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  • Does a Declining Stock Market Worry You?

    The USA stock market has not been doing so well recently (the S&P 500 index is down over 9% so far this year). And I own S&P 500 indexes in my retirement account (in addition to other index funds). So I am losing money on those investments but I am not worried. It is possible the market will do very poorly over the next few months, year… if the economy struggles (and with the huge credit card like spending Washington much of the last 30 years and huge increases in gas prices that is certainly possible). But I am not worried.

    I don’t plan on using that money for decades. Therefore the short term declines really have no impact on my life. Sure if I was able to move all that money into a money market fund for the decline and then move it back into stock funds for the increase that would be wonderful. But I can’t and no-one has proven to be able to time the market effectively over the long term. It is unlikely you or I will be the ones that do it right. I wouldn’t be surprised if the market was lower at the end of the year, but I wouldn’t be surprised if it was higher either.

    Dollar cost averaging is the best long term strategy (not trying to time the market). And using that strategy, if you assume stocks reach whatever level they do say 20 years from now, I am actually better off will prices falling now – so I can buy more shares now that will reach that final price. You actually are better off with wild swings in stock prices, when you dollar cost average, than if they just went up .8% every single month (if both ended with stocks at the same price 20 years later). Really the wilder the better (the limit is essentially the limit at which the economy was harmed by the wild swings (people deciding they didn’t want to take risk, make investments…) to the point that the final value 20 years later is deflated.
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  • Corporate and Government Bond Yields

    graph of 10 year bond rates

    Over the last 2 months the yields on bonds have increased the discount rate has continued to decline.

    The spread between corporate bond yields and government bonds has decreased a bit as treasury yields have increased 37 basis points compared to just 4 and 6 basis point increased in corporate bond yields.

    Data from the federal reserve – corporate Aaa – corporate Baa – ten year treasury – fed funds

    Related: Bond Yields 2005-2008 – 30 Year Fixed Mortgage Rates versus the Fed Funds Rate – Initial Retirement Account Allocations

  • Save Money on Food

    photo of wineberries

    With the drastic increases in food prices recently a home garden an attractive way to save some money. I have planted a garden for several years. Frankly the main reasons I did so had nothing to do with money. I find it cool to plant a seed or small plant and then just water it occasionally and then be able to eat. Plus it is great to just go grab some fresh food and eat it. It tastes great and is healthy.

    The increasing price of food it makes it more attractive. I plant a few tomato plants and some pepper and cucumber plants. And then some pea and beans from seed (and I did celery this year – though I didn’t realize I was suppose to start them inside 10 weeks early so we will see what happens). I think my total cost was under $30. I would guess all the water I use will be under $5. From that I will get 10+ weeks many tomatoes and green peppers, sweet peppers, hot peppers. The cucumbers and and peas don’t seem to produce as long (if I remember right from last year). I am trying to plant some peas from seeds every couple of weeks and see if that works to give me peas for a longer period this year.

    I also have a bunch of berries. I have wineberries that just grew themselves (which started as 1 plant 3 years ago and now covers maybe 20 square feet) which are the best thing of all from my garden, frankly (I have never been able to buy any berries nearly as good). And I bought a small blackberry plant 2 years ago which has grown to be quite productive. Last year I had birds eating so many berries I hardly got any. The previous 2 years I could get more than I could eat for several weeks and enough to eat for maybe 4 more weeks total. Any advice on how to keep birds away?

    Even while there are some financial benefits I really think the good healthy food and fun is more important.

    Related: Backyard Wildlife: Raptor – Food Price Inflation is Quite High – Backyard Wildlife: Fox – Backyard Wildlife: Turtle

    This post is included in the Carnival of Personal Finance #157: Third Anniversary Edition

  • Foreclosure Filings Continue to Rise

    Foreclosure Filings Continue to Rise

    Foreclosure filings last month were up nearly 50 percent compared with a year earlier, according to one company’s count released yesterday. Nationwide, 261,255 homeowners received at least one foreclosure-related filing in May, up 48 percent from the same month last year, and up 7 percent from April, foreclosure listing service RealtyTrac said.
    …
    last week the Mortgage Bankers Association reported that about 2.47 percent of home mortgages were in foreclosure during the first quarter of the year, almost double the 1.28 percent rate of a year earlier, and the highest point since the group began compiling such figures in 1979. A Credit Suisse report this spring predicted that 6.5 million loans will fall into foreclosure over the next five years, reaching more than 8 percent of all U.S. homes.

