DH invests 12% of his salary into the company employee stock purchase plan (ESPP). Every six months, the plan purchases shares. My understanding is that they look at the market prices on the first and last day of the plan period, and then take an additional 15% off the lesser price.

The latest period closed on 7/31, and was one of the best periods we've seen. The ESPP purchase price was $29.99, and the current market price is $46.97. This period, DH put in $7827, and if he sells now will realize a gain of $4432. 56%return for a six month investment!

Of course this isn't typical, but in general we can count on a 15% return, although there is always the risk with stocks that a very sharp downturn could turn it into a loss in the few days between purchase and when the shares reach our account.

The one wrinkle is taxes. We could hold it for two years, and then only have to pay long-term capital gains tax. Since it's a high-tech stock, this is kind of a risky move. If we sell it within a year, we'll pay income tax on the 15% discount, and short-term captial gains on the rest.

It does make it a little more complicated when we go down to one income, since I need that $1300/mo to make our budget work. If we sell immediately, I'll set aside $7800 and treat it for budget purposes like $1300/mo income. If we don't sell immediately, I'll "borrow" the money from the emergency fund and repay it when we sell.

DH and I need to talk about what do do with the $4400 gain. After setting aside some for taxes, the rest could either go into his stock-trading account, or into our vacation fund. He wants to take a big trip (possibly a Mediterranean cruise) when we turn 40 next year, but I don't currently have funds allocated toward that, nor room in the budget to save the amount we'd need.

Other good news -- with the stock market recovery, our net worth just topped 1 million again.

My brother was here for a visit this week, and we had an interesting conversation about mutual funds. My dad used to be a stock broker, and now works for a mutual fund company that sells actively managed funds that carry a load. Of course he believes that you're getting the value of research that you're paying for with the load and management fees. My brother got both an engineering degree and an MBA. He now works in marketing, but because of his degree has more background in finance than I do.

Anyway, when my dad left his former company, there was a big going-away dinner that my brother attended. He said that it hit him that all these guys at the dinner, who were full-service brokers, are really just salesmen. They don't have a finance degree or tons of training in portfolio analysis. The advice they give is basically fed to them by the parent company.

My brother has had more interest than me in actively investing. He got burned on penny stocks early on, then a couple of years ago he looked at his individual stock-picking efforts and decided he was better off in mutual funds. After the recent market crash, my brother said he took a look at the actively managed funds he owned that were from the company my dad works for. In his opinion, they fared just as badly as the rest of the market, and did not see a large upside during the boom years. He has since unloaded most of his actively managed fund and moved the money to low-cost index funds.

While I question his judgement in getting out at the bottom, and I have no idea how big his portfolio is or which funds he used to own, it was interesting to know he had changed his strategy to one I hear many people here using.

My dad, a former stockbroker who now works for a mutual fund company, called me yesterday afternoon. He said the DOW was down to 7500 and he wanted to add $1,000 to my son's 529 account. He asked me to go ahead and make the purchase and he would send me a check. Thanks, Dad!

It's funny that he's always preached dollar cost averaging, but now he calls me up when the DOW has a big dip and tells me to "buy low". I can't figure him out.

I guess procrastination is once again in my favor. When the stock market had its big fall in October, to 8500, I had $14k sitting in cash within my various IRAs. I invested $10k, and thought I'd wait a month or so with the remainder to see if we got another dip. Then I promptly forgot about it. So now I've got $4k still sitting there and I think I'll invest. Who knows, with the bad economy the DOW could go even lower but I'm not going to wait.

It pains me to realize I still don't have a plan in place to know WHICH fund I want to buy. Guess I'll call my dad again and see which one he recommends.

If only we had our taxes done. I set aside 40% of my consulting income with evey paycheck for taxes. I ran through a quick online calculator and it looks like our effective federal tax rate is going to be about 20%, and we'll only owe a couple thousand this year. So I may have as much as $10k available to put in our IRAs. (We don't qualify for ROTH.) It would've been nice to invest it now, while the DOW is low, but I guess if the DOW goes lower it will be nice to have money to invest then.

