Fixed income investing

 The bond market changed in 2008. Before that, it was actually possible to never touch stocks and still retire.

I no longer believe that to be true. There are 2 things working against a fixed income investor:

1/ The way inflation is measured is constantly being changed. I doubt there are very many people for whom the CPI actually shows real inflation as they experience it.  It's easy to do your own research with expenses if you have just one checking account that you're pulling money from. When I tracked my expenses over the period of a few years, it was an eye opener. A 5-year TIPS got me around 20% at maturity, but expenses went up close to 50%. This is from 2019-2024. If the discrepancy between CPI and your actual experienced inflation is 50% (i.e. when CPI is 1%, you experience 1.5%), this has minimal impact at low values of CPI. The hotter that CPI runs, the bigger the impact. For example, if you have an investment that tracks the CPI and CPI is 4%, you are essentially losing 2% of purchasing power per year. And that's before taxes, which brings us to #2.

2/ Taxes are a killer with fixed income in a taxable account. With the NIIT, for someone in the 35% tax bracket, the total tax rate is 38.8%. With a 3 month t-bill earning 3.6% state tax free (this matters in a lot in states like CA that have a high state income tax), one would end up with only 2.2% after tax. Current CPI is 3.3%. So this is a guaranteed loss of purchasing power. The highest yield on the treasury curve is 4.88% for a 30 year bond. After tax that leaves 2.98%! Yes, even if one was crazy to risk capital for 30 years, they would be guaranteed losing to CPI right now, let alone actual spend which is actually much higher than 3.3%. TIPS in taxable account aren't going to be of much help, plus they come with the added disadvantage that you have to pay taxes on the inflation adjustments even without getting paid--the opposite of tax deferral! Products like BOXX may help, but they require taking added risk which I don't fully understand.

Corporate bonds are even worse because the yield spreads vs treasuries are low and they are subject to state tax. So even they don't keep up with inflation.

If a bond book was written before 2008, it is probably not very relevant for today's investing environment.  When bond investing worked, this book was probably the best book:
https://zvibodie.com/book/worry-free-investing/
You can now buy a pdf for $5 at the link above.
The gist of the book was that you only start investing in stocks when your basic retirement needs are covered by fixed income instruments (money market funds, CDs, stable value funds, treasuries, TIPS, I-Bonds, E-Bonds). This is almost impossible to achieve today as you'd be constantly falling behind.

It's OK to hold bonds. Just know that historical data that shows that it can keep up with inflation (or even exceed it) no longer holds.

Something's wrong with the economy and it can't be fixed

I'm not an economist, but this is something that's been bothering me.

If a company can build a business on issuing debt and buying bitcoin and create millions in wealth for its shareholders, what is the incentive for someone to deploy capital in building and running a factory?

Because of fed policy, pension funds have been driven into stocks.  Therefore, pension funds will become insolvent if the stock market stays flat or goes down over any extended period of time.  So if the stock market is guaranteed to go up, they why deploy capital building and running a factory or any other kind of business where you have to deal with the day to day stress of running the business including labor and legal issues?

Already most of the brightest students aren't seeking careers in medicine, engineering, research, or teaching.  They prefer to become quant traders or work for private equity firms.  This means we simply don't even have the talent to advance the technology as much as other countries do.  What is the incentive for someone to spend half a million on medical school when they can get a job as a realtor after high school and make as much as a primary care doctor?  Unless your earnings are indexed to asset prices (realtor, trader, etc.), your income is probably not keeping up with inflation and your standard of living is falling.  As an engineer or accountant, you struggle to get a raise.  If, on the other hand, your income is indexed to assets which have been inflating then you have made a killing.  So as a realtor, asset manager, private equity banker, etc. life has been great. 

Couple that with a broken medical system and the cost of labor for regular jobs is unaffordable for most businesses.  The medical system cannot be fixed without collapsing the whole economy and the stock market.

I can't think of a way out of this.  As a country, I often hear we will "inflate our way out of this".  But we can't do that because our unfunded liabilities (especially the cost of medical care) is going up much faster than the rate of inflation.

Dealing with ID theft

Things to do to minimize any damage if your identity is stolen.

• Freeze credit bureaus.
• Equifax
• Experian
• TransUnion
• Innovis 
• Lexis Nexis (https://consumer.risk.lexisnexis.com/freeze)
• Chex Systems (for bank account opening)
• Early Warning System
• Clarity Services
• NCTUE (for utilities)
• SSA
• mySSA account to secure SSN with SSA (needs ID.me or Login.gov ID)
• Account with local state unemployment office
• Report stolen SSN to IRS and get PIN (needs ID.me)
• File a report with identitytheft.gov
• File a report with local police department

Here is a thread on reddit summarizing all the actions that need to be taken.

Planning for retirement

 Placeholder for useful links for retirement planning.

• State-by-state guide to tax burden on retirees

Some thoughts on ZIRP/NIRP

ZIRP stands for zero interest rate policy.  NIRP stands for negative interest rate policy.  As governments and corporations are awash in debt, ZIRP and NIRP appear to have been embraced whole-heartedly by central banks.

As the federal reserve started to lower its benchmark interest rate back towards zero (it is zero as of this writing), I started to think about what this means for fixed-income investments if they decide to go from ZIRP to NIRP.

In some of the online forum discussions, folks said a drop of 0.5% in interest, e.g. from +0.25% to -0.25% is the same as, e.g., a drop from +0.5% to 0%.  To show that this is not really accurate, I presented the following example.

Lets say to have $x to invest at an interest rate of r% for a length of time t.  Then as t goes to infinity:

• if r > 0, then the balance, x goes to infinity.
• if r = 0, then the balance stays exactly the same at x.
• if r < 0, then the balance x goes to 0.

In other words, with a negative interest rate, one's balance starts reducing over time and eventually goes to zero.  I hope we (the US) don't get to NIRP, but with the economy the way it is, there's no telling.  Japan and the EU have been in NIRP for a while now.  Large corporations have benefited from this.  LVMH for example had an offering of negative yielding bonds to finance its purchase of Tiffany & Co.--a case of investors actually paying LVMH to borrow their money!

The downsides of ZIRP and NIRP

Some of the down sides of ZIRP and NIRP are:

1. It penalizes savers and those that depend on interest for fixed income.
2. It causes people with money to speculate on assets such as stocks and real-estate. 
3. It causes real-estate prices to rise so houses are out of reach of the middle class without taking on excessive debt and becoming house poor.  This also means that any extended dip in house prices and employment can stress banks as their loans go bad.  This is what happened during the housing crisis.
4. It forces pension funds to speculate in stocks in order to meet their obligations.  This means that any extended dip in stocks will cause a number of these pension funds to become insolvent, putting their ability to pay out pensions at a risk.
5. It leads to rampant financial engineering by companies where they take on long term debt to buy back their own stock enriching their stockholders and executives.
6. It exacerbates wealth inequality in society since people that are wealthy to begin with (e.g. private equity, hedge funds, large businesses) have access to cheap money that retail investors and small businesses do not.

