MarketWatchTax credit for first-time buyers giving little boost to housingMonday November 10, 12:14 pm ET By Amy Hoak
Even with bigger incentive, economic worries could be tough to overcome
ORLANDO, Fla. (MarketWatch) -- Over the summer, many in the housing industry applauded the temporary first-time home buyer tax credits written into the Housing and Economic Recovery Act of 2008. But apparently buyers weren't as impressed.
The tax credit gives first-time home buyers up to a $7,500 credit for buying a home between April 8, 2008, and July 1, 2009. Realtors say it hasn't been effective in getting people to buy homes, which would reduce the excessive inventory on the market.
The problem, they say, is that buyers are turned off by the repayment requirement of the credit. The credit needs to be paid back over a 15-year period, beginning on a buyer's 2010 tax return. In effect, it's really an interest-free loan.
"For the economist, even with the repayment feature, it was a clear benefit. Money today is better than money tomorrow. You receive the money today, put the money in the bank, earn interest, and pay it off over time," said Lawrence Yun, chief economist for the National Association of Realtors.
"It was a clear benefit, but nonetheless, the average Joe Homebuyer does not see it that way," he said, speaking at NAR's annual conference, held in Orlando over the weekend. The conference concludes on Monday.
To entice more first-time buyers, the industry group is lobbying lawmakers to tweak the tax credit, removing the repayment aspect. They also want all home buyers to be eligible -- not only those who haven't been homeowners for the past few years.
The National Association of Home Builders is suggesting an even heftier incentive. It wants a 10% home-buyer credit, up to $22,000, depending on the Federal Housing Administration loan limit in the market, according to a NAHB news release. It also wants that credit to be available to all home buyers who make a purchase in the next year, and for the repayment feature to be removed.
Yun said that $7,500 is a substantial amount of money in moderately-priced markets like those in the Midwest, yet home sales aren't really picking up there.
Economy trumps incentivesBut it's clear that buyers have more on their minds than tax credits these days. Fears about the overall economy and job security are holding back many Americans who might otherwise buy a home.
Forty-one percent of those who are interested in purchasing a home said that overall economic conditions were holding them back, according to survey results released on Monday by Move Inc., the company that operates Realtor.com. The poll was conducted in mid-October.
Another telling response: When asked about the top housing priority for the new president, participants were most concerned about foreclosure prevention.
Half of the 1,000 people polled say that President-elect Barack Obama's No. 1 housing priority during his first 100 days in office should be to help struggling homeowners avoid foreclosure, according to the survey. Read more on housing's prospects in Obama's administration.
On this, NAR also says more can be done and that objectives of the government's $700 billion rescue package haven't been realized.
"The idea was to essentially stabilize the banking system with the thought that it would trickle down into Main Street. Fast forward to today, it's really not trickled down," said Jerry Giovaniello, the Realtors' chief lobbyist.
In the Move survey, other housing issues took less focus. About 23% of participants said that making more affordable credit available should be the top housing priority for the next president, and only 16% said the same about assistance for first-time home buyers.
Affordability improvesBut there's a reason for all this industry attention to first-time buyers; their purchases allow current homeowners to sell their homes and move as well. More first-time home buyers in the market would start a chain reaction to reduce high inventories of for-sale properties, which has been putting downward pressure on housing prices.
Already, first-time buyers are making up a larger share of all home buyers, due to improvements in affordability but also the difficulty that current homeowners are having in selling their homes. With fewer home sales overall, first-time buyers account for a larger piece of the pie.
Between July 2007 and June 2008 41% of all buyers were first-time buyers, up from 39% the year before, according to the NAR's Profile of Home Buyers and Sellers, released at the conference. The survey involved 133,000 home buyers and sellers throughout the country.
But while tumbling housing prices have increased affordability, that wasn't the biggest reason these buyers made a purchase. Fifty-two percent of first-time buyers said it was just the right time for them to buy a home, 16% said it was the best time to buy because of the affordability of homes and 8% said it was the best time because of the availability of homes for sale.
Only 3% of people who bought for the first time wish they would have waited.
Still, there were discounts to be found, according to the report. Consider the following:
Seventeen percent of all sellers surveyed said that they sold for less than 90% of their asking price. Twenty-one percent of sellers said they sold for between 90% and 94% of their asking price, and 38% said they sold for 95% to 99% of their asking price.
Sixty percent of sellers said they had to cut their asking price at least one time before they were able to sell their property.
The percentage of all buyers who purchased a home in foreclosure rose to 6%, up from 1% in last year's survey. About 38% considered buying a foreclosure, but didn't because they couldn't find one that met their needs.
Lately, some of the markets that have been getting the most attention from all buyers are those that have suffered the most severe price declines, according to search data from Realtor.com.
"Where search increases were the greatest, they tended to be clustered in markets which had seen price reductions. So top markets were Stockton, Calif., Naples, Fla., Detroit, the metro D.C. area and so on," said Errol Samuelson, president of Realtor.com.
Financing issuesIt's worth noting that the window of time that the Profile of Home Buyers and Sellers covers mutes some of the financing challenges that people had as the year-long time frame went on.
For example, 34% of first-time home buyers in the survey said they financed the entire purchase price, but no-down payment loans became virtually nonexistent by the end of the survey, Yun said. Last year, 45% said they put no money down.
Plus, down-payment assistance programs such as those available through The Nehemiah Corporation of America are no longer available to buyers as of Oct. 1. In fact, some advocates for down payment assistance believe that the deadline for that assistance was a factor that helped home sales to rise in September.
"Some may be misinterpreting the spike in September home sales to be a potential turning point in the housing and financial crises," said Scott Syphax, president and CEO of Nehemiah, in a news release. "Driving this increase was the swell in demand for down-payment assistance by American families scrambling to take advantage of these programs before the October 1st ban."
Friday, November 14, 2008
Thursday, September 4, 2008
Basic Financial Planning
Basic Financial Planning
A step by step financial plan for Non Resident Indians (NRI) planning to return back to India
1. Basics 2. Setting Goals 3. Establishing an Emergency Fund 4. Funding Short Term Goals 5. Asset Allocation Plan for Long Term Goals 6. Maintaining Your Asset Allocation 7. Common Investor Mistakes
1. Basics Introduction
No one would rush to buy building materials for a house without first planning and developing a detailed plan for it. Yet investors frequently buy and sell stocks without having any plan. This is exacerbated by sheer quantity of advice of questionable quality from a vast financial services industry with deep conflicts of interest. Often the interests of the financial services industry and investors are in direct conflict with each other. This makes investors vulnerable to a variety of poor investment decisions with disastrous financial consequences.
Fortunately investing is a simple process despite frequent attempts by wall street to convince investors otherwise.
Saving vs Investing Saving and Investing represent two distinct ways of managing money. Understanding the difference helps you make informed choices for your financial needs.
Saving means seeking to preserve assets that you accumulate over time. Stability of principal is a higher priority than return potential. Principal is guaranteed but offer only very low return potential. There is a risk of principal not keeping up with inflation resulting in loss of purchasing power.
When you invest your money, you are seeking growth. Investing usually involves greater risk to principal than saving and offers higher return potential. Principal is not guaranteed but it offers possibility of higher returns with greater inflation protection.
Why Should You Invest? Investing is a good tool for building up the funds needed for buying a house or putting children through college. Long-term investing is an essential element of retirement planning, since most people do not have pension plans or cannot accumulate enough savings without some long term growth of principal.
Risk and Reward One of the more basic relationships in investing is that between risk and reward. Investments that offer potentially high returns are accompanied by higher risk factors. There is no free lunch. This is the cornerstone of modern finance and forgetting this often gets investors in trouble. High returns and low risk just don't go together. Don't waste your time looking for any such investments. If you do find one, it is a scam.
Basic Investment Options There are three basic asset classes that one can invest in are 1. Cash 2. Bonds 3. Stocks
Asset Class Comparison
Asset Class
Historical Returns
Maximum loss in one Year
Comments
Cash
3-4%
NA
The risks are low and principal is preserved, but cash equivalents generally do not provide returns high enough to outpace inflation especially after tax.
Bonds
4-6%
-15.5
Bonds represent loans to a government or business. They offer limited potential for increasing returns. Rising inflation can cause substantial losses.
Stocks
10-12%
-38.6
Stocks represent ownership of a company and are a claim on the corporation's earnings and assets. Historically, stocks have provided the best opportunity for long-term growth of principal. Very volatile in short term.
RiskRisk is part of the investment process. Risk is never going away and any investor who thinks he has eliminated risk is just fooling himself. Risk in its most basic form means possibility of losing some or all of the original investment.From the prespective of an investor risk takes three basic forms and investments should be choosen to balance aganist each of these risks.1. Market Risk: Volatility of your investments. Your investments could go down in value just when you need them. Stocks have high market risk, bonds have low market risk and bank savings accounts have zero market risk.2. Inflation Risk: Inflation reduces the purchasing power and over the long term could severely reduce the value of your assets. Seemingly safe savings in bank accounts have a high inflation risk.3. Currency Risk: The currency of your investments might lose its value.
