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…is what you get when you can’t think beyond the bottomline. It’ll happen both in business life as well as in home life. Be afraid of this disease because it’ll strip anything it’s infected of excitement and intrigue, and leave you with boring, lackluster results. See penny pinching, lack of creativity, being inside the box, and high levels of anxiety as you pounce on each chance to cut costs as some of the symptoms of bottomline disease.

Now, setting your sights on the bottomline isn’t always bad. Sometimes people and companies are just out of control, and need to be reined in. Fair enough. Sometimes that’s an easy way to come back to reality. However, if you think that you live and die by the bottomline, then you’re probably going to die anyway. In business you live and die by innovation, which requires that you have your sights focused outward while budgets and such are focused inward.

The same is true for home life. Budgets focus you inward. They’re great if you’re having a problem, and need boundaries set. However, that could trap you in the money box. Your stare is so focus on those budget numbers that you miss great opportunities. Don’t get me wrong. I’m not saying you have to start spending loads of money, but focusing on what you already know as your spending habits can keep you from finding better spending habits, which might actually save you money.

And sometimes, you do just need to spend some money for a great experience. For instance, this trip that my friends and I came back from. It was cheaper than some trips, but more than others, and all of us being in our mid twenties, we might not have reserves of cash for such trips. One of my friends that went on the trip was in that situation.

With a new house under his belt, and still small (but growing) client base for his company, he wasn’t in the same financial situation as myself and our other friend who have much more financial flexibility at this point in life. We wanted him to join us on the trip, but missing mortgage payments afterwards isn’t an option in our book. We tried to encourage him to come, and we knew he wanted to, but at same point, there’s a line for too much financial struggling. Thankfully, he was able to put enough away before the trip to feel comfortable about going. He’d still be tight after the fact, but not missing any bills.

In my opinion, our trip was a once in a life time trip that’s well worth the cost (well, once in a life time trip until our next one around the Mediterranean – I love traveling and experiencing new people, places, and cultures). Had my friend only been watching the bottomline, he’d probably have missed that experience. Heck, he probably wouldn’t have even thought of joining us in the first place. It helps once you know you need the help, like trying to make the cut for this trip, but doesn’t help leading up to it.

Bottomline focus can be infectious. In the short term, it tends to help. You see your costs going down. That feels good because you should have more cash on hand. Great. But, that’ll only get you so far. It follows the law of diminishing returns, which is when your blinders are turned on, and you can’t see opportunities passing you by. As long as you’re aware that bottomline activities such as budgeting are short term activities meant to fix short term habits, you should be fine. A penny saved is a penny earned, but a dollar missed and a life passed by just aren’t worth it.


mustache thinker

This’ll be my last post for the next three weeks (roughly) as I’ll be vacationing with friends outside the country.

In our democratic society, we value fairness and equality, hard work and individualism. However, those are two sets of contrasting qualities. Fairness and equality take a general, balanced, view of a group while individualism highlights the vast differences, the inequalities, within that group, and hard work implies an imbalance in effort. Considering those qualities, what’s the right mix when determining compensation?

Whether you’re an employee looking for a raise or discussing compensation at a new job, or you’re an employer on the flip side, there’s usually no easy answer. As employees, we demand fair pay for performance. It’s only fair that if I do a lot of hard work, then I should be fairly compensated for that hard work. Of course, most employers prefer this option too because it means they’re also getting a fair deal, and only paying when it makes a difference. Or so the theory goes.

However, reality is that performance pay is possibly one of the most corrosive incentives a business can construct because they’re terribly hard to get right (assuming what’s right is “right” for an extended period of time), and when they’re wrong or off mark they easily alter coworker relationships and work results. If you pay a technical support person based on average length of customer support calls, assuming shorter calls means better support, you get technical support hanging up on customers when they hit a specific time limit to hit their mark (true story). If you give people incentive pay for not taking any sick days, then you get people coming into work sick (true story). Or similarly, in order to increase work safety at your coal mine, if you offer incentive pay based on the reduction in the number of accidents reported at work, then you get fewer people reporting accidents and fewer people going to the on site doctors and health professionals, but not necessarily fewer accidents (true story).

