Wednesday, December 31, 2008

My 2008 Personal Finance Report Card

The past year has been a monumental one for us, at least from a personal finance perspective. Here is a quick summary of some of the highlights and closing positions for the year.

Net Worth - our net worth is up 7% over the past year, but this is entirely due to an unexpected and substantial cash infusion from a family source. Without this cash infusion our net worth would have been down by high single digit percentages. Over all we have kept to our plan and had the market treated us nicely, this could have been a banner year. Maybe next year?

Investment Portfolio - we got completely smacked. Our investment portfolio (which does not include our cash position) is down a staggering 33%  for the year. That burns, especially since this number looks better than it actually is due to new money that we have invested in recent months. Still, we continue to fully fund my 401K - my wife is currently working part time and does not have a 401K - and we continue to make regular monthly contributions to our investment portfolio.

Spending - this year we spent about 4.5% more than we did last year, however most of this increase is on non-discretionary items, such as childcare (up %26) and medical bills (up 52%). Over all, we live within our means: in each of the past 12 months we made more money than we spent, with the exceptions of April (where we got hit with a large, unforeseen tax bill - damn you AMT!!!) and June (where we got hit with unexpected childcare expenses, and my wife was not employed).

Career - a mixed bag here. I left my previous company to take a VP level position with a technology start-up in my industry. Generally speaking, I am very happy with this move. My work is interesting, it carries a great deal of responsibility (and stress), and is clearly an important growth position from my previous job. Even more important, this position puts me in a very good spot for my future career path by giving me a great deal of exposure to high level executives in my industry as well as to a large number of venture capital firms. All in all, a good decision, but not a risk-free or stress-free one. My wife on the other hand has had a tough year at work - she was let go of one position, and resigned from another because that position required her to work too many hours. She is currently happy to be working part time, however this situation may not be a very stable one at the company she is with. We'll ride that horse as long as it runs.

Money and Such - this has been a very decent year for Money and Such. I have continued to gain RSS subscribers (thank you guys!) and traffic has been dramatically higher in October and November thanks to some high profile link-backs and a lot of search traffic. The site has also started to generate a little bit of revenue (although this is really minor for me). I have noticed that the number of posts I published this year is significantly down from 2007 - 151 this year compared to 237 last year, however, this is primarily because I did not do much writing between January and April (suffering from blogger malaise, I guess). My plan is to continue going strong in 2009, with an average of 15 to 20 posts per month. My goal is to double the number of RSS readers to 500 by this time next year. I am also thinking of joining a blogger network, so if any of you guys out there, think I am good enough for you, give me a holler. What started out as an experiment for me, has turned into a real hobby. I think that Money and Such will be around for quite a while, and maybe one day I will even try to figure out how to migrate this site to its own private domain. I am not a very technical blogger.

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Tuesday, December 30, 2008

Cutting My Tax Bill

In 2002, as the dotcom bubble was going through its painful deflation, I took my first steps into stock investing, and what painful steps those were. After it was already down by about 50%, I bought a sizable stake in the NASDAQ index fund QQQ. I figured: how much more could it fall? Well, it turns out the a lot more. At the bottom, my position was worth a staggering 67% less than my original investment. Worse, we never recovered those losses. At its best point - in October 2007 - more than five years after the original investment, the position was still about 20% under water. After the crash of 2008, that position is now 56% down.

Well, I have decided to make some money on that miserable investment decision. Or at least, I have decided to cut my losses. Last week I sold off enough of that position to take advantage of the $3,000 ordinary income deduction for the 2008 tax year. We typically buy and hold for the long term, but I figure it's time to admit a mistake and at least harvest some of this loss. By the way, I did not remove this money from the market, I used the funds coming out of QQQ to beef up our REIT index fund which has been badly beaten down over the past year. Rebalancing.