    There numbers really are astounding. How lame were the decisions of banks and mortgagees that nearly 1 in 40 mortgages are in default (and that number likely increasing in the next year to much more?

    Related: Homes Entering Foreclosure at Record (Sep 2007) – Homes Entering Foreclosure at Record – Ignorance of Many Mortgage Holders

  • Forest Glen Preserve Photos

    Photos from my hike in Forest Glen Preserve, Illinois 2 years ago.

    photo of lantern tree

    Other photos: Bull Run Mountain Conservancy Trail, Virginia – Yellowstone National Park – Devils Tower National Monument
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  • Monopolies and Oligopolies do not a Free Market Make

    Pretty much everyone (certainly the vast majority of regulators and politicians) have no clue about capitalism. The concept that a “free market” should be allowed to operate is theoretical, based on “perfect competition” (which essentially means zero barriers to entry). Obviously the politicians support, not capitalism (which would require regulation of imperfect markets (and certainly not support consolidation past the point of many competing companies), but the idea that those with the gold make the rules. Natural monopolies (like gas distribution, electricity, likely internet infrastructure…) should be fully regulated companies which then have the infrastructure accessed by multiple competitors (none of which own the natural monopoly – of course).

    With some market that is even remotely in the area where a capitalist free market was in place, it is very simple to not have to deal with companies that treat customers horribly (like Verizon, Comcast, Time Warner Cable…) you just chose another company to deal with.

    But these companies want to have the government allow them to create a monopoly (or something extremely close) and then claim to be in favor of capitalism (and further make ludicrous claims about what capitalism would suggest about regulation in oligopolistic markets). These ideas is so laughable that if politicians had even a sense of economic understanding they would adopt the appropriate capitalist response (for government).

    Obviously, regulation is required as the market moves away from the area of “perfect competition.” When some huge company wants to buy some other huge company (say creating greater than 10% of the market combined) this would be rejected. If the market is a natural monopoly where the free market is not the proper capitalist market (such as one where the government would allow the proper capitalist response to players in the market attempting to break the free market by gaining to much control), then, of course a regulated natural monopoly would take on that economic task. This is not really complicated stuff.
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  • 30 Year Conventional Fixed Mortgage Rates Increase

    This year, the average discount rate has fallen every month while the average 30 year mortgage rate has climbed all but 1 month (a 5 basis point drop). In January, 2008 the discount rate averaged 3.94% and 30 year conventional fixed rate mortgages averaged 5.76%. In May, 2008 the discount rate had fallen to 1.98% (for a 196 basis point drop) and 30 year conventional fixed rates had risen to 6.04% (for a 28 basis point increase).

    The chart shows the federal funds rate and the 30 year conventional fixed rate mortgage rate from January 2000 through May 2008 (for more details see: historical comparison of 30 year fixed mortgage rates and the federal funds rate).

    30 year fixed mortgage rates and the federal funds rate 2000 to May 2008

    Related: Affect of Fed Funds Rates Changes on Mortgage Rates – real estate articles – Bond Yields 2005-2008 – Jumbo and Regular Mortgage Rates By Credit Score
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  • New Graduates Should Live Frugally

    Graduates should put off living large after college

    Good habits are important to start early,” said Laura Tarbox, founder of Tarbox Group, a financial planning firm in Newport Beach. “Take your finances as seriously as you do your relationship and career decisions, and you’ll end up way ahead of everybody else. But you’ve got to do it now. If you start even five years later, it just doesn’t work.”

    The key, experts say, is a simple one: Live like a poor college student for a couple more years. While you’re doing that, you can pay off your debt, start a savings plan and embrace healthy habits that will serve you well for life.

    This is exactly what I did. Outside of paying for college, extra living expenses in college were small. Just retaining the spending habit of college gets your personal finances off on a good start.