#3 and #4 pretty much mean that once ZIRP/NIRP are used by the central bank, the entire economy becomes dependent on frequent and larger interventions by the central banks.  At some point in time (I think we are already there now) the central banks own the entire market and there is no more real price discovery.

Proponents of ZIRP/NIRP argue that the pros outweigh the cons.

How to invest in a ZIRP/NIRP environment?

This is hard question to answer and I'm not really qualified to do it, but here are some of my thoughts.

Simple investment in savings and CDs are not likely to yield much.  I'm not a big fan of "yield chasing" where you open an account with an online bank only to have them reduce their rates a few months later.  Typical yields in a ZIRP environments are close to zero, lower than 0.1%.  That amounts to an annual return of less than $1000 on each $100,000 invested.  And then there's typically taxes that need to be paid even on those measly returns!

I don't like the idea of being forced to invest in stocks especially since there's an ethical dilemma where I don't want to support the kinds of financial activity that is destroying people's lives.  I know stocks will go up (don't fight the fed, as they say), but still.

Gold is an option, but one has to be careful of the pitfalls of investing in various types of gold and the possibility of price manipulation.

Treasury products such as I Bonds and EE Bonds are a possibility but you have to create and manage an account with treasurydirect.gov and some folks have reported less than desirable experiences when needing any kind of customer support.  The products also aren't as liquid--minimum holding period, interest penalty if cashed within a certain time period, etc., and there are annual limits on the amount that an individual can buy each calendar year -- $10K of each as of this writing.

If I figure something out, I will update this post.

In the meantime, this is what the chair of federal reserve thinks savers should do.  It just amazes me that the chair of the federal reserve and many politicians equate a 401(k) with risk assets.  It doesn't have to be that way.  Most 401(k)'s offer a stable value fund or money market fund as an investment option.  Those 401(k) savers are not benefitting from the federal reserve's policies.

Update 06/27/2020

The fed made a statement saying they will keep rates near zero until at least 2022.

On the American economy

This article by Joseph Stiglitz discusses the problems facing the American economy.  It is well worth a read.  The way the game is setup and is being played, it leads to tremendous amounts of wealth and power concentrated in the hands of a few and the trend is getting worse with time.  While the net worth of the richest folks is reaching new heights, so is the homeless population in many cities.

As has been said, power corrupts, and absolute power corrupts absolutely.  A number of the symptoms that we see like astronomically rising prices of medical care and education are due to the abuse of such concentrated power.

A lot of the imbalances in the stocks and real-estate are due to monetary policy.  Instead of focusing on building good products, corporations are focused on making a quick buck and using cheap access to money to get bigger via various financial engineering schemes and drive their competitors out of business using pricing.  I have noticed this to be true in all areas of the economy -- automobiles, appliances, apparel, hospitality -- you name it.  It's the reason why an ex-stalwart like Kodak stops innovating in photography and instead floats a cryptocurrency of all things.

Here are some interesting charts from the WSJ since the financial crisis of 2008.

A few interesting stories:

• Macy's converted into homeless shelter with ex-employee living there
• Competition is dying, and taking capitalism with it

Equifax data breach

Just read about this hack -- 143 million Americans just had their personal financial information stolen from Equifax.

Aside from a damage control message, they have offered to sign everyone up for free for their credit monitoring service called TrustedID.  What they don't tell us upfront, in a typical sneaky pretending-to-care-but-really-don't fashion, is that they are offering it only for one year.  This means after the first year we are on our own.  In fact, it's a great sales strategy, because they would expect people to continue to enroll in this service after the first free year, paying out of pocket and helping increase their revenues.

Per the terms of service, if one does accept the free offer, one would waive one's right to participate in any class action lawsuits against them.  Not that those are worth anything for the consumer.

What they should have offered

At the very least, Equifax should instead have offered everyone a choice of free service from their own and competitors' offerings since, at this point, why would anyone want to trust Equifax to do credit monitoring on their behalf?  And it should have been offered for life since the data can be misused pretty much forever.  They are already making money by selling consumer information to banks and other financial institutions.

Ethics

Three of their company executives dumped a bunch of stock before the data breach was revealed to the public.

In addition, their security head was a music major!

Was your data compromised?

The official link provided by Equifax to check if your data was impacted is here.  Unfortunately, there is no way to tell if the above link is even reporting accurate results.

Freezing credit files

Many folks recommend calling the credit bureaus and freezing your credit files.  Freezing must be done at all of the agencies.  So far, I'm aware of the following:

• Chex
• Equifax
• Experian
• Innovis
• Sagestream
• Transunion
• Early Warning (only to check banking history)

Most folks are only aware of the big 3 in this space -- Equifax, Experian, Transunion -- but freezing only those would provide only partial protection.

Credit is not the only problem

As noted in this article:

What’s more likely is that stolen information will be used to take over existing accounts, such as banking, brokerage, phone service, and retirement accounts.

And even more as described in this article:

If the stolen information from Equifax gets into the wrong hands, experts say data thieves can open bank accounts, lines of credit, new credit cards and even drivers' licenses in your name. They can saddle you with speeding tickets, steal your tax refund, swipe your Social Security check and prevent you from getting prescription drugs.

What else can be done?

Sign up for a credit monitoring service.  Experian is offering this for free.

Buy identity theft insurance, preferably from a regular insurance company--the same one that sells your renters or homeowners policy.  Some policies will cover financial losses (it is moot as to whether this is needed because assets are typically restored once it is established that fraud was involved) and pay for someone to fix the issue when it happens.

Simplify your financial life and check all of your accounts often -- bank accounts, credit cards, brokerage accounts. That way, if an account is hacked, one may be able to detect the issue sooner rather than later.

Equifax's free offering

Personally, I will not be signing up for any services offered by Equifax.  Based on the way they have handled the data breach, I don't think they can be trusted.  As this article notes:

Equifax already waited six weeks to tell the world about the hack -- that gave hackers a six-week jump on all of us, Nunnikhoven noted.

The lack of urgency is a clear indication that the management at Equifax is completely clueless about the severity of the problem that they have created for the public.  The information that was stolen can be misused for years to come.

But, worse, they had 2 whole months to fix the vulnerability that was exploited in this attack and did nothing about it as noted in this article:

Equifax told USA TODAY late Wednesday that the criminals who potentially gained access to the personal data of up to 143 million Americans had exploited a website application vulnerability known as Apache Struts CVE-2017-5638.

The vulnerability was patched on 7 March 2017, the same day it was announced, the foundation said. Modifications were made on March 10, according to the National Vulnerability Database.

Equifax said that the unauthorized access began in mid-May. That's a period of two months in which the company could have, and should have, say experts, dealt with the problem.

