I decided to take the time to go back and look up the details on our 10-1 ARM. Turns out I was wrong about a few key points, like how much the interest rate could adjust initially and each year thereafter.

For my future reference in plugging into loan calculators:
inital loan amount: $414,000
initial rate: 5.125%
initial payment: $2254.18
term: 360 months
first payment due: 10/1/03
first rate change: 10/1/13
maturity: 9/1/33
index: one-year treasury
margin: 2.75% added to index
adjustment period: 1 year
max rate at first change: 10.125%
min rate at first change: index + 2.75
max change thereafter: 2%
max rate cap: 10.125%

So it's extremely imporatant that I watch the interest rates as we get close to 2013 -- I had no idea it could jump to 10.125 at the first adjustment, and I really thought the max change was 1% per year, not 2%. Still, until we make a decision about whether to stay in this house or move to a better school district, I don't think we should refinance.

My neighbor is a real estate agent, and a few days ago he emailed a bunch of his friends and clients to say that interest rates had just taken the biggest single-day drop he'd ever seen, and he thought it possible that conforming loans (< $418k) might briefly go below 5%.

It sounded interesting, so I contacted the mortgage broker he recommended. She said that currently a 30-year fixed is 5.375, with closing costs of $2k-$3k. She asked me at what rate we would be interested in refinancing.

We are 5.5 years into an ARM loan that is fixed at 5.125 for 10 years, and then can only adjust 1% max per year. My first instinct was to go ahead and lock in at 5.375. Then I decided to play around with some mortgage calculators:

Payment calculator:
http://www.hughchou.org/calc/missing.cgi

Loan comparison:
http://www.hughchou.org/calc/loancomp.cgi

It turns out that at a fixed rate of 5.375, we'd pay an extra $5,500 over the next 4.5 years (plus $3k for closing costs), and then it would take another 3 years before we'd be better off than leaving the $3k in a savings account earning 3%. (I assumed the adjustable rate stayed at 6.125). So it doesn't seem worth doing right now.

Of course, the story might be different if interest rates spike sharply 5 years from now, so that we ended up paying 6.125, then 7.125, then 8.125, etc.

I haven't played with this ARM calculator much yet, because I need to look up some of the details like which index we're using:

Advance ARM calculator:
http://mortgage-x.com/calculators/pay_option_arm.asp

The worst I could do with the calculator was raise the index by .5 per month. Here's how the payments might go up in that case:
Jun 2012: $2,254.18 (5.125%)
Jun 2013: $2,412.80 (5.946%)
Jun 2014: $2,605.85 (6.946%)
Jun 2015: $2,798.56 (7.946%)
Jun 2016: $2,990.05 (8.946%)
Jun 2017: $3,179.47 (9.946%)
Jun 2018: $3,212.48 (10.125%)

The worst case in 2018 looks scary, but I feel pretty comfortable sticking with the current loan through 2014. There's a chance we might decided to move to a better school district between now and then.

If a fixed-rate loan went down to 4.75, on the other hand, we'd break even after 2 years, and it would be worth it to refinance.

Here's another ARM vs fixed calculator:
http://www.dinkytown.net/java/MortgageArmvsFixed.html

I took advantage of Morningstar's open house to try out the portfolio tools and x-ray. It will take me just as long to manually enter it in instant-x ray (which is free) each time so I'm not going to pay $160/yr for the premium membership.

Here's our current allocation according to x-ray:
U.S. Stock: 34%
Foreign stock: 46%
Bonds: 9%
Cash: 10%
Other: 1%


Here's the target I came up with:
stock: 75%
bond: 10%
cash: 5%
real estate: 5%
commodity: 5%

So I'm not too far off. I've decided I'm only going to rebalance my portfolio if it strays more than 10% from my target, and not at all when the market is going crazy like right now. Instead of selling stock to invest in REIT and commodity, I'm going to direct new investments in that direction. I have $9k in cash in the investment accounts right now (which is only about 2% of the portfolio) -- so I'll start shopping around for a REIT. The rest of the cash is from mutual fund managers deciding to hold cash. I figure I'm paying for them to use their judgement on that, so I won't argue with them.

The style allocation for the stock matched very closely with the Wileshire 5000.
value blend growth
large-cap 26.5 27 23
mid-cap 5 4 9.5
small-cap 1.5 1.5 2

The international stock has a large-ish bet on Asia:
US & Canada: 45%
Europe: 26%
Japan: 3%
Latin America: 5%
Asia & Australia: 16%
Other: 5%

My average mutual fund expense ratio is 0.69%, which I was pleased to see.

