2million's Personal Finance Blog

Investment Performance April 2008 (+3.89%)

2008-05-12T12:51:07Z

This is an ongoing monthly update on how our equity investments are performing. Please see this background on the investment tool I developed and how I am using it to track our performance against a benchmark to measure our progress or lack thereof.

Its still a work in progress, any feedback is appreciated and may be incorporated into future monthly reports. The only equity investments not covered are:
1) my 401k which is invested in institutional index funds through my employer that I haven't found a tracking symbol for.
2) investments roughly worth less than $500, simply because I don't have the time and energy to keep up with them. I am thinking I will sell these off at some point and add the proceeds to my current investment portfolio because they are too much work to track.

April Highlights:

I completed maxing out our Roth IRAs for 2007 by adding an additional $1,300 above my wife's normal $400 monthly contribution to her Roth IRA.
I made a contribution of $305 to my SEP IRA. My 2007 taxes are not done yet so I did a back of the paper calculation to estimate how much ore I could contribute.
Remaining investments have be part of our ongoing monthly investments - Pfizer DRIP ($50), IBM ESPP (payroll deductions), and Roth IRA ($800) contributions for my wife and I. Pretty self-explanatory.
IBM has continued to perform well. I have gotten in the habit of selling some of our IBM investment each year during the summer since we have monthly investment contributions through my ESPP so that we don't become super-overweight in IBM. I'll be looking to sell off another block hopefully around July.
Merck and Vanguard Total Stock Market Index (VTI)l paid dividends this month. A small amount of the Merck dividend is not revinvested due to those shares being held directly.
I believe my next step is to determine what my target allocation is so I can create a blended index benchmark to compare our nvestment performance to. RIght not I just compare it to VTI, but that ignores our desired exposure to other assets.

April 2008 Investment Report:

Four Pillars of Investing Book Review

2008-05-09T09:50:49Z

A must read for everyone - this book is a core reading to establish how to invest your money as a laymen. It is divided into 4 sections, each a fundamental part of becoming a successful investor.

The 4 Pillars of Investing:
Theory - The author first goes into the basic theory of investing and the efficient market theories. Its a very good overview of risk vs return, the importance of asset allocation, and why you can't beat the market.
History - The next part of the book gives an overview of the history of investing. I probably took the most away from this section of the book. The author covers manias like the the Diving Mania in the late 1600s, the South Sea Bubble, and the Go Go market of the late 1960s. This section peaked my interest about learning more from the history of investing to improve my resolve in today's investments. The author has some additional reading recommendations to learn more about past events that I plan to pick up.
Psychology - The author covers common psychology for the average investor -- overconfidence, chasing trends, risk aversion, and investing in the next big thing. I think it was pretty obvious stuff, but the author was able to organize it in the way that tied well with the other fundamentals covered in the book.
Business - Finally the author covers the financial service industry. Kudos to the author for spelling it out - bottom line, the financial services industry's ultimate goal is to take your money. He recommends low cost index funds from a few large companies (primarily Vanguard).

Perhaps a unique twist on this was I read this book at the same time as I was listening to Rule #1 Investing by Phil Town. They basically on are opposite sides of the investing spectrum - Four Pillars of Investing touts the Efficient Market Theory (EMT), while for the most part Phil Town's investment technique is built on Ben Graham value investing theories with some technical analysis built in. I found myself one day agreeing with sections of Four Pillars and the next reading Phil Town's book and recalling key points of the "Intelligent investor" by Ben Graham that contradict some of the market generalizations in the Four Pillars. Back and forth it went.

After some reflection I believe both theories are reflected in the market- in general the EMT is sound and most of the time Mr Market gets it right. This means for any investor who cannot systemically beat the market, they will likely have better performance in the long term by following the recommendations of Four Pillars. However, I take issue with the assertion in the Four Pillars that the success of value investors such as Warren Buffet is merely by random chance. Its clear to me that for some, systematic success through value investing is achievable.

The question for me is can I systematically beat the market performance with my value investments? My current track record (albeit short term) says no - for the last 2 months I have trailed passive indexes.