So, incentive can easily cause the wrong, if not exact opposite, reaction that it intended. That’s the most obvious challenge with incentive and performance pay. The next problem is that work is not done in a closed environment. Marketing and sales can’t sell a shitty product when competing with a great one (for instance: Zune vs. iPod. Interesting connection with the Zune too. The marketing company that Microsoft hired couldn’t do much to save or help the bad decisions with the Zune, but have made quite a splash with their recent – absolutely brilliant – campaign with the rock band Nine Inch Nails’ [NiN] newest album, in no small part to the band’s own decisions and openness).

Technology is usually a cost department and not a revenue generating department, but that doesn’t mean they have no impact on revenue. However, sales and marketing tend to get the better performance and incentive pay while technology is driven to cut costs and have to fight for bigger budgets. One feeds the other, so who should get paid for what? On a higher corporate level, performance pay is again becoming a driving topic for executive compensation. Executives earn more if share price goes up, and less if not. And guess what, since most stock price shifts are meaningless and short term, executives think short term (Enron is a prime example of this along with many other bad decisions). If you hire someone to be the company’s visionary and long term leader, but pay them for something else, what do you expect?

Yet, how can you get away from the fact that these people can cause the company to burn or boom, and consequently, not link what they do to how the company does? A runner’s feet need to hit the road at some point, and compensation should match results to some level. All that I can really come away from this, after years of thinking about this problem, is that all people at all levels prefer some kind of safety. Few people want or can get away with constantly fluctuating pay. We all have bills to pay, and having employees constantly afraid of making payments doesn’t produce productive employees. Also, in industries like technology where employees are driven more by what they do than what they earn, you’re faced quite the challenge producing motivation where you need it.

If nothing else, these challenges should encourage us to be more open. What fits one person may not fit the person doing the exact same thing in the next seat. As I said in my previous post on paying dues, employers need to be more creative and open, but so too do employees. In most compensation situations, money is the least important factor as happiness is key for the employee and progress is key for the company, so always make sure to have those two values on mind when dealing with pay and performance, and remember that employee happiness is primary to company growth and improvement.

mouth covered

Whistler blower wins settlement and gets load of cash, and his friend hops onto the forums asking for advice. I’ve already posted about getting $20,000 and the options that you have, but do things change with a change in magnitude? For most people getting $200,000 is a really big event as $200,000 isn’t an amount the average person is used to dealing with. There’s often a sense that something must be different with this amount of money, and since investing is already a typically misunderstood area, such a windfall can produce a lot of anxiety about the unknown, especially if you get this money at a bad time from a not so great situation.

So, this whistle blower – in what way I don’t know – is looking for some advice and his friend is seeing what he can find. The whistle blower’s situation is a little more complex than just getting a load of cash because he doesn’t have a job anymore, and it could be complicated getting his next job. That in itself could cause plenty of anxiety, and if you’ve got a mortgage and kids in school, then figuring out what to do with a settlement could put a person over the edge. As in any big situation, it’s best to stay calm and have a clear head, don’t rush into any decisions.

The discussion in the forum went as usual. A number of people piped up saying that he should talk to a financial planner. A number of other people said forget the planner, and deal with it himself. Personally, I’m against professionals in this industry, and I’m not a fan of financial planners and such because more often it’s a waste of money as it’s the illusion of complexity that drives people to throw good money at professionals for sub par results – results you will have, but on average they’re not worth the fees. However, piece of mind has a lot of value, and in a situation like this, the extra price for piece of mind could be worth it – knowing, or assuming, that someone else is working in your best interest who also understands the landscape of options.

I don’t see much difference between $20,000 and $200,000. For the whistle blower, he should take out a few months worth of money, so he can pay bills while he’s getting another job, look at reducing his debt, and then invest the rest. What do you invest in? The same things that you’ve always been investing in. $200,000 might cause you to rethink your asset allocation, but it probably won’t do that substantially. If you add in another level of magnitude, $2,000,000, then you’ll want to think about shifting your allocation possibly, but you still have the same investment options (index funds).

The biggest issue with this money is the taxes. The only professionals that I do like (to an extent) are tax agents. The government will definitely want its share of this new money, and the less they take, the more you have. In that case, there might be certain investment options that will shield the new funds from excessive taxes, which is good, but don’t expect any miracles. In the end, you’ll have your share left, and you’ll go about investing like usual with all of the standard implications. If you won’t know what those might be, then drop the cash that you don’t need for bills into a total market index fund, and do some research. Once you know more, move the money as you like, but that doesn’t require a financial planner to take a portion of your money as per their fees – however, a tax agent might be able to save you some money and get them self paid at the same time.