Starting to think about my goals for 2009:
[ ] Update will and trust.
[ ] Save 20% of our income -- 15% to retirement, 5% to investing
[ ] Fully fund 401(k): $16,500
[ ] Traditional IRA contribution: TBD
[ ] SEP-IRA contribution: TBD.
[ ] 10% of DH's income to ESPP, to be added to his investment account
[ ] Invest $5-$10k in a REIT fund.
[ ] Move TBD into 529 plan.
[ ] Review current portfolio and write down why we own each fund.
[ ] Meet TSG (target savings goal) of TBD
[ ] Investment return >= TSG
[ ] Have annual review with stockbroker. Follow up on recommendations.

I like the way Merch was very specific and quarterly about his goals, and would like to convert my list to his format.

Notes:
Will and trust: DH doesn't have a will, my will still names the wrong person as guardian, my trust (which I set up instead of doing a pre-nup) needs to be converted into a joint or AB trust, and our house needs to be moved into the trust.

SEP-IRA: To take advantage of the tax break, I currently sell shares in my taxable account and contribute to the SEP-IRA. It's really just moving existing money around rather than investing new money.

ESPP: Buying stock through the employee stock purchase plan is a guaranteed 15% return on the money -- you get the stock for 15% less than the market price on the purchase date. In some ways the ESPP is an extra emergency fund for us because if DH were to get laid off we get the current balance back immediately. DH usually sells the stock immediately. In 2008 we used the money for some big one-time purchases. My goal for 2009 is that this year the cash will go into the stock-trading account that he is free to invest as he pleases. (This account is our solution to our big disagreements about investing philosophy and strategy.)

529 plan: My father set up a 529 for my son when he was born. The intial investment was $20,000, and he has added $1,000 every year on his birthday. (Thanks, Dad!!!) I just need to figure out how much I should add so that it will fully fund my son's education.

When I read a good financial book, I like to take notes for my future reference and for the benefit of others here who might be inspired to go read it. You can see my past entries by clicking on the Booknotes catagory.

I actually read The Morningstar Guide to Mutual Funds several months ago, and just came across my notes -- so the details may be a little rusty. It was well-written, but I find I have a mental block when it comes to reading about investing (very odd considering I'm a bookworm who averages about a book a week.) It took me several libary renewals to get through this one.

This book is the first one I've read that really focuses on the process of how to choose a particular fund, as opposed to generalities of what mutual funds are, and for that I highly recommend it. It explains how to use the information available on Morningstar's website to choose funds.

Questions to ask yourself to check whether you thorougly understand a fund:
* What does the fund own (style, catagory sector)
* How has the fund performed? (3,5,10 year returns, calendar year return, average annualized return, after-tax return)
* How risky has the fund been? (standard deviation, top 10 concentration, Morningstar risk rating)
* Who runs the fund? (fund manager's history)
* What is the fund family like?
* What does the fund cost? (loads, expense ratio)

Know what a fund owns:
* Understand the style box -- this tells you if the fund invests in small, medium, or large companies, and also whether it buys stocks because they are "on sale" (value - a good price compared to history for that stock) or are expected to increase in price quickly (growth) or a combination (blend).
* Check the sector weightings. This tells you how much the fund is investing in different kinds of companies -- say banking, industrial, or high tech
* Check the number of holdings (more stocks = less risk)
* Check the turnover rate (lower is better). If the fund buys and sells a lot, trading fees will decrease the return.

Performance -- things to look at when comparing funds:
* Annualized return
* After-tax return
* Compare the fund's return to the right benchmark

* large cap: S&P 500
* small cap: Russell 5000
* foreign: MSCI EAFE
* taxable bond: Lehman Brothers Aggregate Bond

* Also compare the fund's return to the Morningstar index for corresponding style box
* Look at the long-term history -- the 3, 5, and 10 year returns
* Note how long the manager has been with the fund -- good historical results may have come from a previous manager
* Look at the calendary year returns -- this will tell you if one exceptionally good year is making the other long term results look better than is warranted.