There is another lesson hidden in this little fiasco: no matter how much you think the stock market is beaten down, it might surprise you and fall a lot more. This lesson is not lost on me, and the comparison to the current situation may be a good one. My mistake in making the QQQ investment was to place all our eggs into one basket - investing in technology stocks. My other mistake was moving into the market in one lump sum, rather than moving in gradually over time. I have tried to learn from that mistake and we are now broadly diversified. In addition, I am now very careful about moving money into the market gradually, over time, through monthly, fixed contributions. Still, it is possible that six or seven years from now I will be selling positions I am buying today to offset a looming tax bill. Let's hope not.

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Monday, December 29, 2008

The Urge to Change

In recent days I have been getting antsy about our portfolio. I feel the urge to do something, I am not exactly sure what, but something to improve the overall safety and performance of our investments. Unfortunately (or actually fortunately), I know that there is very little a smart investor can do in this market turmoil other than stick to tried and true investment principles that will ultimately bring success: diversification, cost minimization and regular, disciplined investments and savings.

Maybe it's because my company is shut down for the holidays and I have more time on my hands than I am used to. Maybe it's because I have been spending some of that extra time reading the Wall Street Journal and other business papers. There is so much advice out there: stocks to buy, stocks to avoid, predictions of doom, predictions of a quick stock market rebound... there is a ton of advice out there and much of it is conflicting. It's just not useful.

My assessment of the economic situation is that things are pretty gloomy. The news is pretty much all bad, and while stocks dropped a precipitous 40 some percent over the past year, there is nothing that says that they can't go down further. Having said this, I believe that we are within 10% to 20% of a market bottom, and market timing is simply not something that I believe in. With that in mind, we will continue our regular, monthly contributions to our stock portfolio, and as always those investments will be in the form of index funds. Buy and hold for the long term, will continue to be the strategy.

Having said all this, there are a couple of diversification moves that I have been entertaining. One is something that I have been thinking about for a long time: build a small diversifying position in commodities (I am thinking 5% to 10% of the portfolio). Commodities have taken a major hit in recent months, and this may be a good time to make such a move. The other move I have been entertaining is diversifying into foreign currency denominated investments. I don't know about you, but the massive borrowing that the federal government has undertaken makes me nervous. In the coming years, I will not be surprised to see the value of the Dollar slide and tumble and erode the purchasing power of our savings. E*trade, where we keep our portfolio offers the option of opening an investment account denominated in Euros or other major currencies. This is something I will continue to think about and research and I will keep you guys updated.

In the mean time, I think that a good way to handle the situation is what a wise man once said: "Don't just do something, sit there"...

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Thursday, December 18, 2008

Dealing with the Crisis by Ignoring It

The other day I e-mailed an old friend who I haven't seen in a long time. This guy and his wife own and operate an event planning and marketing promotion business. Naturally, I was wondering how their business was faring under the current economic conditions. He wrote me back saying, and I quote:

"We've heard about the global economic downturn, and we are choosing not to participate."

I was amused. That's the kind of guy my friend is. Now, I am assuming this guy was kidding me, but the question is whether such a response can be a legitimate strategy for coping with the situation. After all, the vast majority of us is gainfully employed and will continue to keep our jobs through the crisis. Those of us who were prudent and fortunate enough to build our cash reserves have a cushion to fall back on in time of need, and if you are willing to take a business-as-usual approach you can get some pretty fantastic bargains these days on anything from cars, to vacations, to homes, to luxury goods.

I am too conservative with my money to follow such a strategy, but I wonder if any of my readers out there are taking this kind of "business as usual" approach. Let me know.

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Monday, December 15, 2008

Not All Lay-offs are the Same

Four thoughts about lay-offs:

1. Last week I heard that a good friend of mine was finally let go from Citigroup where he worked for the past 7 years. He had survived several rounds of lay-offs, but his number was finally up when his entire group was axed last week. I guess that there are some lay-offs you simply cannot escape. Or are there? Knowing that the risk level was high, my friend began networking internally months ago, trying to find islands of relative safety within the troubled bank. Even in badly beaten Citigroup there are groups and divisions that are doing well and making money, and those groups are still hiring. Although he does not yet know whether he will be saved by a last minute move to another group - my friend has two likely leads, and may be able to stay one step ahead of the grim reaper for a while longer. He should know in the next couple of weeks.

