The chicken or the egg (or an almighty creator)?

I’ve been reading Live It Up Without Outliving Your Money! by Paul Merriman which was a great read! It nicely explains why asset allocation is so important and gives step-by-step explanations on how to increase your portfolio performance.

However, like in many books, I see supporting evidence such as this: a study in Fortune magazine found that “investors who made written plans by the time they were 40 years of age wound up with five times as much money by age 65 as those who didn’t have written plans.”

I know he’s trying to underscore the importance of having a written plan, but we seem to have a chicken and egg problem here. Does writing down a financial plan guarantee more returns? No, probably not. If a person does nothing with their finances beyond writing a financial plan they are not going to see an amazing gain in their portfolio.

Or is it that people who are likely to pay attention to their finances (and thus make a written plan) make more money than someone who doesn’t? Probably so.

What is risky?

I’ve been reading Live It Up Without Outliving Your Money! by Paul Merriman and he had a handy little test for determining if you have taken on to much risk. Simply ask yourself the following questions: yes or no?

Have I lost sleep over my investments?
Do I feel compelled to watch the financial news?
Do I feel compelled to check fund prices daily?
Does financial new make me worry about my future?

If you answered "yes" to all of the above it's time to look at your investments!

On one hand I like this test because it is parsimonious. On the other hand, if a person doesn’t particularly understand finances and asked themselves these questions it might incite panic in times such as these. What do you think? How do you try to assess your own financial risk level?

Invested, in what?

I’ve just started John Bogle’s foreword of Benjamin Graham’s The Intelligent Investor, and already there is a part that has jumped out at me. John Bogle has been writing about the original book written in the 1940’s and some of the changes that have occurred since that time in the world of investing. This part caught my attention:

“Today, some 90 million Americans from all walks of life own shares of stock.
Even more astonishing, the lion’s share of those holdings is owned not directly
but indirectly through financial institutions- mutual funds, pension funds,
endowment funds, hedge funds, and the like…This institutionalization has left
the last-line investor in stocks a step removed from ownership, relying on his
managers to be faithful stewards….At the same time, as a trading mentality came
to dominate the market, a new rent-a-stock philosophy came to hold sway over the
former tried and true own-a-stock philosophy. Together, these two trends have
served to sharply dilute the role of the investor as a business owner.”

Here’s the crux of my issue: I don’t feel like a business owner.

I own a few individual stocks (that were aimed at teaching adolescent-me that Christmas gifts weren’t always fun and fuzzy), but the vast majority of my equities are in indexes. So technically, I’m a part-business owner of thousands of businesses.

While I am an investor that has a long time horizon and think frenzied day-trading is generally less fruitful than a lazy portfolio; I still don’t feel a connection to these stocks that I will probably own for 40+ years. I could call in and listen to the yearly owner’s meeting, yet I have no real sway. No ability to really affect policy, and no desire to do so.

I cognitively understand that a stock is a share of business that I am vested in. However, my heart has no connection to those businesses. I don’t care if, in the short run, these businesses cause my investments dip or rise, as long as they trend in an upward manner.

While I’ve read that you shouldn’t get too attached to your investments, is being detached good?

Planning for living on less than two incomes (even if you’re already there)

Well, we’ve been down an income since we moved in February, and so I thought the book “How to raise a family on less than two incomes” by Denise Topolnick might be something to check out.

A surprisingly comprehensive yet easy-to-read guide for people thinking about spending less time at the office and more time in the home. However, it wasn’t quite as helpful for me as I hoped it would be. We’ve already checked for the lowest insurance rates and the chapters about children didn’t apply.

It's a book I'd like to revist in about five years. However, it is something I’d recommend to little Kailey’s mom, one of my good friends, who just gave birth last week. Congrats on safe and healthy delivery!

Where does it go?

One of the things that is emphasized in Chris Farrell’s Right on the Money! is the idea of knowing where your money is going and seeing if this matches what you’d actually like to be spending your money on. In other words, does where you put your money match your values?

To see if I’m on track here’s my Mint breakdown:
32% on Home
20% on Travel
10% on Shopping
8% on Healthcare (the vast majority of this is reimbursed by the hubby’s workplace)
7% on Savings and Investments
5% on Bills and Utilities
5% on Food and Dining
5% on Autos
less than 2% on everything else

While I look at these numbers every month, there is something about having these numbers in percentages that makes it apparent that we’re fairly on track with our spending, but still have room to improve.

Home- We’re living in a great apartment in a great downtown location. It’s the time in our lives when we can do this (don’t have kids, don’t need a lawn). I feel fine about spending this amount on our home.

Travel- We’re both very close to our families, and it is unacceptable to not see them often. We would be very sad people if we didn’t spend the money to spend time with our families and friends. We also make sure to have some vacation time for just us on some of these types of trips.

Shopping- Of course this could be lower. About half of this category was spent on clothing that was wedding related- so this is a category that will go down in our future spending. Almost the rest was spent at Target getting all the things you need from big box stores.

Savings and Investments- I wish this were bigger. Now that we won’t have the wedding expenses, I’m intending to put the difference into savings. Also, once I get a job this will get bigger!

Bills, Food, and Autos- All things you have to spend money on, and are unlikely areas to cut back on without making large lifestyle changes.

How does your values and your spending line up?