The long term fix

Longer term, the US needs to come up with a better way for authentication than using social security numbers, as noted in this article:

The Republic of Estonia uses such a system to identify members of its e-Residency program, even with no physical presence. Each e-resident has a public numerical key that serves as a unique identifier, and a corresponding private key that is never revealed. During the authentication process, the private key is used to generate an irreversible digital signature. The signature is shared and verified by the public key without ever exposing the private key.

Problems are not limited to Equifax

I have had credit monitoring services from a different bureau, courtesy of my data being hacked from several financial and health care companies.  Whenever I have tried to access customer service at that bureau, I find it to be so incompetent that I wonder whether the company even deserves to be in business, let alone be in the business of managing the most sensitive data of all Americans.

Additional reading/resources

• If you're not angry about Equifax, you should be
• identitytheft.gov
• Equifax hack put more info at risk than consumers knew

The stock market and paper wealth

This post explains what I have learnt about the stock market and the creation and destruction of paper wealth.

Let's a company issues 1000 shares at $10 at its initial public offering.  This means $10,000 of new money enters the market from the sideline.  Thereafter people bid on those 1000 shares.  So let's say someone (Person A) wants to buy 10 of those shares and is willing to pay $12.  They would put in a bid for that price, and if a seller emerges (Person B), they exchange 12x10 = $120 dollars and the buyer of the stock (Person A) now becomes the owner of those 10 shares.  In this process, everyone holding a share of this company now thinks that their shares are also worth $12.  So the collective total of all 1000 shares of the company is now considered to be $12000, even though there was only one transaction of 10 shares at that price.  So if some other person (Person C) that was holding 100 shares of the stock that they bought at the IPO price of $10 (worth a total of $1000), they see their wealth has now increased by $200 because those 100 shares are now worth $1200 even though they didn't buy or sell anything themselves.  Paper wealth destruction happens in a similar fashion.  If everyone tried to sell at the same time and there were no buyers, the value of the stock would drop to nothing (this is what happens in the case of companies that declare bankruptcy).

So many news articles talk about money on the sidelines.  This is very misleading.  Every time someone sells a stock and takes money out of the market, there is someone else that is putting an equivalent amount of money into the market.  The only time money enters the market is during IPOs and secondary IPOs (issuance of additional stock).  The only time money leaves the market is when a company has its shares bought out for cash and discontinues trading.

New money enters the economy through other methods that I do not yet fully understand such as monetary policy, fractional reserve banking, and changes to the money supply.  These methods affect the amount of money that is available to chase assets such as stocks, bonds, and real-estate.

The number of publicly traded companies

The number of publicly traded companies has been steadily going down as reported by Fortune:

37% decline in the number of U.S.-listed companies since its 1997 high. With more companies opting for private fundraising over the hassle of public markets (looking at you, Uber), the number of public companies has fallen to 5,734, about on par with the early ’80s.

This may be a potential contributor to the current overvaluation of stocks because more and more money is chasing fewer stocks.

Affordability and assets

A question that often comes in financial forums is the following:  Most affordability numbers are based on annual income, e.g. affordability for a house or car.  What happens if one has a large amount of assets, through a windfall or inheritance, but very little income?

Let's take a hypothetical example.  Someone is looking to buy a house that costs $200,000.  They have $500,000 in assets, but only make $50,000/year.  Can they afford the house?  On the one hand, they have cash to pay for it outright.  But then what about maintenance costs, property taxes, and insurance?  On the other hand, the income is too low by conservative standards because house price divided by the annual income is 4, which is much higher than the recommended 2.5 to 3 times.

A crude way to determine affordability is to look at the assets and see what kind of income it is capable of generating.  This part can be tricky depending on what type of investments one is considering.  As an example, one can use the rate of a 30 year treasury bond to determine how much income can be safely generated.  If we use 3% for that number, then $500,000 is expected to generate about $15,000 per year.  Add that to the original income and we get $65,000.  Now the price to income ratio is about 200,000/65,000 ~ 3.0.  This makes the house appear a lot more affordable.  On the other hand, if we use the current rate for a savings account which is about 1%, the investment would generate only $5,000 in income annually and would increase the original income amount to 55,000.  200,000/55,000 ~ 3.6 which is still a little high.

If one decides to purchase, whether one choose to finance the purchase or pay cash is a different matter than affordability.

Another related discussion that came up was the following.  If one has a portfolio of a certain size, then given that portfolio value fluctuates by 1% on a daily basis, does it mean that 1% of the portfolio is not a lot of money for that person?  Taking an example similar to the above one, if one has $500,000 invested and the portfolio fluctuates by $5000 routinely, does it mean that they person can spend $5,000 without thinking twice about affordability?

The best objective answer that I saw to that question was that daily fluctuations in portfolio should be 100 times larger than sustainable average daily spending.  In this case, that translates to an average daily spend of $50.  This would include meals and all regular daily spending.  Big ticket expenses are fine as long as they are occasional.

How to think about money?

This was the question asked in one of the financial discussion forums.  Here are my thoughts on this subject.

Money is like grease. In sufficient quantity, it makes everything in life go smoother. Too little and you hear squeaks all the time. Too much of it, and it doesn't help things as much, and in fact can cause things to gunk up if it's used without measure.  People with "old money" tend to be much better at managing it.  And, just like grease, money by itself cannot fix a broken machine (whether that machine is health, family, etc.).  An extreme lack of money can cause certain areas of one's life to breakdown (inaccessible healthcare, unable to take advantage of opportunities for education, stress in relationships, etc.).

As I dabble with new age beliefs, I am starting to see how it is very limiting to think about money the way many "responsible" folks do. We think of it as a limited resource and one that can only be earned through hard work and discipline. More and more, I'm finding out that is not true. There are so many examples to the contrary. People born into wealth have different beliefs about it as do people "in the zone".

A few more thoughts on what I have found true in my life with respect to money.  When one is "hungry", one is extremely susceptible to falling for elaborate scams, and must therefore be on guard for them.  When one is "full", it becomes a lot easier to spot such scams, and therefore stay away from them.  Also, people with low self-esteem will often let themselves be scammed even though they can see it, just because they are afraid of being alienated by the scammer.

Stealth inflation

When most people think of inflation, they think of the headline numbers being published like the producer price index (PPI) or some variant of the consumer price index (CPI) such as the CPI-U (CPI for urban consumers.  While those methods are itself are debatable, what I'm going to talk about is a little different.

This is really about how planned obsolescence is engineered into products.  Everything is affected from mundane household items like paper towels, garbage bags, and toilet paper to small and large appliances (toasters, refrigerators, etc.), to furniture, clothes shoes, computers, cars, you name it.  Basically, companies are able to engineer their products precisely for a certain lifetime.  Where companies took pride in building products that were practically indestructible and would last a lifetime (e.g. a washer or refrigerator that would last 30 years with no problems), they now engineer their products so that they last 5, maybe 7 years.  Financial engineering has allowed them to set aside money to deal with warranties and buybacks.  In the process the expense is being borne by the consumer.  Where you might have bought such an appliance for life, you now need to buy 8-10 of them over that same period of time.  On paper it looks like you're getting a lot of features for the same amount of money, but in reality, the quality is gone and you're really paying 6-8 times.  This kind of inflation is not reflected in any of the indices mentioned above.

