The Amateur Financier

Moving Day: Update your links!

noreply@blogger.com (Roger, the Amateur Financier) — Mon, 23 Mar 2009 05:00:00 +0000

Well, my friends, the time has come. I've moved my site from blogger (where you're currently reading this message), to a Wordpress blog hosted by Dreamhost. If want to keep reading all my thoughts on money and life, please bookmark my new site.

It's been a pleasure sharing my thoughts with everyone; I hope to see you on my new blog!

PF Spotlight - Mrs. Micah: Finance for a Freelance Life

noreply@blogger.com (Roger, the Amateur Financier) — Sun, 22 Mar 2009 14:00:00 +0000

Welcome back, my friends, to the feature that never ends. I'm so glad you could attend, come inside, come inside. There behind the glass stands a great PF blog, be careful as you pass, move along, move along.

Yup, I was feeling a bit odd as I wrote this, but I'm serious about my comments. The blogger of the week is Mrs. Micah, who writes the eponymous blog subtitled Finance for a Freelance Life. On top of all the great advice she dispenses in her blog, she also has helped me through the Money Blog Network, for which I am quite grateful. Some of the good columns she has written in the past few weeks include:

Do You Need to Carry a Balance to Get a Credit Score? - Mrs. Micah answers one of the most common misconceptions regarding credit cards. The short version is no, you can get a good credit score even if you pay off the balance in full each month. And it's a good thing, too, as I have managed to get a great credit score (over 770, if you are interested) without ever paying interest to my credit company. (I take pride in being a 'freeloader' in this fashion.)

$7500 HomeBuyer Credit: What Should I Do With It? - Another question, this time looking for suggestions of what to do with the seventy-five hundred dollar credit being offered to first time homebuyers. The ideas are pretty common personal finance fare, covering debt repayment, savings for emergencies, and especially fitting for a homebuying refund, paying down some mortgage debt. All are good ideas for any 'found money', and well worth repeating.

Know the Fees on Your Unemployment Debit Card - An entry written in response to a CNN article about fees associated with unemployment debit cards in Pennsylvania. Being a Pennsylvanian receiving unemployment, I felt I should rectify some of the points that were made and clarify the fees that are assessed. I also noted that getting your funds direct deposited can save you from being nickeled and dimed as you collect your unemployment money. I might have to write more on this subject, as there seems to be much confusion at a time when many people are starting to rely on unemployment benefits.

P2P Lending is Not Like High-Interest Savings - Mrs. Micah provides some reasons why you shouldn't rely on peer to peer lending, in something like Lending Club, as a place to store your emergency funds or other money that can't be lost. The illiquidity and potential risk to your principle with investments like Lending Club make it ill-suited for savings. Better choices are high-interest online savings accounts like ING, HSBC, and SmartyPig.

Weekly Update: Battlestar Galactica Edition

noreply@blogger.com (Roger, the Amateur Financier) — Sat, 21 Mar 2009 14:00:00 +0000

The big news this week, at least for those of us with a geeky bent, is the series finale of Battlestar Galactica. It was an excellent series, not just in the science fiction genre, but as a broader drama, touching upon and exploring some of the deeper issues facing our society. It's a rare series that can be so emotional enveloping, but this series succeeded. The fact that it had semi-regular spaceship fights and some cute robot girls was just an added bonus.

Just two things that bothered me: first, the ending. I'm not going to spoil it for you, but cripes was that a convoluted way to wrap things up. To say nothing about raising more questions than it actually answered...

Second, apparently there's going to be a two hour 'event' in the fall, looking at some of the events from the series from the perspective of the Cylons (the race of evil robots, if you've never caught either the original series or this current remake). While this is a good thing (I'm not going to complain about more Galactica), it does make me think: is it really a season finale if they're already planning more stories (even if just as a two-hour movie)? These are the questions that haunt my mind (which tells you quite a lot about said mind).

On that geeky note, onto the finances:

Savings

PNC (Checking Account) $ 1329 +$1144
Susquehanna (CD) $ 2542 +$0
ING Direct (Checking) $ 55 -$50
ING Direct (Savings) $ 1338 -$1668
ING Direct (Orange CD) $ 1016 +$0
HSBC Direct (Savings) $ 23 +$0
Smarty Pig (Savings) $ 948 +$248
Vanguard (Money Market) $ 901 -$400

Total Savings $ 8152 -$726

Investments

Vanguard (Roth IRA) $ 6654 +$1128
- Small Cap Index (NAESX) $ 3326 +$167
- High Dividend Yield (VHDYX) $ 2796 +$429
- Foreign Total Market (VGTSX) $ 532 +$532

Share builder (ETFs) $ 2771 +$61
- Total US Market (TMW) $ 905 +$10
- Extended Market (VXF) $ 756 +$11
- Total Foreign (VEU) $ 550 +$24
- Small Cap Value (VBR) $ 256 +$7
- Emerging Markets (VWO) $ 304 +$9

Total Investments $ 9425 +$1189

Total Assets $ 17,577 +$463

Debts

MasterCard (JCPenney) ($ 28 ) +$107
American Express ($ 652) +$1260

Student Loans ($ 11,874) -$8

Total Debts ($ 12,554) +$1359

Net Worth $ 5023 +$1822

Not bad, I'd say. A combination of getting my tax refund deposited (over $1300) and some investment gains allowed me to get some substantial increases in my net worth. I paid off my credit cards; a neutral issue as far as net worth, but it was nice to eliminate the debt.

I am in the process of opening a Foreign market fund with Vanguard for my retirement account; on April 2nd, the Susquehanna CD will be cashed out and transferred into my VGTSX fund (which is why I was able to open that Vanguard fund without meeting the $3000 minimum, in case anyone was curious).

All in all, pretty solid week.

The Bright Side of the Economy for Youth

noreply@blogger.com (Roger, the Amateur Financier) — Fri, 20 Mar 2009 14:00:00 +0000

(Welcome to my fiftieth published post! It's been a fairly short, but still wild ride. Hopefully, I can keep posting, entertaining and informing you. In honor of this celebration, I've tried to find some good news to blog about, not an easy task in the current economic climate. I think I've succeeded, at least for those of us in Generation Y.)

If you're young and still working, you should be upbeat, if not cheering, about the current economic down turn. (Just don't do it too near anyone over the age of fifty or so, or they might come after you with torches and pitchforks.)

Just in case you feel I'm alone in thinking this, note that Liz Weston of MSN Money has noted that those of us who are under 35 should be saying hurray to the meltdown. Now, there are some of us under 35 who have gotten caught in the crossfire of the economic meltdown and are currently un(der)employed. But even for us, there are advantages to this crisis; it's been lowering the prices of stocks, for one.

Why is this a good thing? Well, if you're young enough to have multiple decades of work ahead of you (a fun thought, I know, but stay with me), being able to buy stocks on the cheap with your earnings will be advantageous later, when the stock market recovers. Don't believe me? Let's take a look at a real example.

Let's say you wanted to invest in the Vanguard 500 Index Fund (VFINX), the first index fund, and one of the most popular, to boot. If you had invested $3,000 in VFINX on March 19, 2008 to open the 500 Index, you would have paid $120.06 per share and bought 24.988 shares. If you invested that same amount yesterday, March 19, 2009, then your $3,000 would have purchased 41.305 shares at $72.63. A one year difference, but the same amount of money now buys about 60% more shares of the Index Fund.

Think of it as a buy one, get one half off sale; right now, you can buy more shares of the exact same funds that were available a year or two ago at much higher prices. Add in decades of time for the market to recover, and you have a perfect set up for building up financial assets at fire sale prices for years to come.

This isn't an attempt to encourage market timing; I don't know when the economy will recover. We might have months or even years of more financial pain before things get better, or we might already be starting to recover. We'll only know further on down the road, when looking back at the current time frame. It's much better to keep investing, and simply take advantage of the current decline in the market.

In any case, the long-term results for stock investments all but ensure that time and willingness to take some risk will pay off eventually. If you're a member of Generation Y, you are experiencing one of the best set of circumstances you and I will likely see grow our money over time, taking advantage of lower prices now to benefit as the economy recovers and stock prices begin to rise again. So, yes, if you're young and investing regularly, now's a time to celebrate!

Just... not in front of your parents.

Thoughtful Thursday: Financial Advice for High Schoolers

noreply@blogger.com (Roger, the Amateur Financier) — Fri, 20 Mar 2009 00:00:00 +0000

Woo Hoo! Good news everybody, I've had my first guest post published today. My Life ROI published a post I wrote, How to get Ahead of the Game, during his out of country vacation. It's simply some advice for current high school students that I wish someone had told me ten years ago.

Of course, there are other financial columns out there that I didn't write. They might not be as clever, witty, or entertaining as what you're used to here, but they are still worth reading. Some of the more thought-provoking pieces I've read this week:

New Study on Emergency Fund Importance - Flexo on Consumerism Commentary was one of several commentators to note the recent study by the Consumer Federation of American. The primary conclusion of the study? That having an emergency fund leads to greater mental security. This is an excellent lesson to be reinforced, and does have an impact on how you should rank your financial priorities, in this case, favoring putting savings aside for a rainy day over paying down debts without a cushion, for example.

Protect Your Home from Bumping and Bump Keys - Clever Dude has posted a video taken from a local news channel about burgulars 'bumping' keys in locks to force open doors. An interesting video, and something to think about when shopping for locks. You have to stay ahead of the bad guys in the home security arms race.

Learning to Love Generics - Stephanie makes the point that genericfood stuffs will save you money and tend to be just as delicious as brand names. She also teases us with some delicious looking cookies but refuses to share them. Boo!

20 Free Online Finance Courses - A listing of different online sources of information from Generation X Finance. I'll admit, I don't usually follow this blog, but I'm always looking for more good sources of information. Which means this is a doubly useful post, letting me know about plenty good financial information online, as well as cluing me in to another good blogger.

Moving Day!

noreply@blogger.com (Roger, the Amateur Financier) — Thu, 19 Mar 2009 14:00:00 +0000

I have some good news to share with you all; I'm going to be moving! Well, my blog is, anyway.

Yes, after reading up on blogging tips and advice at the Money Blog Network, I've decided to get my own domain and make a more serious effort at blogging as a serious endeavor. I've already set up the weblog at www.theamateurfinancier.com/blog/, and as soon as I get things up and running (probably this weekend, as I'm making a concerted effort to have this switch-over complete by Monday), you'll have a brand-new Amateur Financier site to read and enjoy!

I'm letting all of my loyal readers (or at least, the two people currently following me on RSS feeds) know about this change-over to express a couple of concerns. First, to paraphrase Doctor McCoy from Star Trek, I'm a biochemist, not a webmaster. There might be some quirks and other problems in the transfer that prevent me from doing a seamless transition from Blogger to Wordpress (hosted on Dreamhost, for those who want all the gritty details), and I just want to give you all fair warning.

Second, I'm not sure how this move will affect those of you following me using RSS feeds. I hope that the transfer options on Wordpress will allow me to adjust everything from my end, so that you can continue to receive my words of wisdom on a daily basis. But to ensure uninterrupted bulletins from my blog, you might need to update your feeds. (And if you are linking to my blog elsewhere, I ask you to please adjust your links when the new blog is up and running.)

Third, this move is part of a larger effort on my part to make this blog more relevant and interesting to you, my readers (and, I won't deny, more profitable to me). So, please, if you have any advice or suggestions, on issues from the appearance of the blog to the specific subjects I should cover, let me know. This is a good time for making changes to my blog, and any feedback I can get will be given all due consideration.

Finally, thank you to everyone who is watching me; I hope that I can continue to entertain and inform through my writing.

Great Debate: Bonds vs. Bond Funds

noreply@blogger.com (Roger, the Amateur Financier) — Wed, 18 Mar 2009 14:00:00 +0000

Ladies and Gentlemen, financial fight enthusiasts of all ages, welcome to tonight's event. We are moments away from our main event, a bout that will go down in history and settle one of the great debates in finance once and for all, the argument over whether buying individual bonds or bond mutual funds is the best way to get some bond exposure.

As you are well aware, this grudge match has gotten especially dirty, since both the fighters fill the bond part of your asset allocation. This means they're government or corporate debt, and pay out higher interest rates than most stocks. They also tend to be more stable in price than stocks; they don't drop as far in value, but they also don't rise as fast. Finally, there's more protection if the company or government goes bankrupt than you have with stocks. But that's where the similarities end.

Wait, wait, the fighters are entering the ring. They're circling each other, eyeing each other up. And individuals bonds make the first move, pummeling bond funds with all their advantages:

Fixed Interest Rates: The biggest advantage of individual bonds is that the interest rates they offer stay the same for the life of the bond. (Unless it's called or the company defaults; although those are fairly rare events, especially with high quality bonds.) If you lock in a high interest rate for a long-term bond, you can enjoy high dividend payments for years, decades even.

Return of principal: When the bond's term is up, you're guaranteed to get back your principal. The amount for which you can sell the bonds before they reach maturity can vary, but the underlying principal will be returned at maturity (again, barring defaults). With bond funds, the amount of principal will move up and down as the share prices change.

Oh, bond funds have been taking a beating! But wait, here they come, bringing out all the pluses that come with funds:

Easy Diversification: The biggest advantage of bond funds is the ability to own hundreds, if not thousands of bonds with one investment. The natural diversification of funds lowers the cost to add bonds to your portfolio, as well as decrease the risk should any of the bonds in the fund default.

It's one heck of a struggle out there! And here come the ref, making a ruling on the mat. And it's a tie! Depending on the situation it seems that either individual bonds or funds could be a good choice for the fixed income portion of your portfolio.

There are a few caveats, though; the higher the risk of default, the more advantageous it is to opt for bond mutual funds. If you decide to dabble in junk bonds, for example, you'll end up much better financially by using a high-yield bond fund. The large number of bonds held by the fund will insulate you from much of the risk of default, allowing you to profit from the higher yield of these bonds without gambling on your portfolio.

On the other end of the risk spectrum, if you're looking to invest in Treasuries (US government bonds), you would do best by buying directly from the Treasury. There's essentially no default risk, the bonds are never called, and you can avoid the fees that mutual funds charge by buying Treasuries yourself.

For high grade corporate bonds, which have a moderate amount of risk, you could go either way. If you have the money to create a diverse portfolio and like the characteristics of individual bonds, go ahead with the bonds; if not, bond mutual funds will do fine.

Oh, ladies and gentlemen, that was certainly a thrilling debate. I think we've all gained a little more knowledge about bonds and bond funds.

Investing 101: Bonds

noreply@blogger.com (Roger, the Amateur Financier) — Tue, 17 Mar 2009 14:00:00 +0000

(This is the second in a regular series where I attempt to explain some common investments and other financial terms. Enjoy the knowledge and sharing.)

Q: So, what exactly are bonds?

A: Simply put, bonds are IOUs. When companies, governments, or even individuals (remember Bowie bonds?) need money, they can sell bonds, allowing them to raise capital and pay it back later.

Q: Why would I want to lend money to people I don't even know?

A: Well, unlike loans you make to family members or friends, when you purchase a bond, you'll gain additional money. If you hold onto your bond, you'll receive regular payments (called dividends), usually twice each year. When the bond matures (that is, when the duration of the loan is over), you'll receive your money back.

Q: Sounds pretty good to me! How can I lose?

A: There are a few drawbacks to bond investing, unfortunately. They tend to yield less than investments in stocks; if we look at the returns between 1926 and 2007, we see an average return on bond investments of 5.5% compared to 10.4% for stock investments. And unlike certain qualified stock dividends, bond dividends are taxed at your normal income rate.

Plus, there is always the risk that the company or other bond issuing agency could default.

Q: Wait, what? What's this about default?

A: Well, yeah. If your bond issuers go bankrupt, they may not be able to repay their creditors (which, if you own bonds, will include you). You will be somewhat better off than stock holders (as they are considered part owners, when the company goes under, they lose all their investment), but you might only get a small portion of your investment back, if any. You can avoid this situation, or at least minimize the possibility, if you stick to highly rated, 'investment grade' bonds.

Q: Bond ratings, you say?

A: Yes, there are agencies that review the companies, governments, and agencies that issue bonds, including Moody's, Standard & Poor's, and Fitch. They classify bonds according to the risk of default, from AAA (or Aaa), the rock-solid, safe as can be issuers, all the way down to D, already in default. Sticking with the bonds rated at least BBB (the fourth highest rank, the lowest investment grade ranking) will all but eliminate the chance of default.

(A caveat, though: many of the mortgage backed securities and their derivatives were ranked AAA by the rating agencies. A high ranking shouldn't be the end of your research into the bond issuers in which you intend to invest.)

Q: So, if I stick with high rated bonds, there's no worries?

A: No, sorry, you're not out of the woods yet. Bond yields are determined by the prevailing interest rates. When rates are high, bond issuers have to pay more to get investors (since the investors have many other options that will give them good return on their money). When rates are low (as they are now), you won't get a high return from bonds. If you buy bonds when interest rates are low and then the rates rise, the amount the bonds can be sold for will decrease.

Even if you manage to buy the bonds when they're yielding a high return, there's the possibility that the bond will be called. In these cases, the bond issuer will pay back your principal early, essentially ending your dividend payments and forcing you to find somewhere else to invest.

Q: Arrgh, with all these drawbacks, why would anyone invest in bonds?

A: There are several reasons to invest in bonds. First, bonds are still very safe investments. The risk of default on investment grade bonds is under 2% (and AAA ranked bonds default about 0.1%), meaning that over 98% of investment grade bonds make it to maturity (or are called ahead of time) without incident.

Bonds also tend to be much more stable investments than stocks. Look back at the comparison of stock and bond portfolios; the worst loss an all-bond portfolio suffered was a loss of 8% in one year, compared to a worst-case result of losing 43% in all stocks. Adding bonds to your portfolio will diversify your holdings, help to smooth out your investment returns and make your portfolio more stable.

If you're looking for current income, bonds are one of the best sources. The dividend rate you get from bonds usually exceeds what you can get from stocks. In addition, it's difficult for companies to cut bond dividends without recalling the bonds, so your income stream is safer when investing in bonds than when investing in stocks.

Q: Alright, I'm sold. How do I buy bonds?

A: Well, you can buy bonds directly, from a site like PIMCO or FINRA. (Or US Government Treasuries at the Treasury website) Bonds do tend to be rather pricey, however, frequently selling for $1,000 (or more) each. This makes it tough to build a diverse portfolio as a relatively small investor; most investment advisors recommend between $25,000 and $50,000 to get started in bond investing.

For most investors, getting a diverse portfolio of bonds, enough to ensure that a possible default or two won't upset your investment plans, the best bet is a bond mutual fund. There are a variety of bond mutual funds available, from companies like Vanguard, Fidelity, and T. Rowe Price. These fund give you exposure to bonds, but are much more diverse.

For a more complete comparison of bonds and bond funds, you'll just have to wait until tomorrow...

Q: Awww, do I have to?

Yes, yes you do. But have a good time until then!

Jim Cramer vs. Jon Stewart

noreply@blogger.com (Roger, the Amateur Financier) — Mon, 16 Mar 2009 14:00:00 +0000

If you are a fan of The Daily Show with Jon Stewart, you are probably aware that for most of this week, there's been something of a war or words between Jon Stewart and Jim Cramer (the host of Mad Money and author of numerous investing books). And if you aren't watching The Daily Show, why not? It's excellent satire, and like all good satire, holds up a mirror to our culture.

It started last week, when Jon Stewart had a segment featuring some of the mistakes made by CNBC in their marketing predictions. Jim Cramer, as one of the major stars of CNBC was featured quite a bit (along with Rick Santelli, whose cancellation prompted the clips being aired), particularly with regard to his recomendations to buy Bear Stearns.

Jim Cramer responded that clips were taken out of context, leading to yet another Daily Show clip collection showing that although Jim Cramer was correct about that particular clip, he had recommended buying it recently. (If you take nothing else from this blog entry, take the knowledge that The Daily Show is very good at finding embarassing film clips).

Finally, things came to a head in Thursday's episode of The Daily Show. Jon and Jim went head to head, and from my perspective, Jon Stewart came out ahead. Here's a few thoughts I had as I watched all this (I happen to be a huge Daily Show fan, going back all the way to when Craig Kilborn was the host). Some thoughts that have occurred to me as I re-watched the clips and considered Jim Cramer's reactions:

1) The financial media has made many, many mistakes, and it's nice to see someone call them on it. I'd love to see Jon Stewart interview the CEOs of the banks, hedge funds, and investment companies, and see what he'd do with them. He is easily one of the best interviewers I've ever seen, and when he's on the top of his game (as he was on Thursday), he is a sight to behold.

2) Jim Cramer has managed to bump up my opinion of him as a result this interview. He didn't really hold his own, but the simple fact that he was willing to subject himself to this scrutiny and potential recrimination speaks well of his personality and openness.

3) If I recall correctly, court jesters were considered to have a special place in the medieval court. They were the only ones were able to insult the king, and in that way, speak truth to power. It seems that we live in times where only the jesters in the news media (The Daily Show, the Colbert Report, The Onion) are willing to point out the utter absurdity of our financial system. And kudos to them; I just wish we could get more people like Jon Stewart out there, looking out for us.

So, go ahead and watch the Daily Show interview; it really is an excellent example of a populist rebuttal to recent financial events. Plus it has more than a few jokes!

PF Spotlight: Get Rich Slowly

noreply@blogger.com (Roger, the Amateur Financier) — Sun, 15 Mar 2009 14:00:00 +0000

If you follow financial blogs, even casually, there's a good chance you've read, seen references to, encountered quotations from, or at least heard about Get Rich Slowly. J.D. is one of (if not THE) most famous and trusted personal finance bloggers around, and he consistently writes interesting, thought provoking pieces.

I'll be honest, I haven't been reading Get Rich Slowly long, and most definitely haven't had the opportunity to go back through his rather impressive archives, but what I have read is interesting, informative, and helpful. A few of his more recent articles:

Finding a Good Job in a Bad Economy - A reader named Jill writes in to ask whether she should stay in her secure, but not particularly desirable, current job, or take a temporary job with lower pay in her field of choice. I'm honestly not sure what I would recommend to her; it comes down to whether she values safety or job satisfaction more (and how much of each she would get with either choice). On a side note, I do wish I was facing the choice between a full-time, permanent job I didn't quite care for and a temp job offer (or possibly offers) in my chosen field. At the moment, either one would be a great improvement on my situation.

Some Thoughts on the Return of Traditional Skills - J.D. notes the recent up tick in interest in traditional skills, like gardening, home maintenance and sewing. I haven't noticed quite as much of an increase, myself (in suburban Pennsylvania, it seemed that most people were do it your-selfers with regards to yard and house work for as long as I can remember). But I can certainly see how, when the economic climate is so shaky, that people would want to be as independent as possible; I've been trying to find more time to learn about home maintenance, myself.

25 Useful Financial Rules of Thumb - Just about every one sentence bit of financial advice I've ever heard is listed here, from 'Pay yourself first' to 'Your mortgage should cost no more than twice your annual income' (although, I've heard as high 2.5X elsewhere). Some of the rules I actually disagree with (the 100-(your age) rule as a good guide to how much money to have in stocks, for example), but all are at least worth knowing, so you can form your own opinions.

How do Marginal Tax Rates Work - A good explanation of how marginal tax rates work. I'm not going to try to explain the concept in one paragraph, especially as J.D.'s already done an excellent job. Some of the conversations that resulted are worth reading, if only to see the diversity of opinions that exist with regard to tax policy.

Weekly Update: 3-14-2009

noreply@blogger.com (Roger, the Amateur Financier) — Sat, 14 Mar 2009 14:00:00 +0000

I feel stuck between two different worlds this week. On one hand, there's four-day rally in the stock market. There are almost as many different perspectives on what exactly this upturn means as there are commentators on TV, in the newspapers and online, which is to say thousands all told. I personally don't claim to have anywhere near the amount of knowledge and experience to predict what this means, if anything; I'm simply going to hope for the best and continue to invest my money as regularly, calmly, and automatically as possible.

Now, onto the other world...I am working part-time as an organic chemistry tutor at my old university. There is a test this coming Tuesday, the second of the year. For many of the students, this test could very well determine the course of their future; many of them are trying to get into the Pharmacy school, and if their grades are not good enough, they won't have a chance. Add in the drop course policies, and this is literally the last chance some of them will have to make it into the Pharmacy school.

Why do I bring this up? Simple; for these students, the broader economy is last thing on their mind. By the time they graduate from Pharmacy school in 2013 (if they make it in, of course), this week's financial news might be remembered as a temporary deviation in a horrible market, or as the first coffin nail for the Recession of 2008. And that's assuming it's remembered at all.

Much more importantly, this is yet another reminder of the importance of a long-term perspective. What happens from week to week isn't nearly as important as where you end up. The struggles the students face from one test or even one course are nothing compared to their final degrees. And by the same token, we as investors have to focus on our goals, and not the ups and downs the market throws at us.

Which is why, even though I track my portfolio's progress every week, I do it for my own information and knowledge. Slow and steady wins the race, and makes Roger a wealthy man...

Savings

PNC (Checking Account) $ 185 +$85
Susquehanna (CD) $ 2542 +$0
ING Direct (Checking) $ 105 -$550
ING Direct (Savings) $ 3006 +$0
ING Direct (Orange CD) $ 1016 +$0
HSBC Direct (Savings) $ 23 +$0
Smarty Pig (Savings) $ 700 +$0
Vanguard (Money Market) $ 1301 +$0

Total Savings $ 8878 -$465

Investments

Vanguard (Roth IRA) $ 5526 +$636
- Small Cap Index (NAESX) $ 3159 +$359
- High Dividend Yield (VHDYX) $ 2367 +$277

Share builder (ETFs) $ 2710 +$555
- Total US Market (TMW) $ 895 +$241
- Extended Market (VXF) $ 745 +$99
- Total Foreign (VEU) $ 526 +$101
- Small Cap Value (VBR) $ 249 +$59
- Emerging Markets (VWO) $ 295 +$55

Total Investments $ 8236 +$1191

Total Assets $ 17,114 +$726

Debts

MasterCard (JCPenney) ($ 135) -$28
American Express ($ 1912) -$115

Student Loans ($ 11,866) +$63

Total Debts ($ 13,913) -$80

Net Worth $ 3201 +$646

A rather good week, investment-wise. I will admit to a mild bit of disappointment; if I was still making the same level of investments I was making while I was working, I'd be in an even better position to take advantage of this rebound (if it is in fact a rebound and not a fluke) and make money on the uptick.

But, other than that, things are looking good; investments are doing fine, my Sharebuilder purchases went through alright (three hundred dollars of the increase there is added investment capital), and my spending was kept under control (especially for a weekend I went to visit my girlfriend). All in all, an excellent week.

Active, Passive, and Portfolio Income: Which is Best?

noreply@blogger.com (Roger, the Amateur Financier) — Fri, 13 Mar 2009 14:00:00 +0000

If you read any financial literature, chances are you've come across the terms active income, passive income, and portfolio income. You might wonder what each of these terms means and which one is the best type of income, especially when it seems that there almost as many recommendations as there are authors. Here's the quick rundown:

Active Income: the income you earn from work you perform. It can either be an hourly wage or an annual salary, depending on the exact position. Generally speaking, if people ask you what you do for a living, you'll respond with your source of active income. Also known as 'earned income'.

Pros: You can make more money initially via active income than you could with passive income (that is, the income from the first month at a new job will be higher than your first month's profit from most passive sources). Also, you can usually raise your active income simply by working longer, which will result in more paid hours or possibly a raise.

Cons: You need to keep working to keep making money; if you quit your job or get fired, your income stream will dry up. (Also, it's been argued that the tax system favors other sources of income, at least here in America; but that depends a lot on your specific situation.)

Passive Income: the money that's earned which doesn't require your material involvement. Common examples are rental income on properties, royalties from books, and blogs (like the one you're reading now). Once the initial work to create them has been completed, the amount of money they earn is independent of the time devoted to them.

Pros: Your income does not depend on the hours of work performed. That is, once the book or website has been created or the rental property purchased, the income can grow independently of the time spent by the owner. As a result, it's possible to earn money in your sleep with such income sources.

Cons: Your income does not depend on the hours of work performed. The nature of passive income is a double-bladed sword. While it's true that you can conceivably earn much more money creating passive income sources than you could with active income, you can also spend time creating a website or buying rental properties that end up returning nothing (or even costing you money).

Portfolio Income: Sometimes considered a sub-section of passive income, portfolio income comes from monetary investments in things like stocks, bonds, and mutual funds. Usually, portfolio income refers more specifically to money generated in the form of dividends, rather than increasing prices (capital gains). Portfolio income involves using your money to make more money, by putting it into vehicles for financial growth.

Pros: Like passive income, portfolio income grows without requiring your involvement. Once you've put your money into a particular investment, the money can grow without you needing to do anything else at all. (Although, watching your investment in case things change is always a good idea.)

Cons: To generate portfolio income, you need money in order to start investing; you'll need another source of income to create your portfolio. Also, as the recent events have shown, there is a lot of volatility in the financial markets, and you have to have back up plans in case your portfolio does not perform as well as expected.

Which type of income is best? The answer to the question is, they all have their own uses as you create a stable financial future. Active income will help you generate seed money that can be put into your portfolio. Your portfolio will grow and build up, enabling you to get more portfolio income out of it. And passive income sources can be cultivated, providing you with supplemental money to put towards your financial goals. Combine the three, and you've got a full and bountiful garden, ideal for creating a solid financial future.

Thoughtful Thursday: The Government Is Not Giving You Money

noreply@blogger.com (Roger, the Amateur Financier) — Fri, 13 Mar 2009 02:00:00 +0000

Alas, it seems that everywhere you turn, someone is trying to rip you off. With the recently passed stimulus bill, the scammers, conners, and other rip-off artists have a whole new avenue to abuse. Mrs. Micah reminds us all that the government is NOT going to be sending you a check. (This time around; maybe if we need yet another stimulus in a few months or so...) Be vigilante, be intelligent, and be careful; the best person to watch out for your money is YOU. (Or possibly your mom; but even she can't watch out for you forever.)

Some of the other good posts I've seen in the past week:

How to File Your Taxes for a Recent Graduate - MyLifeROI writes about some of the basics of filing your taxes. He covers several different options, from filing yourself to using professional services, covering the good and bad about each. Personally, given my relatively simple financial situation and low funds, I opted for filing a paper return on my own, but if you have a more complex situation (investments, owning your own business, etc.) you should probably consider professional help.

College Money Tip #12: Free Stuff, Part I - Stephanie of Poorer than You notes several free services that available. She focuses on several budgeting tools, like mint and wesabe as well as some other useful sites. She also mentions NetworthIQ, which I'm particularly interested in (don't be surprised if a little NetworthIQ icon shows up on the side of my blog; as you might be able to tell from my Saturday posts, I like to track how much money I have). Plus, the Part I indicates there will be a Part II coming soon.

I could have kept that $20 (Ethical Quandry) - We heard a story of CleverDude returning money to a confused couple. He raises an interesting ethical question, about what situations we attempt to return money lost by other people, and what lengths we go to do so. Personally, I respect him for making the effort to return the money; ethics are what you do when nobody is forcing you.

Save Money on Television - Lazy Man and Money gives some interesting suggestions on how to save money on your television. The first one I particularly liked, spending more money on your television to save money. Although it's counter intuitive, if you can cut down on the expenses for other entertainment (like going out to the movies) by paying a bit more for television, you'll ultimately save money.

Lending Club Adventures

noreply@blogger.com (Roger, the Amateur Financier) — Thu, 12 Mar 2009 14:00:00 +0000

As I've been reading more personal finance blogs, I've been coming across the concept of peer to peer (or P2P) lending. One place in particular that's come up multiple times is Lending Club.

I've heard about Lending Club before, but finally decided to take the plunge when I read Stephanie's review of Lending Club on Poorer than You (which, as a side note, is one of the coolest named blogs out there). So, after getting a recommendation link from her, I set out on my merry adventure.

After filling out a few online forms, I was enjoying adjusting the little slider to determine how much risk to take. I came up with a fairly conservative, but still quite profitable arrangement, as shown below:

So, there I was, feeling good about taking this step. I've heard good things about Lending Club, not only from Stephanie but from The Writer's Coin and Rocket Finance. Besides, I had gotten $50 from Lending Club, so it's not like I even had any of my own money on the line.

However; I hit a little snafu...

Apparently, Notes are not currently being sold directly to residents of Pennsylvania. And I happen to be a resident of Pennsylvania, at least when I last checked. As such, I'm not actually allowed to purchase the notes directly. I even went as far as writing to the help desk at Lending Club, which verified that yes, I'm out of luck at the moment.

Interestingly enough, though, there's apparently no rules about buying Notes from other members on their Note Trading platform. (Which perplexes me somewhat; I'd think that if I was not qualified to buy an investment from what is essentially a brokerage house, I should not be able to buy them from other members. It's the same investments, after all; the difference is about the same as buying stocks at an initial public offering versus buying them on a stock exchange.) I'm still trying to study up on the Note Trading platform, and hopefully I'll find some good investments via that method. Prepare for more updates in the near future!

One Million Dollars

noreply@blogger.com (Roger, the Amateur Financier) — Wed, 11 Mar 2009 14:00:00 +0000

The Writer's Coin posited an interesting thought experiment: What would you do with $1,000,000 (after taxes)? It's an interesting idea, as most of us will save for much of our lives to get somewhere near that amount by the time we retire. (Especially adjusting for inflation, since one million now will have the same purchasing power as nearly four million dollars by the time I plan on retiring in about four decades.)

That in mind, here's my 'off the top of my head' answer to what I would do if I woke up tomorrow and found I had inherited one million dollars:

-Tithe ($100,000) - I'm not a terribly religious man (and honestly, I have my doubts about most of the religious 'leaders' in the world, even in my own faith), but I love my church, and I'd want to do what I can to help it out. Plus, given the fact that I'd need a miracle in order to get that much money handed to me, showing some thankfulness is probably in order.

-My Mother ($50,000) - My mother has done so, so much for me over the decades, and the least I can do is try to help her out as she nears retirement, as much as I am able. And I most certainly would be able to help her out if I suddenly had one million dollars to my name.