This nice girl isn't rich

I’m finishing up Nice Girls Don’t Get Rich by Lois Frankel and it’s been an interesting look at what fiscal problems specifically plague women. I like the format of the book in that you start by taking a self-assessment and then each chapter addresses each of these questions sequentially. That way one can check out the areas that are most relevant to that individual. While I don’t always agree with everything she says- I came across another definition of wealth for my register.

“If you don’t already have some kind of retirement or investment account in your name with at least your age x $2,000 in it, get going fast.” P.170

While this obviously has some ceiling/floor effects issues here’s what it means:

25-years-old = need $50,000 in my own name (not in a joint account!)

Oouch!

Happy 4th of July

I'll be watching the fireworks explode over the Golden Gate tonight with a group of friends! I hope that you too are spending this national birthday somewhere wonderful with your family and friends.

I'll leave you with this quote I found in Nice Girls Don't Get Rich by Lois Frankel:

"Remember, Columbus would never have made it to America if Queen Isabella hadn't financed the trip."

Chatting about guidelines

I’ve just finished Jean Chatzky’s You Don’t Have to be Rich and I loved it. It gets at some of the psychological issues people have with money that I find fascinating! She cleverly wraps in relevant personal finance advice in order to help everyone enact good money management practices.

One of my favorite nuggets of information that she gives it this:
A quick estimate of how to construct your asset allocation is “roughly, 100 percent minus your average age is the amount you want in stocks, with the rest split between bonds and cash”.

So for us it would be:
100-25.5=74.5 (oh heck I’ll round up- it’s only four months until my birthday)

So 75% in stocks, 12.5% in bonds, and 12.5% in cash.

Granted, this is a rough estimate.
I feel like we should have more stocks and cash in part because I just don’t get bonds. I understand that they help reduce risk in a portfolio, but it seems that they (at least the safe AA rated ones) don’t give that much more return than money-market accounts. Are they really worth it?

Maximizing interests

Reading Houseonimics by Smith and Smith hasn’t been the most exciting read. (My favorite antidote so far: the photos of the houses rented vrs. bought on pages 21 and 22.) Nevertheless, it does have great information about the home buying process. While we’re in no position to buy now, we hope to be in the next few years.

However, it was a point about leverage and investing that caught my attention:
“You will make money borrowing at 6 percent and investing at 10 percent; you will lose money borrowing at 6 percent to invest at 2 percent” p.84

An obvious statement, but it got me thinking about my stimulus check.
(Yes, I know, it was an odd jump, but that is how my mind works sometimes…)

I’ve got a later SSN, so I’ll be one of the last people to get my stimulus check. (Haven’t got yours either? Go to the federal website to see when you will). While I would l-o-v-e to already have it, the time lag has allowed me to think about how to best use it.

For me, I don’t need to spend it. I know that is what the government wants you to do with it, but that’s not in my best interest. I want do as Smith² suggest and maximize this “free” money that is coming my way.

Here are my options as I see them:
A) Beef up my emergency savings (earning 3% and I’ve got 2.5 months worth and I’m going for 6 months)
B) Contribute to my ROTH IRA (given the crazy stock market swings I’ve only earned 1% this year and I’ve got $1600 of a possible $5000 saved for 2008)
C) Pay down my college loan (@ 7% I’d be “earning” more than any of my savings and investments in the short term)
D) Divide my $600 among all the accounts

Choice C seems the most beneficial in the short term. However, what would that $600 be in 40 years if I put it in my ROTH? Given that my ROTH returns are uncertain year to year (but hopefully the markets will continue to trend upwards) and my loan is a set percentage, would it still be advantageous in the long run to pay down the debt?

Any opinions or ideas?

Definitions of wealth

I’m starting a new section of this blog to compare and contrast the different ways wealth is defined. In an era of keeping up with the Jones, one’s wealth can be realized in many different manners. In SoCal wealth can be defined by zip codes, wheels, or silicon and nips-and-tucks. In other words- down here- wealth is the ability to buy stunning things.

However, I’ve just started The Millionaire Next Door by Stanley and Danko. While its’ data is outdated (I’d never let students turn in paper 100% supported by ten-year-old studies…), I think in 1996 it was a turn in the way this materialistic society thinks about money.

Their definition of wealth is:

(your age)(pretax income from all source except inheritance)/10 and compare this to the wealth you’ve actually got

If your wealth is twice this amount you are a very wealthy person.
If your wealth is half this amount you are an under-accumulator of wealth.
If you’re in between, you’re average.

So how do I stack up?
(25)(0)/10=0 and I’ve got more than that in the bank- in fact I’ve got thousands more than that amount!

Whoo-hoo! I’m rich!

Ah- so this calculation doesn’t work for the unemployed.
I’d suspect this definition has ceiling effects (what would a person who is 110 really need that much money for? They’re going to die soon…) and floor effects (does a five year old need more wealth than their weekly allowance?). But I see it as a good general rule of thumb.

I wonder how other people stack up using this rule.

Young or Dumb?

Yesterday I came out and confessed my biggest financial blunder to date. While I’m in the process of fixing this situation (which I’ll write about later), I read something that made me think of this faux pas in a new light.

Summary from Your Money and Your Brain:

People who have damaged prefrontal cortexes (part of the brain that helps us think logically and reflectively; allows us to plan for future) tend to act in financially risky ways in order to gain a large short-term gain.

Now my Psychology background tells me that this area of brain doesn’t fully develop until mid-20’s.

This made me wonder: I made this decision in my young 20’s, it was certainly risky (all of my money was in it), and I was hoping for an immediate gain. Was I just immature or brain damaged?