Where I used to buy clothes that would last forever, it feels like I'm constantly wearing them out every few months now.  Where I could buy a pair of shoes and have them last a year, they are now gone in 3-4 months tops, usually even sooner.  The price of a pair of shoes is the same or lower, but it's now made of such poor quality, it just doesn't hold up.  In this process, we have not only lost our money, we also waste more time shopping and also spend many futile hours looking for something that might be of better quality.  Does better quality exist?  It does, but even that is hit or miss, and usually only with luxury brands.  To get decent quality from a pair of shoes, one would have to pay about 5-10 times what one might pay for a "normal" pair.  And yet, going with a luxury brand and paying that much may or may not yield a better product, so it's a roll of the dice.

What is most frustrating is when things fail in unpredictable way, e.g. trash bags puncturing and making a mess of everything.

Best of all companies will then send a survey to ask your perception.  There's probably an executive at that company saying "if people aren't complaining, we're building in too much quality and we need to reduce it."  In this way, they target a delicate balance where they achieve decent reviews (typically written by people who haven't owned the product long enough) and a few bad reviews (from people that experienced the product fail unexpectedly and actually bothered to write a review).

Planned obsolescence coupled with offshoring of manufacturing to cheaper locales has kept inflation in check.  What happens after every ounce of quality has been engineered out of the product and there are no other lower cost locales to move manufacturing to?  That's when a "new and improved" product is introduced (still worse than the original one) at a higher price, and that's when we start seeing regular inflation.

It's going to be a slow and painful journey into the future.

A new business model

Purely my perception--with planned obsolescence, we're seeing the emergence of a new business model.

The model works as follows.  The company builds a product with bad quality and starts selling it.  The majority of people won't complain.  For the small percentage of people that complain, the company simply issues a refund (if the customer complains to the store) or coupons for more free bad product (if the customer complains to the manufacturer).  Manufacturers have a finance department that determines how much funds need to be set aside for issuing such coupons and refunds.

Product quality, which was the primary driver of brand loyalty, has now been replaced by loyalty programs (rewards points) and marketing. But loyalty programs are itself an illusion--they encourage one to buy sub par quality, overpriced goods, in exchange of a tiny percentage of the purchase in rewards.

Legislation to the rescue?

France recently passed a law to require appliance manufacturers to display how long their appliances will last and how long spare parts would be available for the same.

Imagine if all products required that?  There would less room to cheat.

Simple investment portfolios

I have previously written about worry-free investing (my first blog post!).  I have more or less being following that approach (i.e. mostly fixed-income investments).  However, the monetary policy of the last few years in the US has made me start to rethink that approach.  Historically low interest rates (typically < 1% on a savings account) coupled with stocks going sky high (a nearly 200% gain since the low of March 2009) makes me feel like I'm "missing out."  In all likelihood, I will never actually implement any of these portfolios, but the primary reason for this, as with my post about ways to own gold, is to consolidate my learnings on this subject.  I will continue to add to this as I learn more about the subject.

The basic asset classes

Most simple portfolios comprise a weighting of 2 or more of the following asset classes.

• Stocks (small cap, mid cap, large cap, ...)
• Bonds (short term, mid term, long term, ...)
• Real-estate
• Precious metals
• Cash

Simple portfolios

The following are are of the simple portfolios that are supposed to weather all economic times.  They are supposed to work on auto-pilot using a fixed allocation of various asset classes and so they require minimal maintenance.  These simple portfolios also tend to have better returns than many actively managed funds when measured over longer periods of time.

• Couch-potato portfolio (50% stock, 50% bonds)
• Coffee house portfolio (10% in various stock funds, 40% fixed income)
• Permanent portfolio fund (25% stocks, 25% bonds, 25% gold, 25% cash)
• Using age to determine what percent of assets should be in stocks (110 - age)
• Ms. Cheat Sheet sample portfolio for recessions (100 - age in low volatility stocks [USMV], age/2 in bonds [BSV], age/2 in cash)

I should note that none of these portfolios was able to successfully dodge the financial crisis of 2008-2009.  In particular, here's an excellent article by Doug Short on the pros and cons of the Permanent Portfolio Fund, and another one about diversification.

There are variations of these to try to bring in more diversification, but I think that unnecessarily takes away from the simplicity.  If I ever decided to try something different than the worry-free investing approach, it would probably be one of these or a very minor modification of it, e.g. 20% in an S&P500 index fund and the rest in US treasuries or cash.

Several "lazy" portfolios are described here.

Timing the market

All of the above simple portfolios are of the set-and-forget type.  At most, the only maintenance that may be recommended would be rebalancing at the end of each quarter or at the end of the year to make sure the asset allocation hasn't moved too much off target.  The effect of rebalancing is widely debated.

Is it possible to time the market?  I'm not sure if it can be done reliably.  In the short term the answer is a definite "no."  In the long term, it may be possible by careful observation and interpretation of macroeconomic data.  I have been following several economic blogs since 2005, and only one of those blogs -- CalculatedRisk -- has made several correct predictions about the economy, including recession calls, and the bottom of the real-estate market in terms of home prices and inventory (see the "economic predictions" section towards the end of this post).  However, the author of that blog refuses to offer investing advice.  If he is actually able to call the next recession correctly, I think I will have to assume that timing the market is possible!

I recently came across this article from Doug Short (he updates this at the end of each month) which explains a market timing strategy based on moving averages as described in the Ivy Portfolio.  Doug's page is updated monthly with the signal that indicates whether to remain invested in the fund or stay in cash for each of 5 funds - VTI (total US stock market), VEU (world, ex-US), IEF (7-10 year treasuries), VNQ (US REIT), DBC (commodities).  Scott's Investments has a nice spreadsheet for the Ivy Portfolio that is updated in real-time.  The moving average strategy for various durations can be backtested here.

Finally, someone in the bogleheads.org community suggested this method which takes into account both market trends and the unemployment rate.  Apparently using two indicators avoids some of the whipsaws that the Ivy Portfolio method is subject to.