-A House ($200,000) - Living in my mother's house is not the styling lifestyle I had hoped for in my mid-twenties. Getting a place of my own, preferably near enough to my girlfriend that she can move in with me, is one of my first priorities. I can probably get a nice house near her for this much, or perhaps even less.

-A Diverse Portfolio ($500,000) - The best idea of what to do with a windfall is to put it into investments that can help fund my lifestyle. If I can invest a half million dollars so that it yields about 5% (easily done with an investment of two-thirds stocks and one-third bonds, let's say), that will be $25,000 a year on top of whatever I can earn from work. Although, if I had a million dollars...

-My Dream Career ($150,000) - No, I don't believe that I can buy a perfect career with a few hundred thousand dollars. Rather, this is the money I'd use to live off while I endeavored to live my dream. I can easily get by on less than fifty thousand a year, allowing me to have at least three years to do whatever I want and attempt to build up a career of my dreams.

What career, you ask? Well, if I could be anything I wanted, I'd like to make a living as a professional artist. Which is one good result of this thought experiment; I see that I should be spending more time with my art, hopefully developing my skills more and getting more talented at something I really enjoy.

Investing 101: Stocks

noreply@blogger.com (Roger, the Amateur Financier) — Tue, 10 Mar 2009 14:00:00 +0000

(This is the first entry in a regular series, covering some basic information about a variety of investment options in a question and answer format. It'll be witty, informative, and entertaining, just like high school! Or at least, as what we all wished high school was like.)

Q: What are stocks?

A: In a nutshell, stocks are small ownership portions of a company. If you have Microsoft stock, for example, you are a part owner of the Microsoft corporation.

Q: Sounds good! So, when can I start bossing Bill Gates around?

A: Well, two problems with that: first, Bill is essentially retired, and is putting more time into charity work than Microsoft these days. Second, it's unlikely you own enough stock to have a controlling stake in a company as large as Microsoft.

Q: Well, shoot, that's no fun. What determines how much of the company each share of stock represents?

A: It depends on how much of the company's equity is represented by the stock. If, when initially selling the stock, a company decides to sell 40% of its equity (the value of the company and its assets) in the form of stock, and issues 40,000 shares, then each share will represent 0.001% of the total company. If you bought 1000 shares, for instance,you would own 1% of the total company. Most companies put out millions of stock shares, making it all but impossible for regular investors to gain a controlling (that is, more than 50%) share.

Q: That's interesting. But why should I own stocks?

A: Stocks are good investments as they have high rates of return. They tend to outperform many other investment categories, such as bonds and money market funds, over the long run. They are useful for saving and growing money for people who have time and patience.

Q: That all sounds good, but how exactly can stocks make me money?

A: Stocks have two different ways to return your investment: (a) capital growth: when stock prices rise, you can sell your shares for more money than you used to purchase them, and pocket the profits, and (b) dividends: some (but not all) stocks pay out a portion of the company's profits to shareholders once a quarter, essentially rewarding you for holding onto your shares.

Q: Which of those two methods is best? And how should I invest to achieve that goal?

A: Two questions, hunh? Alright, to answer the first one, it depends on your goals; if you are seeking to grow your money, investing for capital growth should be your aim. If you want to gain spendable money (if you're retired and want a steady source of income), investing for dividends might be better.

You can shift your investments to meet your particular goals. If you want dividends, invest in large, well-established companies (known as blue-chips), which tend to pay out more of their income as dividends. Or invest in REITs, specialized stocks that invest in real estate and are required by law to pay out a large amount of their income. For capital growth, consider investing in smaller companies; they have more room to grow and expand.

Q: That's great! How can I lose?

A: Well, there are risks to owning stocks. Stock prices rise and fall, sometimes dramatically and quickly, so if you can't count on regular capital gains. If the stock prices go low enough, you might even find that the stocks are worth less than the money you paid for them. Dividends can be reduced or even cut entirely, sometimes with little warning. And if a company goes bankrupt, as companies sometimes do, the stock holders are unlikely to get any of their money back; they are behind bond holders and other debtors in claiming corporate assets.

Q: This is getting dicey. How can you find good stocks?

A: That's the $64,000 question; there aren't too many ways to ensure your stocks will do well. The single best method is to do careful, thorough, complete research, completely vetting the companies you want to invest in, and continue to follow the stocks regularly, being sure to know when things change with the company you now (partially) own.

Q: That sounds pretty hard. Is there any way to get the benefits of stocks without all this work?

A: The easiest way is to buy mutual funds. This allows you to own dozens, hundreds, or even thousands of stocks with a single investment. As a result, you'll get the dividends and growth potential of stocks with much less risk, and much less work, than hunting down and studying individual stocks. You will give up the potential of finding a superstar stock that drastically increases in value, but you will avoid the possibility of having a large amount of your money tied up in another Bear Stearns.

That wraps up this week's Investing 101 segment; come back next week, when we'll delve into the wonderful world of bonds.

Working Through the Monday Blahs

noreply@blogger.com (Roger, the Amateur Financier) — Mon, 09 Mar 2009 14:00:00 +0000

For those of you who read my post last Monday, you know the college where I am working had Spring Break last week. Since that's currently my only job (although, hopefully not for too much longer *crosses fingers*), I effectively had Spring Break as well. I spent most of it out visiting my girlfriend, and had a great time.

Unfortunately, though, it's left me behind in my blogging. I've managed to get the last two entries out during this rather busy weekend, but I'm getting stuck about what I should write this week. Luckily, I have a few ideas of how to break my mental block:

1) Catch up on my PF blog reading - I've got over two hundred entries to read in my RSS feed, just from the few writers I follow regularly. Reading, digesting, and possibly commenting on all those articles should certainly spark an idea or two.

2) Reading more PF books - I've been falling behind on my reading to learn lately; between my job, my blog, and my personal life, I haven't had a chance to read some of the books I've really wanted to read. Besides sparking some ideas for related posts, it might even be worthwhile to consider putting up a few book reviews.

3) Engage the PF community - I'm currently a member of the Money Blog Network forums, where a lot of PF bloggers gather and discuss various issues. More than a few of the topics I've read through made me think, 'hum, this might make a good blog entry'. Now all I need is some follow through.

4) Write to teach myself - There are plenty of personal finance and money topics I'd like to learn more about; making an effort to identify, study, and then write about those topics would be an excellent learning experience, and would probably provide enough material for years worth of posts.

5) Consider a different blog - I like personal finance, and love writing this blog. But, as they say, variety is the spice of life. Perhaps cutting down on the 7-10 entries a week I put up on this blog and starting another blog for one of my other interests could help to keep me motivated.

Just some thoughts on how to break my Monday 'Blah' mood and start writing again.

PF Spotlight: Punny Money

noreply@blogger.com (Roger, the Amateur Financier) — Mon, 09 Mar 2009 03:00:00 +0000

(Update: As of March 16, Nick and Punny Money have returned. Oh, happy day! His latest post discusses the new Burger King 'burger shots' in his normal sarcastic tone. Check him out, he's still as funny as ever.)

Ah, alas, it is with a heavy heart that I write this particular spotlight. I've wanted to feature one of my favorite blogs, Punny Money, since before I even started this blog. Unfortunately, it seems that Nick, the proprietor of Punny Money, has gone on an unannounced hiatus.

One of the greatest things about Nick's blog is the hilarious cartoons he's been including with his posts. The artwork is fairly simple, largely stick figures and other interesting cartoony aspects. But his twisted sense of humor, and ability to find the funny even in the oddest of places led to some truly, truly funny cartoons. Add in the detailed and insightful articles he wrote, and it's a wonderful blog.

While I hope that Nick will be back to writing and drawing for Punny Money soon, but in the meantime you can check out some of my favorite articles from his blog:

Adventures in First-Time Homebuying - Nick wrote a series of articles about the joy and peril of buying a house. It's easily one of the most comprehensive and complete series of homebuying articles I've seen, covering everything from mortgage rate explanations to finding a realtor to getting a loan and closing. There are over twenty articles in the series, and they make great reading, even if you aren't currently in the market for your first house.

How to Save Your Safe Deposit Box From All the People Trying to Steal It - Nick details some of the risks of safe deposit boxes, mainly the risk that your bank might declare it abandoned and auction off the contents. He doesn't really come up with a solution (other than putting baking soda labeled as cocaine into your box, so that the police will track you down if your box is declared abandoned...), but the cartoon is hilarious, and the risk of losing your important documents and other deposits is, sadly, real.

Eat Your Money's Worth at Any All-You-Can-Eat Buffet - Exactly what the name says, techniques to maximize the economic benefits of buffet eating. Some of the basics: don't starve yourself, eat the meat first (and second, and third...), and take some time off before you gorge again. Pretty good tips, and useful if you like buffets.

