PFBlog.com: The Unique Personal Finance Blog Since 2003

1-Year and 10-Year Mutual Fund Performance Figures Skewed

2010-03-12T00:46:28-08:00

This March conveniently marks both the one-year anniversary of the stock market trough during the Great Recession and the ten-year anniversary of the dot.com bubble peak. As such, the trailing 1-year and 10-year performance readings of all mutual funds just had a facelift.

Morningstar gives us a timely reminder:

For the trailing 12 months:

A look at the one-year returns for all of Morningstar's fund categories shows how incredibly strong, and also remarkably broad, the rally has been. The category returns should make one realize how unlikely it is that such performance will recur on more than the rarest occasions.

..., it's always tough to predict the markets, but I'd guess that investors should not assume they'll be getting returns of this magnitude every year. With that in mind, perhaps the best approach right now might be to smile, take a moment to be grateful for such gains, and then forget that the past 12 months ever happened.

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World's Richest Man: Carlos Slim Helu

2010-03-10T18:52:39-08:00

Many people may wonder: who is Carlos Slim Helu?

He was just crowned as the World Richest Man by Forbes. Slim, whose amassed his $53.5B fortune in Mexican telecom market, beat Bill Gates by half a billion dollars, or merely 1%, to come up at the top of the list.

Bill Gates comes at second with $53B and his old friend Warren Buffet was third with $47B in his pocket.

Here is the 10 richest of the richest on earth:

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BofA Put an End to Overdraft Fee

2010-03-10T01:16:24-08:00

More than one news outlets (USA Today, WSJ, AP) reported that Bank of America will formally end its practice to charge overdraft fees that go as much as $35.

Starting from June 19 for new customers and starting from August for existing customers, BofA will:

1) Disallow overdraft at point of sale
2) When customer's ATM withdrawal will result in negative balance, BofA will ask customer permission on the $35 charge before they will get the money.
3) Customer can still opt in for overdraft protection.

BofA made the move following Federal Reserve regulation that forbid banks from charging such fees unless with customer permission. It is widely believed that many other banks will follow the lead of BofA, which issues 15% of the nation's debit card, and adopt similar policies. (Citi already ended overdraft fee.)

Like many others, I always keep at least a few hundred bucks in my checking account, so I never had to pay a dime on overdraft protection charge in my life. Actually, although this new change makes no difference to me on the surface, it might bring unintended consequences. As reported by Eileen Aj Connelly at Associated Press:

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Shiller vs. Siegel

2010-03-08T19:17:49-08:00

Wall Street Journal published a good article today discussed oppsing views of the market's prospects. What makes it interesting is the two heavyweight scholars that take drastically different sides: Robert Shiller as the bear and Jeremy Siegel as the bull.

Prof. Shiller, whose book "Irrational Exuberance" correctly predicted the .com bubble, and whose name is associated with the monthly housing price index, thinks the market is due for a correction:

Mr. Shiller has compiled market data back to 1881, measuring stock prices month by month relative to corporate profits. To avoid short-term profit distortions, he uses an average of profits over the previous 10 years. Over the long run, by his measure, stocks trade at an average of about 16 times annual corporate profits—that is, their price-to-earnings ratio, or P/E ratio, is about 16.

He has found that when this ratio has gotten above 20, as it is today, it has signaled that the market was expensive and sooner or later would hit a stretch of subpar returns.

The way Mr. Shiller sees it, the problem today isn't just that the current P/E is above 20. It is that since 1991 it has spent only seven months, in late 2008 and early 2009, below the average level of 16. At the start of 2000, it was above 40. No one can say how much longer the P/E can keep rising or when the past year's bull market might end, especially with the government providing heavy stimulus. But past trends, and the law of averages, suggest that at some point the P/E is likely to fall below 16, pulling stocks with it.

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Warren Buffett's 2009 Annual Letters to Berkshire Shareholders

2010-03-07T21:28:17-08:00

The Oracle's Annual Letter to Berkshire Shareholders is always a good read. Finally, I found some time during the weekend to go over the letter and the 2009 annual report. Owning 600 Class-B shares, I'm of course happy with the stock's performance and especially recent stock price spike. I've been owning Berkshire since 2005, and I am sure I will be happy shareholders for many more years.

Predictably, the annual letter started with the Berkshire Hathaway book value change with comparison to S&P 500 index, and certainly, the Oracle is taking pride in BRK's consistently market-beating performance:

"[W]e have never had any five-year period beginning with 1965-69 and ending with 2005-09 – and there have been 41 of these – during which our gain in book value did not exceed the S&P’s gain."

This time, thanks to the recent BNSF acquisition, Buffett went to length to re-introduce each of Berkshire's business segments. If you are a new shareholder, you might want to read the Owner's Manual as well.

The annual letter has been put under microscope by all financial journalists in the last weeks or so, so more repetition won't add much value. I will just quote some interesting paragraphs:

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Monthly Update - February 2010 ($984,687, +$14,331)

2010-03-03T20:38:52-08:00

Here comes the monthly tally time again. Our financial life has been uneventful lately. We continue to save about $3,000 a month, and the rest of our fate is governed by the financial market. For this month, the market lifted all boats and my portfolio included, bringing our net worth number much closer to the million dollar figure.

I have moved away from the days when I kept streaming quotes on my desktop and spent hours and hours reading individual companies' annual reports. In the last two years, I'm adapting to a lifestyle where I predominantly only invest thru mutual funds (with Berkshire Hathaway as the only stock holding), and only look at my portfolio two or three times a month. (I do still read WSJ every morning to keep myself up-to-date of what's happening in the business world.) If anything, the financial turmoil in the last two years at least helped me to adapt to a much healthier lifestyle, even though it set me back for more than a year financially.

Without further ado, here is the month-end balance sheet:

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A Price Hike from Citi and One Less Customer

2010-03-02T18:57:57-08:00

When the credit card overhaul was signed into law last year, many predicts that the banking industry will find new ways to replenish billions of lost revenue. Since then, this is becoming more and more of a reality, and it finally happened to me, even though I have a pristine credit history and have a 780+ credit score.

To be specific, Citi just sent me a letter saying I need to pay for my credit:

"We're writing to let you know about an important change we're making to your account. Effective April 1, 2010, an annual fee of $60 is being added.

The reason we are making this change is to maintain the quality of our service amid the rising cost of doing business. However, because we value you as a customer, we wanted to give you an opportunity to have the annual fee credited back to your account.
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Monthly Update - January 2010 ($970,356, +$452)

2010-02-05T17:54:33-08:00

If I can only add less than $500 to our net worth tally every month, it will take us another five years to reach the 7-figure milestone. On the other hand, the tiny improvement in January is not exactly bad, considering the brutal market condition.

On the income side, we started the year with a positive note. Aside from our regular income, many long-term business relationships are again generating cash results, which helped our cash stockpiling. We continue to save about 40% of our regular income.

The result from the investment side is cloudy at best. After suffering some loss, we continued our flight to safety which gradually lowered our risk-taking positions. The employee stock option lost 30% of its value at the end of 2009, although we hedged some of the loss. We will have a portfolio report later with more details.

So, welcome to my net worth report for a while:
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Fidelity Offers $7.95 Commission and Free ETF Trades

2010-02-05T02:17:47-08:00

As reported by New York Times, Fidelity is lowering its online stock trading commission to $7.95 in response to Charles Schwab's earlier move of cutting commission to $8.95.

In addition, Fidelity is upping the ante by aggressively competing in ETF trading as well. In fact, it is now offering free trades on 25 iShare Exchange-Traded Funds (ETFs) managed by BlackRock.

Those ETFs available for commission-free trade represents a wide spectrum of asset classes:
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Losing 37% a Year for 10 Years Straight

2010-01-25T14:15:47-08:00

Yes, the past decade of 2000s didn't treat investors well. If you invested in the DJIA, you lost 9% for the decade. A S&P 500 investor lost 24%. And a NASDAQ investor lost 44%, thanks to the fact that we started the decade at the height of the dot com bubble.

All the above figures are absolute, un-annualized returns. That is, your original 10,000 dollar investment will end up at approximately $9,100, $7,600, and $5,600 respectively.

But how about losing at an annualized rate of 37% a year for 10 years?

That's what Frontier MicroCap (FEFPX) has managed to treat its investors. If your crystal ball had guided you to the fund back in 2000, every $10,000 of your original investment have become, well, 98 cents.

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Berkshire Hathaway Completed 50-for-1 Split

2010-01-21T22:51:06-08:00

I waked up this morning, and was surprised to find my net worth dropped by over 40 grand overnight. Yes, the broad market was down, but not to this magnitude! Are we back to the Lehman Brothers days?

Then I realized what happened. January 21 was the date when the B shares of Berkshire Hathaway underwent a split of 50-for-1. My 12 shares of the conglomerate led by the Sage of Omaha is now 600 shares, and my personal accounting software was not smart enough to pick that up.

Stock split is technically a net-zero event, but as USA Today concluded, the split of one of the most expensive stock on the market makes it a tad easy to invest with the Oracle:

Even at $3,500, the typical individual investor probably couldn't buy many B shares of Berkshire. After the split, shares of Berkshire will be more accessible to investors with only a few hundred dollars to invest, says David Ikenberry, professor of finance at the University of Illinois.

Not to be overdone on stock price, Warren Buffett still keeps the A shares of Berkshire Hathaway intact. The A shares are trading hands at $108,850 apiece. Only if I can afford to keep one such six-figure A share in a diversified portfolio!
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Income Tax Law Changes in 2010

2010-01-11T19:10:37-08:00

Our legislators in D.C. are determined to challenge everyone's intellectual capacity in handling ever-growing tax code every year. What will 2010 bring?

TurboTax maker Intuit compiled a good list of the new tax code that will govern our tax life in 2010 (and future years). Among the changes, the most important one for savers will be the Roth IRA conversion change (emphasis is mine):

Roth IRA Conversions

Starting in 2010, individuals with any amount of modified Adjusted Gross Income are free to switch a traditional IRA to a Roth IRA. Conversions are fully taxable at your regular tax rate. For conversions in 2010, taxpayers can spread the tax due over two years. Half the tax will be due in 2011, and the remaining half will be payable in 2012. Removing the limit on conversions effectively eliminates the income limit on contributions to Roth IRAs. A taxpayer with income too high to use a Roth will be able to contribute to a traditional IRA (which does not have income limits for contributions) and immediately convert to a Roth.
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Maximizing Stock Option Value: The Tax Consequences

2010-01-11T01:03:21-08:00

(This is the third installment of the employee stock option (ESOP) discussion. Please refer to Part 1 and Part 2 for the context of the discussion.)

As we concluded in Part 2, if you are considering to exercise your employee stock option (ESOP) today, it is always a better idea to adopt a write-a-call strategy to fully extract the remaining time value of your ESOP grant. In our hypothetical example, one can improve gross proceeds by over 10%.

In Part 2, we didn't explore the after-tax impact. The tax impact is tweaking the balance significantly, for the better.

Several key parameters to keep in mind:

1) Employee Stock Options is usually taxed as ordinary income when the employee exercises the option and chooses to receive cash proceeds.