Market valuation indicators

The following are some of the indicators used for measuring the valuation of the stock market (i.e. to determine whether stocks are over- or under-valued).  Because periods of over- and under-valuation can persist for long periods of time, they are perhaps only useful in terms of what to expect in the long term.  Additionally, there are other factors such as interest rates that affect the valuation at any given time.  But here are the indicators:

• Price-to-earnings or P/E
• Price-to-dividend or P/D -- the dividend for the S&P 500 can be obtained here
• Tobin's Q
• Market Cap to GDP
• Price/earnings growth ratio or PEG ratio
• FINRA margin debt (formerly NYSE margin debt) (@yardeni.com)
• Greg Mannarino's MMRI (DXY * 10Y yield) / 1.61

Some useful tools and references

• stockchoker.com
• portfoliocharts.com - Provides charts showing how any portfolio would have performed using data going back to 1972.  Here is the data for one of the sample portfolios called the "Golden Butterfly, but users can design their own portfolio to generate each of those plots (although it is a somewhat slow process). 
• Morningstar Investing Classroom
• finviz.com - Stock screener.
• World's most ethical companies by Ethisphere
• A list of S&P 500 companies with no debt

Organizing financial and other papers

I'm not really sure how I got into organizing my paperwork at home, but it was somewhat inspired by how I observed people filing away their work at my first job.

Organizing approach

It's a pretty standard approach to organizing.  I use a bunch of hanging files in a small 2-drawer filing cabinet and have various categories -- one for each of the bank accounts, one for each of the utility companies, one for car records, one for every year of taxes, one for medical records (which I then later broke into physical, dental, optical, and mental), one for my flexible spending account (FSA), etc.

For longer term records that do not need day-to-day access (such as tax returns and supporting paper work, and FSAs from prior years), I use cardboard filing boxes such as this one from Bankers Box.

Financial records -- what to keep?

For the first few years, I kept everything.  Of course, after a decade or so, I noticed papers piling up.  The hanging folders were all bulging.  That's when I tried to figure out what needs to stay and what can go.  This page from Bankrate provides some guidance for what needs to stay and what can go.  I do hang on to all of my tax returns and since I started using an FSA, I have been hanging on to those records as well.  Other than that I tend to purge things early each year -- I hold on to bills and statements for at least a year but toss everything else.  There's always the option to go electronic and just keep these files such as bills and statements electronically, but for now, I still keep everything in paper.

Non-financial records

For non-financial records, I still hold on to everything, but I really ought to find a better way to organize this.  For instance, I have thought of transferring the records to an electronic form such as spreadsheet that is easily searchable.

Finding a good credit card

This is a post to summarize some features I look for in a credit card and resources for where to research them.  It has been a long time since I applied for one, though.

Must haves

• No annual fee.  Since there are many options without fees, why pay a fee?  Some cards offer interesting concierge and travel benefits but their fees can be as high as $400-$500 a year.  Since I don't have a lifestyle to take advantage of those, I don't bother with them.
• Cash back.  There are many cards which offer cash back varying from < 1% to 5%.  Some have rotating categories of spending (e.g. for one month you get 2% on groceries, otherwise it falls back to the standard rate of 0.5%), some are tiered (e.g. 1% for the first $5000 spent per year, 2% thereafter, etc.).  I don't think it's that critical to try and optimize this return.  Just getting something is good enough.
• Annual summary statement.  This is a great benefit at least for me.  At the beginning of each year, I can toss out all of the statements and just hang on to the annual summary statement.
• Auto rental insurance.  Having this allows one to decline the various insurance add-ons that rental car companies tend to offer.  The catch is that the rental must be paid for with that credit card.
• Extended warranty.  Many cards offer an extended warranty for products purchased with the card, doubling the manufacturer's warranty, up to 2 years.
• Good customer service.  This one is hard to figure out without actually getting the card.  At a minimum, there should be 24-7 customer service, and it shouldn't be something that is only automated after hours.

Nice to have

• No foreign exchange transaction fee.  This is a fee that credit cards usually tack on to purchases made in a foreign currency, even though it might be a web purchase.  The typical fee is about 3% but some cards charge a lower fee, like 1%.  This is getting harder to avoid.  There are cards which offered no foreign transaction fees in the past but now charge 1%.

Don't care for

• Loyalty programs.  I don't care for cards that offer frequent flyer miles or other loyalty programs such as hotel or shopping points.  This means that I am stuck with whatever they offer and I find that restricts my options when it comes time to plan for travel or shopping.
• Low interest rate or balance transfer fees.  I usually pay my card in full each billing cycle.

How many cards?

Can't have zero because we need credit cards for such basic things as renting a car and reserving a hotel room.  One card can be limiting.  Sometimes, there are situations where a card is lost, forgotten at a merchant, or compromised by fraud and thus deactivated.  In those situations, it helps to have a second card handy.  Finally, having just one card may mean that it is not accepted everywhere.  For example, many places in Europe do not accept American Express.  Also, while Visa and Mastercard are almost universally accepted in the US, there are merchants in Europe that will accept only one or the other.  So it's generally a good idea to have at least 2 cards.  I should mention that an ATM check card could be used in situations where the credit card is lost, stolen, or not accepted.

I would avoid getting too many cards or even getting a card for its introductory freebies and then canceling it.  Your personal details will be in too many places and despite all of the security, there can be loss or theft of that personal information and identity theft is on the rise.

Credit cards and credit history

Each time we apply for a credit card, our credit score gets dinged; not by much, but it does get dinged.  So that is something to keep in mind.  Getting lots of cards and canceling them also dings the credit score.  Having lots of high-balance credit cards, even if they are not used, negatively impacts the credit score because the person is viewed being at risk of being able to run up large balances.  Finally, even after we close a credit card account, it typically remains in the credit report for up to 7 years.

Places to research credit cards

• creditcards.com
• money-rates.com

Additional reading

• 5 credit card fees you should never pay

(Disclaimer:  I am not an expert in this area.  This is just a quick summary of what I've learned over the years.  If you happen to find an inaccuracies, I'd appreciate hearing about them so I can correct them.)

Resources for buying a car

This post is a collection of resources that I've found to be useful for buying new cars.  Because I tend to research things endlessly, I figure I might as well put all of my findings in one place.  One significant issue that I have no experience with is leasing, so that is not addressed.

Let's begin with the first question.

How much car can I afford?

A question that immediately comes to mind when thinking of a car purchase is "how much can I afford?"  Some people think it's as simple as having sufficient savings to pay cash for the car, while others look at it as the ability to afford the monthly payment of financing the car.  Yet others will say "If you have to ask, then you can't afford it."  I see this as a personal decision because people do their financial planning differently (some prefer to be more conservative than others), but here are a couple of resources that I have found useful.

Bankrate.com has an article titled "How much car can you afford?", which states:

How much should you spend on a new car? Not more than 20 percent of monthly income, say experts. "This includes payments on all the cars you may own, whether you have one vehicle or six," says Karl Brauer, editor-in-chief at Edmunds.com. "And we're talking about your take-home pay, not your gross income."

They do have some exceptions to the rule which are stated in the article.  But it also leaves some open questions:

• Does this rule assume that the car is being financed?  Or leased?
• Does it include maintenance costs and the cost of insurance?

Another respected name in the financial planning world, Dave Ramsey, in response to a similar question, says:

The total value of all of your vehicles—things with a motor in them—should not be more than half of your annual income.

Again, there are some open questions:

• Is he talking about pre-tax or post-tax income?

