Posted: May 29th, 2008 | Author: Joe | Filed under: Investing | Tags: Investing, Simplicity | 3 Comments »
There was a time when I led a matrix-like life: part super hero, part secret super spy… back when geek was chic. I was employee #10 in an Internet startup. Women wanted me, and men wanted to be me. Well, that was the 90′s.
Then the bubble burst and while I didn’t lose my job (I was one of the few with formal training and a degree in the software field – a rarity of the time), I did lose my superstar status.
What does any of this have to do with personal finance, and debt free living?
Just like working in a hot job field at the right time, investing in the hot market at the right time is sexy and thrilling. People flock to be near you at neighborhood picnics just to catch any drops of wisdom that may fall from your mouth as you regale the listeners with tales of the latest double digit gains in your portfolio. But just like an over heated job market, the temperature of over heated market can drop like a stone overnight and if you’re left holding a portfolio full of yesterday’s winners, you’ll quickly find yourself out in the cold. Just ask the millions who were left holding the bag when the tech bubble burst, or more recently the housing market.
In short, there is unnecessary risk in being exciting.
How Not To Be Left Holding The Bag.
Be Boring.
That’s right. Boring, practical and simple approaches to finances win out in the end. And that’s what it’s all about – reaching your financial goals. It’s not about wowing the Joneses at the neighborhood picnic.
Here’s a simplified portfolio as suggested in this month’s Money Magazine article, The Only 7 Investments You Need.
The Simple 7 Portfolio.
1. A blue-chip U.S.-stock fund.
Money Magazine recommends Fidelity Spartan 500 Index (FSMKX), iShares S&P 500 Index (IVV) or Selected American Shares (SLASX)
2. A blue-chip foreign-stock fund.
Money Magazine recommends Vanguard Total International Stock Index (VGTSX), Vanguard FTSE All World Ex-U.S. ETF (VEU) or Dodge & Cox Intl. Stock (DODFX) .
3. A small-company fund.
Money Magazine recommends T. Rowe Price New Horizons (PRNHX),Vanguard Small-Cap Index (NAESX) or Vanguard Small-Cap ETF (VB).
4. A value fund.
Money Magazine recommends Vanguard Value Index (VIVAX), iShares S&P 500 Value Index (IVE) or T. Rowe Price Equity Income (PRFDX)
5. A high-quality bond fund.
Money Magazine recommends Vanguard Total Bond Market Index (VBMFX), Vanguard Total Bond Market ETF (BND) or Harbor Bond (HABDX)
6. An inflation-protected bond fund.
Money Magazine recommends Vanguard Inflation-Protected Securities Fund (VIPSX), iShares Lehman TIPS Bond (TIP) or T. Rowe Price Infl.-Protected Bond (PRIPX) .
7. A money-market fund.
Money Magazine recommends Fidelity Cash Reserves (FDRXX),Schwab Value Advantage Money (SWVXX) or Vanguard Prime Money Market (VMMXX)
Each recommendation lists 2 no-load mutual funds, and 1 ETF. Why two mutual funds? Probably because the first has performance that matches the underlying index more closely and has less of an expense ratio. The second fund deviates from the index (slightly) and is thus more risky (so the thinking goes) and carries a higher expense ratio, though most are under 1%.
There has been some criticism of the funds recommended above, specifically that they require large amounts of cash to open the account or to buy into the fund (i.e. Large Minimum Investment required). This is true if you’re investing a lump sum, but most (if not all) of the brokerage firms that manage these funds waive that requirement if you sign up for automatic, investing. This is also why they include an ETF with each of their recommendations, because if you have a lump sum investment to make, ETFs are more cost effective than mutual funds.
Another point of criticism is why 7? If Americans can’t manage to spend less than they earn and sign up for a 401k to begin with, why would you think they’d be capable of following 7 different investment types?
I think this is perhaps a bit harsh on most Americans, especially the ones interested in investing to begin with. But I can see the point, and to be honest I’m not sure why Money included a value fund, but not a growth fund? Especially when both funds invest in large cap U.S. equities, which is already covered under “1. A blue-chip U.S.-stock fund”.
So, for those critics, or the ultra simple investor, I give you:
The Super-Simple, One Minute Portfolio.
1. The Whole Enchilada.
This is where you invest in the entire U.S. Stock market in one shot. Small Cap to Large Cap, Growth to Value, Sector to sector – You own it all. Recommendations: Vanguard Total Stock Market (VTSMX), or Vanguard Total Stock Market ETF (VTI).