Fight Thieving Restaurants With Checksum Tips - Nick's most commented-on post, it details a method to prevent the wait staff at restaurants from adding more money to the tip than you intended. The basic idea is to make the last digit of the total (the penny column) equal the sum of the dollar digits. So, if your bill (with desired tip) came to about $54.62, you'd add the 5 + 4, and change the last digit to a 9, making the total you actually write $54.69. Then, if anyone tried to add more to the tip, the math wouldn't work, and you'd realize instantly that something was wrong.

The reason it's the most commented on post is pretty simple; just about everyone has an opinion on the issue of foiling tip inflation. Numerous commentators wrote in to call Nick cheap and paranoid (accusations that weren't helped by the fact that his example had a tip amount of 10%). Angry waiters and waitresses wrote about the number of times that people would give them poor (or nonexistent) tips, and decried the implications that their profession was crooked. Several loyal readers and money nerds commented about how neat the concept was, and expressed their support of the idea. Nothing like raising some controversy to spark an involved conversation.

Weekly Update: 3-7-2009

noreply@blogger.com (Roger, the Amateur Financier) — Sun, 08 Mar 2009 04:00:00 +0000

Well, I have returned from four days spend wining and dining my dear sweet girlfriend Sondra. Actually, the week was pretty slow; other than cleaning up her attic so that she could set up a bedroom/apartment, we were just calm and relaxed. Moving all the necessary furniture and other accouterments up to the third floor was quite an ordeal, but worthwhile to have a place of our own.

Our big fun this trip was going out to see the Watchmen movie. It was very, very good. I've read the graphic novel, and the movie followed the (admittedly complex) storyline rather well. My girlfriend had not read the graphic novel, and she enjoyed it as well. I recommend the movie highly to anyone interested in a smart, deep, action movie.

One caveat though: do not, I repeat, DO NOT take children (or squeamish/prudish friends) to this movie. Although it is a 'comic book movie', it's rather violent (sometimes realistically so) and sexually-charged at times, and the underlying themes and concepts are extremely deep. The best option in my mind is to read the graphic novel first (it's an excellent read) and see if it is appropriate for your family.

Now, to see how my finances are doing after going to visit my girlfriend and spending nearly a week with her:

Savings

PNC (Checking Account) $ 100 -$138
Susquehanna (CD) $ 2542 +$0
ING Direct (Checking) $ 655 +$616
ING Direct (Savings) $ 3006 +$1601
ING Direct (Orange CD) $ 1016 +$4
HSBC Direct (Savings) $ 23 +$1
Smarty Pig (Savings) $ 700 -$1739
Vanguard (Money Market) $ 1301 +$301

Total Savings $ 9343 +$646

Investments

Vanguard (Roth IRA) $ 4890 -$505
- Small Cap Index (NAESX) $ 2800 -$308
- High Dividend Yield (VHDYX) $ 2090 2287 -$197

Share builder (ETFs) $ 2155 -$179
- Total US Market (TMW) $ 654 -$51
- Extended Market (VXF) $ 646 -$66
- Total Foreign (VEU) $ 425 -$27
- Small Cap Value (VBR) $ 190 -$25
- Emerging Markets (VWO) $ 240 -$10

Total Investments $ 7045 -$684

Total Assets $ 16,388 -$38

Credit Cards

MasterCard (JCPenney) ($ 107) -$0
American Express ($ 1797) -$152

Student Loans ($ 11,929) +$0

Total Debts ($ 13,833) -$152

Net Worth $ 2555 -$190

Not a bad week, overall, but not too good, either. Another small hit to my net worth. Another reason to control my spending and bring it under my incoming funds.

Investment Pyramid - Hopes and Goals

noreply@blogger.com (Roger, the Amateur Financier) — Fri, 06 Mar 2009 15:00:00 +0000

Up to this point, we've been talking about the how of investing, from getting yourself ready financially to starting to build up some diverse investments to expanding into other investment opportunities. This is all important to know, but it doesn't touch on the broader question of why we invest. The short answer is, we invest to help us fulfill our hopes and dreams:

The longer answer goes like this: investing gives us more money, and more money (as well as alternative ways to get it) lead to more options. The main reason to invest is that by diverting some of your money from current consumption (that is, not spending all the money you earn), you can help to secure a more stable future.

The money you have, determines the possibilities that are available to you. If you want to retire early (or retire at all), travel the world, engage in philanthropic endeavours, or simply want the flexibility to shift your career without panicking about your income, investing can help you to achieve your goals. There are just a few things to consider as you work toward your goals:

1) Be realistic about your goals - If you're twenty now, making $40,000 a year and don't have any money invested yet, being a millionaire by the age of thirty just isn't realistic. Having $80,000 in investments by thirty is possible, though. Understand what is possible, what's impossible, and how to understand the difference between the two, and you will go far with your investments.

2) Be willing to sacrifice - All investments entail some short-term sacrifice. The money you are putting into stocks or mutual funds could be spent on entertainment now. Being able to say no to going out every night or spending money on a new television is necessary to be a successful investor.

3) Be confident - It's easy to find times when staying in your investments seems risky, or even stupid. As I write this, in March 2009, we are in one of the most volatile markets in decades. It's easy to find people panicking over market volatility, pulling their money out and keeping it in savings accounts or Treasuries.

These actions might make you feel safe in the short term, but it becomes nearly impossible to meet your long term goals with such low growth. Achieving your goals requires taking some (smart) risks, and being confident that investing for the long term will yield positive growth.

With these words of advice, I know you'll do well with your investments. Keep your goals in mind, work towards them every day, and you'll achieve them in the end. Good Luck!

Investment Pyramid - Speculation

noreply@blogger.com (Roger, the Amateur Financier) — Thu, 05 Mar 2009 15:00:00 +0000

If you've spent any time reading through investment literature, you've probably noticed that there are many, MANY possible ways to invest that we haven't mentioned in our discussions of mutual funds and stocks. Most of these methods actually are really speculation; taking substantial risks in the hopes of generating even greater returns.

Speculation is inherently risky; unlike investing (at least, passively investing in index funds or similar investments), it involves significant work, research, and frankly, more than a little luck, in most cases. My best advice regarding speculation is simply to limit your exposure. Keep at most 10% of your portfolio in speculative ventures, and then, only if you can afford to lose that money with no effect on your retirement and other long term plans.

If you decide to engage in some speculation (and again, there is no requirement that you must), there are plenty of ways you can go about speculating. Day trading stocks is one method, but of course, you run the risk of mixing your investments with your speculatory stocks. There are numerous other financial instruments that are used only for speculation:

Futures - Futures are contracts to secure the price of some commodities for a future date (hence the term, futures). The underlying goods can range from agricultural products (corn, cattle, soybeans) to raw building materials like lumber and steel. For producers and consumers, futures can serve to decrease the volatility of the market and help to limit future price risk. Selling a futures contract allows the producer to lock in their profit, and buying one enables the consumers to ensure their expenses.

For most investors, though, investing in the futures market involves trading contracts without intending to take physical delivery of the underlying goods. Depending on how the prices of the commodites change, the value of the futures contracts will change, leading to profit or loss for the investors.

Options - Options are financial instruments similar to futures. They enable you to lock in a price on a stock, bond, or other asset for a future date. Options come in two flavors, calls and puts: calls give you the right to buy the asset at a pre-arranged price (the strike price), while puts permit you to sell an underlying asset at the strike price.

Buying options is a method of hedging, enabling investors to ensure the future price they'll be able to buy or sell an asset in which they are interested. Buying an option doesn't compell the buyer to exercise the option (that is, buy or sell the underlying asset at the strike price), so the only money at risk is the cost of buying or selling the option. Selling options can be a way of generating funds (the price of the options), but there is the risk that you could be compelled to buy or sell the underlying assets at prices much worse than the current market prices.

Currencies - More commonly known by the term forex, currency trading involves currency pairs. Large international banks need to convert from one currency to another in the course of their business dealing. The market for these exchanges is the interbank or spot market.

Speculators in this market try to determine how the exchange rates of currencies will change, usually over short periods of time. They buy or sell pairs of currencies, representing the exchange rates between two different monetary systems. Profit or loss results from the movement of currency rates and the particular bet the investors have made.

(Beware of leverage with regards to these investments, particularly with options and currencies. Leverage essentially translates to borrowing money with the hopes of investing it and generating profit, enabling you to repay the loan and generate a larger profit than possible with your money alone. The advantage is that relatively little money can be used to generate a large profit; however, the disadvantage is that a bad investment can lose more money than you initially invested. Be very, very careful about the investments you choose, and be sure you know the largest amount of money you could end up losing if your speculation fails.)