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.

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
------------

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.

Jim_Ohio had a very interesting post about whether high-income earners (above the ROTH limit) should direct money toward a taxable account or a non-deductible IRA. In the comments he asked me a series of questions, so I thought I'd blog a bit about our situation, and maybe if I'm lucky Jim will stop by and give me his take.

Currently DH makes about $130k. I have the choice to work or not -- currently I'm contracting 20 hr/wk and expect to gross about $60k. We'll probably have about $35k in deductions, plus $10k in exemptions. Last year we had $9k in dividends and $23k in capital gains.

Our tax situation this year will be very different from last year, since I only worked for 5 months and didn't start with as many hours. Last year, our AGI was $169k, my business income was $23k, our taxable income was $124k. I'm guessing our marginal tax bracket was 25%, but our effective tax rate was 10.5% federal and 9% state.

1) How much are you investing each year? In the taxable account?
$15,500 to DH's 401k
$13k to DH's ESPP
$4k to DH's traditional IRA
$4k to my traditional IRA
No new money to my taxable account.

The IRA contributions will likely come from selling existing taxable mutual funds rather than new income.

2) how many years to retirement? Is early retirement a desire?
We are almost 38 now, so theoretically 27 years. I'd like the option of retiring at 60, so 22 years.

3) is mortgage paid off? Is their any reason to NOT pay the mortgage off?
The mortgage is a 10-1 ARM that is fixed at 5.125% until 2012. I think it's more advantageous for us to have the mortgage deduction and invest in the stock market instead of paying it off. Also, there is a fair chance that we will want to move to a better school district in 3-5 years time.

4) What choices are available for health care (HSA?), child care (child care account available?) and other less used deductions.
DH has excellent medical coverage, completely employer-funded, so no HSA.
We're currently taking advantage of the FSA health deduction, although I've been burned with it in the past. The dependent care deduction is tricky -- currently the part-time nanny prefers to be on a cash basis. To use the deduction we'd have to set up tax withholding, etc.

Here's our current strategy:

I wait until TurboTax tells me whether we qualify to contribute to a ROTH or not. We qualified for a partial contribution the year that I was not working, or I could take a deduction on a spousal IRA.

When we don't qualify for ROTH, we contribute $4k each to non-deductible IRA.

Now that I have business income, I sell stock in my taxable account to make the maximum contribution to the SEP-IRA to reduce the taxable business income.

One wrinkle -- it's quite possible that we will be in a higher tax bracket in retirement than we are now. I've been playing with the retirement calculators at http://www.hughchou.org/calc/index.html#RET. Our current retirent accounts total $339k, and current taxable accounts total $357k. I asked for $200k income and assumed 10% return. If we save all that for retirement, and don't contribute another dime, the calculator says we're "set for life". If I just look at the retirement balance, and assume we add $24k to it each year, and assume a 10% return, we're still good for a $200k (current dollar) income.

So what do you think, Jim? Am I better off to leave that $8k each year in the taxable account, or move it over to the IRA?

This has been on my "to do" list since paying estimated taxes in mid-June, and I finally had the time and inclination to sit down and make an attept at it. I'm still in the process of figuring out exactly what to look at in these quarterly reviews. As usual, I find that I end up spending the majority of the time creating a new spreadsheet and manually typing in details that I later decide aren't really what I should be looking at.

I've been slowly making my way through Morningstar Guide to Mutual Funds, and taking notes on each chapter. I find it to be far better than the "learning" information on the website, which seems to be generic handwaving.

