3 yrs later: I finally understand the housing crisis

The “Return to the Giant Pool of Money” radio show from This American Life was really interesting and insightful. I am a little embarrassed to have to admit that I never really understood the “housing crisis” completely. I knew big banks and greedy investors were at fault and that they were giving people bad loans, but I had no idea how complex the whole system had gotten and how many players were actually involved. This radio show definitely cleared a lot of things up for me!

Two things that really suck out to me (that I didn’t know before):

1. The Wall Street people were looking at BAD DATA. No wonder this practice of giving NINAs, creating CDOs, etc., went on for so long. The data was telling them it was a good idea. This was a triumph of data over common sense. 
2. No one was looking at the big picture and thinking about the long term effects to the economy. There were lots of players in the game, from mortgage brokers, to banks, to investors and no one took responsibility, because everyone thought it was not their problem. 
3. These players were earning A LOT of money to make this system work. A ridiculous amount of money on commissions. These high commissions and high ROIs definitely propelled the problem and encouraged the loosening of the rules.

The show included the story of two people who started at the complete opposite ends of the spectrum and ended up in similar situations: Richard Campbell, the Marine facing foreclosure, and Glen Pizzolorusso, the sales manager making a lot of money selling bad loans/mortgages (and ending up losing everything).

I liked how they started with Glen and his lifestyle before the housing crisis and then transitioned to Richard and the beginning of the crisis and finally, back to Glen and the outcome of the crisis. Through interjecting these personal stories throughout the show in between the technical talk, it was really easy to understand how the mix of personal behavior, bad banking products, and loss of oversight lead to such a severe economic downturn.

I realize now that from the outside it’s very easy to point fingers and blame all the people who made lots of money from taking advantage of low-income individuals and families. But, really, we need to look at the whole financial system and the governmental laws put in place to support these risky actions if we really want to change things.

Go ahead, listen to it! "Return to the Giant Pool of Money"

Tracking Savings for Early Retirement

My previous post covered my aggressive intent to save 85% of our monthly take home pay for investment purposes.  The key of course is to have the discipline to maintain this aggressive goal and actively track it month by month.  To have any chance of success here, we figured we needed an easy and automated method to implement this, so we are forced into following this guideline for savings.  So our proposal is: as soon as both my wife and I get our monthly salaries in our salary accounts, we will move out 85% of that months' income into investments (through SIPs), or EMIs (for our home loan) or into our secondary bank account.  All monthly expenses will continue to be routed through our respective salary accounts, in the form of utility bill payments, monthly credit card payments, and cash withdrawals for day-to-day expenses.  Let me know what you think of this approach and if you have used something similar before.  We will kick-off with this method starting November 2011. 

Early Retirement : How much to save?

The key determinant of success to achieve your early retirement goals is your savings rate while you are working.  The higher the percentage of savings, the better chance you have of meeting your early retirement goal.  Now of course, the level of savings you can achieve is also dependent on your monthly income levels.  At the start of your career, when your monthly income levels are low, it will be very difficult to achieve a significant savings percentage.  Since you still have to meet your basic expenses for food, housing, clothes etc (the basic essentials) it will be difficult to increase your savings percentage.  However, as your career advances, and your monthly income levels go up, you should be able to start increasing your savings percentage, as typically your monthly basic expenses will not increase much after a certain level.  Particularly in the Indian context, it should be possible to save a very large percentage of your take home salary, if you stick with the principles of LBYM and do not unnecessarily extend your lifestyle. 

I always like to take aggressive goals when it comes to enabling my early retirement.  So far starters I am going to target a 85% savings rate on my monthly income.  This might sound like a huge portion of my monthly earnings, but the objective here is to be as aggressive as possible and find ways to reduce my monthly expenses to enable this savings target.  Just to be clear about my accounting method, here are a few assumptions I will make. 

1. The 85% savings target applies to both my and my wife's monthly take home income.  Any yearly bonuses etc will be additional savings and not accounted for in the 85%

2. All investments in stocks, MFs, real estate EMIs, insurance premiums, are considered as savings for the purposes of this exercise.

3. All expenses in the form of monthly food, entertainment, vacation spending, intermittent medical expenses, utility payments etc are NOT savings and will need to be accommodated in the remaining monthly 15%

Now that I have written this, it makes me wonder if I can achieve this level of aggressive savings, and importantly is there a way for me to track that I am really meeting these savings goals.  My next post will cover how I intend to measure my savings rate, to check how I am doing when compared to the target of 85%

Greece is the Problem? How Dumb Do They Think We Are?