The Four Pillars of Investing is a must read book for everyone - especially if you haven't read a good book on EMT. Overall its advice is excellent and the majority of individuals should follow it. Even for those folks who think active investing is the way to go this is a must read to understand the other viewpoints.

$50 SmartyPig Gift Card Giveaway

2008-05-06T12:53:08Z

I turn 32 today(ugh!). However I am the one giving out the gifts.

We have a $50 SmartyPig giftcard to give away to one of our readers. To enter to win, 3 requirements:

Subscribe to 2million's RSS Feed
Leave a comment, tell us you are a subscriber or have subscribed, and let us know what you're saving for (if you want to)
You must have a US mailing address.

Smartypig is a pretty innovative product that has recently launched to help people save towards their goals. There are already so many reviews out there that I will simply share a couple reviews here and here if you want to learn more about the product.

This contest will run till next Tuesday, May 13, 2008 at 9:00 pm EST. We will pick a winner at random and will notify them via email.

Good luck!

April 2008 Net Worth Update (+$14,068)

2008-05-05T10:44:06Z

April brought above average monthly returns for our stock investments but also brought higher expenses as we took a couple trips to explore what we could in Asia. Its been an amazing experience to travel around the other side of the world and in my opinion worth the higher expenses to see it. Its just too bad we can't do this every month - at least not until we hit our financial freedom goal.

Assets	Mar-08	Apr-08	Change	%
Cash & Savings	$ 89,820.98	$ 86,625.21	$ (3,195.77)	-3.56%
Taxable Brokerage Accts	$ 74,725.49	$ 76,735.92	$ 2,010.43	2.69%
Roth IRAs	$ 38,687.73	$ 42,958.36	$ 4,270.63	11.04%
Pre-tax Retirement Accts	$ 156,118.06	$ 162,055.81	$ 5,937.75	3.80%
Stock Options	$ 17,432.00	$ 18,120.00	$ 688.00	3.95%
ESPP	$ 38,337.02	$ 39,885.58	$ 1,548.56	4.04%
House #1 - Rental	$ 160,000.00	$ 160,000.00	$ -
House #2 - Rental	$ 128,225.00	$ 128,225.00	$ -
House #3 - Primary	$ 116,500.00	$ 116,500.00	$ -
Receivable (Payable)	$ -	$ -	$ -
Other Assets	$ -	$ -	$ -
Total Assets	$ 819,846.28	$ 831,105.88	$ 11,259.60	1.37%
Liabilities
Credit Card Balances	$ (15,643.46)	$ (18,524.27)	$ (2,880.81)	18.42%
House #1 Mortgages	$ (114,224.26)	$ (114,028.61)	$ 195.65	-0.17%
House #2 Mortgages	$ (101,930.68)	$ (101,697.03)	$ 233.65	-0.23%
House #3 Mortgages	$ (98,916.39)	$ (93,415.56)	$ 5,500.83	-5.56%
Rental Deposits	$ (6,447.00)	$ (6,447.00)	$ -	0.00%
Additional Tax Liability	$ (6,101.20)	$ (6,342.00)	$ (240.80)	3.95%
Other Liabilities			$ -
Total Liabilities	$ (343,262.99)	$ (340,454.47)	$ 2,808.52	-0.82%
$2million Goal Progress*	$ 458,999.68	$ 467,566.97	$ 8,567.29	1.87%
Net Worth	$ 476,583.29	$ 490,651.41	$ 14,068.12	2.95%

Highlights for April

All credit card debt (except current month's purchases) is in the form of 0% APR balance transfers earning interest in my savings accounts.
We continued to move money from our house savings goal and pay down our mortgage to cancel PMI. Given the return is ~6.7% after tax I think its has a decent return for only giving up a little liquidity. We are now somewhere in the 78-80% LTV and my next step is to call Chase to press them to cancel the PMI.
My wife and I are starting to wind down our assignment in China by taking as many trips and visitors as possible. This month we hit Kuala Lumpur, Singapore, Beijing, and Xian. As a result, our expenses are higher than usual this month and next.
I reviewed our 2007 passive income
Here is an explanation why our housing values have remained constant.

Additional Stock Investments for April (Outside of 401k & ESPP):

April Investment Transactions still being gathered
March 2008 Monthly Investment Report
Future Investment Transactions will be covered in the monthly investment updates

You can see my previous monthly net worth updates here.

Want To Replicate Our Net Worth Results?

2008-05-02T10:28:01Z

In the last 6 years, I have taken my (now our) net worth from $18k to nearly $500k. I am pretty satisfied with the results - we are making good progress on our financial freedom goals. I think there a couple things I/we have done that contributed significantly to our progress.

We didn't do any radical. We worked hard to increase our income. We spent significantly less than we earned. We also invested our savings. Sounds easy enough right?

Here is a more granular account of some of the things we have done to reach this point:

I set financial goals (hint: It's the title of this blog)
I measure our progress with monthly net worth reports
I started my career in a higher-starting salary field - Engineering
I lived like a college student for as long as possible
My car is a means of transportation -- I still drive the used car I bought in college
I focused on career growth and acceptedgrowth opportunities at work and look for opportunities like my international assignment
I took advantage of 0% Balance Transfer arbitrage
I max out my retirement contributions
I married someone who spends within her means
We only use insurance to cover catastophic events, and self insure as much as possible.

Ofcourse we are still early on our journey to financial freedom and we might still be taking some wrong turns. Stick around to find out how soon we make it.

Get Your Claim on Money Back for International Purchases

2008-04-29T10:18:09Z

This rebate for international purchases was posted previously, but its probably worth repeating given the deadline is ~~May 1, 2008~~ [extended to May 30, 2008]. A class action settlement is being proposed for those people who used their credit cards for international purchases

Members of Settlement Class
Anyone who used a Visa, MasterCard, AmericanExpress, Diners Club brand credit, charge or debit card between February 1, 1996 and November 8, 2006.

File for Claim
Submit your claim via mail, fax, or online at www.ccfsettlement.com.

Option 1: EZ Claim for $25. Even if you strapped for time, submit the claim with Option 1 to at least put your claim in for $25. Option 1 is recommend for those individuals who made less than $2,500 in foreign transactions or traveled outside the US for less than one week during the claim period.

Option 2:A Total Estimated Refund for those that travelled internationally for more than 1 week to estimate your total travel during the class period.

Option 3: An Annual Estimated Refund option if you made some big transactions or traveled extensively during the class action period and are willing to provide annual information on your international transactions.

I submitted my claim using Option #2 for 130+ days outside the US. I didn't realize I had spent so much time previously outside the US till I added it all up.

As a reminder the due date for submission is ~~May 1, 2008~~ [extended to May 30, 2008].

Subscribe to 2million's Personal Finance Blog

2008-04-24T00:21:05Z

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Weekend Reading: 75% of Your Net Worth Should Be Invested

2008-04-21T12:14:04Z

Here is some weekend reading that has peaked my interest:

75% of Your Net Worth Should Be Invested - I really like this article that says no more than 20% of your net worth should be tied up in your house and no more than 5% in other stuff. That leaves 75% invested in investments. Maybe these are the rule of thumb measurements I have been looking for on how much we should spend on a house. I am thinking the house equity should be 10-20% of your net worth (less is better in the long run), but given housing prices these days I think the lower end of that range is harder and harder to reach. So for us with a $2million financial freedom goal we should would consider ultimately spending between $200k-$400k on our home.
Wachovia Capital Infusion - As we have been loading up on Wachovia over the past couple months, this is timely news for our investments. Wachovia has cut the dividend to raise cash, and added a $6B capital infusion to improve it capital ratios. In my opinion the company is now in better shape to ride out the rest of the housing crisis.
RMB vs US Dollar - Sun has posted a graph of the RMB to the USD - highlighting what my wife and I have been previously seeing with the RMB exchange rate while we are on our assignment in China.

March Investment Performance (-1.85%)

2008-04-18T11:36:05Z

This is the first of hopefully an ongoing monthly update on how my equity investments are performing. Please see this background on the investment tool I developed and how I am using it to track my performance against a benchmark to measure our progress or lack thereof.