As usual, keeping the equation simple is almost always best. Worst case, you have some non-standard tax options to consider, but that’s about it, and that’s all easily manageable by yourself. As long as you aren’t in a rush to spend the money, it can sit in a nice spot like a total market index fund, and wait for you to do something with it. That leaves you time to deal with the hassles of whatever brought you that money.

I received an reply from Mr. Bogle a couple weeks ago to a letter I emailed him, my email was posted in full here. You can read the reply on his blog under the Ask Jack section [PDF] (see middle of page 4 for the start of my letter). I won’t post his reply in full here because you can read it on his site now, and you can also read a few other questions and comments sent to him. I also didn’t post his reply because I’ve been reading his new book (his “Little Book”) [disclaimer: free copy sent from the publisher], and that’s as good of a reply as anything else. I haven’t had the time to sit down and write the review just yet, but it’s an excellent book – I expected no less – and I’ll have a review of it in more detail in a day or two.

I’ve been recovering from a soccer injury to my hand – I’m a goalie – so I’m typing a little slow right now.

money judgement

The eternal struggle of when to sell stocks and funds has hit home for me. While we’d like this process to be very mechanical, it’s actually very emotional, and that can be dangerous if you aren’t able to control your emotions. Here’s a simple guide to help protect yourself from making silly mistakes or becoming overly emotional (I first set out two rules, then turn them into one rule).

My story is that I’ve been planning a trip with a couple of friends to vacation through Southeast Asia, and it’s about to happen – we’re buying tickets now. One of those friends flies out frequently for work, so he knows the area relatively well, and has a made a number of friends and connections that can help us when we’re there. So, I need to free up some cash so I can buy the tickets as I keep as much as I can invested (and growing) until I need it.

Selling some portion of funds to pay for this, which I’ve been planning, so I know I have the money saved, makes the when-to-sell question quite easy. I sell when I need it, which is rule #1:

Rule 1 – Sell when you need it, not when you don’t. You invest your money for a future purpose, so you should sell when you need to take an action. Remove the environment of the market from the equation as the market doesn’t react to your specific situation.

Now, I hadn’t set a date ahead of time for selling because the plans haven’t been set in stone until a few days ago. The best way to go about this, as it removes as much emotional reaction as possible, is to pick a date as much as a week or two ahead of schedule, and set it in stone through some auto sell-by-date option. You should be able to set a sell date when setting up the sale, but in my case, I just said sell now.

To my fortune, the fund has gained a few percentage points in the last couple of days because the market seems to like the fact that a regularly scheduled FED announcement said they wouldn’t raise interest rates (and probably for a few other reasons too). Had I focused too much on this coming announcement, I may have tried to sell early because I expected bad news, or I might still not want to sell as I planned because I’m reacting to what the market did (either hold longer if I expect more gains, or hold longer because I want to recover from some loss). As you can see, I’d no longer be focused on the reason I actually want to sell, which is my trip, but instead because of expectations I have with the market – expectations that I have no control over or real way of understanding (beyond flipping a coin).

Rule 2 – Don’t plan your sale around short-term shifts in the market. The market doesn’t move around your life plans, so don’t plan around the market. This is when you get emotional because you don’t know what will happen, and worrying about short-term gains (or losses more often) will only lead you into a lose-lose situation. You already have a good reason for selling, so keep your eye on that.

Since this is a blog about removing complexity, and keeping personal finance simple, I’m stopping at 2 rules, and really it could be one rule:

2 Rules as 1: Selling is about planning, not reacting, so sell for a reason like needing the money for a specific purpose or regularly planned rebalancing (if you do this). With the exception of catastrophes (and even then probably not), don’t planning around market expectations because they will bite you in the butt.

To finish, lets assume that I let my emotions take over, and I sold based on my market expectations, and lets also assume I lost money by holding onto the fund after the announcement. Now, I’ve been scarred by this. Humans hate loss, and we do what we can to protect ourselves. Next time there is an announcement, I might feel anxious and want to sell for no reason other than avoiding a temporary loss, which actually costs me money in transaction fees to move the money around, and that’s a loss in itself.

If you go down the road of reacting to the market, the short-term market, then you’ll start to become like many of the traders I used to know who would get anxious, maybe even losing sleep, about potential loss and overconfident about gains both of which they had little control over. Even trying to predict the long term market has big risks, which is why holding the whole market is in most cases the best option (in both risk and return).