Finally, I'd like to remind you that there's no reason to engage in speculation if you don't want to do so. It is certainly possible to create a complete and comprehensive investment plan without touching upon speculatory investments at all. Only engage in speculation if you have the funds available, can lose them without affecting your investment goals, and understand exactly what you're doing. If you don't meet all these qualifications, stick with investments lower on the pyramid.

Investment Pyramid - Concentrated Investments

noreply@blogger.com (Roger, the Amateur Financier) — Wed, 04 Mar 2009 15:00:00 +0000

When we left off last time, we were looking at the joy and wonder of investing in mutual funds. For most people, this is about as far as they need to go in building up an investment pyramid. It might be a flat-topped pyramid if you are following my little diagram below, but there's nothing wrong with that. But, if want to keep building up your pyramid, the next step is to look into individual stocks:

I like to call these 'concentrated investments' because they aren't diversified (and I'm a chemistry dork, so I think in terms of concentrated and dilute). This can be a good thing; if your investment goes up, you'll make much greater profit by holding a single stock than owning it as part of a diverse mutual fund. The flip side, of course, is that if the stock goes down, or if the company goes bankrupt, you'll be take a much greater loss holding the stock directly compared to having hundreds of stocks in a mutual fund.

Try to limit how much money you put into stocks; it's easier, much easier, to lose all the money invested in individual stocks than it is to lose the money that's in mutual funds. Start with a small portion of your portfolio in stocks (10% to begin with), and then, as you gain experience, you can expand that amount upwards, should you desire. If you're going to invest directly in stocks and bonds, be sure to keep a few things in mind:

1) Be sure to do lots of research - individual stocks and bonds require a lot more attention than mutual funds (especially if you stick with index funds). If you invest in individual stocks, you need to closely watch the company in which you are investing, or you might end up holding another Lehman Brothers as it takes down a large portion of your portfolio. If you aren't willing or able to look over your stocks weekly, investing a significant amount of time studying the companies in which you are investing, you simply will not do well.

2) Learn to read financial statements - in the same vein, understanding how to read the numerous financial filings that companies need to make with the Securities and Exchange Commission (SEC) is important when you want to invest in individual companies. Being able to read and understand a 10-Q or 10-K form (to say nothing of knowing what they are) is vital for investing in individual companies. If you haven't learned how to read financial statement, the SEC can show you the way.

3) Consider your asset allocation - if you're investing in American, large company stocks ('blue chips', as they are frequently called), you should probably cut back on the US stock funds you hold. That way, you'll remain diversified, even as you expand your holdings into individual stocks.

4) Know your risk tolerance - investing in securities can be a harrowing experience; stocks go up and down daily, sometimes for fundamental reasons (the company itself is doing well or doing poorly) and sometimes for emotional reasons (stocks are bought and sold by people, and people react emotionally). As a result, there will be movements in the stock price, sometimes dramatic, and there could be times when it seems like the company might go under. If you aren't prepared for this, if you haven't thoroughly studied the stock and have the stomach to face harrowing drops in the stock price, you're going to be much better off investing in safe index funds and letting your investments ride.

5) Be sure to buy and hold - investing is all about the long term; it's about where you end up, not what happens along the way. Buy stocks with the idea of keeping them for the long term. You can invest for capital growth or for dividend payments (or both), but look toward the long term. Trading weekly, or even daily, will drive up your commissions with your brokerage firm but will be very unlikely to lead to higher profits for you.

6) Tune out the noise - one of the biggest obstacles to simply buying and holding is the sheer amount of chatter you will encounter, whether on TV, in newspapers, or online. Learn to tune it out; finding, buying, and holding quality stocks for the long term is the best way to make money from individual stocks. At best, shows on CNBC or online stock pickers can be sources of ideas as to where to begin your investing, but you shouldn't buy or sell without doing hours of your own research.

7) Consider sector-specific funds - finally, if you're looking to get more exposure to a particular subsection of the economy, there are ways to get it without buying individual stocks. A mutual fund (or ETF) that invests in a particular sector of the economy can give you a way to invest in financial stocks, for example, without having to invest in individual stocks. These sector-specific fund give you a greater margin of safety, while still letting you participate in the weakness or strength of a particular part of the greater economy.

Following these rules should help you to expand your holdings beyond mutual funds. If you still need more excitement in your investing life, though, you can always look into speculation. And by sheer coincidence, that's the subject of tomorrow's blog article!

Investment Pyramid: A Broad Base

noreply@blogger.com (Roger, the Amateur Financier) — Tue, 03 Mar 2009 15:00:00 +0000

Welcome to the second part of our week -long look at building an investment pyramid. Yesterday, I shared some advice to help secure your finances and get yourself ready. If you took all the steps I recommended, you are now in good shape to begin investing. But, where to start?

Your first steps into investing should be as broad-based as possible; the market can be volatile, and having wide-ranging holdings is the best way to minimize just how much risk you take on. In other words, diversify, diversify, diversify!

The best method to diversify your holdings is by using mutual funds. Mutual funds are essentially collections of investments, such as stocks, bonds, or other assets, that are held by the mutual fund company. The fund, in turn, sells shares to investors. Buying shares of a mutual fund gives partial ownership of all the assets held by the fund; if a mutual fund you invest in owns stock in one hundred companies, you will own a small portion of each of those company's stock.

At LEAST 70% of your investment money should be invested into broad-based mutual funds; if you're conservative or just don't want to be bothered with lots of research, you can go all in on mutual funds, and your investments will work out fine. There's no need to get any more complicated than mutual funds if you don't want; mutual fund companies make mutual fund investing complex enough already. There are thousands of mutual funds currently in existence, divided into numerous categories and groups based on what assets they hold. Some of the broad categories used by mutual fund companies are:

-US Stocks - One of the biggest and broadest categories is mutual funds that own stock (partial ownership stakes) in companies based in the US. There are numerous ways that these stocks are divided up: on the basis of company size, growth-oriented (that is, companies that are increasing in size) vs. value-oriented (companies that are selling for less than their intrinsic value), and those that are managed by humans as opposed to those that simply buy all the stocks in a particular index (called index funds, appropriately enough).

US Stock funds will typically form the bulk of your portfolio, especially if you're young. The growth potential of stocks is among the highest you can get from investments, and making sure your holdings take advantage of that growth will help to meet your investment goals. If you don't have the time (or the interest) to do in-depth study on the many, many US stock funds that exist, you can simply buy a total market index fund, like Vanguard's VTSMX, and essentially own the entire market.

-Foreign Stocks - There are companies located in countries other than the United States, of course, and foreign market funds invest in stocks based around the world. Frequently, these stocks are divided up based on the home country of the company (into European or Pacific Rim companies, for example) or how developed the country's economy is currently (into developed or emerging markets).

Foreign stock funds add more diversity to your holdings; if you're entirely in US stocks, troubles with the domestic economy could drop your portfolio, as well. Holding foreign stocks lessens (but, does not eliminate) the possibility of all your investments being down at the same time. Again, a broad-based, whole foreign market fund, like the VGTSX from Vanguard, provides an easy way to get your desired foreign exposure.

-Bonds - Bonds are essentially IOUs, pieces of debt from companies or government that need to borrow money and agree to pay it back, with interest. They come in a variety of flavors, from US government bonds (Treasuries, essentially your own little piece of the national debt) and municipal bonds (used by cities to meet their expenses) to corporate debt. The latter is rated and grouped according to the estimated risk of default, and grouped into investment grade (the ones that are unlikely to default) and 'junk' (bonds that are quite likely to default, and thus pose a significant risk).

Bonds are primarily used to help stabilize your portfolio; because they aren't as volatile as stocks, holding a portion of your assets in bonds will tend to blunt the pain of downturns in stock prices. Unfortunately, the same holds true on the upswing; high bond holdings will limit how much your investments can grow. As a result, if you have a significant time before retirement, more than twenty years to go, for example, you're probably best served with an all stock portfolio. When you're approaching retirement, slowly adding to your bond holdings, in a short-term bond fund like VBISX from Vanguard, will cushion your portfolio and make your investment life a little less harrowing.

-Money Market - money market funds invest in short term debts, and offer fairly low dividend payments to their investors. They are designed to keep a stable price of $1 a share, and are considered exceedingly safe (last year, the Primary Reserve Fund created waves when it was the second money market fund in history to decline in value). These funds typically generate interest rates in the same neighborhood as that available from online savings accounts.

While you're young, money market funds are probably used for storing your emergency fund. They're very stable, but offer almost no growth; most of the time, you'll barely keep up with the rate of inflation. When you are approaching retirement, though, increasing the amount of money you have in ultra-safe investments will give you somewhere to start drawing the income you'll need in retirement. Having three or four years worth of expenses in a money market fund like VMMXX from, yes, Vanguard, will give you a nice cushion to wait out a market downturn, while limiting the need to sell your other assets until they recover.

