so I spent a little more time looking at this tool, and it's interesting, but I think it's a little more intense than the average trader would like to bother with. The tool looks at a list of data series that can help give you an idea of the volatility of your portfolio through your stocks or the markets they're traded under. I've tried to look at the math a bit, and it begins with an easy look at variance, but quickly goes above my head - my specialty isn't in statistics. Let me know if you have any insight to their methods.
Unwanted early retirement
Posted by Mike
Sorry about the brief posts I've put up over the past few days - I've just finished moving , which has proven more time consuming than it should have been...
In any case, news today has talked about a bit about unemployment rates. June has reported a drop in unemployment, but at the same time, a large number of jobs are disappearing, and the federal reserve expects the unemployment rate to stay rather high in the foreseeable future.
I didn't want to talk about the unemployment rate as such, but I did I want to bring attention to an article about Pat and George Breaul, a couple that has found themselves in an unplanned early retirement, as I imagine a number of people may be finding themselves in similar positions. The article explains a little about the Breauls, but also offers a few tips on how to deal with finding yourself in their situation. In brief: try to gain some income, and don't spend too much. Perhaps it's not the deepest advice, but maybe it will help clarify where you stand.
Make a mint (.com)
Posted by Mike
I've been trying to test out a website that was recently reviewed by the Wall Street Journal called Mint.com. Unfortunately, my efforts have been for naught, due to some technical difficulties on my end, so I can't offer you a first-hand review. But I'll talk about the service and how it works, because it seems like it would be pretty useful. (I do want to stress that my technical difficulties are my own - they really have nothing to do with the site.)
The basic idea is that you can connect all your bank accounts, investments, loans, mortgages, etc. all in one place for you to access easily. This way, you can keep an eye on your budgets, on what you owe, and even set specific goals, like saving up for a vacation. Oh, and it's totally free.
What I think is even more innovative, is that the site looks for opportunities for you to save cash, such as higher interest savings accounts or lower interest credit cards, and makes commission from selling you the products. In other words, they make money by saving yours.
The one thing that's important to mention is that for all this to work, you need to give the website access to your accounts, which means giving them your usernames and passwords. This may seem a little weird, but they promise that they use the same security banks do, and that because they aren't a bank, no money can be moved - just viewed.
I don't want to go on and make this sound like any more of an advertorial than it already does - especially because I haven't even had the chance to test out the features it advertises - but it does sound like this could be really useful. If you try it out, leave a post about how you find the site and whether you think what they're offering works well for you (both generally, and in terms of specific products).
Less talk. More stock.
Posted by Mike
We've all had that moment when you look at the stock prices and think, "Why didn't I actually invest that money instead of buying another Tron motorcycle?" Well, maybe not that exact moment; I know some people went for the Batmobile replica.
In any case, if you've decided to avoid these moments in the future and to start investing, you'll need to find a stock broker. Brokers can range from a self-service stock trading service online to a full-service investment advisor and manager. Depending on your confidence - and experience - an online trading service may be right for you, and we'll look at some of these later. Right now, though, take a look at some articles that discuss how to make this decision and what to consider.
Plenty of websites have articles about picking a stock broker. You can check out those on moneyunder30.com, allbusiness.com, and ehow.com, for example. The biggest lesson, of course, is that when you hire someone you should make sure you know exactly what you're buying - both in terms of service and stock.
Time to go condo shopping?
Posted by Mike
Just a quick post today...
CNN Money today offers some advice to people looking to take advantage of today's condo market:
After falling 20% nationwide and 60% or more in the hardest-hit areas, median condo prices remained flat nationally in the first quarter vs. a year earlier. And sales in March were up 40% from the previous year, hinting that prices might be heading back up soon too.
Before you jump on any new development, though, you'll want to make sure you're making a smart purchase. Their advice? Only look at completed developments that are 80% occupied. Check out the article for more (same link as above).
I'll write a little more about condo mortgages in our next My First Mortgage, coming soon.
The cost of healthcare
Posted by Mike
Now don't get me wrong - I believe everyone has a right to medical care - and hence medical coverage. But then again I also believe in the ruthless destruction of newly obsolete hardware...
