Writing Off 2008 Already

The new year has a rough start. Will it continue? Who knows but historically the beginning of the new year has little impact on what happens for the rest of the year as shown in the following article from Marketminder.com.

January Ineffect
1/7/2008

Story notes:

• January’s rough start has many investors invoking the old saying, “So goes January, goes the year.



• Statistically, this belief isn’t supported. History shows negative starts can be followed by positive years and vice versa.



• Market volatility is normal, no matter when it happens, and doesn’t mean a prolonged downturn is at hand.

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January has commenced with gray weather, record snows, fierce storms, already broken New Year’s resolutions (stupid leftover pumpkin pie), and the usual post-holiday gloom—not to mention a continuance of December’s volatility. Most major market indexes are negative so far this year, leading many investors to invoke the old saw “so goes January, goes the year.” Already, we’re seeing stories highlighting the long and widely held belief that a rough start to January portends trouble ahead.

The Stress Is Just Beginning
By Tomoeh Murakami Tse, Washington Post
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/05/AR2008010500149.html

This article states, “If the first three trading days of the year are any indication, 2008 is bound to test the nerves of even the most poised investors.” Fair enough—volatility always “tests nerves.” Except the first three trading days are never an indication of what’s ahead. Not ever. Three days of any month, no matter the calendrical significance, tell you nothing. Investors wouldn’t make a stock forecast based on the Ides of March—there’s nothing about any one day or group of days’ returns that tells you anything about what to expect looking forward.

Statistically, this is easy to disprove by checking historical data to see what happened each January and the annual results. Throughout history, negative starts to January have been followed by all sorts of combinations of positive and negative returns. Positive start, negative January, positive year. Negative start, positive January, negative year. On and on. Looking at the six worst first 10 days for the S&P 500, you see US stocks ended positively four of those times—one year up a big 42%! Another up 26%! What does that tell you? Nothing—beyond stocks are positive more than negative. And the third best start ever ended the year down 15%. Not so great.

Fundamentally, this makes even less sense. What do a few days in January tell us about investor demand for securities? Markets don’t obey a calendar. There’s nothing magical about January’s start suggesting markets must suddenly begin “behaving” themselves. Markets are volatile. They can be volatile in January, July, on Tuesday, the day after the Fourth of July—pretty much any time. Markets don’t have neat steps-and-stairs increases, and if they did, you wouldn’t be happy with the return you got. If you want that kind of steady appreciation, you’re going to have to be satisfied with what you can get by buying US Treasuries and holding them to maturity (i.e., not much).

We call the market “The Great Humiliator” (TGH for short) around here for a reason. Its sole purpose is to humiliate as many people as it can for as long as it can for as much money as it can. Scaring investors out of superior long-term returns with a bumpy start to the year is one way the market robs otherwise rational people of their senses.

We remain confident the world is altogether too dour. Don’t let TGH humiliate you out of the market with a bumpy start to the year—that’s just what that filthy trickster wants

New Chair

I bought a chair. It’s used slightly. It was expensive, but it was a good deal for an ok price. It was $300, but I wish it had been cheaper. I’ve sat in a lot of chairs now. My tushie is tired. The one I really wanted was navy leather and cost $1000. It’s discontinued so it was never a temptation.

But since I’ve been looking for an armchair for the last four years, it’s what it is. It’s the chair I’ve got now.

I really wanted another chair so I could have a real sitting group in my apartment and entertain people. Right now your options are to sit side-by-side on my couch or sit in a hard kitchen chair. (No cushions.) For hours and hours of knitting, a real armchair/side chair is much better. And now I have one.

Goody!

Developing my legitimacy bit by bit

It pleases me to report that I have passed the first of two exams necessary for me to attain the certification of Accredited Financial Counselor, a designation awarded by the Association for Financial Counseling and Planning Education. Once I have completed a second exam (probably sometime in the spring), finished several hundred hours of practicum experience, subscribed to the Code of Ethics and paid the membership fee, I will be a blogger with a legitimate, real-life accreditation, and not merely an "internet professional"! How many other personal finance bloggers can say the same?

It was quite a test. Nothing at all compared to the CPA exams or the CFP nightmare, but it definitely required a lot of preparation to fully understand all concepts covered.

If you are eligible and interested, this program is a great opportunity for military spouses and survivors to get free education and certification in an important field. The certification would cost about $900 out of pocket otherwise. Applications are accepted in the spring sometime, usually in March. For more information on the program, click here.

