Finances

I have long been disappointed in capitalism’s drive towards growth for growth’s sake.  I’ve usually referred to it as ‘unbridled capitalism’ as I’ve seen it as companies run amok with no regard for the long-term impact of their actions.

Now I’m not against capitalism.  I just feel like some control is a good thing.  Take banking for instance.  In my opinion, the financial collapse is a good example of what can happen when companies (or industries) are left to their own devices.  Can anyone really still argue that what AIG was offering was not insurance and therefore didn’t need some kind of oversight?  How much have we given that company?

I’m not exactly schooled in this however, and so I’m not particularly eloquent on the subject.  That’s why I especially like the comments and writings of Umair Haque.  I was recommended his blog by a former co-worker and I’ve been really drawn to Umair’s viewpoint, and his ability to express it, ever since.  He tends to talk less about regulation and more about companies and how they should behave in their own best interest.  And I totally believe that there is a benefit to this kind of thinking that most companies would realize if not for their near-sightedness (or desire/need to satisfy the short-term financial statements).  It is for these reasons that I believe some regulation is needed.

Here’s a fairly typical blog posting of his discussing the idea: The Scale Every Business Needs Now

For a more comprehensive look at what he calls constructive capitalism, check out these links that he provides.

A couple of weeks ago I wrote about the current state of my finances, and how/what I had done in the past year.

Since that post, the market has continued on its rally and is now up even more.  It’s to the point where one has to question when things will settle off a bit.  This is where the emotions of the stock market start to get to me..  I wonder whether I should pull out some of my gains and set them on the sidelines for what must be the inevitable reset that’s just around the corner.  Or is it?

Here’s a snapshot of a few of the funds/stocks that I had purchased earlier this year, and their performance since I made those purchases:

Note that even my loser pick Washington Mutual – which I purchased prior to the downfall last year – is off from it’s overall lows (where I was down about 96%).

The problem I have, I guess, is that I’ve already got (I feel) a pretty diversified portfolio (this table only represents a portion of my overall holdings) – so other than cash (where it will earn nothing) I wouldn’t know where to put the money once I pull it out of the market..

So in the market it will stay, and I’ll continue to hope that the fast climb won’t soon be met with a fast decline.

I’d love to hear what others are considering.

Around this time last year I was heading off to Germany for a vacation planned months earlier.  It was while on this break that the US (and international) markets really started to report all of their irregularities that resulted in the ‘economic crisis’ of the last year.

S&P 500 1 year chart (via Yahoo Finance)

While this made for interesting conversations while on vacation, it was all a bit shocking to be watching while so far from home.  I returned from Germany and was rather amazed (along with so many others) to watch the markets continue to decline for as long as they did and as far as they did.

During the past year I made a lot of financial decisions to try to salvage some value in my portfolio and I decided to take a look back at some of the decisions I made, and where I am now, compared to last year.

I, like many people, find much of my savings in retirement plans.  As such, I try not to overly manage this money (since it will be a while until I draw from it).  The downside to this is that I had pretty much the same portfolio makeup at the beginning of the crisis as I had during the boom times of the previous decade.  Unlike some friends who warned of impeding doom (with calls to pull money out of the market) my money was still sitting vulnerably out there.  And it was hit.

Luckily though, I did have some safety.  First and foremost, I had recently transferred out a bunch of money from a previous employer’s 401k plan so that was sitting – as cash – in my IRA.  This meant that almost 30% of my IRAs value was haphazardly stored as a non-declining asset during the market slide.  Secondly, I had a reasonable security mix in my assets – including bonds, international and domestic stocks of various sizes.  This prevented a major loss in my accounts.  But even with these measures, my portfolio lost close to 35% of its value (but much better than the 50% decline in the S&P).

It was time to more actively manage the situation.

First: What to do with the cash?  I decided I needed to transfer from cash in a money market fund (earning less than 1% return) into something that would start earning.  I was also reasonably concerned that money market funds wouldn’t prove to be as safe as they had in the past.

Unfortunately, My first moves didn’t fare so well.  I moved some cash into commercial paper.  This quickly looked like a mistake.  At first these investments lost value but thankfully the strength of the companies is holding out and the value of these investments is recently back on track – most are now up in value with only 1 laggard which has been making a slow comeback throughout the year.

Second I decided to buy into stocks – breaking my multi-year streak of only owning funds. I decided to try to buy companies recently hit hard by the slide.  Google and Yahoo have proven to be good decisions (and I still hold out hope for the family of Yahoo properties providing even more upside).  Washington Mutual?  Not so much (currently down 97% on that one).

Finally, I diversified my Mutual Fund holdings even more.  I purchased lower-fee index funds (have you looked at that S&P chart over the last 6 months?!) and sold off some of the more expensive funds.  I already owned reasonably low-priced funds but these new funds are better and I’m more and more a fan of index funds for a bulk of the holdings.

So where am I today?

Not including contributions made over the past year, my portfolio is still down – just about 7%.  Not bad, considering it was down close to 35% just 6 months ago.  And I feel like I’m better poised for future growth, given my current mix.  Some of the commercial paper that I own will bring me a 6.75% return for the next 10 years – that might not always beat the market, but it sure is better than the past year.

And, I’ve continued to invest over the course of the year, so including my contributions, my portfolio value is up 8%.  While most of that is contributions, not all of it is.  Looking at my 401k for instance (which is easy to track since I started a new job just 1 year ago) I’ve made a 17% return on those contributions.

So, overall I feel pretty good about where I am.  I still have some cleaning up to do in my overall portfolio mix but I’m happy to have an overall portfolio value that is up in this troubling year.

I’ve lived in my apartment for 4 1/2 years now and recently, things have started to get a little more crowded (filed under girlfriend, cross-referenced with dog).  Actually, there are many apartments in my building with a larger occupancy than mine (including the upstairs neighbors – 2 adults & 2 kids) so it’s not all that bad – at all.

But, being Americans, it’s in our nature to covet more.

I decided to just see what our options are, and to contact my real estate agent who helped me with my current place and I was really shocked by the change in the landscape.

Now, I know all about what’s been going on in the world for the last year, so it’s not that this comes out of the blue.  What I didn’t appreciate was how much it changed the whole dynamics of home buying.  See, when I bought my apartment, I was able to do so with a very sketchy loan scenario in many ways:

• I was qualified for way more than what I ended up paying for my place.  Ultimately I decided on what I thought was a much more reasonable price point than what my lenders were willing to give me.
• I put only 5% of the purchase price down; using a home equity loan to cover another 15% (thus avoiding the need to pay any mortgage insurance)
• I got a 7-year ARM loan (opting again for a more conservative route: I was originally offered a 1, 3 or 5 year fixed time frame but I decided I wanted a little more security)
• I got an interest-only loan, meaning that during those 7 fixed years, I would only have to pay the accruing interest on the loan, and not any principal.

In many ways I played it much safer than what was being offered – I took the 7 year ARM, I bought a cheaper place, and importantly, I’ve always made larger payments than called for, refusing to pay only the interest portion of my loan.

So while I figured things would have tightened up in the past couple of years, I underestimated by just how much.

Talking to my real estate agent (and followed up by my mortgage broker) the scenario today is much more straightforward: put 20% down.  Anything less requires mortgage insurance.

Wow.  That’s a lot of up-front payment, especially here in San Francisco.

I was expecting the disappearance of the interest-only loans.  I was expecting tighter standards of credit worthiness.  I was expecting more realistic alignment of loan amount to income.  Each of these I was prepared for.

What I wasn’t expecting was a big hunk of cash being needed.

I see where this makes sense: this puts a LOT more risk into the hands of the borrowers.  If my apartment were worth 500,000 (it’s not), that would mean that when I bought, I would have had to put out 25,000 as a down payment.  If I default on my loan and walk, I’m out 25000.  With 20% down, that number changes to 100,000 – something I’d be a lot less likely to walk away from (and if I did, I’d feel a much worse sting).  Also, if the bank were forced to sell that property at a loss, there’s a much smaller risk that they’d lose significant value – since they’d be able to sell it at 80% of its value without losing a cent (since I would have already lost the first 20% of value).

This makes total sense from an industry that’s reeling from too much risk exposure.  But it’s really tough for folks like me who hadn’t really thought about the need to save up a 20% down payment.  It also really hurts sellers (or potential sellers) who won’t benefit from the same number of potential buyers.  No wonder we’re just not seeing that many for sales these days.

So, a little furniture rearranging, maybe a little paint here and there, and my apartment should be good for a little while longer.

Last week, I wrote about how I tried to actively manage my finances, in order to better afford the things that are important to me.

There have been a few simple methods I’ve used over the years to help me with my finances.  The first is really easy – simply subscribing to a financial magazine.  I tried a few over the years (and I haven’t had one now for a couple) but I found that just getting a monthly reminder in the mail that financial planning is something you should be considering was enough to keep me engaged – I’d check in on my 401k allocations, think about whether I was saving enough money, and pledge to get better at doing both.  Of course many of those pledges were unrealized, but if even a few came to fruition, that’s still once a quarter where I did something to improve my financial standing.

Lately, I’ve been enjoying all of the content that the ‘new’ web has to offer including podcasts and blogs.  One blog that I’ve come across lately that I like is Get Rich Slowly.  This site offers straightforward advice on how to think about your finances and how to apply that to your living situation in a sane way and hopefully build wealth while you’re at it.  The problem with this site, for me, is that many of the topics are for people just looking to get control of their situation – get out of credit card debt, live within their means, etc.,  This (thankfully) hasn’t been me for many years.  But, again, the check-in from time to time on these topics is a good reminder to myself to think about what I’m spending and saving.

By far, the most successful method I’ve had for thinking about savings – was to remove thinking from the equation (go figure).  I started with an automated 401k program at work (years ago) but I’ve built that to what I have now: A fully though-out system for putting money away.

Each paycheck I receive gets broken into different parts automatically and stashed into various accounts.  In January my company overhauled its payroll system which was the perfect opportunity for me to overhaul my savings plan.

Right now it works like this.  Each paycheck:

• 15% of my pre-tax earnings goes to my 401k contribution.  Without going into gory details, this is enough for me to maximize my contribution each year.
• about 30% of my pre-tax earnings goes to benefit myself and society alike (taxes)
• about 1% goes to my company’s medical plan (the company pays double what I do)

The rest is mine to do with as I see fit.  Rather than having all of that deposited into my checking account (where it would be sure to disapear) I have the following in place:

• 10% goes into a checking account I use for cash – this constitutes a majority of my weekly spending (via ATM withdrawls)
• 10% goes into a brokerage account which I consider to be long-term savings (for those times when I take a break between jobs)
• 80% goes into a checking account I use for paying bills

This is working pretty well right now.  For the first time in a long time I haven’t touched my brokerage account and my cash account has covered my weekly spending well.  All of my bill payments are paid electronically, with the fixed ones (mortgage, insurance, etc.,) automatically withdrawn and the rest manually entered each month or paid by credit card (which is then paid via online bill pay services).

As I get better, My plan is to have all discretionary spending (cash and paying off the credit cards) be covered in one account.  Right now, my credit card payments are taken out of the same account as my mortgage, and that doesn’t make sense.  In this way I’ll have a better understanding of what I’ve roughly allocated for myself and when I’m overspending that.

With this system, my savings rate right now is more than 25% of my take home salary right out of the gate.  As long as I don’t spend every dime in my checking accounts, the actual rate is even higher.  That’s a rate that I’m happy with for now, but I intend to notch up as the year goes on.

I’ve been pretty fortunate over the years, generally having jobs that have paid me well.

But I’d like to think that that’s only half the story.  After all, I was making half what I’m making now and still enjoyed a pretty good life in San Francisco – and I was making one-third of that when I was living in Chicago and I was having a blast then.  (Of course the $300 a-month rent made that possible!)

There are times that I’m amazed that I’m able to travel to Africa, with a nice camera, all while not having a job.

But then again, I like to think that some of that fortune comes from the decisions that I make.

I’ve been pretty good about saving money over the years, and not living above my means.  I haven’t carried a credit card balance for many years now, I’ve paid off my car and motorcycle loans early, and I’ve maximized my 401k contributions for a long time.  This is all because, as I’ve indicated above, I make a pretty decent salary – but it’s also because of the choices I’m making.  I prioritize what’s important to me (traveling, friends) and I skip over the things that aren’t (new furniture, new cars).  One of the mantras I try to live by is: experiences, not stuff.  I try to prioritize experiences that will live with me forever over stuff that just accumulates.

This isn’t always easy, of course.  I’m not above temptation of the latest gadget any more than anyone else.  But I do try to avoid the temptation when I can.  I remove myself from emails from retailers; I try to get rid of the catalogs that get sent in the mail; I avoid Best Buy when possible.. And probably most effectively, I keep myself busy.  It’s when I’m bored and find myself window shopping that I’ll end up with some purchase that somehow happened.

This has all been on my mind lately as I look at the economy around the world.  For the longest time I’ve been wary of unbridled capitalism – and I’ve been concerned about where growth for growth’s sake would take us.  And I’ve been amazed and jealous at the way people have lived their lives.  But now I’d like to think that some of that has come crashing down.  Unfortunately it’s impacted so many in such detrimental ways but hopefully we’ll be able to find a way to come out of this on the other side with more people conscious of their finances and what they need to keep them in a more healthy state.

Having said all of this, I don’t think I’m impervious to the bad economy.  I haven’t been that golden in my activities (did I mention I went to freakin Africa without a job!).  And as such, I’ve ramped up my savings over the past 6 months to build up a cushion in case things do go sour.

Hopefully though the more optimistic projections will take hold and we’ll see things start to turn around in the next few months.  I hope so.  That 401k savings is just not what it used to be!