There has been a tremendous amount of nervousness in public sentiment about the state of the economy.  Some of it is certainly legitimate, with the S&P 500 down double digits in the 3rd quarter alone.  As I started to write writing this in early October, much talk over the summer about the market tumble centered around the European debt crisis as being a primary factor.  Then last Thursday's local paper proclaimed "U.S. stocks surge after course of action is presented to strengthen Europe's banks and lower Greece's debt" following the S&P's 8% gain over the trailing week and I couldn't put off injecting some intelligent thought into this discussion.

While it is factually true that Europe has a debt problem, how can anyone give legitimate credence to that problem 'causing' the stock market decline? Let's look at the facts - last year between April and July the market plummeted over 15% because of the threat of Greece defaulting on their debt.  So far, so good, right?

Then, for the nine months between July 2010 and April 2011, the market went up 33%. 

What happened to Greece and the Euro debt concerns during those nine months?   Were they fixed?

Do the talking head really expect us to believe that the Greek / European banking problems signaled impending doom for three months in 2010 (causing the markets to drop sharply), then became magically cured for nine months (causing the stock market to soar majestically), and then become a sign of the apocalypse once again earlier this year - and now that there's a plan in proposed to fix them, markets should rise again?

If it sounds silly when reading the above paragraph out loud, forgive me for for interrupting the hysteria with facts. 

I cannot predict what the short-term future holds with regard to European banks, Grecian debt or stock market returns (and neither can anyone else - at least I don't pretend to!) But it seems far more likely to me that the current death-of-equities is, as usual, caused by media-driven fear as opposed to real economic disaster.

a little update on last year's retirement obsession

Almost a year ago now, I wrote a couple blog posts on retirement, because for some reason I was a little obsessed with it. Well I'm not that excited about it anymore.

Your retirement is FRAGILE! 

I did a lot of research and invested about $1750...now I have $1535, which is not that bad since we had a major downturn in the stock market about two months ago. But, still! I'm down $200...when I wanted to be making money. This really makes me question the whole system. I can't believe people rely on the this type of income to fund their retirement.  It seems absolutely crazy and risky.  Yet, it's the norm.

When I saw my account decrease I was sad, but I wasn't worried.  My retirement is many, many years away. This account is a good start, but if I loose most of my money I can always start from scratch again.  But, what about those individuals who are in their 50s. They only have a couple more years until they will need that money to live off of.  I cannot imagine what they are feeling watching the stock market crash the way it did this summer.

There's got to be a better way to save for retirement!

Social Security barely covers living expenses and it's complicated.  I tried calculating how much money I would get on their wesbite (http://www.ssa.gov/retire2/) and didn't get very far.

I say we bring pensions back for everybody! Why should government bureaucrats & public service people be the only ones who get them?

Why do I want to retire early?

The first thought that comes to my mind when I think of retirement is "early".  How do I retire early, and get out of this rat race?  I have been in the corporate world for several years now, and lately I find myself increasing dis-illusioned by the whole corporate atmosphere.  There has got to be more to life than dragging oneself to work everyday, doing ones best to claw your way up the corporate ladder, put in the mind boggling long hours and late night meetings, soak up the pressure of increasingly tight deadlines, and worry oneself about meeting mindless targets quarter after quarter, and sometimes day after day.  When I started my career, I never dreamt that there would come a day when I would feel like this.  Today I know that I am burnt-out, and I want out.  I figured the best way to keep myself honest to my goal, is to first acknowledge how I feel, and share my feelings out here.  Going forward, I intend to chart out a course of exit, and blog my journey to early retirement in this journal.  Lets hope this story has a happy ending.

An Analogy to Help Deal with Market Volatility

A financial planner whom I respect, Michael Zhuang of Washington DC, had a great analogy regarding market volatility in a recent post to his blog:

Imagine your house has a ticker symbol, and it scrolls along the bottom of CNBC together with other ticker symbols. The price of your house, like a stock price, is set by a bunch of people you’ve never met making apparently random bets based on a combination of intuition, general economic statistics, output of an automatic-trading program, and, a couple of times a year, the real price achieved by one of your neighbors actually selling a house.

Minute by minute, the price of your home would gyrate wildly. If you are a nervous type, you might lie awake at night wondering if its value would cover your mortgage in the morning.

Of course, no one frantically checks their home value every day, wondering if he should sell.  But if we had minute-by-minute reporting of real estate values, your house would be every bit as volatile as your stocks.

Granted, your house is not just an investment, it is your home which has more than financial value.  But the same principle applies if the real estate in question was a rental duplex or an office building.  Thinking of your investment balances as something to update on a year by year - or even over multiple year - basis, like your real estate, will help keep your emotions on par with your plan.