2. The Whole International Enchilada.
Just like #1, but everything outside the U.S. – emerging and old Europe. Recommendations: Vanguard Total International Stock Market (VGTSX) or Vanguard FTSE All-World ex-US ETF (VEU)
3. The Bond Enchilada.
For proper diversification, bonds are a given. Recommendations: Vanguard Total Bond Market (VBMFX), iShares Lehman Aggregate Bond (AGG) . There is the Vanguard Total Bond Market ETF (BND).
Why so much Vanguard? Well, their expenses are the lowest around and they hold true to index tracking, so it’s simple and straightforward with no mystic index formula voodoo. Besides, they often have one of the highest yielding Money Market funds available as well, and that should be the foundation upon which your investment portfolio is built.
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Posted: May 27th, 2008 | Author: Joe | Filed under: Saving, Tips | Tags: Cheap, entertainment, Hobbies, How To, Lifestyle, Saving Money | 35 Comments »
There was a time when my wife and I would go out to the movies every weekend to catch the latest “must see” release from Hollywood. That’s about the same time I would buy the latest upgrade for my PC to run the latest game that was fetching rave reviews. Yes, I’m a former Unreal and Quake addict.
But the times, as the saying goes, have changed.
Flash forward 8 years and I’m writing this on my old gaming PC, circa 1999. The last movie my wife and I saw in a theater was The Return of the King in 2003.
Why the lifestyle change? We now have two small children that take up most of our time (and money). Don’t get me wrong, we wouldn’t have it any other way, but scaling back to live on a single income has meant making tough decisions about what is important enough to spend our limited financial resources on. Hence, the foregone computer upgrade, and lack of an entertainment budget.
That doesn’t mean we don’t have fun. It just means we’ve had to find inexpensive hobbies to amuse us in what we jokingly call our spare time. Here are some of the ways we entertain ourselves on the cheap:
1. Playing Music.
This can be costly if you are buying an instrument, but teaching yourself to play is relatively cheap. Also, the various equipment and maintenance (reeds, strings, picks, piano tuning, etc..) are re-occurring expenses, but relatively infrequent. Upright pianos can often be found for free (“if only someone will take it away!”), and other instruments can be found likewise through want ads or freecycle .
Even if you don’t go the hand me down route, many new instruments can be purchased for a one time cost of a couple hundred dollars. My wife bought me an acoustic guitar somewhere in the $400-600 range for my birthday a few years back, and I’ve only ever spent money on new strings every couple of months or so. Any serious guitarist will tell you that this is not often enough, but hey- it’s only a hobby. This type of hobby is not to be ignored especially if you have children. Children love music, even if you’re not a trained musician. Trust me, I know. I have been playing guitar for 6 years now and I’m no Eric Clapton but my kids love it. Most of the time. 
Great, cheap guitars for beginners can be found for under $200.
2. Writing.
You’ll be amazed at what you can learn about yourself through regular writing, whether it is in a journal or a blog. Plus, there’s no better escape from the drudgery of life. If you really like to write and find that you’re not half bad it, you can even make a few extra dollars doing it. Check out content development sites like AssociatedContent and HubPages or start your own blog.
3. Reading.
Reading is the single best way to increase your knowledge, or escape from the dull realities of your everyday life. The best part is – it’s absolutely free through your public library. With the Internet and inter-library exchanges, you can find most any book at your local library. You’re already paying for it with your tax dollars, so why not use it?
4. Knitting and Crocheting.
My wife loves to knit. It’s pretty rare in our generation, but it is a soothing hobby for her and she’s even made some hats, scarves, and the obligatory sweater for the kids. Having a relaxing hobby to unwind after a day of chaos AND making your own clothes for mere pennies – that’s a good thing in my book.
5. Astronomy.
OK,I know what you’re thinking: “Astronomy is a cheap hobby? No way!” The problem here is that any hobby can get expensive if you get carried away, it’s just that getting carried away with astronomy entails dropping a couple grand on delicate equipment like telescopes and lens. But it doesn’t have to be that way. You can get quite a bit out of a pair of binoculars (much less expensive than a telescope), and a star map.
6. Photography.
Photography was once a keen interest of mine, but after I left college I dropped it like a bad habit. The problem was that I no longer had access to a photo lab and I was horrible at remembering to get my film developed. Plus the cost of film and the development of that film was not exactly cheap. But digital cameras have changed that. You can get a decent digital camera for less than $200 and if you get really good at photography, development is dirt cheap now as well.
7. Walking, Hiking and Running.
These are excellent hobbies because they’re cheap AND healthy, and who doesn’t like that? It’ll only set you back the cost of a good pair of shoes and maybe some appropriate clothing.