Analyze the Fund's Risk:
* Add up the % invested in the top ten holdings -- how concentrated is the fund in these stocks?
* Style risk: Large-value is the least risky, small-growth has the most risk
* Past volatility: look at the worst calendar year. If it happened again, would you be willing to ride it out or would you feel compelled to sell?
* Standard deviation: this tells how much the fund has varied from the 3 year average. 68% of the time, your return will be within 1 standard deviation. Lower is better (means the fund is more consistent). Compare a fund's standard deviation to the standard deviation of the index.
* Morningstar's risk rating:

* low: least risky 10% of funds
* below-average: next 22.5%
* average: the middle 35% in terms of risk
* above-average: next 22.5%
* high: most risky 10% of funds

Evaluating the Fund Manager
* Look for 10 years experience as an analyst or portfolio manager, with at least 5 of these years as a portfolio manager
* Seek ones who spent their early years at a high-quality firm like Fidelity or American Funds
* Management changes -- consider selling if the management changes and the fund is from a small family has just a handful of fund, or if the fund is the only good one in that family, or if the catagory is small or emerging markets

Analyze Costs
* Growth, small-cap, and international funds will have higher expense ratios because they require the fund to do more research.
* Look for funds charging < 1.25%
* Compare the fund's expense ratio to the following averages:

* large-value: 1.41
* large-blend: 1.24
* large-growth: 1.5
* mid-value: 1.43
* mid-blend: 1.40
* mid-growth: 1.60
* small-value: 1.51
* small-blend: 1.53
* small-growth: 1.64
* Foreign (Europe, Japan, and World): 1.75
* Foreign (emerging markets): 2.19
* Sector funds: 1.72

Portfolio Mix
* Main asset classes are stock, bond, and cash. Some consider foreign, emerging markets, and REITs as separate classes.
* Diversity among the main classes is the most important.
* Diversity among the sub classes (style box, foreign) is useful but not as crucial.

Where to invest money for your short-term goals (plan to use the money in 1-5 years)
* Money-market
* Ultra-short bond funds (bond maturities < 6 months)

Where to invest money for your medium-term goals (plan to use the money in 5-10 years)
* 25% in short-term bond or cash
* 75% in stock funds -- either large-blend or balanced funds
* Shift the money into bonds as you get closer to the goal

Where to invest for long term goals
* I seem to be missing notes for this

Structuring your Portfolio
* Your foundation should be made of a core of funds, comprising 50-80% of your assets. Recommend large-cap domestic fund for the foundation
* Small cap should be < 20% of your portfolio
* Consider having some foreign funds in developed markets (ie Europe and Japan)
* Risk diminishes significantly by owning at least 3 funds
* Above 7-10 funds, risk doesn't diminish
* Watch out for overlap if you own multiple large-cap funds
* Four-corners strategy: invest in large-value, large-growth, small-value, and small-growth
* Check total exposure to each catagory sector -- no more than 30% in any one sector

Write down why you bought each investment.

Understanding the investment strategy of your fund:
Value Styles:

* relative-value: choose stocks that are cheap compared to benchmark such as historical price ratios, industry, or overall market. American Funds Washington Mutual is recommended for this strategy
* absolute-value: figure out what a company is worth, and buy when the stock price is less than that amount. Manager studies the company's assets, balance sheet, and growth patterns. Be prepared to wait out long dry spells.

Growth Styles:
[indent]* earnings driven or "momentum": focus on identifying accelerating earnings. This style has a price risk -- the price of a stock may plunge on bad news. These funds tend to have significant short-term drops.
* revenue-driven: buy stocks that have strong revenues
* GARP (growth at a reasonable price): strike a balance between strong earnings and good value. Fidelity Magellan is a recommended example

I think there may be one or two chapters at the end that I didn't cover...

I have mentioned before that my dad used to be a stockbroker with a full-service brokerage, and now works for a mutual fund company. You'd think I would've gotten a great education in investing from him, but I find I'm having to go out and read books to educate myself like everone else.

In the past when I've asked him to teach me about investing, I'd get a 5 minute lesson that involved comparing this year's year-to-date (or was it 1-year?)return to the 10 year average for that fund. Once he sent me a book by Jane Bryant Quinn that defined bonds and mutual funds but didn't explain how to pick a particular fund.

Recently I asked him about asset allocation and he said he doesn't believe in rebalancing -- it was just a way for authors to sell books and advisors to look like they're doing something.

Dad doesn't believe in index funds -- he once told me that their popularity had driven up the price too much. And of course he believes that you're getting the value of research by buying loaded mutual funds.

I once asked him at what point would I have saved enough for retirement and could enjoy the present a little more. "Save every penny you can," was his answer.