So in an attempt to understand what I currently own, I created a spreadsheet wtih the following columns (picked from my notes from the book):

* fund
* symbol
* account
* style
* stars
* sectors
* % assets in top 10
* asset allocation
* benchmark
* trailing annualized return (3, 5, 10 year)
* benchmark return
* 3 yr standard deviation
* expense ratio

Then I looked up each fund I own and copied the info. Putting in the sectors and the returns took the bulk of the time -- what a lot of typing! Not sure this was worth the effort. I noticed a little bit of duplication -- two large-value, and two world large-value funds -- but the holding in the second fund in each case were fairly small.

The only conclusion I came to was that, yes, American Funds has low expense ratios.

Next I made another worksheet for the current hodlings:

* fund
* symbol
* account
* shares
* current value
* amount invested
* amount withdrawn

My basis info isn't available on my brokerage website, probably because the funds were originally purchased directly from American Funds rather than through the brokerage. I later transfered them to the brokerage so everything would be on one statement. I need to call my broker and see whether the basis info can be obtained and added, or if I need to go back through 15-20 years of statements to figure out the basis for each fund.


Finally I went to Morningstar and used instant x-ray to get an overview of the whole portfolio (including DH's funds). The asset allocation is currently:
Cash 9.47
US Stocks 35.93
Foreign Stocks 43.51
Bonds 10.57
Other: 0.53

Next time, I'd like to work out a way to streamline transferring the current holding numbers from the brokerage to the x-ray tool.

I'm considering eventually putting a 5-10% stake into REITs, but that's another learning curve in itself! My thinking is that real estate is an asset class that moves independently of the stock market, and the current bust may make the next few years a good time to invest.

The stock style is currently
size:value/blend/growth
large: 24/29/23
mid: 6/4/7
small: 2/2/3

Going forward I think I want to add more small- and mid-cap exposure.

The Stock Sector percentages were mostly close to the numbers for the S%P 500. Nothing struck me as terribly high, although I have no real opinions on which sectors should be 5%, 10%, or 15%.

World Regions:
US & Canada: 48.44%
Europe: 27.84%
Japan: 2.39%
Latin America: 2.82%
Asia & Australia: 14.45%
Other (Africa): 4.06%

Average Mutual Fund Expense Ratio: 0.68%

Stock Stats (ratio to S&P 500):
Price/Prospective Earnings: 13.27 (0.99)
Price/Book Ratio: 2.10 (0.91)
Return on Assets: 8.80 (1.03)
Return on Equity: 21.35 (1.00)
Projected EPS Growth - 5 yr% 13.00 (1.14)
Yield % 2.71 (1.25)
Avg Market Cap ($mil): 24,233 (0.49)

I'm not sure what to make of the Stock Stats section, but it seems to me to indicate that most stats are on par or a little better than the S&P 500.

Broken Arrow expressed some concern about my 44% international exposure:

Yikes... perhaps you have higher tolerance than I have, but I feel like the international is actually... too high!

Everybody is going international... and well, yes, that's understandable.... However, what exactly is international anyway? Is fund diversification really going to spread out the risk enough for us to simply invest in it and feel safe?

I currently use a full-service broker and the vast majority of my money is in American Funds. I was a bit concerned the first time I saw how high the international was, but my broker explained that with Amerian, most of the "international" companies are really big multi-nationals, which includes companies that were founded in the US, but register overseas. If you look at the breakdown by nation the majority is in US, Europe, or Japan. He felt that the international component was about right.

I wouldn't say that I'm a savvy investor. I've got a big portfolio because I stashed 10-15% in my 401k the first 12 years that I worked as a software engineer, and because I made a $150k profit on a townhouse I bought, and decided to invest it instead of rolling it into our second house. I've basically followed the advice of my broker, and the townhouse profit has almost doubled in 6 years time, so he's done pretty well by me so far.

I had a big wake-up call when I read The Complete Idiot's Guide to Getting Rich, and realized that I'm entering a growth phase where how I manage my investments is becoming more important than how much I contribute each year. For instance, last year my dividends and capital gains were about $30k, where maxing out 401k and ROTH would only be about $23k.