2. Laying people off during the holidays sucks big time. It's just not right. I know that businesses are struggling and I sympathize with management teams that are doing everything in their power to save their companies, but laying people off a week or two before the holidays should be done only as a very last resort...

3. Speaking of which, my former company also went through a 10% lay-off last week, which only goes to show you that big and mid-size companies like my former employer, do not necessarily offer employees more job security than smaller companies like my current start-up. People knew that this lay-off was coming about a week in advance, and pretty much everyone knew in ahead of time who was going to go. It just goes to show you that lay-offs are NOT arbitrary. The writing is typically on the wall long before any pink slips are handed out.

4. Not all lay-offs are the same. In this post I mentioned two companies that went through lay-offs. Citigroup and my former company - a Silicon Valley high tech company which shall remain nameless. My friend who was laid-off at Citigroup, received a 6 month severance package. He will not be out on the street any time soon (he is highly talented and will certainly recover quickly anyway, but the cash certainly helps). Some of my former colleagues fared far worse. For example, one of them, after 10 years of service was given only 8 weeks in severance pay. That's not right. It just goes to show you - it's important to know which company to get laid-off by...

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Sunday, December 14, 2008

Credit Room - Site Review

These days folks looking for a new credit card have a variety of websites catering to their needs with offers for matching their lifestyle and financial objectives to the most appropriate card for them. The Credit Room is one such site and the thing that immediately struck me when I visited it was the clean graphic style and appealing layout which are clearly aimed at visitors of the female persuasion. 

I found it very easy to navigate the site and information is very accessible. Visitors can search for cards by feature (e.g. fee free cards), reward type, or the strength of their credit score. Credit Room also offers a large number of credit related articles, many of which aimed at women (I don't think that articles such as "beauty and credit" are meant for tough guys like myself), and others of more general interest - such as this article about dealing with credit limits and this article about identity theft.

All in all, Credit Room is a very nicely designed site that does what it's there for, and does it elegantly. However, one area where the site misses the mark is in the advanced search functionality. This section is meant to allow visitors to search for the right cards based on multiple criteria, such as credit history, country of residence and type of user. The problem is that the functionality simply doesn't work. I entered my country of residence as the U.S., my credit history as good, and identified myself as a consumer... the engine found precisely zero cards that matched my criteria... clearly some repairs are in order.

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Thursday, December 11, 2008

Fall of a Stock Picker

In yesterday's Wall Street Journal, there was a front page article about William Miller, who I suppose is the manager of Legg Mason Value Trust, a mutual fund which according to the article "outperformed the broad market every year from 1991 to 2005. It's a streak no other fund manager has come close to matching". In spite of Mr. Miller's phenomenal run, in this latest market downturn he stumbled so badly that according to the WSJ, "These losses have wiped away Value Trust's years of market-beating performance. The fund is now among the worst-performing in its class for the last one-, three-, five- and 10-year periods according to Morningstar." The WSJ quotes an investor in this fund as saying: "Why didn't I just throw my money out of the window -- and light it on fire?", and complaining that Mr. Miller's strategy "worked for a long time, but it's broken." I would like to point out that throwing your money out the window and then lighting it on fire, is redundant. You could reduce your expenses by taking either action, but both are probably not necessary.

So what's my point? Only this: investing is not about beating the market over the short term. It's not even about beating the market consistently for 20 years. It's about generating enough returns to guarantee your financial future. Even if you think you found a star-performing fund manager, or you think you can pick stocks better than anyone else you know, you should have zero confidence that this streak will continue. Apparently Mr. Miller is a very talented investor. Either that, or he is lucky beyond belief. However, even his market beating returns were completely wiped out by a short term mistake.