2) When you trade option in the open market, the resultant profit or loss are treated as capital gains/losses. That is, short-term capital gains are taxed at ordinary income tax rate, while long-term capital gains will receive preferential treatment up to 20%. Any tax gain can be used to offset capital loss carry-over from prior tax years.

In my case, the gap between these two taxing mechanism is truly wide. For me, the marginal tax rate on ordinary income is about 40%. But in the case of capital gains, I, like many investors who were burnt hard in 2008, has a huge capital loss carry-over to lean to. Therefore, my next $100,000 capital gains will be tax-free. Also, if you implement the write-a-call strategy by writing a LEAP option (which usually spans more than a year), it will be taxed at long-term capital gain rate even if you don't have a capital loss carry-over base.

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Morningstar Announced Fund Managers of the Year 2009

2010-01-08T00:55:42-08:00

Mutual fund rating firm Morningstar is announcing the recipients of the coveted "Fund Managers of the Year" award for 2009:

Domestic Stock
Bruce Berkowitz of Fairholme Fund (FAIRX)
2009 Return/Percentile Rank: 39.0%/9th

International Stock
The Team at American Funds EuroPacific Growth (AEPGX) (Stephen Bepler, Mark Denning, Robert W. Lovelace, Carl Kawaja, Sung Lee, Nicholas Grace, Jonathan Knowles, and Jesper Lyckeus)
2009 Return/Percentile Rank: 39.1%/15th

Fixed-Income
The Team at Loomis Sayles Bond (LSBRX) (Dan Fuss, Kathleen Gaffney, Matthew Eagan, Elaine Stokes)
2009 Return/Percentile Rank: 36.8%/14th

This is the 23rd year that Morningstar issued this award, but a smart investor shouldn't just dive into these fund immediately. After all, if you look across the history of this award, rarely was there a manager who won the Fund Manager of the Year title more than once.
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Writing Option to Improve Option Value

2010-01-06T20:56:32-08:00

Yesterday I shared that I'm working on the financial problem to maximize return on my soon-to-expire employee stock options. An outright sale is an easy path to choose, but does it make the most economic sense?

One thing to note about stock option: it does not only bear value when the strike price is lower than the market price (in the case of "call" options, which is the case for all employee stock options), it bears time value too. For example, for stock option of the same strike price, the further the expiration date, the more value the option is.

So, if one determine the market price is right but the employee stock option grant still has some shelf life, one can sell the stock option (instead of exercise the stock option) in the open market. Technically, it means to write (or "sell to open") a call stock option position with strike price and expiration date similar to one's employee stock option grant.

To illustrate this in an example, let's use the same data set in my last post:

Stock Option Strike Price: $26.4375
Quantity: 2,222
Expiration Date: February 12, 2011
Price of Underlying Stock: about $31

As we calculated in the last post, the gross proceeds before tax will be ($31 - $26.4375) x 2,222 = $10,138.

One can look at the option table and find the January 2011 $27.5 Call LEAP option is trading hands at $5.20. (Standardized options are trading at specific intervals, so we take $27.5 as a strike price proxy.)

To implement the strategy, one can write 22 contracts of such option. This transaction means one will receive 2,200 x $5.20 = $11,440 upfront for selling the right to someone else to buy 2,200 shares of the underlying stock at $27.50 from the seller before January 2011.

So what's the difference? Below is the table that shows how this strategy will work.
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Maximizing the Value of Expiring Employee Stock Options

2010-01-06T01:46:51-08:00

Here comes the first financial challenge for the new decade: employee stock option. My employer has ceased to grant employee stock option (ESOP) since 2005, but I still have some stock options left from the old days, the most recent batch will expire in February 2011. With the underlying stock hitting all-time highs since the global financial crisis, it's good time to decide what to do about it.

The basic parameters:

Stock Option Strike Price: $26.4375
Quantity: 2,222
Expiration Date: February 12, 2011
Price of Underlying Stock: about $31

The first option is of course to cash it out now. At the current price of $31, my gross proceeds will be ($31 - $26.4375) x 2,222 = $10,138.

10 grand is still a good chunk of change, except for the fact that I'll be imposed a marginal tax rate of 45% thanks to the local tax system. So my net proceeds will be $10,138 x (1 - 40%) = $6,083.
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Net Worth Trend: '07-'09

2009-12-30T22:36:56-08:00

It's an awful long hiatus since I last updated my monthly net worth tracker. Admittedly, I fell prey of the psychological denial when the market crashed in 2008. For quite some time, I avoided reading my brokerage account statement and refused to watch CNBC.

So I hunkered down. I wasn't in a very good mood to spend time refreshing this blog. And with the first-ever massive layoff announced by my employer, I also put significant more time to my job -- luckily it has been secure all the time and still yielding handsome cash flow.

Like many others, it's a great relief to me to see the gradual market recovery since this spring. While my confidence hasn’t been fully recovered, it is probably good time to recognize I made mistakes and re-embrace the responsibility to manage our money forward.

Fortunately, during the long lapse, I still keep track of all financial matters in Microsoft Money. So it's good time to take a look at what happened in the last three years:
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Decade's Winners and Losers

2009-12-30T18:41:39-08:00

At the turn of the decade, SmartMoney provided a sampler of the past decade's winners and losers in the domestic equity market.

Some winners:

Goldman Sachs
Price per share on Dec. 31, 1999: $94.19
Price at Dec. 28 close: $163.76 | Net gain: 73.9%

Caterpillar
Price per share on Dec. 31, 1999: $25.53
Price at Dec. 28 close: $58.26 | Net gain: 148%

Google
Price per share on Aug. 19, 2004, its initial public offering: $85.00
Price at Dec. 28 close: $619.89 | Net gain: 521%
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Decade of Progress

2009-12-28T21:50:31-08:00

Another three days and we will be officially walking into the decade of 2010s!

There are a lot to write about the decade of 2000-2009 -- or the "Aughts", if this is the right way to call it. In the mood of the holiday season, let me quickly summarizing what the last decade means to me:

Family

At the onset of 2000, I was single and wasn't not in any kind of relationship. Then, I was fortunate enough to meet my wife in 2000 in the same company, and we got married after knowing each other for less than a year. Today, we will soon be celebrating our 9 year anniversary. I am so lucky to have a wife that is supporting and devoting. And after that many years, we still love and trust each other like day one. What a magic!

And even our son is approaching eight. He is a bright kid and doing well in school. Unlike me who was more grown up in the mountains of books, our son is outgoing and developing interests in Taekwondo and swimming. I wouldn't have imagined that a child's smile can bring so much fun to our life.

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How Much Are Credit Card Issuers Charging Merchants?

2009-02-04T05:31:01-08:00

Do you know why some small businesses refuse to take credit cards, and do you know why credit card companies can afford giving away 1% cash-back or even more when you swipe your card? Yes, your card issuers will charge any business you pay by credit card. But by how much?

The short answer: it varies. According to TrueCostofCredit.com:

- A standard card from Visa or Mastercard with no reward feature charges about 2.3-2.4% for big ticket purchases like airfare and electronics, and 1.5-1.6% for groceries.

- Visa and Mastercard rewards cards usually mean 0.3% higher charge for the merchants.
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100 Best Companies to Work For (2009 Edition)

2009-02-03T05:13:36-08:00

Fortune magazine just released its 2009 installment of "100 Best Companies to Work For". Here are the top ten companies.

1. NetApp
2. Edward Jones
3. Boston Consulting
4. Google
5. Wegmans
6. Cisco
7. Genentech
8. Methodist Hospital
9. Goldman Sachs
10. Nugget Market

And the link to the full list. (My employer is a distant 38th on the list, but at least it is still one of the 15 companies that pays 100% of employee health insurance premiums.

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What You Should Know About 2008 Individual Income Tax Returns

2009-02-02T04:29:42-08:00

The cliché goes that there are only two things remain constant in this world: death and taxes. With this year's April 15 deadline approach, do you know some important tax law changes that might affect your individual income tax return?

Below is a concise compilation from CCH CompleteTax of what you need to know about your 2008 tax return:

Exemptions

• Personal exemption. This increased to $3,500 per person for 2008.

• AMT exemption. The AMT exemption increased for 2008 to $69,950 for joint filers and surviving spouses, $46,200 for single filers and $34,975 for married persons filing separate returns.
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Monthly Update - January 2009 ($796,679, -$11,654)

2009-02-01T00:30:29-08:00

We continued to live below our means and save a huge portion of our income. But even though our portfolio is only mildly exposed to equity investments, we still took a hit from worst market performance in any January since 1928. As a result, our net worth retreated 1.4% and dipped below the $800k mark.

On the other hand, our mutual fund automatic investment plan is in its full throttle. $23,000 net purchase was made in the month, bringing our total investment exposure as a percentage of net worth by two points to 33.4%.
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How A Year Is Lost

2009-01-31T22:42:11-08:00

As a farewell bid to 2008, I compiled a full reconciliation table of the investment gains and losses in the unfortunate year of 2008.

Technical Notes:

- Purchase = Total money paid to acquire additional stock or mutual fund shares, including commission.
- Sale = Net proceeds from selling stock or mutual fund shares, after commission.
- Cash Dividends = Total dividends received from stock.
- Note on mutual fund dividends: since all mutual fund dividends are automatically reinvested, there is no cash flow transaction to record. Additional shares from reinvestment are reflected in the year-end Quantity column.

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Investment Plan 2009, Part 1: The Macroeconomic Assessments

2009-01-20T21:35:17-08:00

For a long time, I had been rather sporadic in managing my investments, picking up a fancy stock today, and jumping into another mutual fund the next day. Obviously the approach was proven wrong in 2008. So my new year's wish: more rigor in managing my financials. After all, although the financial crisis has wiped out a sizable fortune, I still need to count on building and growing my nest egg for a much aspired early retirement.

In the last few weeks, I have some rarely-find personal time to develop and implement my investment plan for 2009. I will take the next few posts to share my plan and solicit your feedback.

My plan starts with personal assessment of macroeconomic situation, a result of at least 30 hours of readings and analysis:

1. Asset Price

Assessment: Asset price is approaching reasonable levels.

Major stock markets have lost almost half of its peak value, and commodity price have tanked. By many measures, equity price is at very attractive level now. On the flip side, since we haven't seen the full impact on corporate earnings yet, it can be argued that the ordinary price metrics like P/E ratio may offer a false reading at the moment. All told, I come to believe that while no one can predict where the bottom is -- the claim that November is a long-term bottom is becoming weaker every day -- it can be said that asset price doesn't have much room to drop further.

Actions: Currently, 3/4 of my portfolio is on cash and that allocation certainly is not optimized for growth. I intend to start increase exposure to riskier assets. Also, I plan to enter into automatic investment plans to avoid being sidetracked during market swings.

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What Is the White House Worth In the Market?

2009-01-10T15:51:14-08:00

Can you put a price tag on the White House? Of course, 1600 Pennsylvania Avenue will never be put to the market, but the online real estate site Zillow.com decides to make some timely noise now that the new First Family only needs to wait for another 10 days to move in. The estimate: $308,058,000.

Yes, if Uncle Sam is in a fire sale, the "55,000 square feet of indoor space, 132 total rooms, 35 bathrooms, 16 bedrooms, three kitchens and 18 acres of premium downtown Washington, DC land" will slightly help our budget deficit.

And more fun facts if we think alone this line:

- Were someone to take out a standard 30-year, fixed-rate mortgage on the White House today (assuming 20 percent down and a 6 percent rate), their monthly payment (including principal and interest) would be $1.48 million. Even with the Treasury Department's proposed 4.5% rate on 30-year mortgages, a monthly payment would still top $1.25 million.
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Why Did I Sell All My Stock? (And Not)

2009-01-09T09:57:35-08:00

My stock picking days are finally over, for now. Back in April 2003, I bought my first stock -- Pre Paid Legal Service (PPD). Over the six and half years since, I bought a total of 33 stocks. As late as May, I was sitting on almost quarter-a-million portfolio of individual stocks, including many financial stocks (AIG, BAC, JPM, LFG, MMC, WTM, just to name a few) -- what a good portfolio it was in a financial crisis :-)

And with the market testing new lows every other day, my portfolio was taking one nosedive after another. For a moment I was in denial, and hesitated to share the losing record, especially to a special reader of my blog -- my wife. Knowing that we won't touch on the investment portfolio for at least a decade, and stock market will surely recover in the long run, I felt it was not necessary to create a lot of anxiety under the same roof.

In retrospect, the biggest lesson I learned from loading more and more financial stocks between 2007 and 2008 is: I acted blindly. With 60-hour work weeks, I should have known that I cannot dedicate enough time to study each company and keep track of all developments. My corporate finance background should have helped me, but without a lot of time to study my portfolio holdings as much as I study the corporate P&L I'm managing, it is no surprise that I chose the wrong path.
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Best and Worst Performing Stock Markets of 2008

2009-01-07T23:05:12-08:00

How bad did the worldwide stock markets perform in 2008? Too bad that there is only one country with some positive gains.

And comparing to the 94% plunge of Iceland stock market, we are truly blessed to "only" sustain 30%-plus loss in the States.

Via BBC:

The Best Performing Stock Markets in 2008

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Free Credit Score for Everyone

2009-01-03T16:40:04-08:00

Isn't it good that when you wake up from hibernation, everything in the world is better?

A good portion of personal finance planning is about credit management, and that usually involves you keep track of your credit report and credit score, so as to maintain a good credit record that might help you when you apply for the next mortgage, car loan or credit card.

Three years ago, the new FTC legislature requires each of the "big three" credit agencies to provide a free credit report to everyone once every year. If you haven't tried that yet, go to https://www.annualcreditreport.com/ and order yours. If you space out your retrieval carefully, you can get one free report every four months.

But that will only give you the credit report for free. Credit score is still something you normally have to pay for. Now, it seems that the advertising-supported business model is hitting this corner of the world too ... introducing CreditKarma.com, where you can get unlimited flow of your latest credit score on demand for free.

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The $1M Goal Revisited: Should I Take Risk?

2009-01-02T15:13:10-08:00

One of the few things that are long-lived at PFBlog is the $1M goal stated in the tag line.

When I started PFBlog in 2003, my intention is to use the blog to track my progress to become a millionaire by the age of 40. It doesn't take long for me to realize that we can claim a seven-figure asset much earlier with diligent savings and financial planning. Therefore, in 2005, I changed the goal to break the million-dollar mark by 36.

Now you may say one million dollars is no longer enough to support a comfortable retirement, but it is still an attractive milestone, isn't it?

So after a long hiatus in my blogging activity, a quick snapshot assessment of where we are:

To start off, we still ended the year with just over $800,000 in assets. In a few months, I'll turn 33, so we still have about three years to add the final 200 grand to our coffer.
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Annual Update 2008 ($808,333)

2009-01-01T15:31:55-08:00

It's time to face the moment of truth. After a lapse of six months (which all of us want to forget), let's pick up again the monthly ritual of reporting my net worth. Here comes our balance sheet at the end of the year:

The worst market performance since 1930s caught us as a victim too. After this carnage, our net worth is 80 grand less than the last time we reported. We also closed 2008 with almost $90k lighter than what we started the year with. What a year!

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Bye Bye 2008

2008-12-31T14:51:56-08:00

2008 is finally around the corner now. What a busy year! Now 2008 will soon be a memory, I took the chance to write a final annual summary so the year will be remembered when I looked back decades from now.

Family

What's Good: My wife, my son and I, as a family, has much stronger bonding compared to last year. We enjoyed a lot of precious family moments. My wife continues to have success in her great freelance job, and my son, now at grade 2, is starting to having fun in his school. Everyone, including my extended families, is still healthy.

What's Not So Good: Really nothing. I feel blessed our family is growing in the right direction.

Work

What's Good: I'm taking much more responsibilities at work than a year ago and received an important promotion as a result. I continue to feel valued and am excited to come to work on most of the days. I derive a lot of fun working with my team, including my new boss who was parachuted to us 6 months ago.

What's Not So Good: For the entire year, I was essentially taking the workload of two, and the financial crisis has been challenging the effectiveness of our team to optimize resources. Many times, I felt I am consumed by the work by having to get up 6am in the morning and attend late-night calls. Also, I took more business trips than last year -- I spent altogether over 100 days on the road for business. To some extent, the economic crisis and accompanying reduced level of business travel is a blessing :-) In all means, 2008 is simply the busiest year ever I had in my career.

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Monthly Update - May 2008 ($885,297, +$12,932)

2008-06-03T20:26:13-08:00

While our portfolio barely made an inch, we continued to save a substantial part of our take-home pay and this ultimately drove home a 1.5% net worth addition in May.

Should I feel good that Our net worth winning streak is finally extended to the third months?

For the four full years between 2004 and 2007, there were only three "down" months in between. Now with our net worth changes are mostly governed by the market turbulence, our monthly performance is close to a coin toss lately -- exactly three "down" months and three "up" months in the last six months.

And this means my annual financial goal of $225,000 net worth growth is probably out of reach now -- our net worth actually retreated about 10 grand so far this year compared to where we ended 2007.

Now I actually don't feel too bad. If anything, the market condition and ensuing sea change in our net worth growth trend is a good wake-up call on how important it will be to manage the financial risks after our peak earning years. We are still fortunate that we are able to save more than 50% of our pre-tax income month after month, so we can definitely ride through this hurricane and come out stronger (both financially and mentally).

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Portfolio Update - May 2008 (Up 0.12%)

2008-06-01T00:52:57-08:00

SUMMARY

May is a pretty stable month for my portfolio in terms of absolute gains -- my stable of mutual funds, stocks and cash inched higher 0.12%. But on a relatively basis, my portfolio lagged the benchmark by 1.3% in this month. Certainly not a good month for relative performance!

TRANSACTIONS

I made a further $7,000 commitment to Dodge & Cox's domestic stock offering (DODGX). Also, I started a new (yet admittedly tiny $500) position at T. Rowe Price New Era (PRNEX), as an effort to beef up my energy exposure. I have enrolled in

NEXT STEPS

My individual stock positions have been lagged the market for a few months in a row now -- the huge concentration on financial stocks has been proven untimely, but at this price level, it can be argued that opportunities and risks are relatively balanced. Anyway, I'm intentionally controlling the relative share of my individual stock exposure now -- individual stock positions now represents only 28% of my portfolio, vs. 34% at the end of 2007.

With another series of reports on worsening housing market, it doesn't look like I need to eagerly commit more money to the market now. I do plan to sit in the side line of the equity market, and move more money to China for some currency bets.
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Monthly Update - April 2008 ($872,365, +$39,068)

2008-05-10T04:29:29-08:00

Thanks to a nice comeback of the stock market, our net worth received a much needed boost of 4.7% in April. I hate to mention the fact that despite our continued hard work and savers' mentality, our nest egg is still lighter compared to the low 900's it fetched in October 2007 -- our total wealth basically went no where in the last six months thanks to the rollercoaster ride of the stock market.

BALANCE SHEET

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Portfolio Update - April 2008 (Up 3.98%)

2008-05-08T06:27:29-08:00

SUMMARY

The market finally recovered some ground after five back-to-back monthly losses, and my portfolio benefitted from the market's sudden enthusiasm too with a nice gain of 3.98%, the largest monthly gain in a while. Since my portfolio is decidedly under-exposed compared to my benchmark, my monthly gain is dwarfed by the benchmark's 4.45% expansion. On a year-to-date basis, both my portfolio and the benchmark lost about 3.30%.

TRANSACTIONS

I made some shuffling in my mutual fund positions to embrace the newly available option of BrokerageLink -- a 401(k) plan feature that allows participants to expand investment options to almost all stocks and mutual funds. As such, I dropped Russell International Growth and ING International Value (NIIVX), bought more of Harbor International (HIINX) and USAA Precious Metals and Minerals (USAGX).

In addition, I moved more U.S. dollars to Chinese Yuan on my "carry trade" experiment. By the end of the month, I have about one seventh of my portfolio in Chinese Yuan, yielding handsomely from gradual, predictable appreciation of the currency. (Starting from this month, I'm breaking our my Chinese Yuan positions from the "Cash/Fixed Income" category.)

Also, I had to pull some money out of my portfolio to repay some 0% APR credit card debt that is coming due. This, of course, reduced the leverage of my portfolio.

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A $215 Refund

2008-04-12T20:55:34-08:00

The workload surge in the last two months caused many slips in my life. Not only was I forced into a "sabbatical leave" from blogging, I didn't even notice that I have fallen behind on a monthly credit card payment.

The card at issue is a Discover Miles card, which I took advantage back in November for its 0% APR balance transfer offer (after a $75 balance transfer charge). While I was only a few days behind the due date, I was slapped with a $39 late payment penalty and a $176 interest charge.

I have to admit this incident is not typical of me; I have been meticulously managing all bills for many years and almost never missed a payment. Now it is very hard to swallow that my first miss in years set me back for $215.
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Monthly Update - March 2008 ($833,298, +$5,976)

2008-04-08T05:54:14-08:00

The first month of net worth gain came rather late in 2008. Helped by continued strength in my day job and sideline business, our net worth edged up 0.7% in March. While we are $62,100 off where we started the year, we still increased our wealth by over $150,000 in the last 12 months.

Again, the market is testing the patience of every participant and spectator. If anything, I'm getting very good at dealing with market turbulence -- daily five-figure portfolio loss doesn't bother me much these days.

Now I don't think I'm a role model when it comes to investing -- some can easily discount me as market timer by keeping a big cash reserve, or being on the fence between stock picker and fund investor -- but I'm glad I'm true to myself and put my money where my mouth is. There are and will continue to be hits and misses, and it will surely take a long time to get better in the game. I won't mind people giving me more criticism or feedback along the way.
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Monthly Update - February 2008 ($827,321, -$25,287)

2008-04-08T05:19:08-08:00

It seems that our distance to the seven-figure net worth milestone only increased in the first 60 days of the year. With another 25 grand retreat in February on the heels of the $42,790 net worth decline in January, our net worth took a 7.6% nosedive so far this year.