Mutual fund frustrations

I have a mutual fund (within an IRA) that hasn't been doing very well. And by not doing very well, I mean it's doing worse in comparison to similar funds. Despite that, I wasn't panicking. I just had in mind that I would transfer it to a less-risky fund it when it came up a bit, which it seemed to be doing. So I began looking into what it would take to transfer it to some different funds.

Now this is an old account, that I had gotten back when I had no idea at all what I was doing. I'd bought it through a financial planner. So I contacted that planner to ask about putting part of it into some different funds instead. They didn't want to do that, and suggested I transfer it to a brokerage house instead. So I sat on it awhile, trying to figure out how to do that, and which broker to transfer it to. And the fund proceeded to lose almost 3% of its value while I fiddled around. Irritating? Yes. A good lesson? Yes.

What have I learned?

First, don't invest in something that you don't understand. While I did understand the concept of an IRA when I bought the fund, I didn't really know what made a good fund. I didn't know anything about risk, which is kind of important. I'm still not an expert at mutual funds by any means, but at least I now have a better idea of what to look for. I also didn't know anything about diversification, so all of my money was in one fund. Bad idea.

Second, I learned that you shouldn't invest with someone unless you fully understand their role. It's also good to look into their qualifications, level of experience, and to evaluate their performance from time to time.

Finally, I learned that I am very easily frustrated when it comes to not being able to do what I want to do. (Ok, so I knew that part already.) But what I realized is that those feelings were getting in the way of me making a rational decision. So I took a step back and thought more about what my original plan was, pre-frustration.

I also reminded myself that at least I have a better idea of both what to avoid and what to look for in the future.

Me And My SEP

So I just set up an SEP-IRA for myself, partially because then I can contribute for last year, and knock a good chunk off the taxes I owe, and because I came across this wonderful bit of logic from Five Cent Nickel:

As I noted above, you can contribute to your SEP-IRA as either the employer, the employee, or both. In the case of the latter, it counts against your annual IRA contribution limit, so it reduces the amount that you can contribute to a traditional or Roth IRA. But in the case of the former, there’s no effect on your annual IRA contribution limit. Thus, it seems that you can use employer contributions to your SEP-IRA as a way of legally exceeding the IRS contribution limits.

Brilliant!

See, an SEP can't be set up as a Roth, but you can still deduct it from your taxes, and you can contribute up to 25% of what your business makes each year. So I can contribute my money to either the SEP or into my workplace accounts, and it doesn't make any difference. This is attractive because depositing into my workplace accounts can't exactly be done when I have a bit of spare cash - I have to fill out a form and hope they process it before my next paycheck. ALSO, I could roll it over into a Roth whenever I pleased, and I'm not limited to waiting until I leave this job. So I could have my 403b, my 457b, my Roth IRA, AND my SEP IRA.. drool. (I'm definitely in the savings-is-addictive club.)

Pottery Barn credit card bonus

Whilst perusing the latest Pottery Barn catalog, I noted that the fine print of their credit card bonus program is actually pretty sweet. If you spend $750 during the six-month "program cycle" (which appears to be the first six months of the year, and the second six months) you get a $50 gift certificate to Pottery Barn. Plus, if you spend $100 in the first month, you get a 5% rebate certificate which you could use to make the gift cards go farther. If I spent $750 on my American Express card, I'd only earn $7.50 in gift certificates, so that seems like a good deal to me. To totally dork out, $100 in gift certificates just for spending $1500 with the card (and it doesn't stipulate anything about balances, so you could pay it off right away) gets you a 6.6% return on your money. If you don't want to shop at Pottery Barn, you could sell the gift certificates on eBay or get 70% of value without hassle at GiftCardBuyBack.com or a similar site. (Most of the time eBay'ed gift certificates will get at least 85-90% of value, but it's more time-consuming and you have to pay fees.) I'm probably going to do some credit card arbitraging once my current 0% deal expires and I pay it off, so I'll apply for this one too and get my free gift card.

Details: http://www.potterybarn.com/cust/ccsplash/cust.cfm?cmtype=fnav

June 2008 update

June was the best month ever as far as meeting my goals goes. I finally, FINALLY achieved my goal of spending $2000 or less in a month. My total expenses for the month were $1,861.97, and that includes $350 in medical-related expenses, plus clothes, a haircut, and eating out. Now I just need to figure out what was different about June, aside from it truly being an unusual month because I spent less than normal. Income was up too, which was a plus. I hope that both of these things continue in future months.

Net worth wise, things were good too. Assets were up, despite the stock market grumbles. My liabilities were down, because I put less on my AMEX and we finally started paying toward principal again on the house.