That said, I think it's important to know how healthcare is paid for - because it doesn't come cheap (fact sheet in PDF form). CNN's Money posted an article a few weeks ago that I neglected to talk about, and I think in light of all the reforms that are about to take place, it 's worthwhile mentioning it now.
The health-care bill that Congress passed in March contained two surprising new taxes to help pay for the changes: an extra 0.9% levy on wages for couples earning more than $250,000 ($200,000 for singles) and a new 3.8% tax on investment income on those same people (technically, people with "adjusted gross incomes" above those amounts).
So what does this mean to you? Well if you fall in the high-income bracket, it means that you should be budgeting for a tax hike. It also means that you should be proud to pay it. Your money is saving lives.
Keep on keepin’ on
Posted by Mike
A thought crossed my mind a few years ago - I could live relatively well off of interest accrued on a savings account with a $1,000,000 balance. Why not just make a million and then relax?
Well aside from the difficulties of the first step, there are some other things to consider about the logistics of living off interest. In fact, someone else asked a Money Magazine's "Expert" this very same question (albeit in relation to retirement savings), and Walter Updegrave, wrote a pretty good response. In essence, he notes that you have to consider things like inflation and how your money is saved. For example, if you account for an annual reduction of the buying power of the dollar, you may find that $40k just isn't quite enough to do what you want to do in a few years' time. To be honest, when I thought about this, $40k annually seemed pretty good. Now, about 5 years of inflation (and maturity?) later, I'm thinking I'd want to be bringing in more than that - especially if I have a million in the bank.
As mentioned, the linked article really discusses the question in terms of retirement funds, so extra factors - like higher tax rates - may change things a little for the working individual, but the principal is the same. (See what I just did there?)
More from Toronto
Posted by Mike
Big news comes today as the G20 summit closes and a number of participating nations promise to halve their deficits by 2013. There isn't too much to discuss on the issue - especially as this doesn't yet have direct impact on financial advising, but I thought it was worth a quick note.
Certain things
Posted by Mike
They say that two things are certain - death and taxes. I'd like to add a third: violent protests at G20 summits.
While protesters in Toronto are burning cars, breaking shop windows and even damaging media vehicles (you can read a real-time blog here), leaders from the world's richest nations are having some serious discussions about financial institutions.
Aside from the new regulations being imposed on US financial institutions regarding credit cards and debit card transaction fees, President Obama is expected to sign a bill in July that would impose a $19 billon tax on large banks and hedge funds. The bill may be largely due to pressure from G20 leaders, many of whom are instituting similar taxes in their respective countries.
While the taxes vary from country to country, the reasoning behind them is basically the same: to ensure that banks are responsible for the risks they take and not taxpayers.
"The failures of the banks imposed a huge cost on the rest of society," said George Osborne, the U.K. Chancellor of the Exchequer. "I believe it is fair and it is right that in the future banks should make a more appropriate contribution, which reflects the many risks they generate."
In addition, Congress is discussing another $90 billion Financial Crisis Responsibility Fee.
Interestingly, some G20 leaders suggested imposing a global bank tax, but this was rejected by leaders of countries whose banks didn't require any aid.
Personally, I think these new taxes and fees are fair moves given the banks' roles in the crisis that we're still recovering from. That said, I'd like to add a fourth "certain thing": New bank taxes being paid from their customers' pockets instead of their profit.
Any thoughts?
Return of the living dividend
Posted by Mike
This chart, posted today by the Wall Street Journal, shows a few examples of a bunch of dividend payouts that are being increased, "just months removed from one of the worst years for corporate dividends on record".
This is good news for a lot of people, as dividend payouts on the S&P 500 were reduced by some $52.6 billion in 2009. What's a little interesting is that there were 78 dividend reductions last year, but 135 companies have already announced increases for 2010. This may be a sign of how good things are - or a sign that I'm missing the numbers for 2008 - I'll have to get back to you.
There's a lot more in the WSJ article (same link as above) about the implications of this - for example, tax rate caps that were made under the Bush administration are set to expire, which could double what you pay for your new dividend payouts. Take a look - and let us know how much better you'll be doing in 2010.