I can blame this to the stock market, or MSFT's unsolicited bid for Yahoo!. But either case, it just makes it much harder to achieve the net worth growth goal for the year.
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Portfolio Update - March 2008 (Down 1.37%)

2008-04-06T22:49:41-08:00

I'm back to PFBlog! I know it has been a long hiatus since the last time I posted, but the last couple of months hasn't been easy. I was asked to take over a billion dollar P&L that had been poorly run and turn it around. While PFBlog is always an important source I find the meaning of life from, in this circumstance, I have to answer to the call to devote 100% of my bandwidth on this important career-lifting opportunity.

Anyway, after 6 weeks on the road traveling around the world in the last three months and countless hours of overtime poured into the work, I'm finally getting some work/life balance. This doesn't mean the hard work has been completed in my day job, but I'm satisfied that solid foundation has been built to put the business back to the right track.

So, I'm back to the blogging, and I'm starting by putting together some long-overdue monthly updates:

SUMMARY

Though the daily price change still suggested a lot of volatility in the market, the market almost ended the month where it started. My portfolio hasn't been that lucky: the heavy exposure on financial stocks still dragged the overall performance of my portfolio. It ended the month with a 1.37% haircut, versus the benchmark performance of minus 0.24%.

It is worth noting that March marks the fifth back-to-back month of portfolio decline, not something easy to swallow. During the five months' timeframe, my portfolio lost 8.36% while my benchmark index retreated 10.46%.

On a year-to-date basis, my portfolio bested benchmark by 1.70%. Still, not exactly something to brag about since I still lost dearly in the market.
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Portfolio Update - February (Down 2.78%)

2008-04-06T22:46:12-08:00

SUMMARY

$54,134 is a big amount to lose in a single month, and it doesn't make life any easier when it comes immediately after another $60,000-down month.

Most of the damage is done by the untimely Microsoft bid for Yahoo! The bid, which was made public in the first day of February, immediately pulled MSFT back to the 20s, almost halved the value of my employee stock option account.

On my self-managed portfolio side, my heavy exposure to financial stocks penalized my performance -- it was a complete reversal of fortune compared to January, when these bank stocks lift the

TRANSACTIONS

Flying to safety is probably the best summary of my several trades for the month. I downsized my equity holdings by closing my positions in FSTMX and KBE.

With the reopening of Dodge & Cox's domestic equity stock, I started an initial position on DODGX before the famous fund gets closed again.
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Morningstar Fund Manager of the Year 2007

2008-02-12T03:16:31-08:00

Earlier this month, Morningstar announced the winners of Fund Manager of the Year award for the past year. Here are the winners:

Domestic-Stock Manager of the Year: Will Danoff, Fidelity Contrafund and Fidelity Advisor New Insights

International-Stock Managers of the Year: Hakan Castegren and Northern Cross Team, Harbor International

Fixed-Income Manager of the Year: Bill Gross, PIMCO Total Return and Harbor Bond

Coincidentally or not, I actually own the two stock funds, Fidelity Contrafund (FCNTX) and Harbor International (HIINX), that helped their respective managers make to the list. I used to own PIMCO Total Return (PTRRX) in my 401(k) account too, but now I have better place to park my fixed income position -- that is, China-based money market funds that will benefit from the continued appreciating Yuan while earning handsome interest.

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Monthly Update - January 2008 ($852,608, -$42,790)

2008-02-09T14:02:24-08:00

Suffering the biggest-ever loss in our portfolio -- a total of $60,000 -- our net worth took a nosedive again in January. That is, the second month in red in the last three months. For the month, our net worth declined by 4.8%, or over $42,000. I would be lying if I say I don't miss the good old days when we can count on consistent net worth improvement month after month.

On the other hand, it is probably not a bad thing if one takes a long-term perspective. After all, it could be much worse if this happens after I finally bid good-bye to my corporate life -- that extreme early retirement scenario has been in our plan for many years and all we wait for is we hit a certain net worth number. If anything, the recent market turbulence serves as a timely wake-up call in our last stretch toward millionaire club that early retirement is only the means to an end, and risk management is more important than ever in our ride toward financial independence.

Fortunately, our core income streams are still well-oiled machines. My daily job is still generating five-figure monthly cash flow even after paying all taxes and living expenses. Our sideline business also delivered a big surprise in January with monthly net proceeds topping $10,000 again.

All together, our family is little affected by the paper losses (or gains) in our portfolio. Bottomline is, even with the market slide in recent months, we still added more than $190,000 to our net worth in the last 12 months.
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Portfolio Update - January 2008 (Down 3.02%)

2008-02-07T15:49:37-08:00

SUMMARY

With the S&P 500 dropped more than 6% and the international market performed no better, January sees perhaps the most brutal start of the year in recent memory.

For three months in a row now, my portfolio lost money. This time, for a total of 60 grand in one month, including more than $26,000 in one month in self managed portfolio, and about $34,000 in my employee stock option account.

There is little to celebrate, except that my self-managed portfolio is actually performing better than the general market. My finance-stock-stuffed individual stock portfolio was helped by the aggressive rate slashing of the Fed, and one of my stock pick returned over 50% in this past month. All in all, my portfolio lost 3.02% in the month when my benchmark lost 5.77%.
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The Unfamiliar Names Among The World's Five Richest People

2008-01-15T22:07:44-08:00

Back in August, I noted in this blog that Bill Gates was replaced my Mexican tycoon Carlos Slim as the world's richest person. Although both Mr. Gates and Mr. Slim have seen their stocks appreciated lately, they are now dwarfed by a new name from India.

According to The Boston Globe:

Indian businessman Mukesh Ambani's fortune rapidly rose from $20.1 billion in March 2007 to $63.2 billion in October 2007, thanks to India's booming stock market.

The other names on the list:

- Bill Gates and Carlos Slim tie for the 2nd place with $62.3 billion each.
- Warren Buffet, the Oracle of Omaha, cling to his fourth place with $55.9 billion.
- And then there is Lakshmi Mittal, the steel giant with Indian origin, who is worth $50.9 billion.

I don't even both to count the number of 0s in their money. Only if I can triple my net worth in seven months!
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Portfolio Review 2008, Part 1: Where Is The Alpha?

2008-01-14T14:54:50-08:00

Yesterday I shared my grand plan to thoroughly review my portfolio management again in 2008. My first stop is to drill down to my 2007 results, and understand where the benchmark-beating results come from. Yes, I beat my benchmark index by 1.77%, and that's what is called alpha in portfolio management.

To refresh some memory, earlier in 2007 I set my target asset allocation as follows:

• 50% Domestic Equity
• 35% International Equity
• 15% Cash & Equivalent

Furthermore, I built the following benchmark portfolio to measure my relative performance:

• 50% in Vanguard Total Markets ETF (VTI)
• 35% in iShares MSCI EAFE Index (EFA)
• 15% in Cash (assuming yielding 5% every year)

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Portfolio Review 2008: The Introduction

2008-01-13T18:52:38-08:00

I first realized that the game rules of my personal finance journey have permanently changed back in the summer of 2006. First, one day I woke up in the morning and found out my portfolio was worth half a million. Then, more frequently, my portfolio started to generate five-figure monthly ups and downs, replacing my savings as the main theme of my monthly net worth fluctuation.

In the spirit of holistically reviewing my portfolio management practice and determine course of action, one year ago, I published a series of 9 articles called "Reengineering My Portfolio Management" over a course of 2 weeks. In retrospect, the thought exercise worked out great. I finally put my portfolio management onto the right track by setting up target asset allocation, declaring a benchmark, and reporting to the audience about my success and failure on a regular basis.

To some extent, I guess I'm subject myself to external scrutiny so that I can consciously spend more time in getting this right. After all, if early retirement is what I'm after, I will have to master portfolio management so in the decades after I bid goodbye to the corporate career ladder, my family and I will continue to live a happy and stress-free life.

Therefore, I decide to take my investing practice to the next level by kicking off a new series of "Portfolio Review 2008," in which I plan to reflect on what I learned in the past (especially in the last year), look into the future, and solidify my portfolio management approach.

Practicing the second habit of highly effective people, I'm starting by laying out the framework of this series upfront. I envision this series should include the following chapters:
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2008-2010: The Upcoming Golden Age for Investors in Low Tax Brackets

2008-01-12T11:19:11-08:00

Our generations of lawmakers truly don't want to make our financial life easy, and that's why every year there are a long list of tax rule changes that affect everyone's life. To this end, Tom Herman, the tax columnist at the Wall Street Journal, provided a great summary of major personal income tax changes for 2008.

Without repeating the every single bullet in the long list, I just want to highlight one change that may have profound impact on many's investment strategy or portfolio management. Do you know the rules of capital gains are becoming much more favorably starting this year for those in 10% or 15% tax brackets?

Yes, for the next three years (2008 to 2010), taxpayers in those two tax brackets won't have to pay anything for long-term capital gains and qualified dividends. The tax rate on such income for those of higher income, will stay at the prevailing rate of 15%. For short-term capital gains and disqualified dividends, all taxpayers still have to pay tax at the marginal tax rate just like other ordinary income.
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2008 Financial Goals

2008-01-11T02:45:30-08:00

Starting in 2004, I have always published my annual financial goals at the beginning of each year, and reviewed the result when the year wrapped up. It is a great practice that allows me to keep a record and learn from past experience.

Having spent most of my December to complete my 2008 Financial Plan, I found it might be time to summarize and publicize my financial goals for 2008 in this dedicated post.

Measurement #1: Net Worth Growth

Goal: Net Worth of $1,120,000 by the end of 2008 ($225k annual growth)
Stretch Goal: Net Worth of $1,150,000 by the end of 2008 ($255k annual growth)

Comments: Net worth growth always comes at the top of my annual financial goals and this year will be no different. We are anticipating a challenging year and our net worth improvement in 2008 is likely to be smaller than that of 2007. However, I still want to assign myself a stretch target that exceeds our detailed plan by over 10%.

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How Much Will You Marry For?

2008-01-10T00:47:10-08:00

Robert Frank's column The Wealth Report at the Journal is all about the rich people's financial life, or anything related to the riches. You will read about how the riches use MySpace-like portals to get connected, how someone can have an A-380 as a private jet, and what the truly rich buy for Christmas gifts.

His recent article on a research about how much people will ask to marry for money provides some fancy figures:

According to a survey by Prince & Associates, a Connecticut-based wealth-research firm, the average "price" that men and women demand to marry for money these days is $1.5 million.

The survey polled 1,134 people nationwide with incomes ranging between $30,000 to $60,000 (squarely in the median range for nationwide incomes). The survey asked: "How willing are you to marry an average-looking person that you liked, if they had money?"
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What's My Total Investment Cost in 2007?

2008-01-09T01:44:04-08:00

I started to use personal finance software like Microsoft Money to track my finance as early as 1998, but admittedly I have a broken track record -- in my first few attempts to gain control to my finance, I was always too lazy to keep doing the bookkeeping after a few months. Still, I'm proud of my latest streak: since 2002, I have been religiously tracking where my money comes and goes, and I have six years' of history in my Microsoft Money file now. Of course, opening the book to public eyes in this blog is an important motivator (or pressure) to extend the streak.