Which leads us to the second question.

What is the cost of owning and operating the car?

While purchase price is one factor, cars that are more expensive to purchase are often more expensive to maintain as well.  For this, we can get some guidance from Edmunds.com's True Cost to Own (TCO) calculator.

And now there is a new tool that reveals the hidden costs -- all the costs -- associated with buying, owning and operating a car over a five-year-period.

There are some issues with the calculator.

• It assumes you're looking for ownership over 5 years.  If you own for less, it will probably cost more per year than the 5 year number.  Conversely, if you own for longer than 5 years, it will cost you less per year than the 5 year number.
• It assumes that the car will be driven 15,000 miles a year.  Most will drive more or less than that number, and some, significantly so.
• It assumes that the car is being financed, but there is no mention of the interest rate.  If purchasing with cash, one can get rid of the finance charge.  (But there is still some loss of income since the money would have been earning interest in a savings account.)

Yet, it is useful for getting a ballpark figure for what it would cost to own the car.  Even though some manufacturers offer free maintenance, they don't cover the cost of tires.  And tires on high-performance cars wear out pretty quickly and are more expensive to replace than tires for regular cars.

The tool also has the capability to price the car with options.

So let's take an example.  Running the calculator for a 2012 Honda Civic DX sedan with an automatic transmission, we find that the purchase price of the car is $16,924, but the total cost of ownership over a 5 year period, 15,000 miles a year is $37,113.

This gives an average annual ownership cost of $7,422.60.

Putting it all together

Now that we have the annual true cost of ownership of the car, we can decide what percentage of income we're willing to spend on the car (which in turn would depend on several factors such as the number of cars in the household, other debt/obligations, etc.) and decide whether or not we can afford it.

The purchase process

There are a couple of websites that will allow you to build the car and price it with options.  These sites also provide the "true market value" (TMV) which is the average price people in a certain area have paid for that car.  This can be useful for knowing what would be a reasonable price to pay for the car.

Edmunds: This site provides the ability to get quotes for the car and contact dealers that are willing to offer it at that price on your behalf.  From the homepage, click New Cars, scroll down and select a make, then select the year and the model, and that will take you to the page where you can price the car with options.  It provides the invoice price, MSRP, and TMV.

KBB: Offers a pricing tool that is similar to Edmunds.

Truecar: A number of banks, credit unions, credit card companies, wholesale clubs (e.g. Costco), and AAA offer a car buying program where they provide one with a quote and contact participating dealers on one's behalf.  Most of these are offered through Truecar.

The quotes and dealer(s) contact are offered with no obligation, so it's always OK to walk away if a dealer doesn't honor the price that was quoted by the website, or if you can find a better deal elsewhere.

Extended warranties

Most cars come with a bumper-to-bumper warranty for some period of time -- usually 3 yrs/36000 miles, while luxury cars come with a longer warranty of 4 yrs/50,0000 miles.  Whether or not an extended warranty makes sense depends on the reliability history of the brand/car.  I've always purchased extended warranties on my cars, but I wait till I'm close to the end of the factory warranty to get it.  Here are a few things that I have found helpful:

• Wait until close to the expiration of original warranty.  It may be wasted money if one decides, for whatever reason, to get rid of the car while it's under the original warranty, or if the car is totaled in an accident.
• Get the extended warranty by the manufacturer of the vehicle.  Normally, the dealer tries to push other third-party extended warranties, but I stay away from those.
• Pay attention to any exclusions.  The last warranty that I bought specifically excluded the radio/CD player and navigation.  My car didn't have navigation so the latter wasn't an issue, and fortunately I didn't have any issues with radio/CD player.
• Shop around by calling several dealers.  Often, it is possible to buy these remotely by just sending in recently used key (many car keys contain information about the mileage of the vehicle), so there is no need to limit yourself to dealers that are close by.  Prices can vary quite significantly.  Usually, you'll be dealing with someone in the finance department at the dealership rather than a regular car salesperson.

Prepaid service plans

Some manufactures offer service plans for the car.  Sometimes the service plan is already included in the cost of the vehicle; e.g. as of this writing, all BMW come with prepaid service for 4 yrs/50,000 miles.  Other manufacturers may offer pre-paid service for an extra charge.  Some things to check on about these plans are:

• Do they cover all wear and tear items (e.g. brakes and wiper blades) or do they just cover scheduled maintenance items.
• How long is the plan valid for?
• If the car comes with a prepaid service plan, can an extended service plan be purchased?
• If the car comes with a prepaid service plan, wait until close to the expiration of original plan.  Otherwise, it may be wasted money if one decides, for whatever reason, to get rid of the car while it's under the original plan.
• Shop around by calling several dealers.  Often, it is possible to buy these remotely by just sending in recently used key (many car keys contain information about the mileage of the vehicle), so there is no need to limit yourself to dealers that are close by.  Prices can vary quite significantly.  Usually, you'll be dealing with someone in the finance department at the dealership rather than a regular car salesperson.

Wheel and tire insurance

Some car manufacturers offer wheel and tire insurance plans.  Depending on the type of car, these could make sense.  Car with low profile tires, run flat tires, and large rims (18" or 19") are especially prone to being damaged by hitting potholes or curbs.  And they are usually very expensive to replace.

Other add ons

Many dealers try to sell other add ons such as paint protection or fabric protection.  Personally, I don't think these are worth it, especially if it's not something that is coming from the vehicle manufacturer.

A few more inputs for the decision process

• Crash test data
• IIHS Top Safety Pick
• NHSTA via safercar.gov (can also be used to check for recall notices)
• Euro NCAP
• ANCAP
• Reliability ratings
• Consumer Reports
• J D Power & Associates
• Driving reviews
• Car and Driver
• Motor Trend

Driving reviews from magazines are useful because they provide insights into some quirks that one might not otherwise notice during a test drive.

Related reading

• Can you return the car you just bought?
• Understanding heat reduction and window films
• Which window film/tint brand is best?
• Running low on gas can be costly
• Saving Lives -- lists 20 vehicles with least and most deaths per million registered vehicles
• 9 car insurance money savers and surprises

Ways to own gold

(Some interesting quotes on gold in literature can be found here.)

This is not a post advocating that the reader buy gold.  This is simply a summary of my research on the different ways to own gold.  There was a period of time around the financial crisis in 2007-2008 when there were a number of people talking about why it's a good reason to own gold.  That got me into doing some research.  So here's what I came up with when I researched this subject back then.

There are several ways to own gold.

• Gold bullion
• Gold-backed exchange traded funds
• Leveraged exchange traded funds
• Online gold accounts
• Gold-linked CDs

Each of these has its pros and cons.  Let's take a look.

Gold bullion

In this case one would buy actual physical gold (coins, bars, etc.) from a reputable dealer and find a place to store it.  Most proponents of gold bullion fall into two categories.