    Sallie Smart, 22, economizes like crazy in her first years after school so that she can save $500 a month in her 401(k), and she keeps that pace up indefinitely. Her employer matches 50%, pitching in $250 a month. If she earns a 9% annual return on her investments, when she wants to retire at age 65 she’ll have $4.1 million in her nest egg.

    Patty Procrastinator lives a little better when she first gets out of college and doesn’t start saving in the 401(k) until she’s 32. From that point, she also saves $500 a month, her employer adds $250 a month, and she earns a 9% return — just like Sallie. But at age 65, Patty will have only $1.7 million. That decade of delay will cost Patty $2.4 million.

    Incidentally, Sallie contributes from her own money just $60,000 more than Patty does. The rest of the difference comes from employer contributions and investment returns.

    By immediately starting to save for retirement and other needs you create a great foundation for your finances. Start saving for a house, a new car, create an emergency fund… Then you can create a situation where the only loans you need to take are for a house and maybe a new car – avoiding credit card debt or other personal loans.

    Related: Personal Finance Basics: Health Insurance – Initial Retirement Account Allocations – Why Americans Are Going Broke

  • True Level of USA Federal Deficit

    What’s the real federal deficit? by Dennis Cauchon, 2006

    The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005. The set the government doesn’t talk about is the audited financial statement produced by the government’s accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005.
    …
    The audited financial statement – prepared by the Treasury Department – reveals a federal government in far worse financial shape than official budget reports indicate, a USA Today analysis found. The government has run a deficit of $2.9 trillion since 1997, according to the audited number. The official deficit since then is just $729 billion.
    …
    The new Medicare prescription-drug benefit alone would have added $8 trillion to the government’s audited deficit. That’s the amount the government would need today, set aside and earning interest, to pay for the tens of trillions of dollars the benefit will cost in future years.

    Standard accounting concepts say that $8 trillion should be reported as an expense. Combined with other new liabilities and operating losses, the government would have reported an $11 trillion deficit in 2004 – about the size of the nation’s entire economy.

    The federal government also would have had a $12.7 trillion deficit in 2000 because that was the first year that Social Security and Medicare reported broader measures of the programs’ unfunded liabilities. That created a one-time expense.

    The continued attempts by politicians to distract from the huge taxes they are voting to place on our children and grandchildren is disheartening. And the continued actions that are the equivilent of getting another credit card when they spend so much that even the “official” books that they have exceeded the allowable total federal debt that is damaging the economy. They need to learn how to live within the current taxes they collect just as people need to learn to live within their earning. Either that fails to do so mortgages their future.

    Related: Politicians Again Raising Taxes On Your Children – USA Federal Debt Now $516,348 Per Household – Washington’s Funny Accounting – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren – Failed Leadership: Estate Tax Repeal

  • 12 Stocks for 10 Years Update – June 2008

    I originally setup the 10 stocks for 10 years portfolio in April of 2005.

    At this time the stocks in the sleep well portfolio in order of returns:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Google – GOOG 163% 17% 14%
    Amazon – AMZN 124% 7% 7%
    PetroChina – PTR 114% 7% 7%
    Templeton Dragon Fund – TDF 90% 10% 10%
    Templeton Emerging Market Fund – EMF 47% 4% 4%
    Cisco – CSCO 42% 7% 8%
    Toyota – TM 38% 10% 11%
    Tesco – TSCDY 9% 0% 10%
    Intel – INTC 3% 5% 6%
    Danaher – DHR 1% 5% 8%
    Pfizer – PFE -29% 4% 6%
    Dell -30% 7% 6%

    At this point I am most positive on Google, Toyota, Templeton Dragon Fund and Tesco. I am wary of Dell – they seem to be moving in the wrong direction, but I am willing to give them longer to improve. I am even more wary of Prizer but again willing to stick with them for the long term. I will be looking for a suitable replacement.

    In order to track performance I setup a marketocracy portfolio but had to make some minor adjustments. The current marketocracy calculated annualized rate or return (which excludes Tesco) is 9.8% (the S&P 500 annualized return for the period is 7.9%) – marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that the return is about 10.8%). View the current marketocracy Sleep Well portfolio page.

    Related: 12 Stocks for 10 Years Update (Feb 2008) – Retirement Account Allocations for Someone Under 40 – Lazy Portfolio Results