Simple Mutual Fund Plan - If we put together all the features we've been discussing to this point, we can come up with a simple, fairly conservative investment plan for a lifetime. When you start investing, put 30-50% of your money in a foreign total market fund, the rest into a total US market fund. When you're about twenty years from retirement, start to transfer money (using new money as much as possible, to avoid selling off your stock funds) into a short term bond fund, increasing the portion of money in the bond fund each year. So, 10% in bonds with twenty years to go, 20% five years later, 30% at ten years to retirement, and 40% with five years before we get to retirement. With less than five years to go, start to add to your money market funds, building up a sizable cash cushion for when you need to start drawing down your funds, and you should have a smooth retirement.

That's essentially my plan for my investments (although, being the nerd I am, I couldn't resist complicating it just a bit). It's pretty simple, but the best plans usually are. If you do want to look into other investments, you're in luck: we'll be covering those in the next few days.

An Investment Pyramid: A solid foundation

noreply@blogger.com (Roger, the Amateur Financier) — Mon, 02 Mar 2009 15:00:00 +0000

(It's Spring Break this week, for both me and my girlfriend. As a result, I might be away from my computer more than usual, and can't count on completing my blog posts in a timely manner. In order to get around this problem, I'm going to share my thoughts on creating an investment pyramid for the rest of the week. Because nothing makes investing fun like adding pyramids; if it works for nutrition, it should work for money-management!)

All this week, we're going to be building an investment pyramid. Building on a solid foundation, creating an appropriate set of investments, and working towards your hopes and dreams are good steps for anyone to take, and now, I'm going to share my thoughts on creating an investment pyramid of your very own. We're going to start by creating a solid base on which to add our investments:

Building an investment pyramid is like building any large structure; if you don't build on a solid foundation, it's going to sink into the ground, leaving you with no pyramid and a great big hole. And nobody wants to spend their retirement in a huge hole in the ground.

There are many things you may need to do to get your financial foundation in order, enough to fill an entire week of posts (which is a nice thought for the next time I'm out of town for the week), but here are a few basics. If you can take care of all of the following, you should be in good shape to start investing. You'll also be in pretty good shape for life:

1) Have a reliable source of income - If you don't know whether there will be any money coming in next week, then your first priority has to be to SAVE, not to invest. Yes, you will miss out on some of the benefits of compounded earnings over time. But if you end up selling off your investments to pay the bills, you might end up taking a double hit: not only won't that money be working for you, but you could lock in short-term losses, and have less money available for the expenses. If you don't have a ready source of income, whether from a steady job, freelance work, or unemployment, your first task is to save until you acquire a regular money stream.

2) Spend less than you earn - Alright, so you've got money coming in on a regular basis. That's a good start, but if you're spending each paycheck as soon as you get it or have to stretch to make it from paycheck to paycheck, you still have some work to do. This sentiment goes double if you have to use credit cards because you're spending MORE than you earn.

For the long stretch, you should try to increase your income, by making yourself more valuable at work, creating alternative income sources (like, say, a blog), or even working a second job, if needed. In the short term, it's easier to trim your expenses and pocket the difference, by cutting out regular purchases such as lattes... But even when you have a little breathing room between your income and spending, you are not free yet.

3) Take care of your expensive debt - I touched upon the idea of cheap and expensive debt briefly when I talked about student loans, but the basic idea is this: paying off debt you owe to others at X% interest is the equivalent of getting an investment return of X%. If you put $1000 in an investment that grows by 10% annually, you'll have $1100 in a year; if you pay off $1000 in debt at 10% interest, you'll save $100 in interest over the next year. In either event, the effect on your net worth is the same: you'll be $100 richer one year from now than you would be had you simply kept the $1000 in an envelope at your home.

In fact, paying off your debts is even better, because the return you get by paying down a debt is guaranteed, unlike most investments (especially now). Add in the high interest rates that you might be paying on credit cards (frequently in the 20-30% range), and cutting down on your consumer debt is a great investment, probably the best one you could make. If you have any debt that is charging more than you can reasonably expect to earn by investing (8% is a fairly conservative number), focus your energy and extra money paying it down first.

4) Set up an emergency fund - So, you've eliminated your (expensive) debt, have a regular income, and spend much less than you bring in; time to start investing, right? Not quite yet... If you run into financial trouble in the future, you need to be able to get past it without selling your investments. If you don't have a stash of money set aside for unexpected expenses or a potential loss of income, you might have to sell when your investments have gone down or add expensive debt just to get by.

There are many different places to build and store extra money for your emergency fund; the key is that it be safe (you don't want this money to disappear on you right when you really need it) and accessible (you should be able to get at the money if the need arises for a large, one-time expense, like car repairs). Two good options are high-yield, online savings accounts (I have accounts at ING, HSBC, and SmartyPig) and money-market mutual funds, as offered by mutual fund companies such as Vanguard.

How much to put in the emergency fund is the subject of endless conjecture from financial writers; I've heard suggestions ranging from two months worth of expenses (for someone with no dependents and a relatively secure job) to one year (for those with little tolerance for risk and multiple people who depend on their income). Enough money to cover six months of expenses is my goal, but if you want a more specific answer, you'll have to ask yourself some hard hypothetical questions:

-If my car breaks down, how much would it cost to fix? How long could I get by without using my car? If I need to get another vehicle, do I have the money available to afford it?

-If there's a problem with one of the appliances, can I afford to get it fixed? Are any of the appliances nearly the end of their lifespans? If so, can I afford to get new ones?

-Is there any part of the house that needs repair? If so, how important is the needed repair? Are there any known problems that might need to be fixed in the future? Are they structural or superficial; that is, can we still live in the house if we delay the repairs, without having to worry about our safety?

-If I lose my job, how much could I expect to get in unemployment? How much would I need on top of that to cover the monthly expenses (including COBRA or other medical, if my employer isn't providing it anymore)? Is it reasonable to assume I'll get another job before the unemployment benefits run out? If not, how much more should I have in the emergency fund to cover the period between running out of unemployment and getting another job?

These are all difficult questions, most going far beyond a simple matter of how many months of expenses to keep in your account. The main thrust is this: make sure you have enough money on hand to cover any costs you are likely to face, without having to float them on your credit cards. Your emergency fund is a buffer, keeping you from piling on debt or pulling money from your investments, allowing the money you've invested to keep working for you.

Once you've completed all four of these steps you should be ready to invest. You'll have more money coming in than going out, no high-interest debt holding you down, and an emergency fund should some unexpected problem arise. The only question is, how to invest? Which, luckily for you, is the subject for tomorrow's blog entry.

PF Spotlight: My Life ROI

noreply@blogger.com (Roger, the Amateur Financier) — Sun, 01 Mar 2009 15:00:00 +0000

One of the most interesting new blogs I've encountered is MyLife ROI. (The ROI part is Return on Investment, just so you know.) He's interesting, amusing, and has an excellent grasp on personal finance math. He's also the first watcher I've gotten, and so has a special place in my heart for that reason.

It's also one of the newest PF blogs I've come across, and one of the few that's younger than mine. As such, there aren't too many posts there yet. But, here are a few of the highlights from the posts that are already up:

Why Canadians Are Dumb - One of ROI's unique features is its weekly comic strip. It's a rare addition to a PF blog; it reminds me of the late, lamented Punny Money, and Nick's great strips there. That said, I'd say out of the way of any angry Canadians looking for ROI...

How Government Spending IS Different - An interesting argument in favor of government spending to lift the economy, which seems to be a rare position to take in the PF blog community. ROI apparently got into a (surprisingly civil) debate with rocketc about the latest government bailout. Besides being a reminder of how to have a healthy, friendly, and informative debate (even if you fundamentally disagree with the other person's position), ROI points out some interesting facts about the stimulative effects of government spending, and backs them up with some hard numbers.

How to Fill Out a W-4 - Pretty much exactly what the title says, a complete walk-through of how to put all the needed information into a W-4 Form when starting a new job. He adds some helpful commentary about how many exemptions to claim (not too many, but not too few) and gives some advice on using the part-year method, if you work less two-thirds of the year (something to think about if I don't get another job until the summer).

Student Loans Driving Your Career? - A thought-provoker, looking at the connection between how much job dissatisfaction students are willing to tolerate in order to increase their earnings. Making a trade between job satisfaction and money you earn is tough to figure out, even if you have all the needed information; when you aren't sure how much you'll enjoy the job, it gets even harder. But the advice ROI gives, to keep student loan debt in check so that it isn't the driving factor in your job decision, is a good one.