So I'm trying to get to the point where I actually understand what is going on rather than passively following the broker's advice. At the same time, I'm reluctant to change anything (and potentially screw it up) before I feel I have a deeper understanding.

My dad, who was an investment broker for many years, believes that American is one of the best at protecting your money -- losing less in the down years than the other families. I'm in no position to judge.

I'm happy to report another item checked off the TO DO list! DH has invested his IRA rollover money!

Between us, DH and I have worked for 9 different companies in the last 5 years -- that's a lot even considering the high-tech field we're in! I've been pretty good about making sure our 401k's were rolled over into IRA's but not so good about investing the money afterward. Part of the problem was that for a long time DH and I couldn't seem to talk about investing strategy without getting into an argument.

Finally I came to my senses and proposed to DH that he invest his IRA as he saw fit. With the stock market tanking the last few months it seemed a really good time to move money out of cash and into some mutual funds. Things got rolling when I proposed we sit down side by side one Saturday afternoon, separately researching mutual funds on our individual laptops.

I was mainly going through the exercise of using Morningstar to analyze and actually pick a fund on my own. (I think I detailed what a miserable failure that was in an earlier post.) DH, on the other hand, successfully managed to pick out 5 funds he wanted to invest in. He had about $75k to work with, and put about $15k into each.

He's gone a lot more aggressive and international than I would have -- Vanguard International Value, T. Rowe Price funds for Latin American, Southeast Asia, and Africa & Middle East, and Fidelity Southeast Asia. It's a lot of foreign exposure, but should be balanced out by the large amount of American large-cap and balanced funds that I hold in my accounts. Although my portfolio is 50% international, I've been told it's primarily made up of multi-national companies that are really American in nature.

We still have about $15k in my accounts that need investing. I'm considering waiting for the subprime mess to be straightened out, then buying a REIT that specializes in commercial property. I like the idea of having a stake in another asset class. The downside is that I don't know much about REIT's and so will need to get some education on them.

I also gave DH the green light to invest $10k in a stock he thought was a good buy. The purchase was made from his taxable stock account, which has been doubling as our emergency fund. He sold it a couple of weeks later and made a $1k profit. He also sold his employee stock-purchase shares for another $1k profit.

So all in all we're making good progress.

I finally puchased Quicken Home & Business, with the plan of using it to analyze my investments. I won't track budget and spending in it, for that I use YNAB. I was debating about spending the extra $20 to get Home & Business instead of Premier, then realized that if I use it to track invoices I can writeoff the cost of the software as a business expense.

Anyway, I've got all our brokerage accounts set up, and entered "placeholder" values for the basis information -- there's no way I'm going to go back and enter 25 years worth of transactions! (My dad started my first mutual fund when I was 12, and I've still got it today!) I was disappointed that I had to enter that manually -- probably some deficiency in what the brokerage provides to Quicken, as they do show my basis in my statements.

Quicken does show a pie chart for my current asset allocation, which is good. However, I'm thinking I would like to invest maybe 5-10% in REIT's after the lending crisis settles down, and I don't see a way to list a REIT as a separate asset class. (My thinking is that REIT's represent an asset class that may not have close correlation with stocks.)

I also noticed that although the stock purchased through my husband's ESPP was deposited into its own account at Etrade, I can't seem to access that account from Quicken. So there's $8k of stock that isn't showing up.

The other area where I'm disappointed is the performance analysis. The "Average Annual Return" list for my mutual funds appears to be my personal return since I downloaded everything in Feb -- and everything shows N/A* (*Placeholder entries used for missing transactions.) I can't seem to get it to look up and display the published 3,5, and 10 year stats for all the funds I own. I wanted to be able to pull all those and look at them in a single table.

I've tried to set up a portfolio view on Morningstar's site, and use x-ray on it, but I can't seem to save it and end up having to reenter everything every time. My hope was that Quicken would solve this for me.

So far I don't really see how Quicken is going to be of any help in monitoring my investments.

Thought this post of mine on the investing forum would be interesting to keep around in my blog. Sorry if you've been following the thread and this is a repeat.

I'm a mutual fund gal, buy and hold (to a fault), very long-term (>10 years) focused. (I say "to a fault" because when I first started working, I bought about $6k of AT&T stock through an ESPP, and held on to it while it divested into Lucent, Comcast, and a few other stocks. At one time my Lucent stock was worth over $40k, and I held it all the way up and all the way down and finally sold at a loss a few years later. If that's not buy and hold to a fault, I don't know what is! I concluded that until I'm willing to pay more attention, I should not own individual stocks!)


My DH feels I've been holding him back from investing in individual stocks. At times he has mentioned he wants to put $10k or $50k into a single stock, and by the time I've gotten over the shock of the dollar amount he says the buying opportunity has passed. The argument we have is entirely predictable -- he says $10k, I ask how about $2k, I ask if he's timing the market, he tells me how he lost money by holding a certain stock too long because I kept talking about buy and hold. He doesn't end up buying the stock (even though I would've been ok with investing a smaller amount) and we're both frustrated.

The answer, I think, is to have an account that is dedicated to stock trading, and to agree that he can invest it any way he wants. Would $20k be a reasonable starting amount for such an account? Our overall picture is $395k in retirement accounts, $375 in taxable mutual funds, $9k in ESPP stock, $17k in money market, and $20k in checking/savings. We're 37 years old. I estimate the emergency fund needs to be in the range of $13k to $26k, and we contribute 12% to 401k. We've agreed in principal to each manage our own retirement funds, although we're trying to consult each other before making any major moves.

This is so frustrating. I'm an engineer. I've always been good at math. For my degree, I had to take two semesters of calculus, differential equations, and a real bear of a class called Engineering Mathematics (Bessel polynomials, anyone?). I got A's in the first three and a B+ in the last one. So I am not math-phobic by any means.

But I just can't get my head around the process of analyzing the numbers associated with mutual funds. This is not math, folks, it's business, and I hate it. I sit there and look at total returns and expense ratio and loads and my attention just seems to slide off the screen.

DH and I sat down today to look at mutual funds. Both our IRA's have some cash that needs to be invested -- about $70k in his (from rollovers), and about $15k in mine. We've had a lot of difficulty in the past whenever we talk about investing, so it was real progress just to be sitting side by side, not really talking, but each looking at mutual funds on our separate laptops.

So I pull up the Etrade Mutual Fund Screener and start entering criteria. I decide to try to look for a no-load domestic mid-cap fund with an expense ratio under 1%. (Why do I choose this? Because a year ago my full-service broker mentioned that I don't really have much mid-cap in my portfolio, and that would be one area I could consider adding.) This narrows the field down to 25 funds. But how do I know that this selection will give me the best quality? Maybe it would be better to limit the search by capitalization instead? I see some companies I've heard of, like Fidelity, and other I haven't, like FPA.

I click on the Performace tab. Look at Fidelity Value (FDVLX), just to pick one. The manager's been there 12 years, which I like and the name isn't as specialized as something like Fidelity Select Chemicals. Etrade has tagged it "all-star", but Morningstar only gives it 3 stars.

Returns are:
1yr 3yr 5yr 10yr inception
-6.41% +8.80% +16.41% +9.51% +13.75%

So if I believe Bogle that funds generally "return to the mean", is this fund on its way up or down? Beats me. The 3yr is under 10%, the 5yr is over, and the 10yr is close. The negative 1yr return doesn't bother me -- stocks have been down lately, maybe it's bargain time?

Expense ratio is 0.70% for both gross and net. Some on the page are as low as 0.50%, others as high as 0.90%. Is this significant, or is anything under 1.00% good? Is 1.00% the magic number, or is it 1.50% or 2.00%? I don't know.

I click on the risk tab. 4 more columns of numbers. I can't remember the difference between the different risk measures, and whether higher or lower numbers are better. I don't feel like looking it up again. Even if I knew what the numbers meant, I don't know the range of numbers for a given parameter that would be acceptable to me.

I click on the link to look at the fund's page. Top 5 holdings are Owen's-Illinois, Xerox, Avon, Agilent, and Eastman Kodak. I know Agilent was spun off from HP, or was it Motorola, and Kodak isn't a player in the digital camera realm, but are they good companies to invest in? Who knows? I'm buying mutual funds because I don't want to analyze stocks!

Let's look at the chart comparing it to a benchmark. From 1998 to 2005 it essentially tracked "Mid-Cap Value" (I need to look up what that is again to confirm that it is a mid-cap benchmark as the name implies), and then in the last 3 years it's been maybe $2k higher. I vaguely try to remember whether it's Fidelity or Vanguard that is the king of index funds. The arguements I've heard (was it from sweeps?) for managed funds have swayed me toward them over index funds, although I couldn't for the life of me tell you what they were.

It's paralysis by analysis. I know enough to know that I don't have an intuitive feel for what I'm looking at. If I were to pick this fund, so far the real reason for my choice seems to be that I recognize the company (Fidelity), they chose a simple name (Value), the manager has been there 12 years, and the returns since inception are good. Is this rational?

By this time my eyes are glazing over, and I've only looked at one fund!

I think this is why so many people default to picking index funds or ones Etrade or Morningstar has tagged as "all-star". It's certainly why I've stuck with a full service broker so far. Maybe I could've gotten a better return picking my own no-load funds, but maybe my paralysis would've made me too conservative, who knows?

DH wants to use Etrade and pick his own funds in his retirement accounts. I'd like to understand enough to have an intelligent conversation with him about the funds he picks. And I'd like to be able to have an intelligent conversation with my full-service broker about the funds he recommends.

I'd like to feel confident enough to make a decision about how to invest my money.

Why do I use a full-service broker? It's a good question. My dad was a broker before he was promoted to the home office, so when I needed to do my first 401k rollover it just made sense to ask him to recommend someone. So at least I know I'm dealing with a firm and an individual I can trust. The first time I sold a house, I was originally going to sell it myself, but then balked when I realized how much paperwork was involved in CA. It was a good thing, too, because the realtor correctly priced and sold it for much more than I would have, more than making up for her commission. I think a good broker can help in the same way -- preventing you from making some costly mistakes. DH would probably prefer to see me move the account to Scottrade or someplace similar and manage it ourselves. But I find investing to be really dull, and I know I wouldn't spend enough time on it to do a good job of managing it myself. (I don't agree with DH's investing philosophy, so I'm not comfortable turning the money over to him to manage.) I'm currently trying to educate myself so that I'm an educated client rather than just blindly following what the broker says.

We met with the broker for about 2 hours. His take on the asset allocation was that 50% foreign was just fine. In fact, he recommended that the most aggressive portion of the portfolio should be in funds that have a significant foreign component.

Based on risk tolerance, I'm considered to have a focus on "growth". (The other styles are "income", "aggressive income", "balanced growth & income", and "aggressive growth").

Here's how my retirement portfolio compares to the brokerage recommendation:
cash 4% (rec 0-10%)
income 0% (rec 10-20%)
growth & income 64% (rec 40-50%)
growth 28% (rec 20-30%)
aggressive growth 4% (rec 5-15%)

Although in the past he has urged me to put 10% in a bond fund (ie income), I've always resisted, something I'm reconsidering as I read The Intelligent Asset Allocator. So his recommendation was for me to reduce the growth & income portion by about 20% and move part of it into aggressive growth and part into growth. Since it's in an IRA and the fund family allows changes between the funds without any charge, this is very easy and economic to do. Two of the growth & income funds have so much duplication that he recommended them as good candidates for the move. My "aggressive growth" fund is showing a big profit right now, and when I asked about selling it, he said he could support doing that to take the profit and then dollar cost averaging back in, because it is still a good fund to own.