2. Setting Goals
Before you start any investments you need to have a clear understanding of what your financial goals are.
The first step in this process is to list all your assets and liabilities. Then calculate your net worth and your net liquid assets (cash, stock, bonds).
The second step is to create a list of your goals along with estimates of how much is needed for each and when you plan to reach them. Examples of goals are downpayment for a house or car, kids college tution, retirement, etc.
3. Establishing an Emergency Fund
The main reason to set up an emergency fund is to help you to meet your monthly expenses in case you lose your job. So how much you save in the emergency fund is primarily determined by how long you expect to be able to find a new job. Three to six month of living expenses should be set aside for this purpose. It would be a good idea to have a separate account from your regular bank account for this purpose so you would not be tempted to use this money for other needs. This should be in a taxable account as you would not be able to withdraw money quickly from a tax sheltered account like an IRA or a 401K.
A money market account would be an excellent choice. Personally I would recommend Vanguard Prime Money Market fund. A key factor in this selection is your access to this money. You should have instant access to this money since you would be using this primarily for emergencies. Other slightly more aggressive options include using a short term bond fund like Vanguard Short Term Corporate or an I Bond. Choose the one you are comfortable with, there is no one right way for this.
4. Funding Short Term Goals
Identify your short term goals like saving for a house, a car down payment or money you plan to take back to India within a short term. These are goals for which you expect to spend money within the next 2-10 years. If you do not have any such goals you can skip the rest of the section.
Calculate how much you need for all of your short term needs. Determine how much you need to save each month to reach your goal. Then choose how you need to invest based on the following table.
Criteria for Choosing Asset Classes
Time Frame
If you goal is more than 5 years away you can consider investing 20-40% in stocks. For less than 5 years you should be in CD/Short Term Bonds/I-Bonds/EE-Bonds.
How flexible are you regarding time frame.
If you willing to be postpone your goal by a few years in case of investment looses you can consider investing in stocks.
Need to take risk
If your goal can be achieved without any need to take risk then you can avoid investing in stocks. The difficult case is you are planning to build a dream house and more often then not you can always use a little extra money. In this case you can invest a small portion in stocks (20%).
Relative size of the goal compared to long term portfolio.
If your short term goal is only a small fraction of your retirement goal you can take more risk. If you do suffer loses you can use money from retirement goal for the short term goal and avoid selling the losing investment in the short term goal.
If you do decide to invest in a portion in stocks, invest the very first few years into stocks and then invest the remaining in bonds. This would give the money invested in stocks to work longer for you. Choose the following for short term goals in increasing order of risk/reward. The only exception to this is I/EE Bonds which should be the preferred choice as they defer taxes.
1. I/EE Bonds 2. Vanguard Short Term Corporate or Vanguard Ltd-Term Tax-Exempt for 28% tax bracket and above 3. Vanguard Total Bond Market Index or Vanguard Ltd-Term Tax-Exempt for 28% tax bracket and above 4. Vanguard Total Stock Market Index 5. Vanguard Total International Stock Market Index
Start reducing your stock holdings 1-2 years before you plan to withdraw. The same steps as in the next section apply if you plan to hold stocks.
5. Asset Allocation Plan for Long Term Goals
Asset allocation is the strategy of dividing up your assets based on a tradeoff of risk and return. This is a central tenet of Modern Portfolio Theory which attempts to maximize your return for a given level of risk. Several studies have concluded that the most important determinant of a portfolio's return is its asset allocation. However asset allocation is still an art rather a science and it involves making personal choices to balance risk and rewardBy combining assets with different characteristics in a portfolio an investor can achieve higher returns with lower risk over the long term. Adding high risk asset classes and investments to a conservative portfolio may seem risky but its effect will be to both increase returns and lower the overall risk of the portfolio. Each asset class has a different exposure to each specific type of risk. Dividing you investments into different asset classes reduces risk by balancing aganist each type of risk. Diversification is the investor’s primary defense against risk in their portfolio.
Investors should use as few funds as possible in their portfolio to simplify management. A simply well diversified portfolio could be developed with as few as three funds representing US stocks, International stocks and bonds. Such a portfolio would by definition beat the returns of the average investor and over the long run can be relied on to beat 90% of the investors.
Developing an Asset Allocation Plan
An asset allocation plan should be chosen based on three criteria: 1. Need to Take Risk: The basic idea is that if your goal can be met without taking any risk then there is no need to take risk. Hence in this case we would choose a portfolio with very low risk. But for the majority of the investors there is a need to take risk as they would not be able to save sufficient money for retirement without some growth of principal. 2. Ability to Take Risk: A long investment horizon means you have greater ability to take risk. Investment horizon means how long you are planning to hold on to the investment. Suppose you plan to take money back to India in three years when you go back, your investment horizon is only three years. Even thought you might plan to use it to fund a long term goal in India its invesement horizon in US is still three years (short term goal). Hence it should be invested as a short term goal. When you have a very stable job with high earning potential your ability to take risk is high but if you have no source of income ability to take risk would be low.3. Willingness to Take Risk: Your tolerance for risk. Basically your ability to sleep well at night with the level of risk. A conservative person would be less willing to take risk and hence should have lower percentage of stock. Your risk tolerance is not static, it will change as your age.
For a Non Resident Indian (NRI) planning to go back to India it would be a good idea to keep a portion of the investments in US. In this case you should consider only the portion that you plan to hold in US for the long term (10+ years) as long term investments in US. If you plan to go back to India in less than 5 years and do not plan on holding investments in US you should not hold any stocks.
Take Advantage of NRI Benefits
After you return back to India for good you are treated as a Returned but Not Ordinary Resident (RNOR) for a period of 2 years. During this time all your foreign income is exempt from taxes in India. Once you return back to India and become a Non Resident Alien as per US IRS regulations you can also avail of several tax benefits of US. The most important of which are the 0% capital gains on stocks and mutual funds. You pay 25% on dividends. This provides an ideal opportunity to convert all your retirement money (from 401K and IRA) into a taxable account. A suggested approach is to convert your 401K into a rollover IRA before you go back to India. Once in India you can withdraw this money (paying 10% penality for early withdrawal) and pay tax in a lower tax bracket. Depending on the the amount you have in your retirement account you can choose to withdraw this money in 1-2 years to avoid paying any tax to India. Thus it is a good idea to contribute to a 401K even if you plan to return to India in the near future.
For an average conservative investor one suggested way to allocate is to have a 50/50 stock/bond mix. Based on your ability, willingness and need to take risk you can increase or decrease the stock percentage in your portfolio. Within the stock portfolio it is better to allocate between 30-40% of the stock portion into international stocks. This is especially important for investors who might be spending the money finally in Rupees. Having atleast 15-20% of one's long term assets in international stocks provides good hedge against any dollar depreciation. Thus the final suggested portfolio is 35/15/50 US/International/Bond.
If you invested $10,000 in 1970 in 35/15/50 in US/Int/Bond mix it would be worth $264,000 as of December 2002. This is an annualized return of 10.44% with 11.71% standard deviation. The best return in any year was 53.28% and the worst loss in any year was -23.57%.
You should be very careful in selecting your asset allocation. If you are not capable of handling a 50% loss of your stock investments you should reduce it to the level that you would be comfortable with. The time to decide your risk tolerance is before you make your first investment. Once you choose an asset allocation you should not change it unless need, ability or willingness has changed. But resist the temptation to change your asset allocation in an attempt to market time.
Dangers of Market Timing
A study conducted by Dalbar found that between 1984-2000 the average mutual fund investor gained 141% while S&P 500 gained 1201% in the same time frame. Money market funds returned 161% during the same time frame. The study found that investors did not get the entire return because of failed attempts at market timing.
While asset allocation has determined the majority of the returns in theory (and would hold in practice if buy and hold is followed), in reality investor behavior is a much more important determinant of returns.
The idea behind market timing is to buy stock when prices are low, hold onto your investment until the market peaks, and then sell your stock investments moving into cash until the market hits bottom. It does sounds simple enough. But as shown above the consequences have been disastrous to investors. So resist the seductive call of market timing. You will be severely tested during bear markets when you would you distinctly get the feeling of flushing your hard earned money down the toilet. You should fight the impluse to rush into safe investments during bear markets.
It is important to look at the performance of the whole portfolio rather than focus on individual holdings. At any point of time some asset would be under performing and you should resist the temptation to sell the under performing asset in an attempt to buy it back later. Don’t let short-term volatility drive your long-term investment planning. Your best defense against a fluctuating market is a well diversified portfolio and a disciplined program of periodic investments.
Consider any stock/bond investments in India also as part of the total portfolio. Any type of retirement fund in India like Public Provident Fund should be treated as a bond holding in your portfolio. Any pension plans or annuities either in India or US should also be treated as bond holdings. Avoid holding large percentage (25% or more) of your total assets in Indian stocks. India does not yet offer the necessary level of investor protection nor quick recourse to legal remedies in case of outright fruad. However stock/bond markets in India provide attractive investment opportunities for the careful investor. Stick to large mutual fund companies with large asset base and keep a close watch on expense ratios when investing in India.