8. Painting and Drawing.
Paints and paper are relatively inexpensive, and you may have a budding Rembrandt or Picasso inside you. Hey, you never know!
9. Meditation and Yoga.
Two more healthful hobbies that cost little to nothing. You may want to sign up for some classes to get a proper introduction to the techniques, but there are also many how to books for the DIY enthusiasts. I bought a couple such books back when I was still in high school. The techniques I learned from them have helped me get through some pretty tough times over the years. I’ve haven’t practiced either for quite a while, but writing this post makes me want to get back into the habit again. What can I say, after having two small children I long for the peacefulness these hobbies can bring.
10. Baking and Cooking.
If you love to cook, or bake, then this is a win-win hobby! You get the pleasure of making your own meals and desserts, while saving money on groceries. And again, this one can be loads of fun with young children involved.
If you have an inexpensive hobby that’s not on the list, please leave a comment – I’m always on the lookout for something new!
Photos:
Camera and Books © Zsuzsanna Kilián
Yarn © Ben Earwicker
Guitar © Ana Paola Oliveira Loeblein
Yoga © My Yoga Online
Technorati Tags: Hobbies, Lists, Lifestyle
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Posted: May 23rd, 2008 | Author: Joe | Filed under: Economy | Tags: Economy, Rant, Recession | 3 Comments »
There’s actually been some speculation recently in the media that the U.S. might “dodge” a recession. Personally, I’m quite surprised by this. How can we dodge something that we’ve been told we’re in the middle of for 6+ months? I guess I’m really more surprised that the media is changing “moderating” its story. I wouldn’t be surprised at all if the U.S. does dodge the recession bullet.
The main reason is entirely subjective in nature. Despite the doom and gloom in the headlines every single, unrelenting day, it just doesn’t feel like a full blown recession. There is plenty of data to illustrate that so far, the U.S. economy is not in a recession. What I’d like to do today is give some anecdotal reasons why I don’t see a recession.
1. Goods in Action.
I travel approximately 40 miles on an interstate every business day to work and back. When I started this commute (when I got this job), it was in Q1 of 2003. The U.S. was just edging out of a recession that began in 2000-2001, after the tech bubble burst and the Twin Towers fell. Driving to and from work at that time was bliss, from a traffic standpoint – there practically wasn’t any! Flash forward 5 years and it’s almost bumper to bumper some nights. And while the amount of 18 wheelers I see in my travels has lessened some over the past 6-9 months, there are still plenty of big rigs hauling merchandise, lumber, automobiles, dairy and more from point to point, day in and day out.
2. The Shopping Malls are Packed.
We took the kids to the mall a few weeks back when we needed to make way for a house showing, and let me tell you – that place was crowded! Again, it wasn’t the weekend before Christmas busy, but certainly more than I expected on a week night in the middle of “the greatest economic crisis since the stock market crash of 1929.”
3. The Restaurants are Packed.
A few days ago, we again had to vacate the premises for a showing but this time we went out to dinner. Nothing special. Just the local Appleby’s. Again, I was amazed at the volume of people for a Tuesday night. What are all these people doing eating out during a recession?! Aren’t they afraid they might lose their jobs? Apparently not.
4. My Employer Can’t Hire Enough Skilled People.
We’ve been losing people left, right and down the middle since the company was acquired last year. These people weren’t laid off – they left of their own accord. I’m not sure where they’re all going, but there are many places still hiring, I can tell you that much.
To be fair, many of these examples are affected by local economic conditions and markets. But there is national data to back some of this up. For instance, the most recent jobless claims report showed that unemployment was less than expected. Of course, the media has to color it in a negative light by stating “Data still at level indicating labor market is strained” But the fact remains that unemployment figures are still low for the recession we’re supposed to be in.
Also, the Dow Jones Transport Average which is often used in the stock market as a leading indicator of economic direction has been rising steadily over the past 3 months:
I just don’t feel like we’re in a recession. In fact, I feel that we may avoid one altogether. How about you?
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Posted: May 22nd, 2008 | Author: Joe | Filed under: Investing, Reviews | Tags: Book, Investing, Review, Stocks | 1 Comment »
In Getting Started in Stocks, Alvin D. Hall (A.K.A. the Professor of Wall Street) aims to educate the investor by providing the knowledge and background required for success. He does not argue that his way is best, or make claims to teach the reader how he can beat the market. This is not a get rich quick scheme or a book written by the author strictly to make him rich.
As the title suggests, this book is all about the basics of investing in the stock market. The topics are laid out in a logical progression in such a way as to present an encyclopedic amount of knowledge in an easily digested fashion. In short, this is an often dry but complete introduction to the terminology and concepts every investor should know (and few probably do).
Do you know the difference between Common Stock and Preferred Stock? Do you know what a Derivative is?
Neither did I.
Those are only a couple of the things I learned from this book.
IN THE BEGINNING.
The book begins with the basics of investing. Notice I didn’t say the basics of stock picking or stock trading. It begins where investors should begin: Setting Goals. What good is investing when you don’t have a goal or a strategy to go about selecting the stock in which you are going to invest your hard earned money? And no, to “make buckets of cash” is not a sufficient goal 
Also covered in the first section of the book are the different categories of stocks (Growth, Income, Value, Large Cap, Mid Cap, Small cap..), different types of risk as well as the concept of risk vs. reward. The author covers the means and methods of formulating sound investment strategies, and analyzing individual stocks. He covers various aspects of dividends, including the numerous related dates: Declaration Date, Ex-Dividend Date, Record Date, and Payable Date.
Capital Gains, Market timing, Buy and Sell Signals are all covered as well, but he makes key distinctions that a lot of people miss. For instance, Fundamental Analysis is used to determine if the company (stock) is worth owning, while Technical Analysis should be used to determine the best time to buy the stock. Many people get caught up in an argument over which method is best, and completely miss the fact that they are complimentary techniques. Likewise, he spends some time on the differences between being a Speculator vs. Investor, but illustrates that either one can be prosperous.
He uses clear and concise examples to illustrate Stock Splits, Par Value, Tender Offer and IPOs. Concepts like Buy and Hold vs. Trading are illustrated through the use of anecdotal vignettes highlighting various fictitious “investors” and how they use each technique to accomplish their goals.
THE BASICS OF BUYING AND SELLING STOCKS.
The next section of the book details the process of buying and selling stocks.
Here the author covers basic concepts like Bearish vs. Bullish, but quickly gets into some more esoteric (to me) topics like Covering a Short Sale and Buying Stocks on Margin.
But this section is chock full of important terms and techniques every investor who operates outside of a company 401(k) type of plan should know: The difference between keeping the stock certificate in your name, or the brokerage’s name (A.K.A. the Street Name). Another important topic covered here is the 3 types of orders: Market Orders, Limit Orders, and Stop Orders (or Stop Loss Orders).
These are things every DIY investor needs to understand, but many do not.
He also covers the various fees and commissions and general costs associated with different types of brokerage firms – full service vs. discount.
INVESTMENT STRATEGIES.
This is the big picture portion of the book. After taking the reader through the nuts and bolts of investing and preparing the reader, Mr. Hall covers the strategic part of investing. He outlines various approaches to investing, ranking them from least speculative to most speculative – from Buy and Hold to Buying Short on Margin.
He does a good job of outlining the factors that every investor should use to determine the best strategy for the investor, given his style. For example, if you don’t have the time and inclination to read numerous financial news reports and keep tabs on individual stocks, then active trading is not for you. You should opt for a more passive approach. In the section regarding passive investing, Hall covers the magic of Compounding from dividend reinvestment (DRiP) plans and the difference between Buy and Hold and Buy and Neglect.
Also covered are basics like Dollar Cost Averaging, Asset Allocation and Portfolio Re-balancing, Constant Dollar Plan (where the investor’s asset allocation is kept to a specified dollar amount) and the more familiar Constant Ratio Plan (where allocations are kept to a specified percentage of the total portfolio).
Hall ends this section of the book with a discussion of using “paper trading” to simulate investing as a means to gain experience without putting real money at risk. There are many websites that offer this functionality. The one I use, and find quite easy to use, is Investopedia’s Fantasy Stock Market Simulator.
BUILD A STOCK PORTFOLIO OR INVEST IN MUTUAL FUNDS?
The book ends with the age old question “Should I invest in mutual funds, or individual stocks?”
To which the author replies: “How active do you want to become in stock selection and management?”
This portion of the book outlines the differences between Mutual Funds and Stocks, while defining the jargon common to mutual funds like Net Asset Value (NAV) or Bid Price and Public Offering Price.
His recommendations for each boil down to sound, simple advice (which is another reason I liked this book). For stocks: Buy what you know. For mutual funds: Choose funds in your target category that have out performed their respective bench marks for long periods of time (5-10 years) and buy funds run by managers with strong track records.
For most people though, he gives advice that has been echoed in many venues: Invest 90-95% in a mutual fund and the remainder in individual stocks.
CONCLUSION.
This book is a must have for anyone interested in learning about investing and beginning to invest. If you’ve thought about investing, but have never taken the leap – read this book first!
I would also recommend this book for those who are not new to the investing scene as it serves as an excellent source to fill in the gaps that we all have.
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