Here are the stats for June:

Assets: Up $1561.49

Liabilities: Down $829.94

Change in net worth over previous month: Up $2391.43

Opening my mind to money

Tread pointed out something that's going on over at Millionaire Mommy Next Door. MMND said:

“For the next 30 days, I'll open my mind to receive increasingly more money. On day one, I'll decide how I'd like to spend $100. On day two, I'll double that amount to $200. Day three, double again and I'll have $400. And so on, doubling every day for the next 30 days. I'll list how I'd like to spend every penny, with no repeating of items during my month-long spending spree.”

I decided to do a modified version of this exercise because, well, I'm both behind already and impatient. I decided to do the listing of things all at once, and then think about them each day instead.

The most challenging part for me was the “no repeating of items”. I like to repeat items! But not doing so forced me to think about other possibilities. I had the hardest time deciding on what to do with the mid-range amounts ($6 million to $838 million). The lower end amounts followed my pre-existing plans (for the most part) and the higher amounts were easy to think of things that I could help with.

Overall, I enjoyed the idea that each coming day I would have even more money to spend. I'd done a similar exercise before (what would I do if I knew I would receive $40,000,000 every single year) but that made it too easy to avoid the specifics. This was more interesting.

Here is my list:

$100 - groceries

$200 - new clothes & shoes for my son

$400 - massages for the three of us + a really big tip

$800 - the next 8 stocks on my list

$1600 - visit pyramids in Mexico with my husband

$3200 - some kind of flat screen TV thingy for my husband (but still no reception :P), with an entertainment center to make it & the other electronics look uncluttered & nice

$6400 - media server (so that we can get rid of our CDs)

$12,800 - treasury bonds & tax liens

$25,600 - trip for all three of us to Antarctica

$51,200 - college fund for son

$102,400 - pay off house with money to spare

$204,800 - trip wandering around with world for a year (at most)

$409,600 - to retirement funds (accompanied by us retiring)

$819,200 - to family, via them winning a mysterious “prize”

$1,638,400 - property + a small house somewhere more sustainable (probably in Pennsylvania)

$3,276,800 - vacation home in Kauai

$6,553,600 - dramatically exceed savings goal #1

$13,107,200 - for male birth control research

$26,214,400 - to Big Brothers, Big Sisters

$52,428,800 - to state-funded animal shelters

$104,857,600 - for diabetes research

$209,715,200 - to Peace Corps

$419,430,400 - directly to individual residents who are still struggling in New Orleans

$838,860,800 - for kidney cancer research

$1,677,721,600 - to Hospice of the Valley

$3,355,443,200 - to a non-profit called Aliamos

$6,710,886,400 - to endow scholarships for students who are struggling to pay for college even though their parents make over the limits for financial aid

$13,421,772,800 - to pay off 1/8 a percent of the U.S. national debt

$26,843,545,600 - to develop alternative, renewable energy sources

$53,687,091,200 - lobbying to eliminating lobbying from the U.S. political process (yes, irony abounds)

Gotta Quit Singing The Blues

The market hits an all time high but most people think the world is coming to an end. In addition, lots of people say 'so what?' because the market is getting a bit ahead of where it was seven years ago. Number wise, yes but economically no. Seven years ago we had the dot.com nonsense with PEs so out of whack that the bottom had to fall out and it did.

Check out this MarketMinder.com article on the new high. It has one line that should be imprinted on your investing eyeballs so you see it every day which is---Pessimism and undue worry are the stuff of bull markets; euphoria is the bane.

Remember that and read on.

Happy Anniversary!

10/10/2007

Story Notes:

• Yesterday the bull market celebrated its fifth anniversary, but you’d never know it by reading financial headlines over the same period



• Fears about stocks gaining “too much too fast” and “too many years of an up market” aren’t based in reality or logic



• Strong economic and market fundamentals supporting stocks’ climb are still in place—making the immediate future look bright

MarketMinder doesn’t like to dwell on the past because it can’t tell you much of anything about the future. But we feel it’s incumbent upon us to highlight a scarcely recognized fact: The bull market for global stocks is five years old. Here’s one of the few acknowledgements we found:

Happy Birthday, Bull
By David Landis, Kiplinger
http://www.kiplinger.com/features/archives/2007/10/bullmarket.html

Five years ago yesterday, the S&P 500 closed at 776.76. Today, it sits around 1560…over a 100% recovery in five years. Good times!

According to Standard & Poor’s, in those five years Energy stocks were the winner, gaining over 236%. Other economically sensitive sectors also flourished, including Materials with 157%, Industrials with 124%, and Technology’s 144% gain. Traditionally defensive sectors like Consumer Staples and Health Care lagged, each with about 40% gains. An outlier was Utilities, which racked up a whopping 168% rise in the period. On balance, that’s very close to what you might expect from an economy experiencing sustained expansion and high demand. And these are merely US returns—foreign stocks fared even better.