While I can easily give a detailed breakdown of how much we spent for our earthy needs, I have never asked myself the question: how much did I spent on investing my money?

That is, until today, when I have both the inspiration and time to get to the bottom of this question. So below is my attempt to add up all investing cost, direct or indirect, in the year of 2007.

First component of my investing cost is, of course, commission.

Since I keep good track of all my investment transactions, I easily got the line-item details from Microsoft Money's built-in report. I grouped total commission for different investment vehicles for clarity:

Stock: Total Commission = $170.66 from 21 transactions (average per transaction is $8.13, including the usual $8 commission from Fidelity, and SEC fees on stock sales). Yes, I only traded 21 times in my individual stock positions -- I'm not really a trader.
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Supercharge Your Frequent Flier Mileage Account by Applying for Co-Branded Credit Card

2008-01-08T03:26:39-08:00

I am a frequent traveler and I love to collect miles. Over the years, I have been using these miles to bring the family to many nice places with reward tickets. It is a bit addictive if you love to travel: the more you travel, the more free tickets you get, which brings to more travel.

Now you can earn miles not only from flying, but also from shopping using a co-branded more miles. Plus, many of such frequent flier program co-branded credit cards offer amazing sign-up mileage bonus miles that sometimes almost amount to a free reward ticket itself.

Some cards do come with annual fee for the extra perks like travel discount and lower redemption level, but if your family travel at least once a year, you can easily recoup the annual fee from the additional benefits tailors to travlers.

Also, some cards' generous bonus mile offer also includes first year waiver of annual fee, making it more attractive for people who want to try out the program (or the airlines). After all, with the bonus miles, cardholders usually only have to charge another $5,000 on the card to get enough miles for a free reward ticket, a much better deal than even the best cashback cards!

Here are some attractive offers by major airlines. Enjoy!

Credit Card Bonus Miles after 1st Purchase Terms Annual Fee Apply

Continental Airlines Business MasterCard® 20,000 2 miles for every $1 spent on Continental airlines tickets, dining, gas, etc.; 1 mile for every $1 spent elsewhere $85 Apply Now

Continental Airlines World MasterCard® from Chase 20,000 2 miles for every $1 spent on Continental airlines tickets, dining, etc.; 1 mile for every $1 spent elsewhere $85 Apply Now

Citi® Gold/AAdvantage® World MasterCard® 12,500 1 mile for every $1 spent up to 60,000 miles a year; no blackout dates for reward tickets $50 (1st year waived) Apply Now

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How to Play the Dollar/Yuan Carry Trade

2008-01-07T08:53:52-08:00

My life is complicated and one of the complication is I have to deal with two currencies: my investment income and most business income are received in dollar, whilst 95% of my cost structure is denominated in Chinese Yuan (or called Renminbi -- "people's money"). Worse, Yuan is appreciating quicker and quicker against the dollar.

In the past year, I managed to book an annualized rate of return of 8.77% in my self-managed portfolio, but this just barely beat the Yuan's 6.9% appreciation against the dollar in the year. So I asked myself the question in December, should I just buy some money market fund in China for safe return instead of risking my principal in the U.S. equity market?

As the first step, I moved $50,000 to China and bought a load of money market funds here. While I'm still contemplating the magnitude and timing I should continue to do this, here is a quick step-by-step process of how to do the Dollar/Yuan carry trade for those who want to try:

Step 1: Open A Banking Account in China

Everyone with an identification card (for local people) or valid passport (for foreigners) can open an account at any banks in China. Reputable domestic banks in China includes Bank of China, Bank of Communications, ICBC and China Merchants Bank, the latter is what I use primarily. Foreign owned banks like Citibank and HSBC also have branches in major cities in China. One will need to open a Renminbi account and an US Dollar account. It is worthwhile to set up e-banking in your first visit too (it won't be automatically set) because the long queues at major banks can sometimes keep you waiting for hours.
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Courtesy Overdraft: A Courtesy Service or A Profit Center?

2008-01-06T03:10:08-08:00

Have your bank ever promoted the new generation of overdraft service to you? If you occasionally write a check that exceeds your checking account balance, your bank will gladly pay on your behalf to avoid your embarrassment. Of course, there will be a "convenience" fee.

But do you know consumers paid $17.5 billion fee in such "convenient" overdraft protection arrangements?

Bankrate.com's exclusive 2007 courtesy overdraft study can be a good resource to help you understand the situation. Simply put, banks are growingly seeing the overdraft protection as a profit center. Your bank is more than happy to pay an otherwise-will-be-bounced small check for you, for an average of $29 per-item fee. Some banks will only slash you with a per-day fee for every day your account is in deficit.

Even more aggressively, some banks will include the overdraft credit limit into your checking account balance when you inquire via an ATM machine, thus fooling more customers to withdraw money they don't have. Worse, customers who don't reconcile their account regularly won't notice the overdraft until the next statement.
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2007 Net Worth Growth Goal vs. Result (and Brief Annual Income Statement)

2008-01-05T03:56:17-08:00

When it comes to the cycle of setting up financial goals and achieving them, oftentimes a good post-mortem analysis gives more insight than mere celebration of another mission accomplished.

As we are quickly bidding farewell to 2007, I took some time to revisit my 2007 plan -- I did a fairly sophisticated model a year ago to set a net worth growth goal of $230,000 -- and I overachieved it by about $34,000. But what really happened?

In order to complete the exercise, I took the original numbers from my 2007 planning financial model (which I did in December 2006), and compared them against actual results in 2007 in the income statement format I introduced lately. Here is the comparison:
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How Americans Invest in 401(k)

2008-01-04T02:01:43-08:00

The beginning of a year can be a good time to perform a 401(k) check-up. And before that, a timely reading will be this recent feature from USA Today on a study of how American employees invest their retirement fund in 401(k) accounts.

The biggest finding from the survey of 1.8 million 401(k) account holder is: 21.9% of 401(k) balance is invested in company stock. Considering that the Enron debacle that wiped out the lifetime savings of thousands is still in recent memory, it is surprising to see many people are still committing a good portion of their retirement fund to their employers' fate.
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Invest Like Harvard and Yale

2008-01-03T05:20:28-08:00

Ever read about how those successful money managers at Harvard and Yale turn their respective endowments into double-digit gains year in year out? As a matter of fact, Harvard's endowment earned 15% per annum in the last 10 years, and Yale's boasted an annualized return of 17.2% during the same timeframe. Ever think about how your portfolio can match such a starring performance?

SmartMoney's recent article "A League of Their Own" shed some light on how these returns were achieved. Yes, by having tens of billions of dollars you can have asset to the best money management service out in the world, but these consistent performance boils down to one important decision: asset allocation.

We as individual investors are regularly taught that asset allocation is about finding the right risk/return balance by picking from asset classes like domestic equity, foreign equity, fixed income and cash, but those working at Harvard and Yale are maintaining a portfolio that is radically different:
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Monthly Update - December 2007 ($895,398, +$19,549)

2008-01-02T00:51:02-08:00

Recovering from the mass bleeding in November, we ended 2007 with a positive note by growing our net worth by almost $20,000 in December. Savings from our regular job and business income, and the appreciation in our stock option accounts, both contributed to a successful month.

For the full year, we added over $264k to our nest egg, handily beating our annual goal of $230,000 in net worth improvement. It is also the best showing ever for a full year, compared to $231k increase in 2006 and $205k increase in 2005 (the latter includes a one-time gain of $100k by selling our house for a profit).
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Portfolio Update - December 2007 (Down 0.52%)

2008-01-01T12:36:17-08:00

SUMMARY

After another choppy ride in December, the domestic market retreated 0.7% and the foreign market MSCI EAFE index lost almost 3%. My benchmark index, which is composed of 50% domestic equity, 35% foreign equity and 15% cash, suffered 1.34%.

Speaking of my portfolio, although I took some (more) beatings in my large bank and credit card company holdings, my other financial stocks and energy holding came to the rescue. Also, my hand-picked foreign equity funds are performing extremely well compared to the index. All together, my portfolio only took a small haircut of 0.52% in December, which is much better than the 1.34% loss of the index.

Although extremely volatile in the latter half, 2007 is still a good year for investors committed to the market. For the year of 2007, my portfolio recorded a gain of 8.77%, besting my benchmark's 6.98% gain by a good margin.
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Where to Park Your Cash in 2008

2007-12-31T03:32:19-08:00

Every time Fed lowers the interest rate, there will be a quick round of rate adjustment by all online banks. Now that the Fed rate is standing at 4.25% after four rounds of quarter-point cuts, those golden days of 5%+ interest rate on savings accounts are over. So, how should find good places to park one's cash? Here is a list of recommendations:

Online Money Market/Savings Accounts:

By and large, online savings accounts and money market accounts still offer some of the highest interest rates, and the utmost liquidity and security (all are FDIC insured). Some currently available offers:

: 4.90% APY ($10,000+)
Capital One Savings Account: 4.40% APY (no minimal)
ING DIRECT: 4.10% APY ($1 minimal)
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Financial Plan 2008: Net Worth Growth Goal = $220,000

2007-12-30T05:51:28-08:00

So far I have spent three posts in our Financial Plan 2008 series to elaborate the key driving forces of our financials in 2008 (part 1, part 2 and part 3). It is time to put everything together.

In summary, we are looking at $212K net worth increase in 2008, which will likely drive our total wealth to about $1.1M by the end of the coming year. The speed of the growth, however, will be slower than that of 2007, due to a number of headwinds, including:

1) Slower growth of job income, primarily due to change of stock compensation program at my employer;
2) 30% less business income, due to changing industry environment;
3) Unlikely further appreciation of vested employee stock option grants;
4) Higher expense expressed in USD when expensed in Chinese Yuan.

Partially offsetting the unfavorable changes will be a couple of favorable developments:

1) Likely higher income from our self-managed portfolio, mainly due to expanding portfolio size;
2) Reduced tax bill, thanks to more tax gross-up on certain benefits and less tax for employee stock option grants.
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National Home Price Continues Its Dive

2007-12-29T05:47:19-08:00

Home price decline is showing no sign of deceleration these days. According to the latest monthly release of the S&P/Casae-Schiller Home Price Indices, the 20 cities in the survey is showing an average price reversal of 6.1% compared to a year ago.

“No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “Not only did the 10-City Composite post a record low in its annual growth rate, but 11 of the 20 metro areas did the same. If you look at the monthly figures, every MSA went down in both October and September. Eleven of the 20 MSAs, in addition to the two composites, recorded their single largest monthly decline on record in October. For both the 10-City and 20-City composites this was a decline of 1.4% over September”.
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When You May Wish For A Lower Credit Score

2007-12-28T05:54:20-08:00

The quick fall of the housing market and the widespread impact to the American homeowners have already prompted a long list of prompt political actions. All of them came with good purpose, but not all are rational. The often-touted rate freeze and loan-modification program, announced by the White House on December 6th, is a good example of how ridiculous some programs are designed.

Here is a quick run-down of the test that subprime borrowers need to pass to qualify for a "fast-track" interest rate freeze:

1) FICO Test: If your FICO score was under 660 when you applied for the loan, and hasn’t improved for more than 10%, you pass the test. Having too good a credit score -- say, above 660 -- and sorry, you are out of the game (for being creditworthy and therefore you don't deserve to be rescued).
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Financial Plan 2008, Part 3: Spending and Tax

2007-12-27T11:01:43-08:00

Earlier in this Financial Plan 2008 series I shared the respective 2008 outlook of our household's earned income and investment income. Today I will complete the itemized list of planning assumptions by discussing the spending and tax picture of 2008. Still, the discussion will follow the planning framework we adopted earlier (so that if you read all three posts, you can assemble our 2008 Financial Plan yourself).

5. Our spending level in 2008 will be flat in Chinese Yuan terms but will increase by 6% in U.S. Dollar terms.

There are several counter-currents in the play. First, the expected continuation of the U.S. Dollar depreciation against the Yuan will be translated into higher U.S. Dollar spending since most of our cost structure is denominated in Chinese Yuan. Second, in the middle of 2007 we moved to a larger (and therefore more expensive) apartment, and our son moved from kindergarten to elementary school (read: higher cost from private school), so these two of our biggest spending categories will cost us more in 2008. Third, the local economy has a lot of inflation brewing these days -- the latest CPI reading indicates 6% annual inflation -- and inflationary pressure will almost certainly continue in 2008.
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American Express: Winner of 2007 J.D. Power Credit Card Satisfaction Survey

2007-12-26T02:48:15-08:00

J.D. Power recently announced American Express as the winner of 2007 Credit Card Satisfaction Survey, with Discover Card as a close runner-up:

American Express ranks highest among the 10 credit card issuers examined in the study with a score of 735 on a 1,000-point scale, performing particularly well in benefits and features, and problem resolution. Discover closely follows American Express with a score of 728, performing well in rewards, and billing and payment.

I have been an Amex customer for many years, and have always been very satisfied with Amex's great service and generous rewards program. For those who are looking for a new card, I can recommend a few exciting offers from American Express that can meet different needs of different people:

Best Rewards Card: Blue Cash from American Express

- Up to 5% cash back with no cap
- 0% APR on purchases for six months
- No annual fee.
- Apply here!

Card with the Best Sign-Up Offer: The Preferred Rewards Gold Card

- 10,000 bonus Membership Reward points after first purchase, redeemable for a $100 gift card!
- Great Membership Rewards Program.
- First year annual fee waived. You may cancel the card if you don't like the rewards program within the first year to avoid annual fees (and keep your $100 gift card).
- Apply here!
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Christmas Gift from the Capitol Hill: the Alternative Minimum Tax Patch and Mortgage Forgiveness Debt Relief

2007-12-25T05:40:30-08:00

The Congress's Christmas gift for the middle class: several last minute tax law changes that temporarily addressed the tax on forgiven mortgage debt and Alternative Minimum Tax (AMT).

If you don't want to be buried in the Congress's literature of the Tax Increase Prevention Act of 2007 and the Mortgage Forgiveness Debt Relief Act of 2007, you may read the excellent summary at CCH.

And here is the PFBlog analysis:

One-Year Band-Aid for Alternative Minimum Tax (AMT)

The problem our legislators need to resolve is simple: when they first introduced the Alternative Minimal Tax in 1970 to compel the riches to pay a minimal tax, they didn't allow for inflation adjustment in the amount of exemption. After that many years of inflation, the original exemption amount looks ridiculously low and, if adopted, will let AMT hit over 20 millions taxfilers who are normally considered as "middle class."

Both parties have agreement that this would be unfair, but in order to lift the exemptions for permanent inflation indexing, they need to find other sources of reliable revenue (read: assessing more tax elsewhere), and that's where it gets stuck.
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Merry Christmas!!!

2007-12-24T15:39:01-08:00

A special Merry Christmas for the readers of PFBlog from the midst of the Indian Ocean! 2007 has been an amazing year for us, and we want to thank you for watching our growth and providing feedback for the 5th year in our journey!

Merry Christmas! We wish you all the best in the New Year!
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Financial Plan 2008, Part 2: Investment Income

2007-12-24T05:11:08-08:00

The other day I shared the somewhat gloomy view of our earned income in 2008, which will likely to decline by a small percentage due to a variety of factors. To continue this series of 2008 financial planning, let me discuss how I view our investment portfolio will evolve in 2008. I will continue to do this on an assumption-by-assumption basis that resembles the top-down annual planning model I shared earlier.

3. We will be able to achieve 7-8% annual return on our portfolio, although with more volatility throughout the year.

It is very apparent in the second half of 2007 that market volatility is significantly increased compared to the last couple of years of eventless growth. Domestically, although the U.S. economy is potentially facing a recession, it does not mean stock investment will be untimely. Externally, U.S. dollar will continue its devaluation against other major currencies, and the economy of BRIC will continue their boom without the growing consumption by the developed countries. All in all, I do believe a modest single-digit gain is possible by a portfolio that has a deep-value/contrarian flavor, sizable exposure to foreign markets, and active cash position management through USD/Yuan carry-trade.
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Is Exchange Traded Notes (ETN) Dead?

2007-12-23T13:22:23-08:00

Back in November I studied Exchange Traded Notes (ETNs), a new genre of product with apparently better tax treatment than its much popular cousin Exchange Traded Funds (ETFs) with ETFs. The innovation of Barclays, ETNs are debt notes 1) issued by financial companies like Barclays, Goldman Sachs and Deutsche Bank and alike, 2) tracking a certain index like currency and commodities, 3) that can be traded in the stock exchange just like ETFs, and 4) being promoted with preferred tax treatment -- that is, there is no required distribution so that investors only have to pay tax when they finally dispose the ETNs.

Unfortunately, the preferred tax treatment is a claim by the issuing banks, and hadn't been confirmed by IRS ... until now.

According to MarketWatch, the IRS recently denied favorable tax treatment of most ETNs on the market:
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2008 Financial Plan: Participation Award Winner Announced

2007-12-22T04:04:08-08:00

Thank you for the those who participated in the "Producing My 2008 Financial Plan" contest at PFBlog, which I believe is the first-ever contest of one personal finance blogger inviting the community to work on one's annual plan. As planned, today will be the day we announce the winner of Participation Award (prize is $50 Amazon gift certificate). Winner of "Closest to the Pin" Award will be announced before the new year starts and after I publish all posts about my own 2008 Financial Plan thoughts.

Let me start by saying the contest is inspired by an internal company activity. In the most recent summit of hundreds of financial professionals in the company, our CFO asks us to predict the earnings-per-share (EPS) of the company in three years, by supplying us with an Excel model with only seven variables (on revenue and margin growth of each of the three key business lines, and the effect of other corporate finance activities on EPS). The message he conveyed (successfully) is: if one can make a good forecast of a 50-billion-dollar company without a big spreadsheet, it means true business insight can and should be delivered in a simple fashion.
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Financial Plan 2008, Part 1: Earned Income

2007-12-21T05:55:17-08:00

I always enjoyed the budget process. On the job, I organize annual budgets in the magnitude of several hundred million dollars to a billion, and derive great satisfaction by orchestrating how people should envision and plan the coming year. In my personal life, I enjoy dreaming about how we will lead our life in the coming year, spend time to understand the financial realities to support it, and take action accordingly.

Like what I did in 2007, I will start by discussing how I believe the key drivers of our finance will develop themselves in 2008. First on earned income:

1. Income from my daily job will grow at a much slower pace of 5%.

I continue to perform well in my day job duties, I anticipate above-average merit increase on upcoming annual review cycle. Also, the part of my compensation package that is denominated in Renminbi will receive automatic lift as the Chinese currency is getting stronger against the dollar. However, my stock compensation will almost surely decline. Five years ago, my employer switched stock compensation plan from stock options to stock grants, and with my last batch of stock option getting fully vested in 2007, starting from 2008 I can only purely rely on more reliable but much less potentially profitable stock grants getting vested every August.
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How to Capture Tax Loss at Year-End Properly?

2007-12-20T05:06:54-08:00

I discussed briefly in my last monthly portfolio update that I'm looking to capture some tax loss in the remainder of the year so I can lower my tax for 2007. In theory it is simple: since I untimely loaded some financial stocks in October before they took a nosedive, if I sell these stocks by December 31st, I can realize some short-term capital loss. Short-term capital loss can be used to offset other short-term capital gains, which are usually taxed at one's tax bracket. For me, that's a hefty 28%.

But there are other things to consider before biting the bullet:

First, there is the wash sale rule. In short, if you buy the same stock within 30 days before or after your sale, you cannot claim the loss. So, the question becomes: what if your stock has a comeback just after your sale but before you can replace your shares after 30 days?
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Postcard from China: Things That Are Considerably More Expensive Here

2007-12-19T05:03:49-08:00

The common sense is since China is a developing country, things are much cheaper on this side of the Pacific. However, according to the research from renowned HR consulting firm Mercer, living in Shanghai, the biggest city of China, is quite expensive. If the cost of living in New York City is 100, Shanghai will be 92.1.

I can partially substantiate to that. Our living expense of this year is likely to double what we spent in 2003. Of course, we spend a bit more as our income also triples, and then there are factors like inflation and stronger Yuan (which hurts when I report our financials in dollars). But some things are really expensive here:

Housing Expenses

After several years of red-hot housing market, having a roof over your top is not easy. To buy, downtown apartments in a good (but not top-scale) apartment can sell for over $400/sqft (RMB 35,000/sqm), and that's price on "constructed area", which includes all public areas like community center, lobby and elevator -- usually the actual livable area in the apartment will be 15-30% smaller. In other words, one will pay $500 or more for each square foot you have in private.

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My 2008 Financial Plan? You Are Invited To Participate and Win $100

2007-12-18T05:33:20-08:00

It is December and many household CFOs like me are crunching the numbers and make annual plans. At PFBlog, this will be the fifth time I set annual financial goals publicly (see my goals for 2004, 2005, 2006 and 2007). This year, let me do something different by inviting you, valued PFBlog readers, to join the process, and reward you for participation.

Here is how you can be involved. I have created an Excel-based model (snapshot below) that put all key drivers of our household finance to play. You just need to help me make six high level assumptions, and the model will automatically calculate how much net worth increase we can target in 2008. You may also copy/paste the model output as comments into this post as formal submission to the contest.
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Upcoming 401(k) Plan Changes: More SMAs and Self-Directed Brokerage Accounts

2007-12-17T04:02:28-08:00

Last week, Microsoft 401(k) Plan Administrators announced several exciting changes to the Plan in 2008.

First off, four mutual fund investment options currently available to plan participants will be replaced with Separately Managed Accounts (SMAs) on January 16, 2008. These SMAs are designed exclusively for Microsoft's 401(k) plan, managed by the same investment team and closely mirroring the current investment options. The caveat, however, is the new investment options will carry much lower fee structure, thus improving long-term return of the portfolio.