Here's how my taxable portfolio compares:
cash 4% (rec 0-10%)
income 0% (rec 10-20%)
growth & income 52% (rec 40-50%)
growth 33% (rec 20-30%)
aggressive growth 13% (rec 5-15%)

In the taxable account, we'd like to be closer to 40% growth & income, so he recommended which fund to sell. What he said to do to minimize taxes was to sell an amount equal to the original investment, but to leave the gain. So if you put in $25k and the fund is now worth $35k, you would sell $25k and leave the $10k gain in the fund. No taxes due this year because your sale is equal to your basis. Then if you later wish to sell the remaining $10k, do it when you have a loss that can offset it.

For my ROTH, we're going to sell the one stock that I still own. It's worth about $4k, and is showing a $1k profit. I just don't pay enough attention to own individual stocks.

I plugged in all our mutual fund and stock info into Morningstar's x-ray program to get an idea of what kind of asset allocation we currently have. In all I had to make 26 entries -- no wonder I'm having trouble getting this straight in my head! There are actually only 10 unique funds and 4 unique stocks because many funds are in both the taxable and the retirement accounts, but it's still a lot to get my head around.

Cash 12%
US stocks 41%
Foreign stocks 42%
Bonds 5%

The large amount in foreign stocks seems a little worrisome at first glance.

For "stock style diversification":
type value core growth
large..32....27....24.....(83%)
med.....4.....4.....5.....(13%)
small...1.....1.....2.....( 4%)

In other words, mostly large cap, some medium cap, a little bit of small cap, equally divided between strategy -- seems reasonable, although I don't really know enough to judge.

For "stock sector" the breakdown was
information 23%
service 39%
manufacturing 37%

Here's where I really have no idea whatsoever of which sectors are good to be in.

The "stock type" area wasn't useful as 49% was unclassified.

Unfortunately the book I started reading on asset allocation was due back at the library. They wouldn't just check it back out to me because I'd already renewed it once, and insisted on sending it back to its "home" library before routing it back to me again even though nobody else had placed a hold on it. So I'm still waiting to get it back.

We have a meeting with my full service broker later today to do an annual review. It will be interesting to see what he has to say.

Questions I want to ask:
* Why am I in each fund?
* Would you recommend moving any money and why?
* If there is a recession coming, should we move to a strategy that focuses on dividends rather than growth, and how would we accomplish this?
* Where should I put the $10k in cash in the IRA? Should I move it all at once or dollar-cost average it?
* I want to sell $4,000 of something taxable and put it in the ROTH -- which would you recommend?
* Is my son's 529 plan (a gift from my father) enough to cover a public university? How much more do we need to add as a lump sum to cover a private university?

In my last post I mentioned that the 400 point drop in the market yesterday didn't bother me and I wasn't planning any trades because of it. My husband, on the other hand, came home and said that the drop and Greenspan's prediction of a recession indicated we should watch the volitility of the market and be ready to move some or all of our holdings into cash, and to sit on the sidelines for some time (how long was unclear to me). We got into a minor argument about investment philosophy -- the same one we had 5 years ago that shut down our communication on investing. It was never resolved and we've only contributed to our separate retirement accounts since then. This is a mistake I don't want to make a second time, so I asked him to promise me we'd talk more this weekend.

My investing philosophy to date has been buy and hold and hold and hold and hold...to a fault. I had some AT&T stock (from an employee stock purchase plan) that went way way up, split into many companies, and collectively went way way down before I cashed out at a loss. I should've paid more attention to it and cashed out years sooner. I also tend to let money just sit in my funds, not rebalancing them or making moves based on performance. To be honest I don't find investing all that interesting. I've realized that I do need to understand my investments better and be more proactive about them.