What's the answer? As always, my answer is index investing: (i) trust in the long term average returns of the stock market and don't try to beat them because the house always wins, and (ii)  minimize your investment costs because that is the one element that is completely under your control. Oh yeah, and don't freak out and sell when the market turns south. Markets do that on occasion.

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Wednesday, December 10, 2008

Why the Worst May be Over

In these days of economic doom and gloom, I would like to be one of the first to climb on my soap box and take a big risk by saying that: I think that the worst may be over. That's a bold statement with the stock market in the pits, the unemployment rate projected to climb up to 10% by next year, and some big name companies on (the wrong side of) the brink of collapse. Still, I am getting a hunch, and its nothing more than a hunch at this point, that the worst may be behind us. Here are my reasons:

The world isn't ending - yet everyone is acting like it is. Back in September and October (seems like eons ago), it seemed like we were on the precipice of disaster. Personally, I was concerned that the banking system as we know it might completely cease to function. It looks like this is not happening. While some big name banks have gone under in a massive wave of bankruptcies and fire sales, the system is still here. I have been tracking the LIBOR rates - which show the interest rates that banks are charging each other, and rates have been progressively going down since the worst of the crisis. Is some semblance of confidence returning to the markets?

Stocks have slowed their descent - month over month my Quicken reports still show that our portfolio has lost value. However, on a weekly view, for the past few weeks the market has been moving more or less sideways, and in the past 14 days the direction has been up. Could it be that the low of 741 we saw on the S&P 500 just a few weeks ago might be the illusive bottom? Or is this a bear trap we're looking at?

Liquidity galore - the amounts of money that governments around the globe have been throwing at the economy are simply staggering. We are talking multiple trillions here. You gotta believe that all this money has got to make a dent in the problem. Now whether this is a good thing in the long run and whether we'll see rising inflation and a crumbling Dollar in the future is a different question that we should leave for another day, but all of this stimulus should be... stimulating.

The shock is gone - I talk with a lot of people. Over the past couple of months everybody wanted to talk to me about how the economy was horrible and things were going to hell in a hand basket. Over the past few weeks it seems to me that the shock has worn off. These days I don't hear a lot of chatter from folks about how they are losing a ton of money in the stock market and how the latest news will mean disaster for the economy. I think people are more or less resigned to the situation and in their own careful way, are getting back to business. I think this will eventually translate into more robust economic activity.

I don't know, I may be imagining things, but I think that the worst may be over. Don't get me wrong, things aren't going to be great all of a sudden, and if you are out looking for a job in this climate, you are not going to have an easy time. However, I think we may be going from a class 5 hurricane to a class 3 hurricane. It's still pretty bad, especially when it hits you directly, but it's just slight less horrible. Thoughts anyone?

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Tuesday, December 09, 2008

Where the Bail-Out Money Goes

$335B in bail-out money have been committed by the government to date as part of the so-called TARP program. The NY Times has released an excellent graphic that shows where all this ocean of cash has been flowing.

As you know, I have been an early supporter of the financial industry bail-out, however upon seeing the NY Times graphic, I have to ask myself if this is precisely what was intended. Yes, a lot of the money has gone to bail-out commercial and investment banks, however, if you examine the list of companies that have received bail-out money, you will also find American Express - a credit card company; Hartford Life and Protective Life (protective being my own troubled life insurance company); and now several cities and states have joined the list of beggars for our tax dollars, not to mention the auto industry which has been angling for a nice chuck of change financed by - who else? - the American taxpayer.

What a sham this is turning out to be. The financial industry required saving from complete collapse for the benefit of the entire American economy. The same cannot be said for the life insurance companies, car manufacturers or local governments. Seriously, if my home state of California is $32B in the hole, let us, the residents of California, pony up the cash or else give up some services. If I as a consumer selected a failure of a life insurance company, it was my mistake. I am not expecting the Federal government to guarantee my financial decisions. And auto makers? I have spoken my mind on that farce extensively already.

