The Command T.O.C.

Why Helping People Facing Foreclosure is A Bad Idea

First, before everyone goes crazy, let me say I feel sorry for and can empathize with those who are facing foreclosure. Mostly, in this article, I am talking about those who are facing high adjustments on their ARMS (Adjustable Rate Mortgages) and will ultimately be kicked out of their homes. I feel sorry. But, I think helping them out with a freeze or assistance is bad economics and bad for the US economy. Let me explain why.

The plan being looked at right now is described in "Rate Freeze Plan for Arms Gains Traction" and it appears to be a plan where people who have too much debt will be allowed to "freeze" their rates where they are. The article states:

"If you've got a 7% adjustable mortgage that's about to skyrocket past 10%, getting a break may get a lot easier. One solution to the foreclosure problem gaining traction would freeze rates at lower levels."

Sounds nice enough but here is the "more of the story":

"Judging from other lenders' plans, a reset freeze would be available only to those borrowers judged unable to make payments at the reset rates.

That would be determined based on a borrowers' debt and income, according to Pfotenhauer, who could not specify what standard Hope Now will use. Historically, the lending industry judged affordability in this way: Total debt payments each month should not exceed 36% of total income. But in a bill sponsored by Barney Frank (D- Mass.), that threshold is set much higher, at 50%, according to Pfotenhauer."

This puts us in an interesting position whereby we are offering welfare payments to home owners yet we reject providing health care to kids of poor families.

Now, the real problem I have with this is wrapped up in the term Moral Hazard.

Welcome back from your holiday:Now for the recession?

I have blogged about the problem with the US economy for two years now and it appears it is starting to fall apart. Fortune Magazine has written a very good article about how the American consumer will/is pulling back and the economy is going into an inevitable recession.

The so called "bush " economy has been built on a house of cards. Consumer debt and Governmental debt has kept the ponzi scheme that is the American economy running. However, like all ponzi schemes you eventually get to the end of the road and it appears that is where we are. Imagine how much more money we would have if we were not off fighting this silly war.

I blogged about this and even conducted a poll on the Daily KOS. The readers there predicted this issue back on November 6th.

And, for act two: The Medicare fiasco. While Bush wanted to deal with Social Security, he never wanted to deal with the real issue which is medicare/caid and national health care.

Buckle down and keep money in CASH CASH CASH...

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The Greatest Investment Mind - Jack Bogle

I have been following Jack Bogle and his investment strategies since I started work in 1984. Here is a great interview with him recently on CNBC.

The Coming Retirement Crisis

While I disagreed with President Bush's attempt to do away with Social Security, I do think there is an impending explosion in both health care (Medicare) and our retirement system. As a John Bogle "Boglehead" investor (See message boards at http://www.diehards.org), I believe the answer is far simpler than Bush proposed.

Don't end social security, rather, allow us all to invest an unlimited amount into Roth IRAs and only allow index fund alternatives in this fund. The new tax law apparently sees it this way but, unfortunately, it will not be available until 2010. Not sure why we have to wait so long.

There is a great Frontline episode about this and you can watch this here. Also, there is a great interview with John Bogle who correctly describes the fact that the managers of pension funds and the financial intermediaries in the financial systems are reaping huge rewards while, effectively, stealing it from their workers and those who they have a fiduciary responsibility to advise. An excerpt:

"It's a generational storm that is coming in large measure because capitalism has gone astray. We have had what I describe in my book as a pathological mutation from traditional owners of capitalism, where the owners put up the capital and got the lion's share of the rewards, to a new form of managers' capitalism, where the managers, often aided by accountants and the financial system and the marketing system, are putting their own interest in front of the interests of the last-line owners, whether it's the direct owners -- the stockholders of America -- or the indirect owners -- the pension beneficiaries, mutual fund shareholders and the like. They simply aren't getting a fair shake."

Bottom line: Start early, save often and if you think you are saving enough, you probably are not. I like the line from Ben Stein: If it is not hurting, you probably are not saving enough!

Retirment at 100??

I had a discussion with my Father about retiring and we both came to the conclusion that for most, retirement will soon be a thing of the past. With IBM freezing their defined pensions (which most have already done), with companies that retain their pension going out of business, and with the dismal savings rate of the American public, we will be working forever.

The other item which is starting to creep up as an issue is longevity. While we all want to live longer, it means that the retirement age has to go up. You cannot retire at 65 if you will live to 120 regardless of savings rate. So, the bottom line is that even with savings, I think that a 70 to 75 retirement age will be the norm for those 40 to 50 now and for those who are 20 to 30 now your retirement age will be 80 - 90. Sounds strange but with longevity and health trends, this is what will happen.