To be fair, Dad always did tell me which funds to pick in my 401k, and will periodically tell me that a particular fund at his company is "on sale" compared to its historical price. He explained the basic concept of a mutual fund and dollar cost averaging when I was in high school.

Despite all this, Dad did pass along some core bits of advice that have made a big difference in getting where I am today:
* live below your means
* save as much as you can
* start your 401k the day you are eligible
* max out your 401k
* long-term owners do better than long-term loaners (ie stocks outperform bonds and bank accounts in the long run)
* don't put all your eggs in one basket
* start investing in your 20's
* send $50 or $100 to a mutual fund every month(unfortunately I didn't keep following this one)
* mutual funds (at least the ones in his company) will on average go up 3 out of 4 years, and lose money 1 out of 4 years.
* don't buy the most expensive house on the block

From the short quizzes in the Perfect Portfolio book, I was rated to have a moderate risk tolerance (3 on a scale of 1-5), and a moderately aggressive risk profile (2 on a scale of 1-5). I think the risk tolerance quizzes actually tend to underestimate my true tolerance -- I didn't bat an eye when my portfolio dropped $200k in the recent downturn.

So I've decided that a growth allocation is my goal. Here's the starting point that the book recommends:
Goal: Growth
stock: 60%
bond: 20%
cash: 10%
real estate: 5%
commodity: 5%

Given my age, I think that's far too much in bonds and cash. It was a hard sell to convince me that bonds are necessary at all, but The Intelligent Asset Allocator made a really good case for holding 10% in bonds. One thing that I'm never sure about is whether to count our checking, savings, and emergency fund in the cash portion or not. I plan to exclude it just to make the calculations easier (so I can just put the funds in x-ray and ignore the other accounts.)

Here's what I think I'll aim for:
My target:
stock: 75%
bond: 10%
cash: 5%
real estate: 5%
commodity: 5%

I've been interested in adding a REIT at some point, and based on the book's advice I think I'll do it within my SEP-IRA.

The book had very little advice about how to allocate the stocks within the catagories (small, mid, large cap; value, growth, blend), so I still need to make some decisions in that area. I think it's possible we may be entering a decade with little growth, so I will lean toward mutual funds that generate dividends.

I'll come back and edit this post later with my actual current allocation once I run the numbers through x-ray.

When I read a good book on investing, I sometimes like to take notes and record them here on my blog -- both for my future reference and for others here who might be interested.

Today's book is The Standard & Poor's Guide to the Perfect Portfolio: 5 Steps to Allocate Your Assets and Ensure a Lifetime of Wealth by Michael Kaye. It focuses mainly on how to decide upon the right asset allocation for you. You need to understand the basics about stocks, mutual funds, and bonds before reading this book.

The three main asset classes are equities (ie stocks and mutual funds), bonds, and cash (ie bank account, money market, CD, etc.). Real estate and commodities can also be considered asset classes.
------------
Suggested Asset allocations -- adjust these to suit your own risk tolerance and other factors discussed in the book(age, marital status, investing experience, dependents, and affluence).

Goal: Capital Preservation
stock: 0%
bond: 25%
cash: 75%
real estate: 0%
commodity: 0%

Goal: Income
stock: 25%
bond: 45%
cash: 20%
real estate: 10%
commodity: 0%

Goal: Growth & Income:
stock: 45%
bond: 30%
cash: 20%
real estate: 5%
commodity: 0%

Goal: Growth
stock: 60%
bond: 20%
cash: 10%
real estate: 5%
commodity: 5%

Goal: Aggressive Growth
stock: 85%
bond: 0%
cash: 0%
real estate: 5%
commodity: 10%
------------
Universal Rules for your portfolio
* No more than 75% of your portfolio in any one asset class.
* At least 5% in cash instruments
* At least 5% in international equities
* Have exposure to at least three asset classes.
* No more than 10% in any one stock
* At least 25% in stocks
* At least 10% in bonds
* Consider rebalancing if an asset class moves at least 5% from your target, but do not rebalance more than once a year.
----------
For the best tax treatment here are the best places to hold different kinds of investments:
Taxable Account:
* Index mutual funds
* Index ETF
* Municipal bonds
* Individual stocks (held > 1 yr)
* Tax-managed mutual funds
* International funds
* Cash instruments

Tax deferred and tax free accounts:
* Actively managed mutual funds
* REITs
* TIPS
* High-yield junk bonds
* Stocks held < 1 yr
* Corporate bonds
-------------
Impact of the Economy
Historically, different strategies have worked best in the following economic conditions:

Low Interest Rates
* stocks & bonds perform better than real estate and commodities
* mory risky stocks and bonds are the best performers

High Interest Rates (nominal > 8%)
* conservative investments perform best
* equity: staples, pharmaceuticals
* bonds: short-term
* cash: money markets

Rising Interest Rates
* increase short-term bond & money market
* equity: staples, pharmaceuticals

Falling Interest Rates
* stocks & bonds
* equity: banking, home building
* long-term bonds
* CD's

High Inflation
* stocks, bonds, and cash all do poorly -- but of these stocks fare best
* real estate and commodies do well
* international equities
* TIPS
* money market best for cash

Low Inflation
* stocks, bonds, cash do better than real estate and commodity
* more aggresive stocks do well -- technology, consumer discretionary
* longer term bonds

Growing Economy
* more aggressive investments

Recession
* staples, pharmaceuticals, utilities
* lower maturity, high quality bonds
* real estate does poorly

-------------
Compare your investments against benchmarks:
* equity -- S&P 500
* small cap equity -- S&P 600 Small Cap Index
* bonds -- Lehman Aggregate
* cash -- Citigroup 3 month T-bill index
* commodities -- S&P-Goldman Sachs Commodities Index

--------------
Other notes:
In taxable accounts, don't rebalance by selling -- instead redirect new money to a different asset class.

small-cap mutual funds tend to generate larger tax bills than large-caps due to companies growing out of the small-cap classification and the stocks being sold.

REITs are one way to hold real estate. Two main kinds:
* equity REIT owns rental properties
* mortgage REIT owns mortgages

----------
I fall in the "Middle Career" phase of life. Recommendations:
* life insurance important
* fund retirement
* fund 529
* have will & guardian in place
* 6 months expenses for emergency fund
* tax-advantaged -- slightly more conservative than early career
* taxable accounts -- slightly more aggressive than early caeer
* focus on investments with low expenses, low taxes
------------

Nearly 4 years ago I was recruited to a job that exactly matched my career ambitions -- team lead/manager of a small group of software engineers. One month later I got pregnant. It was a happy surprise -- we'd be dealing with infertility for 3 years and just didn't know how or when we would become parents. For many months the question on my mind was, "Should I give up this great career opportunity to fully enjoy my baby?"

3 years ago, having a blast being a SAHM to my little munchkin, my question was, "How long can I stay out?"

1.5 years ago, feeling a little restless and in need of some intellectual activity, the question became, "Will I be able to get back in when I want to?"

And now while working in an ideal situation -- 20-25 hr/wk from home -- the question changes to, "Where is my career going?"

The conflict I feel comes down to time vs type of work. My preference is to work 20-25 hr/wk now, perhaps increasing to 30-35 hr/wk when my son starts kindergarten. The president of the contracting firm I am with has been amazing -- in addition to 4 full-time engineers, he's taken on 3 women with small children who want to work part-time as well as a part-time guy who is moonlighting, and has been very willing to tailor the assignments to the number of hours we want to work. He is building the firm, and as long as he continues to bring in projects there will probably be work for me.

The work itself is ok, but not exactly what I dream of doing. It's writing software -- designing, coding, testing -lots of software engineers are perfectly happy doing just that. Clients bring us in when there is small project they don't have enough staff to handle on their own, or if they need some help bringing up Linux on new hardware. So far it's been mostly telecommunications equipment, some military applications, and some medical equipment. I'm learning a lot of Linux, which is great for the resume. If I'm doing implementation, my dream would be working on a project that has special meaning -- for instance creating communication assistance devices for autistic kids.

In my heart I would prefer to get away from programming. I'd love to be either a systems engineer who designs the architecture for the whole product, or to go back into team/project management and organize the efforts of 10-12 people to make the product come together. The road to those jobs is to rejoin the corporate world and work 50-60 hour weeks.

At some point, perhaps when my son starts kindergarten, I plan to put my resume out to some headhunters and advertise myself as looking for a job-share. Surely there is another woman out there facing the same delima that I am...

It's no surprise that all of our investment accounts have been hit hard by the recent stock market plunge. This morning I decided to bite the bullet and see how bad the fallout was. It turns out I'm no longer a millionaire -- net worth is down to $840k. All things considered, I can't complain -- it was just fun to call myself a millionaire while it lasted. I am confident the stock market will recover over the next few years and we will be in good shape for retirement 20 years from now. I guess my new goal can be to reach $1M net worth again by the age of 40.