It should take more than the purchasing of a regional bank to allow for American Express to claim the title, benefits and bail-out money of a so-called "Bank Holding Company". Enough is enough. Not every failing business should be rescued by the government, and not every miserable financial decision needs to be rewarded. A line should be drawn, and the line should pass exactly at the point where the benefit of a bail-out accrues to specific individuals or limited groups, but the financial cost is borne by society at large. Banks needed to be saved so that our economy could avoid a complete melt-down. The logic does not apply to the other institutions standing in line for cash.

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Wednesday, December 03, 2008

Counting the Loot

This weekend my 6 year old son and I decided to go through the change jar and roll-up some coins. After a fair amount of work we ended up with a total of $237.50 in change all rolled up in the nice little piles you see above. This coin jar has been laying around for several years now and the coins weighed about 10 lbs when we took them to the bank for deposit.

My son really enjoyed this activity and my three year old twins also wanted to help (obviously making more mess than actually helping). While we were at it we also tackled my son's piggy bank from which we pulled out $37 in coins. He was very proud when the teller handed him several new, crisp notes for his change. I was actually contemplating opening a checking account for my son so that he could learn to manage his money, but I think we'll wait a few more years to do that. He's still too young.

Interestingly, in this huge pile of change, my wife spotted a penny from 1946. This coin has been wondering the world since the year my father was born, until it somehow ended up in our change jar. Just think of all the places it's been. Incidentally, if you are curious about where you paper money wanders off to after you use it to pay for something, you can find out by going to Where's George. I used it a couple of times with interesting results.

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Monday, December 01, 2008

Life Insurance Company Stability - More Concerns

In recent weeks I have written a couple of times regarding my concerns about the financial stability of my life insurance company, Protective Life. It seems like there may be new reasons for concern. After Protective Life was downgraded by some rating agencies recently,  it seems that the company is now seeking the status of a bank holding company, so that it can receive some Federal bail-out money... 

I have conflicting feelings about this whole thing. First, can anyone now get federal bail-out money? You simply need to be declared a bank holding company? That seems seriously wrong. However, I am concerned about the status of my life insurance policy and I am not quite sure what the appropriate response may be. Should I be out looking for a new policy from another insurer? How can I tell if the new insurer is any better? I mean, when I did my due diligence, Protective Life seemed stable enough too. Finally, I am not clear whether my life insurance policy is at risk here or not.

Life insurance policies are typically guaranteed by state guarantee associations. However, in last week's issue of Business Week, there was an article about the fact that those associations have very few assets to back-up those guarantees (sorry I couldn't find a link to the article itself). Here is a quote:
"When Executive Life went belly up in 1991, states couldn't raise enough to cover its obligations. Annuity and life insurance policyholders in California recovered as little as 70 cents on the dollar or were forced to accept modified terms with alternative providers. "I wouldn't put tremendous amount of credence in the guarantee funds," says Adam Sherman, president of advisory firm Firstrust Financial Resources in Philadelphia."
Wonderful. Another quote:
"Insurance customers need to be more vigilant. Stop focusing only on cost and service and start worrying about solvency. Check such agencies as Standard & Poor's, Fitch Ratings, Moody's and A.M. Best to find the highest-rated companies, and be alert for downgrades."
Yes, but I did all that. What do you do if there is a downgrade? I don't have an answer yet. Still trying to figure this all out.

In any case, if you would like to find out about the current strength of your own life insurance company,  the Insurance Information Institute offers detailed explanations on how to find and interpret ratings from each of the four rating agencies listed in my quote above (the links are close to the bottom of the page).

I'll keep you posted when I decide how to address this issue, but in the meantime, let me know if you have any suggestions.

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