One has to admire our Plan Administrators for doing an excellent job in negotiating down the cost. Especially in the case of ING International Value Fund, annual fee will be reduced from 1.22% to 0.41% in the new SMA that is to be set up. What's the last time you can invest in a fine actively managed foreign equity fund by only paying 0.41% on annual fee? (In comparison, the widely-held index-tracking foreign-equity ETF option iShares MSCI EAFE Index carries an annual fee of 0.35%.)
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December 19: E*TRADE Customer Appreciation Day

2007-12-16T05:21:48-08:00

The embattled discount-brokerage-turned-bank E*TRADE is announcing that its customers can trade U.S. stocks, U.S. options, global stocks and futures for free, for one day only on December 19, 2007.

Here is the excerpt of terms and conditions:

Unlimited commission-free trade offer is valid for trades entered by E*TRADE Securities customers in U.S. stocks, options and futures from 8:30 PM EST on 12/18/07 to 8:30 PM EST on 12/19/07. Unlimited commission-free trade offer is valid for trades entered by E*TRADE Securities customers in non-U.S. stocks from 5:30 PM EST on 12/18/07 to 5:30 PM EST on 12/19/07. This offer does not include commissions on trades in mutual funds or fixed income securities, but does apply to options contract fees.
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110 Days on the Road, and Other Fun Travel Statistics in 2007

2007-12-15T06:26:45-08:00

One more trip to go, and it will be the end of the year.

And it is a very long year in terms of travel: by the end of the year, I will have flown a total of 124,520 miles. This includes 7 cross-Pacific trips to the U.S., one trip each to Japan, Hong Kong, Singapore, Indonesia, Cambodia and a nice southwestern town in China, and the upcoming Christmas trip to Maldives.

Yes, 124,520 miles is a long distance -- in fact, it is five times the length of the Equator. On the other hand, it is another typical year. In 2006, I travelled a total of 122,709 miles, so my 2007 travel diary will break the 2006 record, but only by the smallest margin of 1.5%.

Commercial airlines usually fly about 500 miles per hour on average, so 124,520 miles means 250 hours or 10 whole days in the cabin. It is no wonder I'm developing my rhythm in the cabin like watching videos in my Zune, reading magazines and playing computer games.
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How Accurate Are My Predictions of 2007? Part 3: On Expense and Closing Comments

2007-12-14T03:13:51-08:00

This is the third and last installment of a three-part series that reflects on my predictions of 2007. In the previous posts, I reviewed the result of my predictions on earned income and investment income. Let me finish off this series by debriefing you on my two last remaining forecast on expense:

Prediction #8. Core expense will grow 8-10% in 2007 with growth in travel expenses.

What I Said One Year Ago: Let's say an expatriate's life in a low-income country is still not easy. We managed to reduce our annual spending from $90,000 in 2005 to $80,000 in 2006. At the current level, I do feel we have the right balance of spend vs value. We do look to travel to more places in 2007 (Scandinavian, Maldives and Canada are in the plan), and hence some potential spending increase over that of 2006. We will still be living well below our means -- we intend to keep spending less than 25% of our income.
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Microsoft 401(k) Plan Replaced Fidelity Overseas with A Separately Managed Account

2007-12-13T04:20:44-08:00

Administrators of Microsoft's 401(k) Plan are really working hard lately to reengineer the program for the benefit of employees.

Earlier this year, the Plan announced replacement of Fidelity Overseas (FOSFX) with Russell International Growth Account, a "separately managed account", or SMA, that is exclusively created for the Microsoft Plan, and managed by Russell Investments using three separate managers, currently Hansberger Global Investors, Neuberger Berman and UBS Global Asset Management.

According to the Plan Administrators, Fidelity Overseas was removed as an investment option due to concerns about fund’s investment process and performance, the new fund manager’s management ability, the growth of assets that may negatively affect performance, and external advisor's recommendation. The Administrator also believes the new Russell International Growth Account, will likely to significantly reduces fees and have "increased likelihood of a higher risk-adjusted returns due to less portfolio volatility." In the FAQ accompanying the change, the Plan Administrators wrote:
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Is Prepaying January Mortgage Bill for Tax Gain a Good Idea? Myth Busted.

2007-12-12T06:38:05-08:00

As we are approaching the year end, many personal finance journalists are busy throwing out last minute tax advices. One of the most discussed year-end tax saving strategy is to prepay your January's mortgage bill in late December so one may deduct 13 months' interest on mortgage payments instead of 12 months'.

Is this really worth your time? Let's run a quick calculation:

If your January 2008 mortgage bill is $500 in principal and $2,000 in mortgage interest, by prepaying the January 1, 2008 bill on December 20, 2007, you only pay the opportunity cost of 10 days' worth of interest on the $2,500, yet you can claim $2,000 more in deductions in the 2007 tax return, and that's worth $500 if you are in the 25% tax bracket.
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How Accurate Are My Predictions of 2007? Part 2: On Investment Income

2007-12-11T04:56:26-08:00

This is the second installment of a three-part series that reflects on my predictions of 2007. In the previous post, I reviewed the result of my first three predictions on our earned income. Today, I will debrief you on my forecast on investment income:

Prediction #4. Size of investment portfolio will grow from $700,000 to $900,000 by the end of 2007.

What I Said One Year Ago: If anything, 2006 educated us how investment is growingly more important to our finance. With some leverage (i.e. 0% APR balance transfers and unpaid tax on unrealized capital gains), I'm currently managing a $700,000 portfolio and this number will most likely to grow to $900,000 next year. It will require more time to be allocated to the investment process and more rigid process management.
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Should I Simply Buy Chinese Money Market Fund (Instead of Stock Picking)?

2007-12-10T01:41:17-08:00

There are enough headlines that U.S. dollar has weakened against almost all major currencies in the last few years, and it is certainly not good news for everyone making a living in the States -- higher price for imported products, more expensive overseas vacation, etc. As a U.S. taxpayer who lives in China, however, I am facing a different flavor of the challenge:

On one side, since most of my compensation package is now mostly denominated in Chinese Yuan, without doing anything, my salary expressed in U.S. dollar will receive automatic increase. This certainly serves me well when I reported my monthly net worth in dollar terms.

On the other hand, since most of my portfolio is sitting in U.S. accounts, and most of my spending is in China and more likely than not we will spend a good part of our golden years in this side of the Pacific, we do worry about our future purchase power in the local currency.
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What Candidates are Proposing for Income Tax on Investments

2007-12-09T07:19:18-08:00

CNN Money's Jeanne Sahadi did an amazing job in compiling the different opinions on tax policy from all presidential candidates. Given the fact that I have a portfolio that briefly crossed seven-figure mark lately, I'm naturally interested in how they think on the investment taxation:

Currently they're both taxed at 15 percent (less for low-income taxpayers), and they are scheduled to rise by 2011 to 20 percent for capital gains and to ordinary income tax rates for dividends.

Edwards: Would make the first $250 of interest, capital gains and dividends tax-free for everyone, although he would favor raising the capital gains tax rate to 28 percent for taxpayers making more than $200,000.

Obama: Would eliminate capital gains taxes for business start-ups, although he would favor raising the capital gains tax rate to somewhere between 20 percent and 28 percent for taxpayers making more than $250,000.

Romney: Wants to eliminate the tax on interest, capital gains and dividends for taxpayers with adjusted gross incomes under $200,000, and would make the Bush investment tax cuts permanent for everyone else.

Giuliani, McCain and Thompson: Would make Bush investment tax cuts permanent.

Huckabee: Has called for the elimination of the income tax system and for a consumption tax to take its place. Under his plan, you would be taxed on what you buy, not on what you earn or save. So there would be no investment taxes.
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Magazines for Miles by Northwest WorldPerks

2007-12-08T04:52:27-08:00

Besides banking and investment accounts, I also use Microsoft Money to track various mileage programs. For Northwest Airlines' frequent flier program WorldPerks alone, I track five different accounts: mine, my wife's, my kid's, and both of my parents'.

The problem is: since my parents didn't travel much lately, their miles are about to expire at the end of the year. Each of them have about 10,000 miles, much less than the cheapest reward ticket, but enough to feel bad about losing them.

Luckily, the WorldPerks program provides a way out: Magazine for Miles. In exchange for a few hundred miles, you can get 6-month or 1-year subscription to a lot of magazines and newspaper.
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How Accurate Are My Predictions of 2007? Part 1: On Earned Income

2007-12-07T05:31:48-08:00

One benefit of blogging is that you keep a written record of your life so you can always rewind to re-learn yourself. One year ago, when I plan for our financial life in 2007, I made 9 predictions. Now that the year is almost over, how is my batting average? We are going to review them one by one in this three-part series:

First on my forecast on earned income:

Prediction #1. Job Income from my daily job will be steadily growing at an annual pace of 8-10%.

What I Said One Year Ago: I have full confidence I will continue to perform at the top of the pack in my company, and expect 1-2 raises throughout the year. I also count on more employee stock option and stock award income. On the balance, some of my expatriate benefits will not grow as fast.

Result: Excluding stock option income, job income increased 15%, although 6% gain is attributed to stronger Chinese Yuan vs. US Dollar. Barring the foreign exchange gains, the real gain is about 9%. Bingo!
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Why I'm Not A Dividend Investor

2007-12-06T06:37:57-08:00

My individual stock portfolio is full of dividend-paying stocks, leading by Citigroup (6.5% yield), Bank of America (5.5% yield) and Pfizer (4.9% yield). As a matter of fact, all but two of my 13 individual stock positions at the end of November is paying regular dividends.

I do believe a long dividend paying history and consistency on dividend increase are good indicators of a company's long-term performance. However, I don't really think myself as a dividend investor. Why?

First, company can create shareholder value in many ways other than returning cash to investors as regular dividends. For one, great companies can always find opportunities to invest for future growth. But even when cash generated by operation exceeds tangible investment opportunities, dividend is not necessarily the best way to return cash to shareholder. Depending on the stock price, shareholders can be better off when company buys back stocks at cheap, and pays dividend when stock price at high. Therefore, companies with no dividend or low dividend payout ratio have more flexibility in maximizing shareholder returns.
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More Income = More Spending?

2007-12-05T06:44:37-08:00

It is not easy to be rich, but being rich can be boring. As WSJ columnist Robert Frank commented in his recent post "Wealth Fatigue Syndrome":

"For the super-rich, houses, yachts, cars and planes are like new toys that they play with for five minutes and then lose interest in," a psychoanalyst named Manfred Kets de Vries says in the article. "Pretty soon, to attain the same buzz they have to spend more money. All the spending is a mad attempt to cover up boredom and depression."

He adds that when someone has and spends so much money, "Feeling any sort of excitement means taking more and more risks, financially and physically."

Money, in other words, is like a drug; the more you have, the more you need to get a buzz. When a first-class plane ticket no longer satisfies, today’s wealthy board private jets. When that feels common, they buy a private jumbo jet. And so on.
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Free Stock Trades at Zecco.com

2007-12-04T02:39:22-08:00

When it comes to stock trading, I'm a premier customer at Fidelity and TD Ameritrade because of asset size. Fidelity charges me $8 per trade and TD Ameritrade charges me $9.99 per trade. Since I typically by in the amounts of $10,000 or so, the trading cost is less than 0.1% of my principal -- not too bad given the first-class customer service I received at both firms.

But there is still money to be saved. Introducing Zecco, an online-only brokerage firm that boasts 10 zero cost stock trade per month for everyone who has $2,500 to invest.

To experiment it, I just opened an account at Zecco with $10,000 to start with lately. The application process is pretty streamlined and I like the simple transaction interface. I haven't completed a real trade yet, so it is hard to say I'll commit to it and move all my money in individual stocks to Zecco, but if it works out, I can probably save $150 to $200. That'll add a couple basis points of gains to my portfolio's annual performance :-)

Better later than never.
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How Much Stock Dividend Did I Receive in 2007?

2007-12-03T06:25:15-08:00

My fellow personal finance blogger 2million did an interesting exercise to tabulate all stock dividend income he received in 2007. While I'm not exactly boasting my self as a dividend investor, my value investing style drives me to many companies that pay handsome dividends. Therefore, I found it is quite useful to ask myself the question: how much stock dividend did I receive in 2007?

The quick answer: over $5,000. The table below includes the line item details, including expected Q4 dividend that has already been announced but not yet paid out.
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Portfolio Update - November 2007 (Down 3.75%)

2007-12-02T09:33:23-08:00

SUMMARY

The stock market took a nosedive in November after three months of gains. At one point, the market was officially declared "in correction," defined as more than 10% off recent highs.

Obviously my finance-stock-stuffed portfolio is not spared from the chaos. It ended the month with a 3.75% loss, even slightly worse than the benchmark loss of 3.47% in the same month. On a year-to-date basis, my portfolio is still up 9.4%, compared to 8.4% gain of the benchmark.

TRANSACTIONS

I'm quite busy in managing my positions in November. Key transactions include:

1) Exercised 1/3 of my vested employee stock option positions (MSFT) at $36.60. Before this month's transaction, I haven't exercised stock option for over 7 years now. The action is prompted first by valuation concerns -- MSFT was bid up to a level that is above my calculation of intrinsic value after a blow-out Q1 release, and second by diversification purposes -- my employee stock option account was representing 17% of our net worth at the end of October and it was obviously too high.

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Monthly Update - November 2007 ($875,850, -$33,806)

2007-12-01T14:54:50-08:00

The broad market correction was wielding its powerful force on my portfolio last month, causing a 3.7% hair-cut of our net worth in a month, the highest percentage decline ever in our history of meticulously bookkeeping in the last five years.

Although I don't feel for the increased volatility in the market this year, I'm getting used to the rollercoaster ride now. To take it positively, we are only giving back some of the enormous gain we recorded in the prior month. In the last two months combined, we still grew our wealth by more than $43,000. And we are still already ahead of our annual growth goal by a five-figure margin, one month earlier.
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Fortune: Home Price Faces 16% Correction In Five Years

2007-11-13T16:18:29-08:00

With the sudden realization that the housing boom is officially over, our interest is shifted to where the bottom is. To that end, Fortune Magazine released an in-depth analysis on how housing price in 54 major cities will likely evolve in the next five years. Fortune's analytical framework assumes that the ratio of rental cost and home price will return to a historic norm, and the journey to a normalized price/rent ratio will involve a correction of current home price, in conjunction with gradual rental increase over time.

The conclusion: on average, the nation's home price is over-valued by 28%, and for it to return to the norm in five years, we should expect 16% price correction, in addition to 12% increase in rental cost.
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Exchange Traded Notes: A Potential Rule-Breaker?

2007-11-12T22:05:21-08:00

Both SmartMoney and Kiplinger's Personal Finance recently shed light on a completely new genre of investment vehicle available to the general investors: Exchange-Traded Notes (ETN).

iPath ETN, created and marketed by Barclays Bank, PLC, is very similar to ETF, or Exchange-Traded Funds (also pioneered by Barclays), which can be traded like a stock throughout the day, but also mimics the returns of a benchmark index. However, ETN comes with an important tax advantage over ETFs and mutual funds -- it is not required to distribute dividends and capital gains every year, making it possible for investors to avoid paying tax on such distributions, and having more money at work until the final redemption.

Now here is the caveat: in order to achieve these tax benefits, ETNs are structured as unsecured, unsubordinated debt securities issued by Barclays Bank PLC, with returns linked to a pre-defined benchmark index, minus fees. In other words, the value ETNs are secured by the credibility of Barclays instead of a pool of underlying investments.

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How to Get 8% Annual Return with Zero Risk

2007-11-06T16:28:46-08:00

What if I tell you there is a risk-free investment that is backed by the full faith and credit of the U.S. Government, will guarantee you an annual return of 8%, and is open to every taxpayer?

And this investment is made available by an unlikely source: IRS.

Yes, you didn't read it wrong. It is from the famous/infamous Internal Revenue Service.

I only learned this from my finally-arrived-after-10-month-delay tax return check for my 2005 federal tax return. (Long story short, my tax advisor can only file my 2005 tax return in January 2007 in order to satisfy certain requirements for foreign-earned income classification. And then my check got lost and we have to file a request using IRS Form 3911 to trace the check. IRS finally issued a replacement check last month.) To my surprise, the amount on the check is $408 higher than what we asked for the in the original return.
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Revealing Details of a 401(k) Plan

2007-11-05T04:56:59-08:00

Every year, each 401(k) Plan Administrator is required by law to disclose summary financial information of 401(k) plan to plan participants. I was reading the Microsoft 2006 Summary Annual Report today and some numbers are quite revealing.

Here is the original text from the report:

"Benefits under the plan are provided by Fidelity Management Trust Company. Plan expenses were $174,588,997. These expenses included $0 in administrative expenses and $174,588,997 in benefits paid to participants and beneficiaries, and $0 in other expenses. A total of 58,263 persons were participants in or beneficiaries of the plan at the end of the plan year, although not all of these persons had yet earned the right to receive benefits.

The value of plan assets, after subtracting liabilities of the plan, was $4,430,511,055 as of December 31, 2006, compared to $3,522,951,171 as of January 1, 2006. During the plan year the plan experienced an increase in its net assets of $907,557,884. The increase includes unrealized appreciation of depreciation in the value of plan assets; that is, the difference between the value of the plan's assets at the end of the year and the value of the assets at the beginning of the year or the cost of assets acquired during the year. The plan has a total income of $1,071,286,136 including employer contributions of $128,814,606, participant contributions of $428,090,550, realized gains of $0 from the sale of assets, earnings from investments of $213,077,272, and unrealized appreciation of $301,303,708."

If the above numbers are boring, below are some interesting revelations from quick calculation:
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Portfolio Update - October 2007 (Up 3.08%)

2007-11-02T09:35:19-08:00

SUMMARY

October is another winning month for my portfolio. My portfolio appreciated another 3.08%, which handsomely beat my benchmark by over 60 basis points. The result is attributable to a couple of winning stock positions (APOL and BRK.B especially) and better mutual fund performance vs benchmark, slightly offset by the loss in my financial stock plays.

So far this year, our portfolio returned 13.7%, compared to 12.3% return from our 50-35-15 benchmark and 11.3% return from the 45-30-25 benchmark.

Outside of the self-managed portion of my portfolio, it is worth mentioning that the value of my employee stock option account more than doubled in October, thanks to terrific quarterly results and upbeat guidance. Including the stock option account, my portfolio is worth over a million dollars for the first time!
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Monthly Update - October 2007 ($909,656, +76,911)

2007-11-01T12:47:43-08:00

One month after we breached the $800s mark of our quest for net worth accumulation, we are now in the new domain of the $900s. Our bottom-line is happily lifted by a blow-out quarter from my employer and the ensuing multi-year highs of its stock, together with significant gains from my self-managed portfolio.

At $909,656, we have out-delivered our annual net worth growth goal of $230,000 by over $48,000, and we did this two months ahead of time.

While we fully understand that the stock market may turn in opposite directions overnight, we are really happy about where we are and what we accomplished. We look forward to exciting planning process for 2008 to bring our net worth up another notch.
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Tax Conscious Stock Sale: A Case Study

2007-10-30T18:32:49-08:00

I wrote a couple of weeks ago about why some basic tax knowledge will not only help you to maximize your tax refund after the fact, but will also serve as good guidance on how one should plan financial activities beforehand. Case on point: my exit strategy on my investment in Apollo Group, Inc. (APOL).

For those of you who don't know, Apollo Group is the operating of University of Phoenix, Inc. (UPX), an accredited university with predominant online presence, and many other educational institutions. I bought 400 shares of its stock at $35.07 apiece on November 20, 2006, following strong recommendation from Morningstar equity research's recommendation. (In retrospect, I bought the stock almost at its 3-year nadir. What a perfect timing!)

Now the stock APOL is trading at over $75 apiece and I'm happily watching my original investment of $14,000 turned out to be another double-bagger. Apparently the stock is no longer cheap at 22 times forward P/E. In fact, in my latest monthly portfolio review, I have listed my target (sale) price of APOL as $65, but I still haven't sold the stock yet. Why?
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What A Year of 0% APR Arbitrage Has Brought Me

2007-10-17T20:21:54-08:00

Long-term readers of PFBlog knows I have been taking advantage of credit card companies for years. Especially, I'm very good at 0% APR arbitrage, whereby I sign up for new credit cards with attached introductory 0% APR balance transfer offer, move the entire balance immediately to my bank account, and enjoy the high saving account rates of 5% or more while remitting only the monthly minimal payment back to the credit card company.

Of course, this strategy will drag down your credit score. Last summer, especially, I applied five cards in two months' time, and my credit score tanked from 720s to 640s, and I was essentially denied new credit application after being seen a credit risk by most banks. But credit score is only of cosmetic value if you don't need credit any time soon. To me, after all, I have no better use of my credit score now that I'm sitting on a portfolio of over $800k and has no plan to buy a property any time soon.

The below chart is a great summary of what happened in the last dozen months:
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The Value of Essential Tax Knowledge

2007-10-16T02:05:41-08:00

Now you can always choose to tackle the annual chore of filing tax return by 1) learning to file tax yourself, or 2) paying someone else to file your tax. You may think the difference is just the $100 or so you pay someone sitting in the booth in Walmart in April, but it can be much more than that.

Take myself as an example, given that I'm working in Asia, taking paycheck from a US-based company corporate entity, running a sideline business and still having to pay federal income tax in the States, my tax profile is on the complicated end of the spectrum. I'm thankful that my employer is paying KMPG several thousand dollars a year to file my tax. I will never be able to figure out how to navigate the intrigue laws governing federal tax on foreign earned income.

Now I also need to confess I'm a control freak when it comes to managing money, so in each of the past two years, I took KMPG's draft return, and crunch every line again in a mass-market tax software, until I can satisfactorily say I understand how all numbers are tied together to produce my total tax number.

This exercise took me about 10 hours every year, and it is worth every minute I put to it. Why? In each of the past two years, I found at least $2,000 worth of error in my favor. The first year, KMPG classified my business income as US earned instead of foreign-earned, effectively depriving me of the opportunity to offset some of my foreign-paid tax. The second year, KMPG even forgot my employer withhold taxes from my vested restricted stock grants.
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