• People who believe in an "economic armageddon" scenario.  They prefer to store it outside the banking system.  Of course, at that point, the safety of anything, anywhere is going to be questionable, so one would have to come up with creative and diverse ways of storing one's holdings.
• People who don't trust the "paper gold" varieties.  They prefer to be able to see and touch their physical gold.  For such people storing gold in a bank locker is probably acceptable.

The issues around theft of gold bullion from one's home is complicated; I haven't really looked into things like whether or not insurance would cover it.

So, in summary, one should be aware of several expenses -- there is a commission when buying (usually resulting in a premium over the spot price of gold), there may be storage-related costs (e.g. locker rent at a bank), there may be insurance costs, and finally, there would be a commission involved when selling it (usually resulting a getting a price slightly lower than the spot value).

Unfortunately, even with gold bullion there can be fraud (see #1, #2).  So if one goes the bullion route, one has to make sure the source is good and perhaps even get it tested.

Gold-backed exchanged traded funds

In this case, one would hold shares of an exchange traded fund.  There are several such funds.  The most popular and largest of these is GLD, but there's also SGOL, PHYS, and IAU.  These funds are reportedly backed by physical gold bars at vaults in places like London, New York, or Zurich.

OUNZ is an interesting option for those that might want to convert their ETF holdings into physical gold without tax consequences.  This page discusses some of the costs associated with doing this.

The pros of using this approach are clear.  It's easy to get in and out of the fund.  There's no premium when buying or selling (other than the fee by the brokerage for the stock trade).  However, there is a management fee for owning these funds (as there is for all types of funds) so there is an ongoing expense, although it's typically taken out by adjusting the net asset value of the fund.

The cons here are that even though the funds claim that their shares are backed by gold, there are some cynics that say there could be fraud involved and, in a doomsday scenario, the fund would simply report that bars of gold just aren't there, or that some number of them are missing.  The funds do state that the bullion is insured and audited -- would be one of the things to check in the prospectus.

Leveraged exchanged traded funds

These include funds such as UGL which use leverage to move at twice the percentage change in the price of gold.  As a personal opinion, I think this is getting into gambling territory, so I wouldn't touch something like this for investment purposes.

Online gold accounts

These include sites such as GoldMoney, BullionVault, and the Perth Mint Depository.  These often offer allocated and unallocated accounts, and in some scenarios will allow the account holder to take delivery in physical form, for a fee, if they should so choose.

The cons with these are similar to that of ETFs.  One has to place trust that they are being run in an ethical and well-managed fashion.

Of these, the Perth Mint Depository is interesting because it is the only one that is backed by a government -- the Government of Western Australia -- which would be the equivalent of something being backed by a state government in the US (as opposed to the federal government).

Gold-linked CDs

Some banks have either offered in the past, or currently offer, what is referred to as gold-linked CDs.  In other words, the returns of the CD are tied to the price of gold.  Often, the principal will be FDIC insured, and there is some, usually complex, formula that determines how the returns of the CD will be calculated based on the movement in the price of gold.

Here's a word of warning from the FDIC on market-linked CDs in general, so make sure that the terms of the CD are well understood before investing in them.

Additionally, with such CDs you typically have to pay income taxes on expected returns which may never actually materialize because the price of gold went up for a while, but then went down by the time the CD matured.

Is owning gold a good idea?

Even as of this writing, some of the blogs that I read such as ZeroHedge, Mish's Global Economic Analysis, and iTulip, talk about gold being an essential part of one's portfolio.  However, there are others such as Warren Buffett who don't think very much of the idea of owning gold.  More recently, there was this article by PIMCO which discusses a viewpoint on gold.

Just as with every investment, it seems like you'll find people on either extreme ("it's the only investment worth owning", or "stay away"), to those that have more moderate views ("it makes sense to have a percentage of one's portfolio in gold").

Personally, I'm much more comfortable with the approach detailed in my post on worry-free investing, sticking with instruments such as TIPS and I-Bonds.  They might not be ideal, but at least I wouldn't have to worry about all the fraud-related risks related to buying and storing of gold.  Of course, as with everything else I write about, this is subject to change.

A word about taxes

It is probably worth noting that any gains for gold holdings are taxed as a collectible rather than as long/short-term capital gains from a regular security.

Disclaimer:  I am not a financial advisor and it is possible that what I have written may contain errors so please do your own research and form your own opinions and/or action plan about this subject.  This post is just my way of documenting and sharing what I have learned.

The backdoor Roth IRA

If one's income exceeds the limits for contributing to a Roth IRA, there's still a backdoor approach for making a contribution.  The method, outlined in this article by Fidelity, shows that one can contribute to a non-deductible IRA (which has no income limit), and immediately convert that to a Roth IRA (which also does not have any income limits).

That catch here is that one must not have any other IRA -- Traditional or Rollover.  Otherwise, that will complicate tax matters since the tax liability is calculated as a percentage of all funds that are eligible for rollover.  If one has a Rollover IRA, usually from rolling over funds from 401(k) plans at previous employers, then to get the most benefit out of this, one would have to roll over the funds from the Rollover IRA into the current employer's 401(k) plan.  Most 401(k) plans allow that.  The down side to such a roll over is that, unlike an IRA at a traditional brokerage which typically has nearly limitless investment options, one would be restricted to the investment choices offered by the current 401(k) plan.

Useful reading

• Backdoor Roth IRA @ Bogleheads

Disclaimer: I am neither an investment advisor nor a tax preparer.  If you think this applies to you, please do your own homework to decide whether it works for your situation.  Otherwise, it can land you in a tax mess.  At the very least, it is a bit more paperwork since it requires filing IRS form 8606 which will show the contribution to the non-deductible IRA, the conversion to the Roth, and report that there are no other IRA funds.  Here is an article warning about some of gotchas to watch out for.

Update 3/21/2016

I recently came across an article which throws another wrench in the works--the Step Transaction Doctrine.  Read the article for details.  This article is the subject of a heated discussion over at Bogleheads.

Finding a "safe" bank

With all the news about the economy headed downhill, a natural question that comes up is whether or not one is banking with an institution that is sound (i.e. unlikely to fail). Here are some sites that allow us to check on the health of financial institutions -- banks, thrifts, and credit unions.

• Bauer Financial's star ratings
• The Finance Buff has a post on how to go about finding a local bank.

Saving for retirement: A thought experiment

In an earlier post, I discussed worry-free investing which was based upon the work of Zvi Bodie. Determining how much to put away for retirement depends on so many different factors that is becomes hard to come up with a "correct" number. There are so many variables such as:

• Inflation rate: By this I don't mean just the widely publicized consumer price index (CPI), since one's spending habits may differ quite a bit from the way the CPI weights the various classes.
• Tax rates: This would relate to current and future income tax rates (federal, state, and local) as well as sales tax rates. This is also affected by where one chooses to live in retirement.
• Returns on investments: This includes things like interest rates and the movement in stocks and bond prices.
• Social security payments: With the financial problems facing the government, it's hard to say what sort of payments social security would be able to make in the future.
• Changes in income: One would normally have more income with age because of experience, but that seems to be changing nowadays with folks losing a job and being forced to accept a lower income.
• Changes in expenses: As one goes through the years, what we spend on changes.  In younger years, one may not need to spend much.  In middle age there is often added costs of supporting a family.  As we age, depending on our health, there may be a lot of expenses for medical care.
• Life span: Perhaps the most crucial one. One may not be around during one's planned retirement years!  But it's probably better to leave behind an estate than to live one's golden years in poverty.