Once you decide on an asset allocation write it down and sleep on it for a week. This would give you time to think and understand your risk tolerance. Most investors would realize their true risk tolerance only during severe bear markets. Many overestimate their true risk tolerance as it is difficult for anyone to accept that they are not daring risk takers. Financial planning is not an arena where you can bluff yourself.
Implementing your Asset Allocation Plan
Once an asset allocation decision has been made you can proceed with the mechanics of implementing your plan. Here we need to consider asset location and expenses for implementing the plan. Asset location simply means allocating your stocks and bonds between retirement accounts and taxable accounts. The optimal tax strategy is to allocate all your bond holdings in tax deferred accounts (IRA and 401K) and stock holdings in taxable accounts.
You can implement this plan at Vanguard by using these three funds 1. Vanguard Total Stock Market Index (35%) 2. Vanguard Total International Stock Market Index (15%) 3. Vanguard Short Term Corporate (50%) or I/EE bonds in taxable account
Why Vanguard?
The Vanguard Group is owned entirely by its fund shareholder - not by a separate company looking for profits. Vanguard's profits accrue to the owners of Vanguard portfolios. This unique structure enables it to offer mutual funds with the lowest expense ratios in the industry. In addition Vanguard offers a wide selection of index funds with low minimum investment requirements. For these reasons Vanguard should be the fund group of choice for all investors.
During the height of the Technology boom as almost every mutual fund company brought out new technology based funds Vanguard refused to follow suit. This is one example of its high ethical standards.
You can hold your investments in Vanguard after you go back to India. You need to fill out a change of address and a W-8 form before you leave.
Follow these steps to implement you asset allocation plan 1. If you have an IRA or 401K invest your bond portion in these accounts. Select an any available short or intermediate bond fund. 2. If you do not have a tax deferred account or do not have a bond fund in your tax deferred account or you need to invest more money than you can fit into your tax deferred account, invest in I/EE bonds (or Vanguard Short Term Corporate if you do not want to invest in I/EE bonds or have maxed both I/EE bonds). 3. If you can invest more in your tax deferred account even after allocating the bond potion then invest in an index fund. Most plans have an S&P500 index fund and you can use this as a substitute for the Total Stock Market Index fund. 4. Invest the remaining amount with Vanguard in Total Stock Market Index and Total International Index fund. 5. Allocate your monthly investments in the same 35/15/50 ratio.
6. Maintaining Your Asset Allocation
Your asset mix should be periodically reviewed and rebalanced to in order for asset allocation to work best. Market fluctuation can easily throw your carefully planned asset mix out of balance. For example, if stocks outperform your other investments they may eventually represent far more than the original target percentage that you set up, which in turn could expose you to more risk than you would like. To bring your portfolio back in balance in this situation, you might choose to sell stock and reinvest in cash equivalents or bonds.
Set a specific day each year when you would review your portfolio against your asset allocation plan. Since rebalancing involves transaction fees and potentially taxes it should only be done with new investment funds are available or if your allocation differs by more than 5% from your target allocation. Say you have $100K with 50K stock and 50K bonds and the next year it becomes 45K/55K stock/bond then you should sell 5K worth of bonds and invest the 5K in stock. But if you are going to invest new money of 15K in the next year you can invest the first 10K into stocks only to make it 55K/55K and then invest the remaining 5K in 50/50 ratio between stock/bond. This rebalancing is more important between stocks and bonds than between different stock classes i.e. between US stocks and international stocks.
Sticking with an investment plan sounds easier than it really is. It is pretty simple to stick with your investing strategy when your financial and emotional life is happy and stable. However, it's the challenging times that you need to think about. An investment plan is successful only if you are able to stick with it through good times and bad. Altering your investment plan should never be done on a whim.
7. Common Investor Mistakes
Keep the following things in mind as you invest as these are some common mistakes new investors make.
Avoid sector funds, even if you think a particular sector would do well in future. A sector can have a very bright future yet deliver poor long term returns.
Avoid active funds at all costs. Active funds are much more expensive than their expense ratio indicates. Active funds add more than 1% in hidden expenses that can only be calculated by analyzing its financial statements.
Be wary of financial advisors. If you want to hire a financial planner read up on investing before going to the planner. Choose only a fixed fee planner.
Avoid the temptation to tweak your portfolio or alter your plan.
Avoid investing in individual stocks. Individual stocks have company specific risk that can be diversified away and thus there is no additional reward for taking this type of risk. While risk and reward are related, you are not rewarded for taking all types of risk.
Ignore advice of mainstream financial press. They are in the business of selling interesting and captivating news not providing sound financial advice.
Watch the fees you are paying for funds. You should not be paying more than 0.5% in total fees as expense ratio, brokerage costs or annual fees per year.
Do not postpone investments because you are afraid of market volatility. There will always be some event that is a cause for concern and if you allow this to delay your investment plan you will never be able to get started in investing. You will forever be waiting for the perfect time to invest.
Understand the Effect of Expenses on Returns
At first glance it would seem that a 1% additional expense for a financial planner or a active mutual fund is not a big deal. But even a small additional expense has a huge impact on final returns and comes as a shock to new investors. Say you invest $10,000 in an active mutual fund that has an expense ratio of 1% higher than an index fund or you pay this to an advisor. After 30 years your return would be $81,000 (at 7% return). The same amount without the additional expense would return $109,000, fully $28,000 more than the high cost fund. Note that this amount is much larger than your initial investment. Expenses are one of the few things under your control and you should strive to reduce them as much as possible.
Disclaimer
I am not an investment professional and have no background in finance. I strongly advice all to read up on several of the investments books listed before getting started in investing.
A step by step financial plan for Non Resident Indians (NRI) planning to return back to India
1. Basics 2. Setting Goals 3. Establishing an Emergency Fund 4. Funding Short Term Goals 5. Asset Allocation Plan for Long Term Goals 6. Maintaining Your Asset Allocation 7. Common Investor Mistakes
1. Basics Introduction
No one would rush to buy building materials for a house without first planning and developing a detailed plan for it. Yet investors frequently buy and sell stocks without having any plan. This is exacerbated by sheer quantity of advice of questionable quality from a vast financial services industry with deep conflicts of interest. Often the interests of the financial services industry and investors are in direct conflict with each other. This makes investors vulnerable to a variety of poor investment decisions with disastrous financial consequences.
Fortunately investing is a simple process despite frequent attempts by wall street to convince investors otherwise.
Saving vs Investing Saving and Investing represent two distinct ways of managing money. Understanding the difference helps you make informed choices for your financial needs.
Saving means seeking to preserve assets that you accumulate over time. Stability of principal is a higher priority than return potential. Principal is guaranteed but offer only very low return potential. There is a risk of principal not keeping up with inflation resulting in loss of purchasing power.
When you invest your money, you are seeking growth. Investing usually involves greater risk to principal than saving and offers higher return potential. Principal is not guaranteed but it offers possibility of higher returns with greater inflation protection.
Why Should You Invest? Investing is a good tool for building up the funds needed for buying a house or putting children through college. Long-term investing is an essential element of retirement planning, since most people do not have pension plans or cannot accumulate enough savings without some long term growth of principal.
Risk and Reward One of the more basic relationships in investing is that between risk and reward. Investments that offer potentially high returns are accompanied by higher risk factors. There is no free lunch. This is the cornerstone of modern finance and forgetting this often gets investors in trouble. High returns and low risk just don't go together. Don't waste your time looking for any such investments. If you do find one, it is a scam.
Basic Investment Options There are three basic asset classes that one can invest in are 1. Cash 2. Bonds 3. Stocks
Asset Class Comparison
Asset Class
Historical Returns
Maximum loss in one Year
Comments
Cash
3-4%
NA
The risks are low and principal is preserved, but cash equivalents generally do not provide returns high enough to outpace inflation especially after tax.
Bonds
4-6%
-15.5
Bonds represent loans to a government or business. They offer limited potential for increasing returns. Rising inflation can cause substantial losses.
Stocks
10-12%
-38.6
Stocks represent ownership of a company and are a claim on the corporation's earnings and assets. Historically, stocks have provided the best opportunity for long-term growth of principal. Very volatile in short term.
RiskRisk is part of the investment process. Risk is never going away and any investor who thinks he has eliminated risk is just fooling himself. Risk in its most basic form means possibility of losing some or all of the original investment.From the prespective of an investor risk takes three basic forms and investments should be choosen to balance aganist each of these risks.1. Market Risk: Volatility of your investments. Your investments could go down in value just when you need them. Stocks have high market risk, bonds have low market risk and bank savings accounts have zero market risk.2. Inflation Risk: Inflation reduces the purchasing power and over the long term could severely reduce the value of your assets. Seemingly safe savings in bank accounts have a high inflation risk.3. Currency Risk: The currency of your investments might lose its value.