March Highlights:

Invested $650 into the Vanguard Total Stock Market Index (VTI). This is part of my effort to focus more attention on low cost index investments until I can prove our active investment strategy is making sense.
We increased our position in Wachovia (WB) which has continued to decline. Given our long term investment horizon I still think we have a good long term financial investment although I have been second guessing ourselves that we should have be investing in a financial index (such as KBE) instead of one company that has been especially volatile the past couple months. Now that the capital ratios have been addressed, I am expecting the investment to be less volatile going forward.
Remaining investments have be part of our ongoing monthly investments - Pfizer DRIP ($50), IBM ESPP (payroll deductions), and Roth IRA ($1050) contributions for my wife and I. Pretty self-explanatory.
-IBM has continued to perform well. I have gotten in the habit of selling some of our IBM investment each year during the summer since we have monthly investment contributions through my ESPP so that we don't become super-overweight in IBM. I'll be looking to sell off another block hopefully around July.
Johnson & Johnson, Chevron, ConoccoPhilips, ExxonMobil, Anheuser Busch, Wachovia, Pfizer, and IBM all paid dividends this month. All but IBM had their dividends reinvested.

March 2008 Investment Report:

Tracking Tool For Our Investment Performance

2008-04-17T10:28:15Z

Ok I have finally put together what I think is a pretty decent snapshot of our investments. Still some work to be done, but it’s a vast improvement in transparency over anything I have published before.

I have been tracking it for a little over a month and its working pretty good so I am going to start publishing monthly along with our net worth and tweak it along the way.

Background
MS Money sucks at tracking investment performance (IMO). Yes it can tell you your starting value and ending value and a whole bunch of stuff in between that is worthless. However especially with dividend reinvestments in the mix I wasn't able to get the picture I want to see.

What Do I Want To See?
1) I need a simple way to benchmark my performance against market indexes. Yes my investments sometimes perform well, sometimes poorly, but I need to start establishing a track record. If I am not consistently beating the market indexes then I need to think about concentrating more assets into market index investments.
2) I want to see the monthly return on each investment and in aggregate in a consistent manner.
3) I want to be able to compare my original cost basis (not including the cost basis via reinvested dividends) to the current value to see my overall gains or loss for the investment.
4) I would like to know in dollars how much I have gained or lost at the end of the month after you factor in dividends, new investments, etc.

Creating and Maintaining My Investment Snapshot Report
I created an Excel spreadsheet and used a web query to pull stock prices off web pages.

To maintain:
1)With one click I can update stock prices on the report.
2)I need to track dividends and dividend reinvestments and update them on the spreadsheet
3)I need to track additional investments and sales and update them on the spreadsheet

Still time consuming, but it gives me what I want. I think when time is tight I won't be able to keep up with all the transactions and will just have to roll them over to whatever month I have time to plug them in. My goal to make this manageable for me is to consolidate my investment accounts as much as possible. We have 15+ accounts at Vanguard, T Rowe Price, Sharebuilder, ESPP, and a number of individual DRIP accounts. I would like to get this number to less than 10 accounts by the end of the year.

The Downside to This Investment Snapshot Report
It’s so easy to open in the morning, click to update the stock prices and see to the penny how much we gained or lost over the past day. It is almost addictive and why I have resisted doing this in the past.

However, at this point I think the pros out weigh the negatives at least in the short term. I need to start measuring our performance and compare it to the market. I suspect our investments have trailed the market overall, but haven't found a consistent way to measure our progress especially with all the transactions that occur each month.

Benchmarking Against the Market Indexes
Right now I only have the Vanguard Total Stock Market Index on the report as a benchmark. I know this isn't consistent with my asset allocation -- this is something I will try to address over time.

Here is a preview of the investment snapshot. Ill give the breakdown of our monthly investments in a later update:

$10 off a $25 Purchase at Lowes

2008-04-16T02:50:17Z

Here is a promotion that is just about as good as cash to any homeowner. Visa is offering a coupon for $10 off $25 or more purchase at Lowes when you pay with your visa card.

For more ideas see my tips for saving money on home improvement projects.

Hidden Vanguard Dividend Reinvestment Fee?

2008-04-14T11:13:05Z

By chance I noticed that my last dividend reinvestment for my Wachovia investment in my Vanguard Brokerage account didn't seem right. The dividend reinvestment was made at $29.69 per share, way above the trading range ($24.00-$26.40) reported by Yahoo!Finance for the day the dividend payment was made.

I sent an email to Vanguard Customer Service to investigate:

Hi I wanted to ask about a recent dividend reinvestment transaction on my account. On 3/17/2008 I had a Wachovia dividend reinvested. The dividend was for $128 and was reinvested into 4.3112 shares @ $29.69. I was surprised that the share price on my reinvestment was so high as it was much higher than the trading range for the day ($23.77-$26.40) and at another brokerage account I also reinvested my Wachovia dividend on the same day in question and the dividend was invested @ $26.54. Could you help me understand why there is such a discrepancy?

I would also like to understand if all dividend re-investments will be at inflated prices going forward?

Here is the thorough response I received back from Vanguard:

Thank you for your recent e-mail regarding Vanguard Brokerage Services®. I
am responding on behalf of your Flagship representative.

Please know that shares reinvested at Vanguard are not purchased on the
dividend's payable date. Unlike many firms, Pershing, LLC, our clearing
agent, does not maintain an inventory of additional stocks to credit to
their clients' accounts for dividend reinvestment. They instead purchase
shares on the open market. For securities with more than four days between
the record date and the payable date, Pershing will attempt to purchase
these additional shares at the market's open on the third business day
prior to the payable date. The record date for the March 17, 2008 Wachovia
Corp. (WB) dividend was February 27, so this dividend payment falls under
this policy.

The third business day prior to the payable date of March 17 was March 12.
On this date, WB opened trading at $29.63 and went as high as $31.20. You
received a dividend reinvestment price close to the opening at $29.69. This
was a valid reinvestment price based on our procedures for reinvesting
dividends. For more information on our dividend reinvestment policies,
please visit this link:

Vanguard Dividend reinvesment

[2million], I trust this information is helpful. I have forwarded a copy of
this e-mail to your representative. If you have any further questions,
please contact your Flagship Representative at 1-800-345-1344. If your
representative is unavailable at the time of your call, any one of our team
of trained representatives will be happy to assist you.

I have to say I am very impressed by Vanguard's thorough response. Check one up on the Vanguard customer service.

But does the dividend reinvestment policy make sense?
I don't know. Just as it worked against me in this situation, it could work for me in future situations as the market is rising so I don't think there's a big difference on the timing front.

What concerns me more about reinvesting dividends (anywhere, not just Vanguard) is the lack of transparency of fees or costs compared to the market. It would be nice to be able to understand what day the money was invested so I can compare it to the trading range of the stock on that day. It gives me piece of mind knowing that nothing is out of whack and I am not paying a 10%+ premium for the shares.

Why Our Real Estate Values are Not Going Down On Our Net Worth

2008-04-11T13:51:31Z

I have been getting several comments about the steady value of the real estate in our net worth given the decline of housing prices across the US. Am I ignorant of the US housing market crisis since I am currently overseas?

Value Reported is Our Cost Basis
The real estate line item in our net worth calculations have always been based on our COST BASIS. They are not based on the current value of our real estate. We benefit from it now, but we paid for it for the past 5 years as our net worth did not benefit from monthly upticks in real estate prices.

Given how illiquid real estate can be, I think its short sighted to use a mark to market valuation of our real estate like many folks do. I believe valuing it at cost basis is a conservative valuation given the long term time horizon of these investments. Profit (if any) will be recognized when the property is sold

Regardless of the valuation technique we use in our net worth statements, the location of the real estate (Raleigh, NC) is not suffering from the same degree of a housing slowdown being felt elsewhere. While real estate transactions in the Raleigh market appear to have slowed, housing prices appear to have only leveled off and not suffered from any significant valuation drop.