But for the purpose of this exercise, we're going to ignore all of that.

Let's say I make 100 pieces of gold for every year that I work, with no change in income, and no loss of income at any point during my working life. Further, let's assume that what a piece of gold buys today, it will also buy n years from now, where n > 0. In other words, a piece of gold will buy in retirement exactly what it buys today. Let's assume that there are no taxes.

Now, for every year I work, I get 100 pieces of gold. Let's say I spend 50 pieces of gold each year and save the remaining 50. Thus, for every year that I work, I have basically bought one year of retirement. In other words, if I work 30 years, I can have 30 years of retirement. If, on the other hand, I spend 25 pieces of gold each year, I have bought 3 years of retirement for every year of work. And if I spend 75 pieces of gold, I have bought only one year of retirement for each 3 years of work. This, of course, ignores the time value of money as well; i.e. there was no attempt to invest the money during the working years, but also bear in mind that any kind of investing necessarily involves risk.

So if we look at the average working life of about 40 years until retirement (age 25 to 65), and we need to plan to live to age 105, a retired life of 40 years, then using this simple example, we need to be able to save 50% of our income. In general, if I work x years, and need to plan for a retirement of y years, then I need to restrict my spending to [x/(x+y)] × 100% of earnings. Put another way, if I save m% of my income each year, then I buy one year of retirement for every (100-m)/m years of work. If we want to account for taxes, then these percentages would apply to the post-tax income.

Perhaps the biggest drawback of this example is that it does not account for social security. At lower income levels, social security tends to replace a significant portion of that income, and would therefore require a significantly lower savings rate. However, at higher income levels social security contributes far less to replacing that income.

Anyway, this is just a thought experiment and is not practical by any means. But I thought I'd write it up nevertheless.

(A few days after writing this post, courtesy of A.Word.A.Day, I found out of the existence of the word gedankenexperiment, which means "thought experiment". Had I known of it before this post, I might have used it in the title.)

Useful "rules of thumb" for home buying

I don't own a home yet, but every time I think of buying one I do some research and find some useful information.  I've read each of these in different places at different times and this is my attempt to consolidate all of them.

What are the costs to be aware of?

• Mortgage payments covering principal and interest.
• Property taxes.
• Home owner's Insurance.
• HOA dues. Usually for condos, but nowadays many gated communities and new neighborhoods have these.
• Other taxes, such as Mello Roos bonds in newer neighborhoods.
• Estimated on-going maintenance costs.

Another thing to watch out for with condominiums are "special assessments" which are one-time levies to pay for significant repairs or renovations to the complex.

Aside from the very first expense above, one would have all of the other expenses even if one owned the home outright.

Typically, only the portion of the mortgage payment towards interest and the property taxes are tax-deductible.

How much home can one afford?

One rule I've heard is that one should buy a home that is no more than 2.5-3 times one's gross annual income. I've seen this ratio recommended to be as low as 1.5 and as high as 3.5.  Incidentally, this is what the price-to-income ratio looks in countries around the world.  As of 2014, this ratio is reported as being 2.4 for the US and it is one of the lowest.

Another is that the PITI (principal, interest, taxes, insurance) should be no more than 30% of gross pay, assuming no other significant debt.

Is the home a good value?

There's the cash-flow analysis where all of the expenses listed earlier in this post must be less than what the property would rent for.

Additionally, patrick.net (a now defunct site tracking the housing bubble around 2008) had the following suggestion:

• Annual rent / purchase price = 3% means do not buy.
• Annual rent / purchase price = 6% means borderline.
• Annual rent / purchase price = 9% means OK to buy.

Indeed, I've often heard that the general rule of thumb is that this ratio should be 10%.

Based on the above analysis, some low end condominiums work out to be "OK to buy", but if we were to subtract the HOA dues from the rent, then the ratio falls to where it's no longer favorable to buy. Condominiums are kind of tricky in that way.

Patrick.net provided an awesome "Should you buy that house?" calculator which allowed you to plug in a price for a given and address and used market rents off of craigslist to answer the question for you.  The calculator is no longer active.  However, one can get rent estimates for any given property/ area from Zillow, but those numbers may not be as accurate.

Rent vs Buy Calculator

This is straying from the main topic of the post (which is supposed to be about "rules of thumb"), but I got a note from a friend who suggested adding it. Rent vs Buy calculators, such as this one offered by the NY Times attempt to tell you whether you'd be better off renting or buying depending on things like:

• Current rent,
• Current home value,
• Length of time that one plans to live there,
• Prevailing mortgage rate (no provisions for a variable mortgage rate),
• Projected annual increase/decrease in rent, and
• Projected annual increase/decrease in the home's value.

Since the last 2 of these variables are almost impossible to predict accurately (especially given the current economic climate), it becomes really hard to get any concrete guidance from the calculator. But I guess it is still fun to play with the numbers.

Researching a purchase

These are some of the things one should get answers for when buying a home.

• Research the school district.
• Check with the local police station about crime in that area.
• Age of the home.
• Age of plumbing and electrical systems.
• If any improvements were made, were the necessary permits obtained?
• Have there been any losses or significant damage?
• Check the fire & flood ratings as that will impact insurance.  (Available on Redfin.)
• Check the Walk Score if you care about businesses accessible by walking.

Of course, anything that's broken will probably be caught during the inspection, so this phase is mostly about catching things that may be about to break or that are not covered by a normal home inspection.

For new homes that are not yet built, check the following:

• If considering a single story home, will it be surrounded by any 2-story homes?
• Locations of public utilities such as transformer boxes, fire hydrants, mailboxes, etc.  Will any of those be on your property?

Looking for a home

Here are some websites that allow you to search and view the MLS listings that match a user's criteria.

• Redfin
• Zillow (Includes estimates of price and rent)

Other useful stuff

• Home improvements and Your Taxes
• Home maintenance manual (from 2-10 Home Buyers Warranty) 
• NACA
• Mortgage/loan calculator with amortization schedule
• Tax burden by state
• Interactive map for air quality
• greatschools.org

Update 8/20/2013

Came across this video titled Don't buy a house without checking these 5 things.

The checklist includes: mold, pests, outdated fixtures and wiring, cosmetic headaches like painted over wallpaper and poorly done DIY flooring, and drainage problems.

Update 4/8/2016 

I did end up buying a house in May 2015.