For those in the Military, count yourself incredibly lucky as you will be the only ones with a pension in 10 years. You are trading off current income for pensions.

Investing Ideas

Today's discussion will be about investing and what I have learned over the years concerning investing. I must admit that I am a "Boglehead" which is a group of individuals who are dedicated to the rational teaching of John Bogle, the founder of Vanguard. While I do not pretend to be a professional in this matter, like Rob of the Sedgecourt Journal, I do believe that over time, the model is to keep it simple and allow "time to cure all ills".

So, you may have guessed, I am an index investor. OK, I am not out of the closet. My belief is that the most important and meaningful decision you will make as an investor is your asset allocation (Bonds, stocks, cash) and not which particular bond or stock you will buy. The goal is to isolate and neutralize "specific" risk (that risk associated to very specific bonds and stocks). You are then only exposed to market risk which you take on or neutralize through asset allocation decisions.

There are three big ways to do true index investing. And, BTW, I am talking about true indexing which means you buy the entire market of stocks and the entire market of bonds. Some have created very specific indexes (i.e., a healthcare index) and while this indexes a specific industry, it is not a "market" index and therefore not one I am involved in.

The first way is through building your own basket. Most people believe that if you buy stock in 30 or so companies, of which 75% of the portfolio are S&P 500 companies then you are very close to making your own basket which replicates the market. The pros are that you are in a little more control but the cons are transaction costs (you have to buy through a broker). This is made a lot worse if you are building a portfolio through dollar cost averaging (DCA) which is a topic I will write about at another time.

The second is through exchange traded funds or ETFs. ETFs are a basket of stocks, much like a mutual fund, but are traded like a stock themselves. They get their NAV from the underlying stocks in the basket. Examples of ETFs (Vanguard calls them VIPERS) are Vanguard Total Stock Market VIPER (VTI) and iShares Dow Jones Total Market Index. SPDRS, DIAMONDS and Qubes are other examples. The advantage to these are you are not burdened by others who may cash in at the wrong time. For example, in a mutual fund, if a lot of people redeem shares then the fund manager may be forced to redeem shares of stock to pay out the redemptions. This may cause you, a person who did not redeem anything, to pay a tax on a capital gain thus making a mutual fund a bit less tax efficient than an ETF. The ETF does not have this issue but, it is burdened with transaction cost issues since it is bought and sold like an individual stock.

The final way is by far the easiest which is to buy a total market index fund. Examples of stock funds are Vanguard Total Market (VTSMX) and bond funds are Vanguard Total Bond Index Fund (VBMFX). These are very easy to buy and keep track of. They are also very tax efficient however they have the issue I mentioned above with the ETF items. This, by far, is the best way for a dollar cost averager to put money into the indexes since there are very low transaction costs and very low on going costs. BTW, do not be fooled by paying high costs for an index fund. If you are paying over .2% of assets or ANY commission at all, you are getting robbed.

My next installment will be on dollar cost averaging. If you have other topics you would like to discuss, please contact me. Some areas for research and reading are:

The Diehards - a guide to the Morningstar message boards about Vanguard investing and Bogleheads.
John Bogle's site - a list of all of his speeches, books and thoughts.

Bogle on Mutual Funds - A great book as a primer on index investing.

More Details on Savings Bonds Changes

Another very good article on the change in Savings Bonds being made May 1. EE to become fixed for 20 years whereas today it floats.

A lot of people have this on "auto pilot" via payroll deduction. Make sure inertia does not mean you are stuck in a bad deal. Get the facts and make a decision.

EE Bonds No Longer Adjustable Rate

For those who invest in EE Bonds from the U.S. Government (I assume all the red staters since it is, after all a "Patriot" bond) there will be a change in how interest rates are calculated in May.

Starting with all bonds issued May 1st and beyond, the interest rate which the Bond will earn over the life of the bond will be fixed at what you bought it at. Prior to this, they adjusted every 6 months. No mention of whether there will be adjustments to how the I bond works.

So, now the EE Bond is basically a 5 year CD. You can compare it to the 5 year CD rates, run the math and determine if it is a good buy or not.

Interesting, the Government is in debt into its eyeballs, we are at war and they make it less attractive to buy US Bonds. They must be perfectly happy with the Chinese buying them all up.

Read more:  The Star News.
Hat tip to: The Vanguard Diehards
US Government EE/I/H Bond site: