Archives for September 2008

September 2008 Investment Portfolio Update

Posted on September 18, 2008 // 24 Comments

Given recent events, I suppose I should take a look at how my investments are doing. I am also planning to make some large-ish 401k contributions and need to figure out which asset classes to buy in order to rebalance my portfolio.

9/08 Portfolio Breakdown
 
Retirement Portfolio Actual Target
Asset Class / Fund % %
Broad US Stock Market 38.8% 34%
VTSMX – Vanguard Total Stock Market Index Fund
DISFX – Diversified Stock Index Institutional Fund*
DODGX – Dodge & Cox Stock Fund*
US Small-Cap Value 9% 8.5%
VISVX – Vanguard Small Cap Value Index Fund
Real Estate (REITs) 8.4% 8.5%
VGSIX – Vanguard REIT Index Fund
Broad International Developed 21% 25.5%
FSIIX – Fidelity Spartan International Index Fund*
VDMIX – Vanguard Developed Markets Index Fund
International Emerging Markets 6.5% 8.5%
VEIEX – Vanguard Emerging Markets Stock Index Fund
Bonds – Short-Term 9% 7.5%
VFISX – Vanguard Short-Term Treasury Fund
Bonds – Inflation-Indexed 8% 8.5%
VIPSX – Vanguard Inflation-Protected Securities Fund
Total Portfolio Value $105,654
 

* denotes 401(k) holding given limited investment options

Contribution Details
Throughout 2008, my wife has been making regular salary deferrals to her 401k, and has recently reached the annual $15,500 limit. I plan to start contributing to my Self-Employed 401k plan shortly.

YTD Performance
The 2008 year-to-date time-weighted performance of my personal portfolio is -27.9% as of 9/18/08. In fact, despite sizable additional contributions, my portfolio is down over $10,000 since my last update in April. Today might have been a bad day to run these numbers… 🙂

Although not necessarily a benchmark, the Vanguard S&P 500 Fund has returned -20.07% YTD, their FTSE All World Ex-US fund has returned –29.74% YTD, and their Total Bond Index fund is up 2.71% YTD as of 9/18/08. (My emerging markets fund is down nearly 40%!)

Rebalancing Details
First of all, I am not changing my asset allocation or moving into safer investments. In fact, I am doing the exact opposite and buying what has been dropping the most…

I am still following the general asset allocation plan outlined here, with a 85% stocks/15% bonds split [115-Age]. Here is an example of how we implemented the asset allocation across multiple accounts, although I’ve since moved some funds around.

So, it looks like I need to buy more Emerging Market and Broad International. I am now a bit overweight in Bonds and Broad US, so I need to sell those. Due to the limited index fund choices in my Fidelity Solo 401k account, I may start buying ETFs if I can justify the $10.95 commissions.

You can view all my previous portfolio snapshots here.

Filed Under: Investing, Retirement //

Money Market Fund Breaks The Buck: What’s Safe Now??

Posted on September 17, 2008 // 31 Comments

One of the largest and first money market mutual funds ever has broken the buck yesterday. The Primary Fund, run by The Reserve, with $65 Billion in assets, saw it’s per-share price drop from the standard $1 to 97 cents, due to it’s holdings of Lehman Bros. debt. They are also restricting withdrawals for up to 7 days. According to the NY Times, this is only the second time in history this has ever happened.

In the aptly titled Pride Goeth Before a Fall, NY Times blogger Floyd Norris points out how The Reserve actually made fun of other money market funds for being careless. This is from a letter from The Reserve to shareholders from earlier this year:

When we created the world’s first money fund in 1970, we clearly stipulated the tenets that define a money fund: sanctity of principal, immediate liquidity, a reasonable rate of return — all while living under the overarching rubric of boring investors into a sound sleep. Unfortunately, a number of firms that sponsor money funds, and a number of investors that selected them, have lost sight of the purpose of a money fund and the simple rules that guide them in their foolhardy quest for a few extra basis points. […] Thank you for your confidence in our Reserve. We never forget you have entrusted us with your reserve(s).

Yeah, you’re welcome. Can I have my money back now? 😛 If you trade with TD Ameritrade and have a money market sweep set up with them, I believe they use The Reserve.

Where Should I Put My Cash?

Consider sticking with an FDIC-insured bank account. Money market funds are not insured. If you want that, you should stick with an FDIC-insured bank and mind the FDIC insurance limits carefully.

Besides, it’s more profitable right now. You can get a savings account today with no fees or minimums that earns up to 3.75% APY. The fund that failed above was only yielding 1.19%, and I don’t know of any money market fund that yields higher than 3%. (Even if it does, be suspicious!). Why settle for less interest and more risk?

Invest in a Treasury money market fund. But many of us have brokerage accounts with an automatic sweep or “core” option. We have to pick some sort of money market fund. In this case, to get the most safety you should choose the “Treasury” money market option, because these only invest in Treasury securities which are backed by the U.S. Government. You often end up with a lower yield, but some of it is recovered if you live in a state with income taxes. Treasury interest is exempt from state income taxes.

For example, with Zecco Trading their taxable money market (CSAXX) is yielding 1.81% while their Treasury MM (ITRXX) is only at 1.16%.

Invest in big fund companies with lots of assets. You might be surprised to know that many other money market funds would have broken the buck this year, except that the fund companies stepped in with their own money to prop things up. The Wall Street Journal reports that “20 money-fund advisers have moved to support their funds within the past 13 months”. One recent example is the influx of money by Wachovia Corp. into the money market funds from Evergreen Investments, which they own.

Why do they do this? Not out of the goodness of their hearts. It is to protect the trust of their brand and to prevent a huge onslaught of withdrawals. I would certainly never invest in a company that I can’t even trust with my cash. Therefore, if you are going to invest in a money market fund, buy one in a company which would spend every last penny to protect it’s name brand. From Marketwatch:

Phillips speculated that because The Reserve is solely a money market shop, it didn’t have the resources to bail out Primary Fund in the way a diversified mutual-fund giant such as Fidelity Investments, Vanguard Group or Evergreen Investments, which is owned by Wachovia Corp , would be able.

FYI for those who invest in Vanguard money market funds:

Vanguard Group’s money-market funds have no exposure to commercial paper from Lehman, Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc., Washington Mutual or AIG, according to a spokesman for the Valley Forge, Pa., asset manager.

As for Fidelity:

Fidelity’s taxable, general purpose money market funds have no exposure to any Lehman Brothers entity, Crowley said. The taxable money market funds do have “modest” exposure to two issuers that are subsidiaries of troubled American International Group.

Although most of my cash is in FDIC banks right now for the higher yield, I would personally still sleep well with money kept in a money market fund from Fidelity or Vanguard.

Filed Under: Investing //

Financial Meltdown Explained: Greed, Leverage, and Keeping Up With The Joneses

Posted on September 16, 2008 // 46 Comments

Yesterday on CNBC, the Bank of America CEO Ken Lewis talked about the financial meltdown. He pinned on a few things: greed, leverage, and keeping up with the Joneses. Lots of homeowners out there are in trouble with their mortgages. Some got defrauded, some simply made poor decisions. But Wall Street executives that earn millions of dollars a year also got caught up in the exact same mistakes.

Greed & Keeping Up With The Joneses

John and Jane Taxpayer want a nice big house. They’ve never been able to own one before, with only tiny savings and so-so credit. But they want one so bad! Besides U.S. home values would never go down, right?

Wait… maybe this might not be smart. But my friends and neighbors have new houses, so that must mean it’s okay! Sign me up!

Bob and Christina the CEOs run an investment business, and want big profits. He’s earning a decent amount with his hedge funds and traditional bonds, but man, these collateralized debt obligations (CDOs) are yielding like 10% and still look safe. They are based on mortgages, and U.S. home values would never go down, right? With these increased returns, I’ll be an hero, and my company’s stock price will soar!

Hmm… maybe this might be riskier than it looks? But wait, the big boys like Washington Mutual, Bear Stearns, and Lehman Brothers are doing it. Sign me up!

Leverage

John and Jane Taxpayer used to need 20% down and good credit for long-term fixed rate mortgage. They only have $5,000 saved up, but want a $300,000 house. Hey, no problem! You just need that $5,000 and you can have your house… with 3/1 ARM that resets to a sky-high rate (which you can refinance later, I promise…). Mortgages are the easiest leverage to obtain for consumers. Three years later… the house value dropped 25% and is now only worth $225k. They put up $5k, and are now down $75k.

We can ride out the storm, as long as we can refinance this adjustable 15% rate! Somebody lend me more money!! No? Crap.

Bob and Christina the CEOs usually only buy investment with their assets. But man, these CDOs are such a good deal. Based on my currently good credit rating, I can borrow at like 7% and these CDOs earn 11%. Sweet leverage! So even though I only have like $10 billion dollars, I can use that to buy $100 billion dollars of tasty mortgage-backed securities!

Of course, if they start getting valued at 75 cents on the dollars, my $100B turns into $75B. I started with $10B, and now on paper I’ve lost $25B. Our credit rating drops. We need more capital. Somebody lend us more money!! No? Crap.

Filed Under: Investing, Real Estate //

Is Money The Secret To A Happy Marriage?

Posted on September 15, 2008 // 42 Comments

The New York Times had an article this weekend called The Key to Wedded Bliss? Money Matters*. It was kind of hit and miss for me, but I did like one particular quote:

“A lot of the debates people have about money are code for how we want to live our lives.”

Money itself isn’t important. Money is simply a tool to achieve what you want. As long as you and your partner want the same things, then in general I think the rest falls into place. You just have to realize that money spent in one place takes away from another desire. However, if you don’t agree on what you want, you could be billionaires and unhappy.

My wife and I remind each other all the time about our primary goals:

  • Work less.
  • Be able to spend time with children.
  • Travel and experience the world.

With this in mind, neither of us bug each other very much about most material things. I don’t ask for a BMW. She doesn’t ask for stuff from Pottery Barn or Restoration Hardware. If our wallets start to wander, then we keep each other in check.

(The rest of the article talks about little things like having a weekly financial meeting, rotating the financial responsibilities, hiring a mediator, and other minor things that I feel aren’t nearly as important. We don’t do any of those things.)

This article caught my eye because my wife and I are currently very close to booking a week-long trip to Spain, pending vacation time approval. It was weird because many of our coworkers’ reactions were “Jeez, big spender, where did you get the money for that?”. I wanted to say something along the lines of “Remember the 18 times last month you called me cheap? Yeah, that’s where the money came from!“.

More appropriate might be “How much did your [new car] cost again? Mine depreciates less than $1,000 per year. Subtract the difference, and that’s an extra $1,000+ for me every year, which is an international trip.” They make fun of our old car. 😉

What’s the point of all this? Having aligned goals is awesome. Oh, and I love my wife. 🙂

Filed Under: Family //

Stock Chart Simulator: Would You Make A Good Day-Trader?

Posted on September 12, 2008 // 43 Comments

Have you ever daydreamed about becoming a daytrader? Sitting at home in your pajamas, making some clicks here and there, and making money out of nothing. Much of daytrading is based on technical analysis, of which Wikipedia says:

Technical analysis is a financial markets technique that claims the ability to forecast the future direction of security prices through the study of past market data, primarily price and volume.

Basically, you try to find patterns in the stock chart, and time your buys and sells accordingly. Doesn’t sound that hard, right?

I just stumbled upon a really cool simulator called ChartGame that tests your ability to do so using old charts (via Bogleheads). Every day, you can either buy or sell your position. Your goal is to at least beat a buy-and-hold investor in the same stock. For those that are familiar, you can even plot things like RSI, Bollinger Bands, and MACD (moving averages). Try it!

Don’t get too excited though if you win a few times, though. Given the parameters, a blindfolded, drunk monkey should beat buy-and-hold half the time. Remember, this is even before taking into account transactional costs like commissions, bid-ask spread, or taxes! See if you can win, say… 8 out of 10 times or better.

Although you may not believe me, I actually used to want to program this exact type of simulator when I was first learning about investing. People often think they can see patterns, but this game gives you a taste of reality. I’ll be honest – I was horrible at it.

Filed Under: Investing //

Rule of Thumb For Reasonable Housing Costs?

Posted on September 10, 2008 // 23 Comments

In an earlier post on motivating myself to work harder, I had thrown out a piece of “common” financial advice:

Spend less than 30% of income on housing.

It was really just an afterthought, but I got a bunch of e-mails about it. Where did you get this? Why 30%? Is that gross income or after taxes?

The source of this “rule of thumb”, which is about as useful (or useless!) as most such rules, is the traditional underwriting requirements of mortgage lenders. You know, before many of them went nuts.

Lender Ratios
Also called the debt-to-income (DTI) ratio, this is the maximum debt load that the lender will accept and still lend you money. You have two types of debt. Housing debt, which usually means PITI, or principal + interest + taxes + insurance, so it’s a bit more than just the straight payment from a mortgage calculator. The “other debt” is the sum of your other recurring monthly liabilities – car loans, credit card balances, student loan payments.

There are usually two lender ratios, a front and a back (Example: 28%/36%). The front ratio meant housing debt divided by gross income. The back ratio was housing + other debt divided by gross income. Usually you have to satisfy both of these ratios.

Some superficial online searching reveals that Fannie Mae and Freddie Mac allow a maximum of 28% for the front ratio and 36% for the back ratio. FHA loans have ratios of 29% and 41%. So that’s where my 30% number came from. Of course, even earlier this year you could find people allowing front ratios of 50-60%.

So if your gross income was $4,000 a month, to get a conforming Fannie Mae loan your housing payment should be no more than $1,120 per month. At the same time, your housing + other debt obligations altogether should be below $1,440 per month.

Filed Under: Real Estate //

Scottrade Referral Code: 7 Free Trades

Posted on September 10, 2008 //

Through October 31st, 2008, the referral bonus from Scottrade is now worth 7 free trades (instead of the usual 3) when you open an account with at least $500. At $7 per trade, that’s worth nearly $50. If you need a referral code, please contact me and I’ll send you one from another reader.

Both referrer and referee will receive 3 free online trades when the referee opens a qualified account with Scottrade. These free trades will usually be credited within 24 hours. An additional 4 free online trades will be credited to both accounts within 15 business days.

Referrals must be made and the new account must be opened by the new referee by the end of business day on October 31, 2008 in order for both accounts to receive the bonus 4 free online trades.

Related

Filed Under: Deals & Offers //

Should Home Ownership Be The Dream?

Posted on September 9, 2008 // 40 Comments

Now to the bigger picture… As of today, the U.S. government is the largest mortgage lender in the country. And that means, if things continue to go badly in the housing market, you and I as taxpayers get to pay for bad mortgages! Hurray!

How did we get into this mess? On Monday’s PBS Marketplace public radio show, economist Gregory Ip had some interesting commentary. I think sums it up nicely, as well as asks some good questions.

Americans woke up today to learn the federal government had basically taken over Fannie Mae and Freddie Mac. It’s one of the biggest government takeovers in history.

This moment, though, has been years in the making. We knew these companies were a potentially dangerous hybrid. They are chartered by Congress to promote home ownership. But they are owned by shareholders who want the maximum possible profit. This means that they could take big risks with the knowledge that if they got into trouble, they’d be too important for the government to allow to fail. The Bush administration tried to constrain Fannie and Freddie, just as its predecessor did. But with the support of many in Congress the companies always fought off these efforts.

And then the housing crisis hit. Far from shrinking them, the Bush administration was now forced to ask the companies to expand their role of buying and guaranteeing mortgages, because, quite simply, private investors no longer wanted to. Unfortunately, just when the economy needed Fannie and Freddie the most, they couldn’t do the job, because they had lost so much money on the mortgages they already owned.

Treasury says it acted this past weekend to keep the housing and financial markets stable. But it still hasn’t answered the question: What role should the government play in home ownership, and do these companies have a part to play? Yes, common stock holders have been punished. They’ve lost almost their entire investment. And over time, the companies will have to shrink under the terms of the deal with Treasury. But Fannie and Freddie will continue to exist unless and until Congress revokes their charters. And the final decision of the companies’ fate will rest with the next president and the next Congress.

Then there’s the question we as a country must answer: How much should we promote home ownership? If we conclude taxpayers should back most mortgages, we must find a transparent and accountable way to do it. It’s not at all clear that these companies can accomplish that.

Filed Under: Real Estate //

Fannie & Freddie Failure = Mortgage Rates Drop By 0.5%

Posted on September 9, 2008 // 6 Comments

I’m still on several mortgage brokers’ e-mail lists, and it appears that the government takeover of Fannie Mae is a glimmer of sunshine in what has probably been a very bleak few months for them. The message: Mortgage rates have dropped by around 50 basis points (0.50%) today! So if you are in the market for a loan or refinance, you might want to see what’s available out there.

This Reuters article questions if the drop will last:

The 30-year fixed-rate mortgage has fallen to near 6.00 percent on Monday from 6.50 percent on Friday, according to Greg McBride, senior financial analyst at Bankrate, Inc, in North Palm Beach, Florida.

[…] “The question is how much of the interest rate drop will actually stick,” he said. […] “There are concerns about how much debt the U.S. will be issuing as a result of this bailout and that could pressure benchmark Treasury yields, offsetting some of the improvement in mortgage spreads”

Filed Under: Real Estate //

September 2008 Financial Status / Net Worth Update

Posted on September 8, 2008 // 24 Comments

Finally got around to adding up the numbers for the last month:

Net Worth Chart July 2008

Credit Card Debt
If you’re a new reader, let me start out as usual by explaining the credit card debt. I’m actually taking money from 0% APR balance transfer offers and instead of spending it, I am placing it in high-yield savings accounts that actually earn 3-4% interest or more, and keeping the difference as profit. Along with other deals that I blog about, this helps me earn extra side income of thousands of dollars a year. Recently I put together a series of step-by-step posts on how I do this. Please check it out first if you have any questions. This is why, although I have the ability to pay the credit card balances off, I choose not to.

Retirement and Brokerage accounts
The bad news is that the market value of our investments went down over $3,500. And this is despite my wife being able to finally max out her 401k for 2008 (total of $15,500 as of this month). At least I don’t own much Fannie Mae stock…

The good news is that I am finally ready to make some big contributions to my Fidelity Self-Employed 401k, at the same time that the markets are near their 2008 lows. Buy low, sell high! Why now? I like to wait because my income fluctuates and this way I have a clearer idea of what my contribution limits will be, as they are based on gross income.

Cash Savings and Emergency Funds
Our mid-term goal was to have six months of expenses ($30,000) in net cash put aside for emergencies. This is now done. As mentioned, future cashflow will be put towards retirement accounts. Speaking of emergencies, with all these hurricanes, I have been checking out portable generators as well.

Home Mortgage
Another ~$500 of loan principal paid off. Housing prices are still dropping in my area. I will probably have to adjust my home value estimate in the future, a short-term goal might be to pick a simple benchmark to follow. After a few other financial priorities are taken care of, perhaps I’ll start a DIY biweekly mortgage plan.

We had some visitors and took a tiny bit of vacation this month, so it was a nice end to the summer. You can see our previous net worth updates here.

Filed Under: Goals, Retirement //

Follow-Ups: WaMu 5% CD, Chest Freezers Everywhere

Posted on September 8, 2008 // 8 Comments

High-Yield Bank CD
Washington Mutual has brought back their 5% APY 12-month CD for another week, which had previously dipped to 4.5% APY. If this fits your needs, don’t miss it this time around.

Chest Freezers
Apparently, I was not alone in doing cost/benefit analysis on an extra chest freezer, as this AP article shows:

Once relegated to the dank corners of the basement, freezers are being embraced again by shoppers who are stashing bulk-sized purchases of meats, fruits and vegetables there as they work to combat rising food prices. Across the country, shoppers bought more than 1.1 million freezers during the first six months of the year — up more than 7 percent from the same period last year, according to research firm NPD Group.

That rings up to nearly $400 million in freezer sales — a staggering figure compared to the rest of the home appliance sector, where industry data shows shipments are down nearly 8 percent. And, experts said, it’s a trend that’s expected to continue at least through much of next year as penny-pinching shoppers buy in bulk to take advantage of deals or bundle grocery shopping trips to conserve gas. […]

About half of all U.S. households already have a chest or upright freezer, separate from the refrigerator-freezer combo that’s a kitchen stalwart, according to industry statistics. [Source]

I also had no idea 50% of households already had an extra freezer. We still haven’t bought one yet ourselves; I’ve been in kind of an anti-stuff mode recently.

Filed Under: General //

Links: Chasing Shrinking Potato Peelers Edition

Posted on September 7, 2008 // 4 Comments

Here are some recent links from fellow bloggers that made my cursor pause…

Grad Money Matters ponders when to stop chasing money? How do we know at what point when we need to slow down? Good question.

Wisebread offers up some cheap things to do in San Francisco. I always like to see other people’s views of an area I am familiar with; everyone always has different ideas. The comments are good too.

The Consumerist tracks the continuing trail of destruction by the Grocery Shrink Ray. AllFinancialMatters laments the shrinking beer bottles of certain brands. Or are they 1/3 liter bottles? Or are 1/3 liter bottles a convenient metric-system-abusing excuse? Financial Ramblings says we get what the market decides. I believe, with consumer awareness, the balance can be shifted.

Get Rich Slowly talks about the best salesman in the world, whose path to riches lay in selling $5 potato peelers on the streets of New York City. Interesting story.

No Credit Needed offers an illustrated guide to debt reduction. I like pictures.

The Simple Dollar explains why they decided to finally merge their married finances.

Christian PF makes his own toothpaste. I must admit, this is something I’ve never thought of doing myself. I do drive my wife crazy by squeezing the last atom out of our current tubes, though…

Almost Frugal shows us how to cut a little boy’s hair. Amazingly enough, no bowls were involved! As a kid, I was happy with a buzz cut for many years. I’ve never been big on hair…

Filed Under: General //
« Previous Page
Next Page »