Perversely, such a big recovery scares many—they proclaim it’s been “too much too fast.” But history tells us this recovery wasn’t all that big. The current bull is actually the second weakest of seven post-World War II bull markets that lasted five years or more, according to Standard & Poor's.

The “aging bull” argument doesn’t fly either. It’s a strange thing to believe stocks should go down just because they’ve been going up. This is a perversion of the mean reversion theory, which simply doesn’t pertain to stocks. There’s no mathematical, economic or financial law that says earnings, economic growth, or stock prices must revert back to any kind of average. Trends can last as long as underlying fundamentals support them. (See our past commentary “Vector Investing” 9/27/07 for more.)

To wit, the fundamental drivers propelling this bull remain intact: Better than expected corporate earnings and global GDP, high M&A and share buyback activity, and relatively dour sentiment (among many other positives out there) are all very much a reality today.

Yep, it’s been a good five years. We hope you enjoyed the ride, but we suspect most didn’t. Thinking back, folks fretted over everything from dollar doldrums, energy prices, terrorism, trade and budget deficits, carry trades, credit crunches, inflation, and consumer spending (to name a few). At one time or another each was hailed as the Apocalypse, yet NONE had the potency to slay the bull. We think that’s a great thing: Pessimism and undue worry are the stuff of bull markets; euphoria is the bane.

Today’s real risks (yes, there are always risks) are minimal and well contained. Deleterious government regulation, protectionism against free trade, and monetary or fiscal policy errors are remote. (For more, see yesterday’s commentary, “The Real Risks.”)

Looking back, it’s apparent stocks reflected reality—not media hype—over the past five years. And while it’s crucial to remain vigilant, don’t forget to step back once in awhile and appreciate the positives of this dynamic and wealth-creating global economy. More gains are just ahead.

A new direction for my net worth this month...

I compiled my net worth statement this month and wasn't too surprised by the results - I'm down about $5,000 - because I finally decided to spend some of my damn money. :) This August, Boyfriend and I will be taking a week-long trip to Rome! I love to travel and Boyfriend took Italian all year, so it works out well. I am so psyched I cannot even begin to tell you.

I am doing pretty well on my "save all my salary, live on business earnings" plan - I am getting a little chicken though, since with paying for the Rome trip I'm down to only (gasp) two or three months worth of living expenses in the emergency fund. You can tell how chicken I am.

I've taken a new philosophy over the past six months or so - I'm finally realizing that I do in fact earn quite a bit of money, and that money isn't any good if you don't use it to get what you want. At first what I wanted was assurance of financial security, now and in the future, so my focus was on building up an emergency fund and retirement savings. Well, I have over $10,000 in cash, albeit earmarked for different purposes, and as of now I have a smidge over $40k in retirement savings. My outlook on savings could best be described as "starvation mode" - you can never have enough. But I am relaxing some, and not saving every dime. Another facet of my realization is that I am spending a good deal more now on restaurants, entertainment, movies, etc, and often paying for my friends (most of whom are students) because I've realized that one thing that I want is to go out and have a good time with my friends, and there is No Good Reason to not use my money to accomplish this end. :)

Next month I will be moving into a more expensive apartment (it's a duplex) and I am also really excited about this. We need more space, and I want a backyard very badly. (My guinea pigs haven't been outside except to go to the vet in a year and a half.) Boyfriend is getting a grill, partially because it is entirely my idea to move as he's perfectly comfortable in our current apartment, and he is putting up graciously with my shenanigans. (Of course, he also has a room to himself as an office, while my desk is in the bedroom.) Now we'll both have an office, and a very nice kitchen and dining room area, which we use extensively. Of course it is more expensive than where we live now, but this is yet another arena in which I need to remind myself that I can well and easily afford this. There is quite a difference between living below your means, and living vastly below them to the point of unhappiness.

I fully expect my net worth to reverse next month, as I am paying off the Rome trip in a lump sum. I also need to contribute more to my SEP IRA, but I have until April 2008 to do that, so I'm not in a hurry.

Machinations

I'm feeling very pleased these days about my retirement contributions. With the new job came a healthy pay raise, and since my involuntary contributions as well as my workplace's contributions are done on percentage, they've gone up 30%, to $814 per month. I'm also putting in $500 per month myself, so I'm now getting nearly as much in retirement contributions as I am living on. This is astonishing to me.

