personal Finance Story

Be Greedy when others are fearful and fearful when others are greedy.

Immortal words.

It may very well be that a day ago, when the market indecies dropped almost 10% in three days, when the VIX surged past 40, when everyone and their brother was contemplating getting out of the market altogether, was the very sign to jump into the market.

Blood was in the streets earlier this week.  Today, markets are set to surge for the second day in a row.

Is this the true bottom?  I have no idea.  I do no that today, just as it was yesterday and the day before had one thing in common.  It was a great time to invest.  Start today if you haven’t already.  Only history will be able to tell exactly when this bear market capitulates and dies out.  You can be sure that the next bull market is ahead of us.

Don’t be caught left out when it comes.

Be safe out there and god speed.

Lets look at the facts and just the facts.

The market is down. Down very close to 20% from the highs we saw around October of last year. That puts us right around a bear market. Another bad day or so and we will be firmly entrenched.

My wife and I have at least two years time before we need access to our housing savings. Maybe three depending on the circumstances.

From those bits of information, I was thinking and thinking very seriously about moving the bulk of our housing savings into a stock index fund and roll the dice on the market correcting itself with our two to three year time frame.

It is risky. Both my wife and I are reeling from individual stock investments. However, buying into a proper index fund should help to massage potential losses by virtue of instant diversification. In the event that the market takes a nastier turn for the worse, it will be one of the worst stock market drops in a while. The market is already down significantly.

I have somewhere around $5,000 that is available for this venture. I’ve already moved the money and am conscidering alternatives while talking it over with the wife.

I have always believed that in order to reap great reward, you need to step up to the plate and take risks. This in my opinion is just such a time. With a two year horizon, I think it is worth a shot and will provide a much better return than ING will ever give us.

All I am looking for is a quick and painless 5% to 10%. I think that the market has that to give. With a little bit more research I will be ready to make a decision. I’ll keep my blog updated with results.

Go big or go home. I don’t want to be stuck on autopilot for the rest of my life.

I wouldn’t have it any other way. It gives me something to look forward to. I am by no means a rich man today. But I plan on it. Here are just a few of my favorite reasons.

The Rich Have Money

Dave Ramsey, David Bach, to Suze Orman and countless others tell us over and over to start investing NOW. The reason is simple. Compound Interest. It does amazing things. The part that is overlooked is that there are two parts to the equation. Time and Principle. The average American does not start investing with a large principle. We all rely on time to do the heavy lifting for us.

On the other hand, if you do happen to have a significant amount of money to invest, then you don’t need time on your side to reap large dollar gains.

Very simply, 5% of $1,000 is $50 while 5% of $1,000,000 is $50,000. Even though each is an equivalent rise in value, I am willing to bet that the majority of readers would rather have the $50,000 gain.

The Rich Pay Less Taxes

The rich more often than not use a significant amount of their wealth to invest. Investments are taxed using a different set of rules than earned income. First and foremost, there are no Payroll Taxes on capital gains. If you sell a stock for a profit, you will pay federal and state income taxes and that is it. You do not pay social security taxes (6.2%) or Medicare taxes (1.45%). That is more money in your pocket instead of the government.

If you happen to of held your stock a full year or longer, or you receive a dividend, your tax liability decreases further still. Long term capital gains as well as dividends are taxed at lower rates, currently both are 15%.

If that wasn’t enough, social security tax has a cap on it. For 2008, income up to $102,000 is taxable for social security. Every penny after that is free and clear further reducing the over all taxes paid by high earning individuals.

The Rich Don’t Worry About Inflation

Gas and food prices have seen rapid increases in the last year or so. This has threatened many families financial well being. While inflation concerns are another great reason to NOT live paycheck to paycheck when you are rich, you don’t have to worry as much.

While the rich may use more gas and food than others, they do not use nearly as much as the rest of the world when you look at it as a percentage of their income. If gas and food costs increase by 12% in a year, the family whose gas and food bills make up 25% of their expenses are going to be far more affected than the family who spends only 5%. Having more money does not mean that you automatically use more gas and food. You have to look at it as percentages to get the full story.

If You Can’t Beat Them…

The people with money have an easier time making more of it. Once you have it it is likewise easier to keep it. It’s a fact of life. So rather than fuss and complain over it, resolve to join their ranks. I plan on being rich. One way or another.

What more motivation does one need?

The awful thing about losing investments is that making it up is always harder than you would think. Think of it this way. If your portfolio drops 50% then your account would then need to double in order to get back to where you started. Such was my situation in the beginning of September of last year. I had lost slightly over 26% of the $3,000 I initially seeded my stock trading account with. That means that the remaining $2,208.96 had to grow by 35.8% to get my money back.

Lesson Learned Number 1: Don’t Pick Stocks Blindly, Do Some Homework

I liked Apple. But was it a good stock? The iPhone was on the horizon, one of the worst kept secrets on the street. But the iPhone would not make or break Apple’s core business. That title undoubtedly belonged to the Mac. I listened in on their earnings conference call on the 25th of July and noted that over 50% of their business came from Mac sales. A full 50% of Mac sales where to customers who had never used a Mac before. Good things were coming for Apple so I did the math.

Trailing twelve month earnings stood at $3.55 giving a price to earnings ratio of 36.2, (Apple was selling around $128 at the time). I reasoned that Apple could grow earnings an additional 30% over the next year. They had a history of doing so already and their own guidance for the next quarter was inline with that expectation. Another thing Apple likes to do is low ball earnings guidance only to exceed investors expectations. Armed with this knowledge, I reasoned that Apple’s growth was worth a 40 P/E ratio.

Assuming earnings grow according to guidance, the next year would see earnings per share of $4.61. Multiplying the P/E by expected earnings yielded a fair price for Apple of $184.40. Since Apple was trading around $128, I saw fit to plunge in and hope for the best.

Buy 16 shares of AAPL @ $128.54.

Lesson Learned Number 2: Don’t Panic, Buy Low and Sell High

In the following months, Apple stock rose to a 52 week high of $202.96. Shortly after the start of the new year, Apple, along with the rest of the S&P, Dow and Nasdaq, started a major correction. Apple fell to a low of $115.44, ironically very near where I had sold it once before last September.

I did not panic. I held my ground. It was a terrifying ride but slowly but surely, the market as a whole bottomed and after trading sideways for a bit, Apple began to rise.

As of the writing of this article, Apple is trading at $175.05. I am very, very close to seeing my account balance back at $3000 again.

Looking back at the rest of my purchases is alarming.

I dodged a bullet in AMD and SRS. Those turned out to be horrible in the last six months. SRS isn’t exactly a surprise though. While markets do wane from time to time, they always recover. The housing market is no different.

If I had bought and HELD FCX and AAPL when I first purchased them, my initial $3,000 investment would be worth $3,411.30 today. I’d be more than just breaking even today.

You live and learn every day. Take a lesson from my miss adventure in investing. Perhaps you will save yourself some heart ache. My experience has not deterred me from adding to my investments. I plan to continue on and make the most of my future dollars. I am a bit smarter and wiser now when it comes to investing and I have plenty of time to swing for the fences.

Step one, get excited. Get very excited. I just graduated college. Never in my life have I made so much money. I was ready to tackle the world with my investing acumen. I was in a word, invincible (financially speaking of course).

After filling out all of the applications, I transfered a tidy sum of $3,000 into my account. It took almost a week to clear. Far too long in my mind. In fact, by the time the money was available to trade I was actually on travel for work. So from a hotel room, with a crappy internet connection I plotted my first purchase.

Step two, make rash decisions and bias the outcome. I thought to myself, What’s a good stock to buy? Instinctively, I went with the very first that came to mind, a company I had used personally and trusted. Advanced Micro Devices. I never looked at their balance sheet. Never glanced at their earnings. I just knew that this was the stock to buy.

Buy 190 shares of AMD @ $15.41.

After no more than three days, I felt on top of the world when my investment went up to $15.70. Obviously, I sold immediately.

Sell 190 shares of AMD @ $15.70. Profit after fees was $48.05.

I was a king of stock trading. No more than three days into the endeavor and my account was already sporting a 1.6% gain. Millionaire status here I come! But what next? What now? What investment would make the most sense after making a profit from one of the worlds most popular computer processor manufacturer? Of course! Their direct competitor, Intel.

Buy 115 shares of INTC @ $25.908.

And after three days, my hopes were dashed when the stock dropped. A whole 60 cents! Calamity! So I did what any prudent investor would do in such a situation. I sold immediately.

Sell 115 shares of INTC @ $25.30. Loss after fees was $69.87.

So now I was down a little more than $20.00 but that Ok. It was a minor setback. I was still a investing power house just waiting for the right moment to pounce. And pounce I did. I fact, I didn’t even make it to the end of the day. I bought my next two stocks the same day I sold Intel. Apple computers and Freehold McMoran Mining Company were on my list.

Buy 15 shares of FCX @ $97.74.

Buy 10 shares of AAPL @ $140.22.

Step three, PANIC!!! (this step also known as buy high and sell low…) Within a few days of buying both stocks, each saw a precipitous dive. It was nerve wracking. Each day I saw my portfolio drop little by little. Never mind the fact that the rest of the market as a whole was also in a decline I was ready to stem my losses. I had to stop the bleeding.

Sell 15 shares of FCX @ $80.38. Loss after fees was $246.38.

Sell 10 shares of AAPL @ $116.91. Loss after fees was $219.08.

I was beside myself. I just could not believe that I let myself lose so much money. As hard as that was, I was determined to recoup my losses. I had not learned my lesson yet. Equities seemed like it was in a tailspin and the buzz word on the street was sub prime. I knew what to do. Bet against the market. It was a bulletproof plan. I jumped into a leveraged short ETF that was intended to match double the inverse of the real estate market. I was betting against the housing market. How could I lose?

Buy 20 shares of SRS @ $115.12.

The day after I bought the shares, the Federal Reserve slashed interest rates in a surprise move before the market open. Real estate stocks rallied, and rallied hard. It took five days for me to capitulate and take the most staggering loss yet.

Sell 20 shares of SRS @ $99.23. Loss after fees was $303.76.

So there I was, staring at a aggregate loss of $791.04, a 26% decline in exactly 40 days since opening my account. If ever there was a cautionary tale for the novice investor this is it. I made all the wrong moves and I paid the price.

There is a silver lining though. Amid such an awful performance, there would be a recovery and in a way, retribution.

To be continued.

There is a time and a place for everything. Swinging for the fences with your finances is no exception. Let’s face it, if you live your entire life saving for retirement from a $50,000 salary, then you will retire with a $50,000 salary. And that is IF you are a saint your entire life and live by a strict spend less than you make philosophy.

By all means I do not want to give the impression that traditional financial advise does not apply. Everyone should be saving in their 401Ks and Roth IRAs. Those investments should be safe ones that have a track record for success such as low expense ratio index funds.

However, you need to reach for higher returns if you want to give your comfortable retirement a splash of luxury. The S&P 500 in the last five years has increased a total of 54.44%, from 898.81 to 1,388.17 today.

Five years ago, Exxon-Mobile (xom) was at $34.79. Today it is at $94.26, up 170.93%.

Five years ago, Aetna (aet) was at $12.80. Today it is at $42.14, up 229.21%.

Five years ago, Apple (aapl) was at $8.97. Today it is at $168.16, up 1,774%. A $10,000 investment five years ago would be $187,400 today.

See the trend? These are all good companies with good stocks. None are in any way obscure either. You may actually use their products in your daily life. Five years ago Apple had already introduced the iPod. It did not take a financial genius to see all of the new white ear buds popping up everywhere you went. All you needed was a little vision and perhaps, a bit of luck.

And if you lose it all? Who cares. You went big and it just wasn’t to be. You won’t ever be worse off if it is money you otherwise wouldn’t miss. You still have your 401K and your Roth which grows and grows with steady long term gains. They are your safety net.

But what if you can find the next blockbuster stock. The only thing that is guaranteed is that you won’t find it if you never try. Remember that some of the best stocks for the next five to ten years may be right under our noses today.

After properly funding your 401K and Roth IRA, if you find yourself with a few dollars more in your investment pool, consider winding up and taking a big swing. In a few years, you may be glad you did.

I signed up for Prosper, an online peer to peer lending network, in late 2006. Since then, I have invested $350 in loans in an experiment of sorts. I have been mildly successful so far and am deciding whether or not to invest more.

For those of you unfamiliar with Prosper, its a way for people to receive loans not from a traditional bank, but from a variety of individual investors like myself. Loans are “bid” on in much the same way as eBay auctions. When I like a particular loan listing, I’ll set a minimum interest rate I’m willing to accept and a dollar amount I’m willing to loan.

In this way, many investors come together with small individual bids of money to fund large loan amounts.

Of the 8 loans I have funded, 1 has been paid back early, 1 has been repurchased, and 1 is currently late. All the others are current with no late payments so far. Here is a recap of my little adventure.

1 Repurchased

This one was a mistake. Knowing what I know now, I would never have helped to fund it. It was asking for the maximum amount. Very little information in the listing and a budget that was woefully lacking. The loan never made a single payment. After more than 4 months waiting on collections, I received notice that the loan was repurchased. This is Prosper’s policy when identity fraud is involved. I’m happy to get my money back but at the same time, there is an opportunity loss having my money tied up in a bad loan.

1 Paid Back in Full

This was one of my first loans. Honestly, I probably shouldn’t of funding this loan either. It worked out in the end which I am happy about. The reality of the situation is, since the loan was paid back early, it made me the least amount of money.

1 Currently Late

I have high hopes for this one even though it’s late. Back in August this loan missed one payment. From then on, payments have come in each and every month on time. Six payments have been on time since the initial slip. However, since the first missed payment was never made up, the loan shows up as perpetually late in my Prosper account.

I have high hopes for this loan. So long as the payments are consistent, which they have been, then this will actually be my most profitable loan in terms of interest paid.

Are Current and On Time

You can see my whole profile on any one of the Prosper stat sites. These loans were made from August of last year to as recent as this February.

So far my account has done well enough. I have yet to have a default and that is the name of the game in peer-to-peer lending. When you win, you win a little but when you lose, you lose big. It takes a number of good loans to counteract a single bad one.

Is Prosper a Good Investment?

Only time will tell. Many have already conjectured but few will commit to a prediction.

So far, I have not lost any money. Given the fact that the stock market is in distress, as it has been for the last several months, Prosper seems like a good investment hedge. The big trouble comes from the fact that your money is tied up for at least three years. The stock market has had few stretches of such consistent bad performance.

Ultimately, the liquidity and consistent long term growth of the stock market trumps anything Prosper has to offer. The stock market is flexible, and has the benefit of decades of historical data. Prosper has only a few short years under it’s belt so far.

But it is Fun!

I plan on contributing to my Prosper account in the future. The main reason is that it is fun. There is a certain voyeuristic glee that comes with rifling through credit information of people you don’t know.

There are more than a few sob stories out there and it make me feel better about my own situation. It sounds bad but it is the truth. I feel good knowing that I have not completely screwed up my own financial story. Prosper is a two way street and I’m glad I’m on the fiscally responsible side.

If you read enough personal finance blogs then you know for a fact that trying to time the stock market is a fools errand. Anyone who says that they have a proven system to track the peaks and the troughs of the market is a liar. Simple as can be.

I’m here to tell you that it’s really a half truth. Stay with me here and I’ll explain.

If you are trying to time to market you are doing one of two things, or both if you think yourself good enough. You can manage to pick bottoms or pick tops or both.

Lets look back at the Dow Jones Industrial Average from 1929 to 2007. This period includes the Great Depression by the way, which started in the fall of 1929. This type of research has been done a few times by various bloggers and writers and it is easily duplicated with Yahoo! finance and your spreadsheet program of choice.

Of the 78 years represented, 54 of those years or just under 70% were positive years. Now if we look at five year periods within the same range we find that 78% made money. Extend the term to 10 year periods and you would have made money 86.9% of the time. When you get to 15 year periods there is not a single one that loses money.

The larger the range of dates, the better the results.

That said, the important thing to take away is that every day is a good day to buy stocks. If you own the entire market (index mutual funds) and have a long term horizon then you cannot lose. Today and everyday is a bottom when you look at least 15 years into the future.

When the market is down, like it is now, the situation gets sweeter. Right now, the Dow is off over 12% from highs set last October. The market will be higher than it was five months ago. It’s guaranteed if you have a time horizon 15 years or longer. The entire downswing that has occurred in the last five months is essentially extra profits!

Forget about picking tops. You don’t need to when you can pick a bottom each and every trading day of the year.

Keep your time horizon long term. Own the whole market with good low cost index funds. The odds are stacked in your favor so make the most of it.  Today is the day to take advantage of this opportunity the market is giving us.

Links>>

• The Digerati Life offers some long term thinking to help you through this recession market opportunity.
• Five Cent Nickel gives us some great quotes on the very topic of market timing.
• Look to the Motely Fool for some solid advice on picking some stocks out of the bargain bin.

For those of us watching the stock market over the last several months, it has been a wild roller coaster ride. Financial and retail stocks have been battered. The S&P and the NASDAQ are both still off over 15% each from highs set in October of last year. Commodities such as gold, oil, and food have skyrocketed. Inflation fears have been rampant.

Wall Street analysts widely predicted that the Federal Reserve would drop their key interest rate a full 1% in order to stave off a financial meltdown at their meeting this past Tuesday.

But an interesting thing happened on Tuesday. When the Federal Reserve met, they decided 0.75% was enough.

For those of you keeping track at home, the last time the Federal Reserve failed to meet Wall Street expectations, there was hell to pay. On January 30th, when the investors and bankers expected a 0.75% cut and received only 0.50%, Wall Street threw a fit, with the Dow actually ending the session lower by almost 40 points after having been up over 200 points prior to the announcement.

But that is not what happened on Tuesday. The markets stuttered for a moment, as if digesting the information it had received, and then continued its march upward.

Another important note is that there was a single dissenting vote arguing for less aggressive action in the January meeting, while there were two at this most recent one. That does not bode well for the probability and depth of rate cuts in the near future.

Today, commodities prices are moderating. Oil is back under $100 a barrel and gold lost over $100 an ounce this week alone. The dollar is seeing renewed strength as well.

Is the bottom in on this market downturn or is it simply a calm before the real storm? No one can know for sure. But I’m willing to bet that this is a great time to buy into a good index fund. A year from now, I’m sure I will be happy I did. If the markets do turn south substantially again, it’s just another opportunity to buy at a bigger bargain. Living below my means today will mean more money to invest when there are bargains to be had.

Don’t let fear chase you out of this market. Keep your time horizon in mind and invest for the long haul.

Links>>

• The Motely Fool reminds us that market downturns are to be expected. For the wise and prepared, there are profits to be made.
• How Not to Ruin Your Life - The last sentence says it all, “The good times will come back when you least expect them.”
• The Simple Dollar - Trent is getting his investment plan off the ground at a great time. Even index funds can be on sale.