2. Setting Goals
Before you start any investments you need to have a clear understanding of what your financial goals are.
The first step in this process is to list all your assets and liabilities. Then calculate your net worth and your net liquid assets (cash, stock, bonds).
The second step is to create a list of your goals along with estimates of how much is needed for each and when you plan to reach them. Examples of goals are downpayment for a house or car, kids college tution, retirement, etc.
3. Establishing an Emergency Fund
The main reason to set up an emergency fund is to help you to meet your monthly expenses in case you lose your job. So how much you save in the emergency fund is primarily determined by how long you expect to be able to find a new job. Three to six month of living expenses should be set aside for this purpose. It would be a good idea to have a separate account from your regular bank account for this purpose so you would not be tempted to use this money for other needs. This should be in a taxable account as you would not be able to withdraw money quickly from a tax sheltered account like an IRA or a 401K.
A money market account would be an excellent choice. Personally I would recommend Vanguard Prime Money Market fund. A key factor in this selection is your access to this money. You should have instant access to this money since you would be using this primarily for emergencies. Other slightly more aggressive options include using a short term bond fund like Vanguard Short Term Corporate or an I Bond. Choose the one you are comfortable with, there is no one right way for this.
4. Funding Short Term Goals
Identify your short term goals like saving for a house, a car down payment or money you plan to take back to India within a short term. These are goals for which you expect to spend money within the next 2-10 years. If you do not have any such goals you can skip the rest of the section.
Calculate how much you need for all of your short term needs. Determine how much you need to save each month to reach your goal. Then choose how you need to invest based on the following table.
Criteria for Choosing Asset Classes
Time Frame
If you goal is more than 5 years away you can consider investing 20-40% in stocks. For less than 5 years you should be in CD/Short Term Bonds/I-Bonds/EE-Bonds.
How flexible are you regarding time frame.
If you willing to be postpone your goal by a few years in case of investment looses you can consider investing in stocks.
Need to take risk
If your goal can be achieved without any need to take risk then you can avoid investing in stocks. The difficult case is you are planning to build a dream house and more often then not you can always use a little extra money. In this case you can invest a small portion in stocks (20%).
Relative size of the goal compared to long term portfolio.
If your short term goal is only a small fraction of your retirement goal you can take more risk. If you do suffer loses you can use money from retirement goal for the short term goal and avoid selling the losing investment in the short term goal.
If you do decide to invest in a portion in stocks, invest the very first few years into stocks and then invest the remaining in bonds. This would give the money invested in stocks to work longer for you. Choose the following for short term goals in increasing order of risk/reward. The only exception to this is I/EE Bonds which should be the preferred choice as they defer taxes.
1. I/EE Bonds 2. Vanguard Short Term Corporate or Vanguard Ltd-Term Tax-Exempt for 28% tax bracket and above 3. Vanguard Total Bond Market Index or Vanguard Ltd-Term Tax-Exempt for 28% tax bracket and above 4. Vanguard Total Stock Market Index 5. Vanguard Total International Stock Market Index
Start reducing your stock holdings 1-2 years before you plan to withdraw. The same steps as in the next section apply if you plan to hold stocks.
5. Asset Allocation Plan for Long Term Goals
Asset allocation is the strategy of dividing up your assets based on a tradeoff of risk and return. This is a central tenet of Modern Portfolio Theory which attempts to maximize your return for a given level of risk. Several studies have concluded that the most important determinant of a portfolio's return is its asset allocation. However asset allocation is still an art rather a science and it involves making personal choices to balance risk and rewardBy combining assets with different characteristics in a portfolio an investor can achieve higher returns with lower risk over the long term. Adding high risk asset classes and investments to a conservative portfolio may seem risky but its effect will be to both increase returns and lower the overall risk of the portfolio. Each asset class has a different exposure to each specific type of risk. Dividing you investments into different asset classes reduces risk by balancing aganist each type of risk. Diversification is the investor’s primary defense against risk in their portfolio.
Investors should use as few funds as possible in their portfolio to simplify management. A simply well diversified portfolio could be developed with as few as three funds representing US stocks, International stocks and bonds. Such a portfolio would by definition beat the returns of the average investor and over the long run can be relied on to beat 90% of the investors.
Developing an Asset Allocation Plan
An asset allocation plan should be chosen based on three criteria: 1. Need to Take Risk: The basic idea is that if your goal can be met without taking any risk then there is no need to take risk. Hence in this case we would choose a portfolio with very low risk. But for the majority of the investors there is a need to take risk as they would not be able to save sufficient money for retirement without some growth of principal. 2. Ability to Take Risk: A long investment horizon means you have greater ability to take risk. Investment horizon means how long you are planning to hold on to the investment. Suppose you plan to take money back to India in three years when you go back, your investment horizon is only three years. Even thought you might plan to use it to fund a long term goal in India its invesement horizon in US is still three years (short term goal). Hence it should be invested as a short term goal. When you have a very stable job with high earning potential your ability to take risk is high but if you have no source of income ability to take risk would be low.3. Willingness to Take Risk: Your tolerance for risk. Basically your ability to sleep well at night with the level of risk. A conservative person would be less willing to take risk and hence should have lower percentage of stock. Your risk tolerance is not static, it will change as your age.
For a Non Resident Indian (NRI) planning to go back to India it would be a good idea to keep a portion of the investments in US. In this case you should consider only the portion that you plan to hold in US for the long term (10+ years) as long term investments in US. If you plan to go back to India in less than 5 years and do not plan on holding investments in US you should not hold any stocks.
Take Advantage of NRI Benefits
After you return back to India for good you are treated as a Returned but Not Ordinary Resident (RNOR) for a period of 2 years. During this time all your foreign income is exempt from taxes in India. Once you return back to India and become a Non Resident Alien as per US IRS regulations you can also avail of several tax benefits of US. The most important of which are the 0% capital gains on stocks and mutual funds. You pay 25% on dividends. This provides an ideal opportunity to convert all your retirement money (from 401K and IRA) into a taxable account. A suggested approach is to convert your 401K into a rollover IRA before you go back to India. Once in India you can withdraw this money (paying 10% penality for early withdrawal) and pay tax in a lower tax bracket. Depending on the the amount you have in your retirement account you can choose to withdraw this money in 1-2 years to avoid paying any tax to India. Thus it is a good idea to contribute to a 401K even if you plan to return to India in the near future.
For an average conservative investor one suggested way to allocate is to have a 50/50 stock/bond mix. Based on your ability, willingness and need to take risk you can increase or decrease the stock percentage in your portfolio. Within the stock portfolio it is better to allocate between 30-40% of the stock portion into international stocks. This is especially important for investors who might be spending the money finally in Rupees. Having atleast 15-20% of one's long term assets in international stocks provides good hedge against any dollar depreciation. Thus the final suggested portfolio is 35/15/50 US/International/Bond.
If you invested $10,000 in 1970 in 35/15/50 in US/Int/Bond mix it would be worth $264,000 as of December 2002. This is an annualized return of 10.44% with 11.71% standard deviation. The best return in any year was 53.28% and the worst loss in any year was -23.57%.
You should be very careful in selecting your asset allocation. If you are not capable of handling a 50% loss of your stock investments you should reduce it to the level that you would be comfortable with. The time to decide your risk tolerance is before you make your first investment. Once you choose an asset allocation you should not change it unless need, ability or willingness has changed. But resist the temptation to change your asset allocation in an attempt to market time.
Dangers of Market Timing
A study conducted by Dalbar found that between 1984-2000 the average mutual fund investor gained 141% while S&P 500 gained 1201% in the same time frame. Money market funds returned 161% during the same time frame. The study found that investors did not get the entire return because of failed attempts at market timing.
While asset allocation has determined the majority of the returns in theory (and would hold in practice if buy and hold is followed), in reality investor behavior is a much more important determinant of returns.
The idea behind market timing is to buy stock when prices are low, hold onto your investment until the market peaks, and then sell your stock investments moving into cash until the market hits bottom. It does sounds simple enough. But as shown above the consequences have been disastrous to investors. So resist the seductive call of market timing. You will be severely tested during bear markets when you would you distinctly get the feeling of flushing your hard earned money down the toilet. You should fight the impluse to rush into safe investments during bear markets.
It is important to look at the performance of the whole portfolio rather than focus on individual holdings. At any point of time some asset would be under performing and you should resist the temptation to sell the under performing asset in an attempt to buy it back later. Don’t let short-term volatility drive your long-term investment planning. Your best defense against a fluctuating market is a well diversified portfolio and a disciplined program of periodic investments.
Consider any stock/bond investments in India also as part of the total portfolio. Any type of retirement fund in India like Public Provident Fund should be treated as a bond holding in your portfolio. Any pension plans or annuities either in India or US should also be treated as bond holdings. Avoid holding large percentage (25% or more) of your total assets in Indian stocks. India does not yet offer the necessary level of investor protection nor quick recourse to legal remedies in case of outright fruad. However stock/bond markets in India provide attractive investment opportunities for the careful investor. Stick to large mutual fund companies with large asset base and keep a close watch on expense ratios when investing in India.
Once you decide on an asset allocation write it down and sleep on it for a week. This would give you time to think and understand your risk tolerance. Most investors would realize their true risk tolerance only during severe bear markets. Many overestimate their true risk tolerance as it is difficult for anyone to accept that they are not daring risk takers. Financial planning is not an arena where you can bluff yourself.
Implementing your Asset Allocation Plan
Once an asset allocation decision has been made you can proceed with the mechanics of implementing your plan. Here we need to consider asset location and expenses for implementing the plan. Asset location simply means allocating your stocks and bonds between retirement accounts and taxable accounts. The optimal tax strategy is to allocate all your bond holdings in tax deferred accounts (IRA and 401K) and stock holdings in taxable accounts.
You can implement this plan at Vanguard by using these three funds 1. Vanguard Total Stock Market Index (35%) 2. Vanguard Total International Stock Market Index (15%) 3. Vanguard Short Term Corporate (50%) or I/EE bonds in taxable account
Why Vanguard?
The Vanguard Group is owned entirely by its fund shareholder - not by a separate company looking for profits. Vanguard's profits accrue to the owners of Vanguard portfolios. This unique structure enables it to offer mutual funds with the lowest expense ratios in the industry. In addition Vanguard offers a wide selection of index funds with low minimum investment requirements. For these reasons Vanguard should be the fund group of choice for all investors.
During the height of the Technology boom as almost every mutual fund company brought out new technology based funds Vanguard refused to follow suit. This is one example of its high ethical standards.
You can hold your investments in Vanguard after you go back to India. You need to fill out a change of address and a W-8 form before you leave.
Follow these steps to implement you asset allocation plan 1. If you have an IRA or 401K invest your bond portion in these accounts. Select an any available short or intermediate bond fund. 2. If you do not have a tax deferred account or do not have a bond fund in your tax deferred account or you need to invest more money than you can fit into your tax deferred account, invest in I/EE bonds (or Vanguard Short Term Corporate if you do not want to invest in I/EE bonds or have maxed both I/EE bonds). 3. If you can invest more in your tax deferred account even after allocating the bond potion then invest in an index fund. Most plans have an S&P500 index fund and you can use this as a substitute for the Total Stock Market Index fund. 4. Invest the remaining amount with Vanguard in Total Stock Market Index and Total International Index fund. 5. Allocate your monthly investments in the same 35/15/50 ratio.
6. Maintaining Your Asset Allocation
Your asset mix should be periodically reviewed and rebalanced to in order for asset allocation to work best. Market fluctuation can easily throw your carefully planned asset mix out of balance. For example, if stocks outperform your other investments they may eventually represent far more than the original target percentage that you set up, which in turn could expose you to more risk than you would like. To bring your portfolio back in balance in this situation, you might choose to sell stock and reinvest in cash equivalents or bonds.
Set a specific day each year when you would review your portfolio against your asset allocation plan. Since rebalancing involves transaction fees and potentially taxes it should only be done with new investment funds are available or if your allocation differs by more than 5% from your target allocation. Say you have $100K with 50K stock and 50K bonds and the next year it becomes 45K/55K stock/bond then you should sell 5K worth of bonds and invest the 5K in stock. But if you are going to invest new money of 15K in the next year you can invest the first 10K into stocks only to make it 55K/55K and then invest the remaining 5K in 50/50 ratio between stock/bond. This rebalancing is more important between stocks and bonds than between different stock classes i.e. between US stocks and international stocks.
Sticking with an investment plan sounds easier than it really is. It is pretty simple to stick with your investing strategy when your financial and emotional life is happy and stable. However, it's the challenging times that you need to think about. An investment plan is successful only if you are able to stick with it through good times and bad. Altering your investment plan should never be done on a whim.
7. Common Investor Mistakes
Keep the following things in mind as you invest as these are some common mistakes new investors make.
Avoid sector funds, even if you think a particular sector would do well in future. A sector can have a very bright future yet deliver poor long term returns.
Avoid active funds at all costs. Active funds are much more expensive than their expense ratio indicates. Active funds add more than 1% in hidden expenses that can only be calculated by analyzing its financial statements.
Be wary of financial advisors. If you want to hire a financial planner read up on investing before going to the planner. Choose only a fixed fee planner.
Avoid the temptation to tweak your portfolio or alter your plan.
Avoid investing in individual stocks. Individual stocks have company specific risk that can be diversified away and thus there is no additional reward for taking this type of risk. While risk and reward are related, you are not rewarded for taking all types of risk.
Ignore advice of mainstream financial press. They are in the business of selling interesting and captivating news not providing sound financial advice.
Watch the fees you are paying for funds. You should not be paying more than 0.5% in total fees as expense ratio, brokerage costs or annual fees per year.
Do not postpone investments because you are afraid of market volatility. There will always be some event that is a cause for concern and if you allow this to delay your investment plan you will never be able to get started in investing. You will forever be waiting for the perfect time to invest.
Understand the Effect of Expenses on Returns
At first glance it would seem that a 1% additional expense for a financial planner or a active mutual fund is not a big deal. But even a small additional expense has a huge impact on final returns and comes as a shock to new investors. Say you invest $10,000 in an active mutual fund that has an expense ratio of 1% higher than an index fund or you pay this to an advisor. After 30 years your return would be $81,000 (at 7% return). The same amount without the additional expense would return $109,000, fully $28,000 more than the high cost fund. Note that this amount is much larger than your initial investment. Expenses are one of the few things under your control and you should strive to reduce them as much as possible.
Disclaimer
I am not an investment professional and have no background in finance. I strongly advice all to read up on several of the investments books listed before getting started in investing.
Monday, July 28, 2008
Nice article about Programming and about learning:
Teach Yourself Programming in Ten Years
Peter Norvig
Why is everyone in such a rush?Walk into any bookstore, and you'll see how to Teach Yourself Java in 7 Days alongside endless variations offering to teach Visual Basic, Windows, the Internet, and so on in a few days or hours. I did the following power search at Amazon.com: pubdate: after 1992 and title: days and
(title: learn or title: teach yourself)and got back 248 hits. The first 78 were computer books (number 79 was Learn Bengali in 30 days). I replaced "days" with "hours" and got remarkably similar results: 253 more books, with 77 computer books followed by Teach Yourself Grammar and Style in 24 Hours at number 78. Out of the top 200 total, 96% were computer books.
The conclusion is that either people are in a big rush to learn about computers, or that computers are somehow fabulously easier to learn than anything else. There are no books on how to learn Beethoven, or Quantum Physics, or even Dog Grooming in a few days.
Let's analyze what a title like Learn Pascal in Three Days could mean:
Learn: In 3 days you won't have time to write several significant programs, and learn from your successes and failures with them. You won't have time to work with an experienced programmer and understand what it is like to live in that environment. In short, you won't have time to learn much. So they can only be talking about a superficial familiarity, not a deep understanding. As Alexander Pope said, a little learning is a dangerous thing.
Pascal: In 3 days you might be able to learn the syntax of Pascal (if you already knew a similar language), but you couldn't learn much about how to use the syntax. In short, if you were, say, a Basic programmer, you could learn to write programs in the style of Basic using Pascal syntax, but you couldn't learn what Pascal is actually good (and bad) for. So what's the point? Alan Perlis once said: "A language that doesn't affect the way you think about programming, is not worth knowing". One possible point is that you have to learn a tiny bit of Pascal (or more likely, something like Visual Basic or JavaScript) because you need to interface with an existing tool to accomplish a specific task. But then you're not learning how to program; you're learning to accomplish that task.
in Three Days: Unfortunately, this is not enough, as the next section shows.
Teach Yourself Programming in Ten YearsResearchers (Bloom (1985), Bryan & Harter (1899), Hayes (1989), Simmon & Chase (1973)) have shown it takes about ten years to develop expertise in any of a wide variety of areas, including chess playing, music composition, telegraph operation, painting, piano playing, swimming, tennis, and research in neuropsychology and topology. There appear to be no real shortcuts: even Mozart, who was a musical prodigy at age 4, took 13 more years before he began to produce world-class music. In another genre, the Beatles seemed to burst onto the scene with a string of #1 hits and an appearance on the Ed Sullivan show in 1964. But they had been playing small clubs in Liverpool and Hamburg since 1957, and while they had mass appeal early on, their first great critical success, Sgt. Peppers, was released in 1967. Samuel Johnson (1709-1784) thought it took longer than ten years: "Excellence in any department can be attained only by the labor of a lifetime; it is not to be purchased at a lesser price." And Chaucer (1340-1400) complained "the lyf so short, the craft so long to lerne." Hippocrates (c. 400BC) is known for the excerpt "ars longa, vita brevis", which is part of the longer quotation "Ars longa, vita brevis, occasio praeceps, experimentum periculosum, iudicium difficile", which in English renders as "Life is short, [the] craft long, opportunity fleeting, experiment treacherous, judgment difficult." Although in Latin, ars can mean either art or craft, in the original Greek the word "techne" can only mean "skill", not "art".
Here's my recipe for programming success:
Get interested in programming, and do some because it is fun. Make sure that it keeps being enough fun so that you will be willing to put in ten years.
Talk to other programmers; read other programs. This is more important than any book or training course.
Program. The best kind of learning is learning by doing. To put it more technically, "the maximal level of performance for individuals in a given domain is not attained automatically as a function of extended experience, but the level of performance can be increased even by highly experienced individuals as a result of deliberate efforts to improve." (p. 366) and "the most effective learning requires a well-defined task with an appropriate difficulty level for the particular individual, informative feedback, and opportunities for repetition and corrections of errors." (p. 20-21) The book Cognition in Practice: Mind, Mathematics, and Culture in Everyday Life is an interesting reference for this viewpoint.
If you want, put in four years at a college (or more at a graduate school). This will give you access to some jobs that require credentials, and it will give you a deeper understanding of the field, but if you don't enjoy school, you can (with some dedication) get similar experience on the job. In any case, book learning alone won't be enough. "Computer science education cannot make anybody an expert programmer any more than studying brushes and pigment can make somebody an expert painter" says Eric Raymond, author of The New Hacker's Dictionary. One of the best programmers I ever hired had only a High School degree; he's produced a lot of great software, has his own news group, and made enough in stock options to buy his own nightclub.
Work on projects with other programmers. Be the best programmer on some projects; be the worst on some others. When you're the best, you get to test your abilities to lead a project, and to inspire others with your vision. When you're the worst, you learn what the masters do, and you learn what they don't like to do (because they make you do it for them).
Work on projects after other programmers. Be involved in understanding a program written by someone else. See what it takes to understand and fix it when the original programmers are not around. Think about how to design your programs to make it easier for those who will maintain it after you.
Learn at least a half dozen programming languages. Include one language that supports class abstractions (like Java or C++), one that supports functional abstraction (like Lisp or ML), one that supports syntactic abstraction (like Lisp), one that supports declarative specifications (like Prolog or C++ templates), one that supports coroutines (like Icon or Scheme), and one that supports parallelism (like Sisal).
Remember that there is a "computer" in "computer science". Know how long it takes your computer to execute an instruction, fetch a word from memory (with and without a cache miss), read consecutive words from disk, and seek to a new location on disk. (Answers here.)
Get involved in a language standardization effort. It could be the ANSI C++ committee, or it could be deciding if your local coding style will have 2 or 4 space indentation levels. Either way, you learn about what other people like in a language, how deeply they feel so, and perhaps even a little about why they feel so.
Have the good sense to get off the language standardization effort as quickly as possible. With all that in mind, its questionable how far you can get just by book learning. Before my first child was born, I read all the How To books, and still felt like a clueless novice. 30 Months later, when my second child was due, did I go back to the books for a refresher? No. Instead, I relied on my personal experience, which turned out to be far more useful and reassuring to me than the thousands of pages written by experts.
Fred Brooks, in his essay No Silver Bullets identified a three-part plan for finding great software designers:
Systematically identify top designers as early as possible.
Assign a career mentor to be responsible for the development of the prospect and carefully keep a career file.
Provide opportunities for growing designers to interact and stimulate each other.
This assumes that some people already have the qualities necessary for being a great designer; the job is to properly coax them along. Alan Perlis put it more succinctly: "Everyone can be taught to sculpt: Michelangelo would have had to be taught how not to. So it is with the great programmers".
So go ahead and buy that Java book; you'll probably get some use out of it. But you won't change your life, or your real overall expertise as a programmer in 24 hours, days, or even months.
References
Bloom, Benjamin (ed.) Developing Talent in Young People, Ballantine, 1985.
Brooks, Fred, No Silver Bullets, IEEE Computer, vol. 20, no. 4, 1987, p. 10-19.
Bryan, W.L. & Harter, N. "Studies on the telegraphic language: The acquisition of a hierarchy of habits. Psychology Review, 1899, 8, 345-375
Hayes, John R., Complete Problem Solver Lawrence Erlbaum, 1989.
Chase, William G. & Simon, Herbert A. "Perception in Chess" Cognitive Psychology, 1973, 4, 55-81.
Lave, Jean, Cognition in Practice: Mind, Mathematics, and Culture in Everyday Life, Cambridge University Press, 1988.
AnswersApproximate timing for various operations on a typical 1GHz PC in summer 2001:
execute single instruction
1 nanosec = (1/1,000,000,000) sec
fetch word from L1 cache memory
2 nanosec
fetch word from main memory
10 nanosec
fetch word from consecutive disk location
200 nanosec
fetch word from new disk location (seek)
8,000,000 nanosec = 8 millisec
Appendix: Language ChoiceSeveral people have asked what programming language they should learn first. There is no one answer, but consider these points:
Use your friends. When asked "what operating system should I use, Windows, Unix, or Mac?", my answer is usually: "use whatever your friends use." The advantage you get from learning from your friends will offset any intrinsic difference between OS, or between programming languages. Also consider your future friends: the community of programmers that you will be a part of if you continue. Does your chosen language have a large growing community or a small dying one? Are there books, web sites, and online forums to get answers from? Do you like the people in those forums?
Keep it simple. Programming languages such as C++ and Java are designed for professional development by large teams of experienced programmers who are concerned about the run-time efficiency of their code. As a result, these languages have complicated parts designed for these circumstances. You're concerned with learning to program. You don't need that complication. You want a language that was designed to be easy to learn and remember by a single new programmer.
Play. Which way would you rather learn to play the piano: the normal, interactive way, in which you hear each note as soon as you hit a key, or "batch" mode, in which you only hear the notes after you finish a whole song? Clearly, interactive mode makes learning easier for the piano, and also for programming. Insist on a language with an interactive mode and use it. Given these criteria, my recommendations for a first programming language would be Python or Scheme. But your circumstances may vary, and there are other good choices. If your age is a single-digit, you might prefer Alice or Squeak (older learners might also enjoy these). The important Nthing is that you choose and get started.
Appendix: Books and Other ResourcesSeveral people have asked what books and web pages they should learn from. I repeat that "book learning alone won't be enough" but I can recommend the following:
Scheme: Structure and Interpretation of Computer Programs (Abelson & Sussman) is probably the best introduction to computer science, and it does teach programming as a way of understanding the computer science. You can see online videos of lectures on this book, as well as the complete text online. The book is challenging and will weed out some people who perhaps could be successful with another approach.
Scheme: How to Design Programs (Felleisen et al.) is one of the best books on how to actually design programs in an elegant and functional way.
Python: Python Programming: An Intro to CS (Zelle) is a good introduction using Python.
Python: Several online tutorials are available at Python.org.
Oz: Concepts, Techniques, and Models of Computer Programming (Van Roy & Haridi) is seen by some as the modern-day successor to Abelson & Sussman. It is a tour through the big ideas of programming, covering a wider range than Abelson & Sussman while being perhaps easier to read and follow. It uses a language, Oz, that is not widely known but serves as a basis for learning other languages. <
NotesT. Capey points out that the Complete Problem Solver page on Amazon now has the "Teach Yourself Bengali in 21 days" and "Teach Yourself Grammar and Style" books under the "Customers who shopped for this item also shopped for these items" section. I guess that a large portion of the people who look at that book are coming from this page. Thanks to Ross Cohen for help with Hippocrates.
Courtesy :http://norvig.com/21-days.html
Tuesday, October 30, 2007
Inventing Faith!!
A group of people at the Oregon state university headed by Bobby Henderson invented a new deity called " Flying Spaghetti Monster" ( also known as Spaghedeity) as a measure of protest against Kansas state board of education's decision to teach intelligent design as an alternate to biological evolution. Flying Spaghetti Mosnter (FSM) which resembles spaghetti and meatballs is believed to be the super natural creator of the universe,
Due to its recent popularity and media exposure, the Flying Spaghetti Monster is used by atheist, agnostics (known by Pastafarians as "spagnostics"), and others as a modern version of Russell's teapot ( a contemporary belief !! that there is no god) atlast there is onething the atheist do believe!!
May be if Henderson would have visited India he would have believed Spaghetti monster really exists and it rules or may be Spaghetti would have become the new superstar in Indian movies ;) with fans poring milk ( should they try pasta sauce!!) on him
Sunday, September 16, 2007
Reading between lines
Really Nice…..
* There are some things that money can’t buy. For everything else, my salary isn’t sufficient!!
* I try to go the extra mile at work, but my boss always finds me and brings me back.
* They can’t fire me, slaves have to be sold.
* Home is where the television is.
* Before borrowing money from a friend, decide which you need more.
* Death is hereditary.
* Many things can be preserved in alcohol. Dignity is not one of them.
* Never argue with a fool. People might not know the difference.
* When you’re right, no one remembers. When you’re wrong, no one forgets.
* Experience is what a comb gives you after you lose your hair.
* Well done is better than well said.
* Everyone makes mistakes. The trick is to make them when nobody is looking.
* Always borrow money from a pessimist. He won’t expect it back.
* You’re not drunk if you can lie on the floor without holding on.
* I like work. It fascinates me. I can sit and look at it for hours.
* If you can’t see the bright side of life, polish the dull side.
* Pessimist: A person that looks both ways when crossing a one way street.
* The light at the end of the tunnel is the headlamp of an approaching train.
* Where there’s a will there are five hundred relatives.
* I have a drinking problem - I can’t afford it.
* Everyone should have a spouse, because there are a number of things that goWrong that one can’t blame on the government.
* There are three sides to every argument: your side, my side and the right side.
* An expert is someone who takes a subject you understand and makes it soundConfusing.
And finally
* Everybody wants to go to heaven, but nobody wants to die.
Courtesy (Copied from) : Analysis, Enjoy Life, Humor, Information, Life, Quotations, Random Thoughts
* There are some things that money can’t buy. For everything else, my salary isn’t sufficient!!
* I try to go the extra mile at work, but my boss always finds me and brings me back.
* They can’t fire me, slaves have to be sold.
* Home is where the television is.
* Before borrowing money from a friend, decide which you need more.
* Death is hereditary.
* Many things can be preserved in alcohol. Dignity is not one of them.
* Never argue with a fool. People might not know the difference.
* When you’re right, no one remembers. When you’re wrong, no one forgets.
* Experience is what a comb gives you after you lose your hair.
* Well done is better than well said.
* Everyone makes mistakes. The trick is to make them when nobody is looking.
* Always borrow money from a pessimist. He won’t expect it back.
* You’re not drunk if you can lie on the floor without holding on.
* I like work. It fascinates me. I can sit and look at it for hours.
* If you can’t see the bright side of life, polish the dull side.
* Pessimist: A person that looks both ways when crossing a one way street.
* The light at the end of the tunnel is the headlamp of an approaching train.
* Where there’s a will there are five hundred relatives.
* I have a drinking problem - I can’t afford it.
* Everyone should have a spouse, because there are a number of things that goWrong that one can’t blame on the government.
* There are three sides to every argument: your side, my side and the right side.
* An expert is someone who takes a subject you understand and makes it soundConfusing.
And finally
* Everybody wants to go to heaven, but nobody wants to die.
Courtesy (Copied from) : Analysis, Enjoy Life, Humor, Information, Life, Quotations, Random Thoughts
Wednesday, September 12, 2007
Mortgage Basics
1. Introduction
Buying a home is the biggest financial investment most of us will ever make. As with any large project or goal, it requires dealing with a variety of complex issues. The best approach is to divide the process into manageable tasks. The following deals with the first steps of gathering your records, determining what you can afford, and understanding mortgage options.
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2. Put Your Own Financial House in Order
Before you go looking for a home, you should determine how much home you can afford. Most lenders will prequalify you to borrow up to a certain amount. Prequalification allows you to focus in on a realistic price range and makes you a more attractive buyer. Whether or not you want to prequalify, eventually you'll need to complete a loan application and it may take some time to gather and assemble the required information.
It's also a good idea to review your credit report. Contact local lenders to determine which credit bureaus they use. Then contact the credit bureaus and request a copy of your credit report (in most states, credit bureaus are required to provide individuals with a free copy of their report). Review your report to ensure that all information is correct. If you have past credit problems, don't lose hope. Be prepared to present a rationale for each slipup, and demonstrate an improvement in your ability to pay bills on time.
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3. How Much Mortgage Can You Afford?
The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Two income-to-debt ratios established by Fannie Mae are standard requirements for conventional mortgages. The first requirement is that monthly mortgage principal and interest payments (P&I), plus insurance and property taxes, cannot exceed 28% of the buyer's gross monthly income (some exceptions may apply to increase this limit to 33%). The second requirement limits total monthly debt payments (housing, credit cards, car payments, etc.) to 36% of gross monthly income. In addition to these requirements, you may have to pay 10% to 20% down on the total purchase price to qualify for a conventional mortgage.
Mortgage Rates and Minimum Incomes Needed to Qualify
Interest Rate Monthly Payment Minimum Annual Income
4% $454 $21,770
5% $510 $24,479
6% $570 $27,340
7% $632 $30,338
8% $697 $33,460
9% $764 $36,691
10% $834 $40,017
11% $905 $43,426
12% $977 $46,905
Mortgage companies use ratios to analyze your mortgage payment. The above example shows the monthly payments of principal and interest, and income needed to qualify for a $95,000 mortgage at various interest rates, amortized on a 30-year schedule, assuming a payment ratio of 25%.
Source: National Association of Home Builders, Economics Division.
4. Types of Mortgages
How much house you can buy also depends on your mortgage's term and interest rate. The term is the length of time (usually 15 or 30 years) over which payments will be paid. The rate can be fixed (meaning it doesn't change over the loan's term) or adjustable (it fluctuates with market conditions). Thirty-year fixed-rate mortgages remain the most popular. The longer term lowers the monthly payment, while the fixed rate provides stability over the life of the loan. Given relatively low interest rates, these mortgages are attractive to buyers planning to stay at least six or seven years in their new home. The drawbacks are low principal payments in the early years, and the risk that market rates will decline over the term. However, if your credit history is sound and you have sufficient income, you can usually refinance your mortgage when rates decline.
A 15-year term lowers the interest rate, reduces total interest payments, and increases principal payments. But it also increases monthly payments. If you can't afford the higher payments now, you might opt for a 30-year mortgage. If there are no prepayment penalties, you can make additional principal payments as your income increases. Making just one extra monthly payment a year will pay off a 30-year mortgage in less than 22 years and can save tens of thousands of dollars in interest costs. If you plan to stay in a home no more than three years, you might want an adjustable-rate mortgage (ARM). ARMs offer initial rates that are lower than fixed mortgages. At some point, usually after the first year, rates are tied to market conditions and are subject to potential rate increases. Most ARMs include a cap on rate increases in any given year, as well as over the life of the loan. Some ARMs offer initial rates at least 2% below fixed rates and limit increases to 1% annually and 5% to 6% over the life of the loan. Many home buyers are attracted by the affordability of an ARM during the initial period. However, you should be confident that your future income will be sufficient if both interest rates and your monthly payments increase.
Another popular mortgage involves a balloon payment. A balloon is a lump-sum payment that pays off the loan in full after a fixed period of time. Generally the rates on balloon mortgages are 1/4% to 3/4% less than on 30-year fixed mortgages, but during an initial period of between 3 and 15 years, payments are similar. After this period, the remaining outstanding principal balance is either due in full or subject to refinancing. This is a good option for home buyers who plan to sell before the final payment is due. But because property values fluctuate, you may not be able to sell when you want. You may also face higher payments if you are forced to refinance at a higher rate, and there is also a risk that you may not be in a position to refinance when the balloon becomes due.
Three Steps to Finding the Right Mortgage
Estimate how long you expect to live in the house. If the answer is less than three to five years, consider an Adjustable Rate Mortgage (ARM), which typically starts out with a lower rate. If you plan to live in your new home longer than five years, a fixed-rate mortgage offers protection against rising interest rates.
Shop around for mortgage rates. Banks, credit unions, and mortgage companies all offer mortgages. Compare at least six lenders in your area.
Add up all the costs for each lender. Include fees, points, closing costs, etc., to arrive at the total mortgage cost for each lender.
5. Interest Rate Points
Points are interest paid in advance to reduce the rate on a loan. One point is equal to 1% of the mortgage amount. The general rule is that 1 point is worth 1/8 of 1% off the loan rate. The decision to pay points for a lower rate is based on how much the seller is willing to contribute to points, how long you plan to stay in the house, and how important lower payments are compared to higher closing costs. You will need to calculate the long-term value of points based on these factors, keeping in mind that points are generally tax deductible in the year paid.
6. Other Alternatives
If you cannot afford a conventional mortgage, there are a variety of alternatives. An anxious seller will sometimes offer owner financing. Federal Housing Administration (FHA) loans offer down payments as low as 3%, but may require the buyer to purchase mortgage insurance. (The FHA is a government agency responsible for insuring affordable housing mortgages.) The Veterans Administration (VA) offers no-money-down mortgages to qualified veterans of the U.S. military. Finally, there are local affordable housing advocates that offer low-cost, low down-payment loan alternatives. For further information, contact the FHA, VA, Fannie Mae, or your local mortgage lender or real estate broker.
Summary
The first step in acquiring a home mortgage is to gather the information you'll need to include in a mortgage application.
Review your credit report by ordering a copy from the credit bureaus used by local mortgage lenders.
Prequalifying for a mortgage lets you know how much you can afford and makes you a more attractive buyer.
Conventional mortgages limit housing costs to 28% of gross income and total debt payments to 36% of gross income.
Mortgage terms are usually 15 or 30 years. The longer the term, the lower your monthly payment, but the higher your overall interest costs.
Thirty-year loans often permit additional principal payments. One additional monthly payment per year will reduce a 30-year loan to 22 years.
Interest rates are fixed or variable over the term of the loan. Variable rates may be best for buyers who plan to sell within three years.
Generally speaking, one point is worth 1/8 of 1% off the loan rate.
A balloon payment is a lump sum payable at the end of a specified term.
Points and interest on mortgages or home equity debt are usually tax deductible.
Checklist
When your credit reports arrive, review them for accuracy. Correct any mistakes immediately.
Get prequalified for a loan. Paying off debts ahead of time might qualify you for a better mortgage.
If you're a veteran, contact the U.S. Veterans Administration to find out whether you're eligible for a no-money-down mortgage.
Tips:
If you are wanting to buy a home, stop , think, study. Owning a home is costs more than just the P and I. Even a new home will require major expenses in 5 - 10 years. Painting, A/C system, hot water heater, etc. Save up the 20% or more down payment. Buy a little less house than you can afford. Then when those expenses come around you can pay for them. Avoid ARM and low or no down payments, your payment will be higher. By saving the down payment you are proving to yourself that you had the disiplan to own a home. Can't wait, then stay in a rental. Otherwise you may wake up and be bankrupt some day.
Coutesy : yahoo finance : http://finance.yahoo.com/how-to-guide/loans/12822
Buying a home is the biggest financial investment most of us will ever make. As with any large project or goal, it requires dealing with a variety of complex issues. The best approach is to divide the process into manageable tasks. The following deals with the first steps of gathering your records, determining what you can afford, and understanding mortgage options.
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2. Put Your Own Financial House in Order
Before you go looking for a home, you should determine how much home you can afford. Most lenders will prequalify you to borrow up to a certain amount. Prequalification allows you to focus in on a realistic price range and makes you a more attractive buyer. Whether or not you want to prequalify, eventually you'll need to complete a loan application and it may take some time to gather and assemble the required information.
It's also a good idea to review your credit report. Contact local lenders to determine which credit bureaus they use. Then contact the credit bureaus and request a copy of your credit report (in most states, credit bureaus are required to provide individuals with a free copy of their report). Review your report to ensure that all information is correct. If you have past credit problems, don't lose hope. Be prepared to present a rationale for each slipup, and demonstrate an improvement in your ability to pay bills on time.
Back to top
3. How Much Mortgage Can You Afford?
The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Two income-to-debt ratios established by Fannie Mae are standard requirements for conventional mortgages. The first requirement is that monthly mortgage principal and interest payments (P&I), plus insurance and property taxes, cannot exceed 28% of the buyer's gross monthly income (some exceptions may apply to increase this limit to 33%). The second requirement limits total monthly debt payments (housing, credit cards, car payments, etc.) to 36% of gross monthly income. In addition to these requirements, you may have to pay 10% to 20% down on the total purchase price to qualify for a conventional mortgage.
Mortgage Rates and Minimum Incomes Needed to Qualify
Interest Rate Monthly Payment Minimum Annual Income
4% $454 $21,770
5% $510 $24,479
6% $570 $27,340
7% $632 $30,338
8% $697 $33,460
9% $764 $36,691
10% $834 $40,017
11% $905 $43,426
12% $977 $46,905
Mortgage companies use ratios to analyze your mortgage payment. The above example shows the monthly payments of principal and interest, and income needed to qualify for a $95,000 mortgage at various interest rates, amortized on a 30-year schedule, assuming a payment ratio of 25%.
Source: National Association of Home Builders, Economics Division.
4. Types of Mortgages
How much house you can buy also depends on your mortgage's term and interest rate. The term is the length of time (usually 15 or 30 years) over which payments will be paid. The rate can be fixed (meaning it doesn't change over the loan's term) or adjustable (it fluctuates with market conditions). Thirty-year fixed-rate mortgages remain the most popular. The longer term lowers the monthly payment, while the fixed rate provides stability over the life of the loan. Given relatively low interest rates, these mortgages are attractive to buyers planning to stay at least six or seven years in their new home. The drawbacks are low principal payments in the early years, and the risk that market rates will decline over the term. However, if your credit history is sound and you have sufficient income, you can usually refinance your mortgage when rates decline.
A 15-year term lowers the interest rate, reduces total interest payments, and increases principal payments. But it also increases monthly payments. If you can't afford the higher payments now, you might opt for a 30-year mortgage. If there are no prepayment penalties, you can make additional principal payments as your income increases. Making just one extra monthly payment a year will pay off a 30-year mortgage in less than 22 years and can save tens of thousands of dollars in interest costs. If you plan to stay in a home no more than three years, you might want an adjustable-rate mortgage (ARM). ARMs offer initial rates that are lower than fixed mortgages. At some point, usually after the first year, rates are tied to market conditions and are subject to potential rate increases. Most ARMs include a cap on rate increases in any given year, as well as over the life of the loan. Some ARMs offer initial rates at least 2% below fixed rates and limit increases to 1% annually and 5% to 6% over the life of the loan. Many home buyers are attracted by the affordability of an ARM during the initial period. However, you should be confident that your future income will be sufficient if both interest rates and your monthly payments increase.
Another popular mortgage involves a balloon payment. A balloon is a lump-sum payment that pays off the loan in full after a fixed period of time. Generally the rates on balloon mortgages are 1/4% to 3/4% less than on 30-year fixed mortgages, but during an initial period of between 3 and 15 years, payments are similar. After this period, the remaining outstanding principal balance is either due in full or subject to refinancing. This is a good option for home buyers who plan to sell before the final payment is due. But because property values fluctuate, you may not be able to sell when you want. You may also face higher payments if you are forced to refinance at a higher rate, and there is also a risk that you may not be in a position to refinance when the balloon becomes due.
Three Steps to Finding the Right Mortgage
Estimate how long you expect to live in the house. If the answer is less than three to five years, consider an Adjustable Rate Mortgage (ARM), which typically starts out with a lower rate. If you plan to live in your new home longer than five years, a fixed-rate mortgage offers protection against rising interest rates.
Shop around for mortgage rates. Banks, credit unions, and mortgage companies all offer mortgages. Compare at least six lenders in your area.
Add up all the costs for each lender. Include fees, points, closing costs, etc., to arrive at the total mortgage cost for each lender.
5. Interest Rate Points
Points are interest paid in advance to reduce the rate on a loan. One point is equal to 1% of the mortgage amount. The general rule is that 1 point is worth 1/8 of 1% off the loan rate. The decision to pay points for a lower rate is based on how much the seller is willing to contribute to points, how long you plan to stay in the house, and how important lower payments are compared to higher closing costs. You will need to calculate the long-term value of points based on these factors, keeping in mind that points are generally tax deductible in the year paid.
6. Other Alternatives
If you cannot afford a conventional mortgage, there are a variety of alternatives. An anxious seller will sometimes offer owner financing. Federal Housing Administration (FHA) loans offer down payments as low as 3%, but may require the buyer to purchase mortgage insurance. (The FHA is a government agency responsible for insuring affordable housing mortgages.) The Veterans Administration (VA) offers no-money-down mortgages to qualified veterans of the U.S. military. Finally, there are local affordable housing advocates that offer low-cost, low down-payment loan alternatives. For further information, contact the FHA, VA, Fannie Mae, or your local mortgage lender or real estate broker.
Summary
The first step in acquiring a home mortgage is to gather the information you'll need to include in a mortgage application.
Review your credit report by ordering a copy from the credit bureaus used by local mortgage lenders.
Prequalifying for a mortgage lets you know how much you can afford and makes you a more attractive buyer.
Conventional mortgages limit housing costs to 28% of gross income and total debt payments to 36% of gross income.
Mortgage terms are usually 15 or 30 years. The longer the term, the lower your monthly payment, but the higher your overall interest costs.
Thirty-year loans often permit additional principal payments. One additional monthly payment per year will reduce a 30-year loan to 22 years.
Interest rates are fixed or variable over the term of the loan. Variable rates may be best for buyers who plan to sell within three years.
Generally speaking, one point is worth 1/8 of 1% off the loan rate.
A balloon payment is a lump sum payable at the end of a specified term.
Points and interest on mortgages or home equity debt are usually tax deductible.
Checklist
When your credit reports arrive, review them for accuracy. Correct any mistakes immediately.
Get prequalified for a loan. Paying off debts ahead of time might qualify you for a better mortgage.
If you're a veteran, contact the U.S. Veterans Administration to find out whether you're eligible for a no-money-down mortgage.
Tips:
If you are wanting to buy a home, stop , think, study. Owning a home is costs more than just the P and I. Even a new home will require major expenses in 5 - 10 years. Painting, A/C system, hot water heater, etc. Save up the 20% or more down payment. Buy a little less house than you can afford. Then when those expenses come around you can pay for them. Avoid ARM and low or no down payments, your payment will be higher. By saving the down payment you are proving to yourself that you had the disiplan to own a home. Can't wait, then stay in a rental. Otherwise you may wake up and be bankrupt some day.
Coutesy : yahoo finance : http://finance.yahoo.com/how-to-guide/loans/12822
Thursday, May 31, 2007
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