I've got an automatic contribution of $200 per month to the Roth, and I'll max it out by the end of the year. And I'm now saving plenty of money. So I'm casting around for ways to get more money into my retirement accounts. I don't want to contribute so much every month that I have to rely on other money to live, but the 403(b) is the only other option after maxing out the IRA to get more money into a tax-sheltered account.

So here's my plan. I use about $1800 per month to pay all the bills, rent, groceries, contribute to the Roth, etc. So my plan right now is that once I have a comfortable amount saved up, I'm going to change my retirement contribution amount for that month from $500 to $2000 or $2500 - essentially my whole paycheck after about $470 in pretax required deductions - and live on my saved-up money for one month. Then I'll change it back the next month and save up my money again. Then when I get another $2000 or so saved up, I'll have another "no-income" month and put it in the 403(b).

This sounds pretty good to me but I'm also kind of chicken about not having the money coming in. But I think I can prep ahead of time and make sure the bills money is in the bills bank account, and the living money in the living expenses bank account, and I've got my ING debit card in case there is an emergency. So perhaps next month... :)

How Much Is Enough To Retire? Finally Some Reasonable Answers

When I see something I like, I steal it. Or at least borrow it. The financial world is full of worthless calculators. Here is something by Jon Clements of the Wall Street Journal that makes sense.

It's halftime. What's the score?

Today, I turn 45. (Don't feel bad; only my mother ever remembers.) By my reckoning, that puts me halfway through my working career and hence halfway to retirement.

How big a nest egg should a 45-year-old have? Here's a look at who faces a midlife financial crisis -- and who might be able to retire early.

Taking stock. Start with the accompanying table, which shows what percentage of pre-tax income you need to sock away over the next two decades, depending on how much you currently have saved.

Suppose you have a $240,000 portfolio, equal to three times your $80,000 annual income. To retire in comfort, you ought to save a manageable 12% of income every year for the next 20 years, calculates Charles Farrell, a financial adviser with Denver's Northstar Investment Advisors.

That savings rate -- which would include any employer contribution to your 401(k) -- will give you a retirement stash equal to 12 times income at age 65, or $960,000 in today's dollars. If you then use a 5% initial annual withdrawal rate, your savings will kick off $48,000, or 60% of your old salary. Add in Social Security and you might be hauling in a respectable 80% of pre-retirement income.

All this assumes you can clock an after-inflation investment return of five percentage points a year during the next two decades. To hit that target, keep a healthy sum in stocks and a tight lid on investment costs. (If you don't have precisely 20 years to retirement and want a sense of whether you're on track, try the retirement planner at www.dinkytown.com.)

Quitting early. What if you have savings of four or even five times income? As you can see from the table, amassing enough for retirement should be a breeze. In fact, if you have savings of five times income today and you never saved another dime, you would hit 12 times income at age 63.

But if you have already amassed a hefty nest egg at 45, you're probably a diligent saver, and you might look to retire early. Let's say you salt away 20% a year.

At that rate, if your portfolio today is equal to four times income, you will hit 12 times income at age 59, Mr. Farrell calculates. Similarly, if you currently have five times income saved, you should be set by age 56.

True, that means retiring before you're eligible for Social Security. But if you are a diligent saver used to living on a small portion of your income, that shouldn't be a big sacrifice.

Catching up. On the other hand, maybe you haven't been so thrifty. As the table indicates, the annual savings rate required to amass 12 times income by age 65 is 20% if you currently have two times income saved -- and a whopping 27% if your nest egg today is merely equal to your annual income.

Can't do it? Instead, you could scale back your retirement goals, delay retirement or both. Suppose you have savings equal to twice your income. If you sock away 12% of income per year, you could retire at age 69 with 12 times income.

Alternatively, you could call it quits with 10 times income at age 66. Again, imagine you earn $80,000 a year. If you retire with 10 times income, or $800,000, and use a 5% withdrawal rate, you will have $40,000 a year from your portfolio, equal to 50% of your old salary.

Meanwhile, if you have a nest egg of just one times income and you can't see cranking up your savings rate to 20% or more, you will likely have to curtail your spending fairly sharply in retirement, unless you work well past 65. For instance, to retire with 10 times income, you would need to salt away 12% of your pretax income every year until age 71.

One warning: All of the above presumes your income rises at the inflation rate between now and retirement. What if your income rises much faster? Ironically, that could make it tougher to retire.

"Let's say you get a big raise at age 50," Mr. Farrell says. "It's probably not feasible to replicate that lifestyle in retirement. The majority of that money should probably be committed to additional savings." If you do that, your nest egg will grow faster, and you won't have to throttle back your spending quite so much when you retire.

Copyrighted, Dow Jones & Company