DH's investing philosophy...I guess I don't really understand it. We don't even agree on what the definitions of "market timing" and "long-term" mean. When he says we should hold off on investing because the market is high or move into cash because a recession is coming, that sounds like market-timing to me. He says it is not because he is not proposing moving in and out and in and out of the market on a monthly basis. I think "long-term" means a minimum of ten years. I'm not sure what he thinks is "long-term", but he has said he doesn't believe in holding things for ten years. DH does not believe in "buy-and-hold" -- he blames that philosophy for influencing him to hold on to a stock that he knew was on the way down, and ultimately resulting in a $20k loss. It's hard for me to judge DH's investing philosophy -- he hasn't been actively managing much money since we married. On the other hand, he pursuaded me to do some rebalancing in my IRA, and the funds he picked have been the best performers of the lot.

I don't feel like I understand what we have and why we have it. I want to understand it before making any moves. DH listens to the market news and wants to act quickly. And so every conversation we've had about investing turns into a minor argument.

I just started reading a book called The Intelligent Asset Allocator. I've seen it recommended by some people who seem to be the kind of prudent investor I want to become. DH says he doesn't know anything about asset allocation theory. I am hoping it helps us to find some common ground.

I really enjoy the SavingAdvice board and will keep posting here, but I'm also interested in finding another forum that has more people focused on the details and experience of investing rather than debt-reduction. EnoughWealth was kind enough to suggest

www.kiplinger.com -- it's got the right focus but it isn't as active or as personal as I was hoping for. Maybe I just need everyone here at SavingAdvice to reach the point where they're hanging out on the Investing & Banking forum!

So far I've found the following blogs where the author is focused on investing, yet is also blogging from a personal perspective:
EnoughWealth: http://enoughwealth.savingadvice.com/
My 1st Million at 33: http://www.1stmillionat33.com/

With over 150 blogs on SavingAdvice alone, I don't have time to check them all out, so if you see one you think I might like, let me know!

2006 was the first time I decided to adjust our withholding so that we would have more money coming in each month and not get such a big refund at tax time. It's kind of complicated for us because I have to take into account dividends, capital gains distributions on the mutual funds, capital gains/losses of any stock sale, and an unpredictable AMT recapture credit. So I was very keen to do our taxes this year and see how I did.

Looks like I blew it. We're going to owe about $1380 on federal and $840 on state. We won't have to dip into the emergency fund, but it does almost wipe out the funds from an envelope I call "Basic Savings" -- I guess you could consider it our baby emergency fund rather than the emergency fund we'd dip into if DH got laid off. It also means that now we really really have to live within the budget I set up in Mvelopes -- I'd hoped to have a few more months to fine-tune it.

When working on the W-4 I correctly anticipated about $6k in dividends, but I'm not sure about the $13k in capital gains distributions. And I completely forgot about $15k in profit from where our broker advised us to sell one mutual fund and redistribute the money to some other funds. I can't remember why we did this, maybe it wasn't performing that well. I've decided I need to keep a notebook where I write down the reason for each purchase or sale. I have about $600k spread across 11 different mutual funds (within the same fund family) and I really couldn't tell you why. Luckily I was conservative on the AMT recapture, predicting $850 when we got back $2500, and we had a capital loss carryover of $10k, or we would've ended up owing a lot more!

I don't trust TurboTax's W-4 page -- it told me to take something like 12 deductions in 2006! I can't remember if we did that for any lenght of time, but at the end of the year DH's paystub shows that we were taking 6 deductions and still ended up owing money. TurboTax is telling me to take 12 deductions for 2007 as well...something's not right. There's a withholding calculator on the IRS website that I trust a lot more:

http://www.irs.gov/individuals/article/0,,id=96196,00.html
and it has us at 5 deductions.

Lots of people open children's savings accounts to help teach their kids about saving, but how many teach their kids about investing from an early age?

When I was 13, my dad made a career change to become a stockbroker. After going through his training, he decided he wanted my brother and I to each have a mutual fund. My parents contributed the minimum amount to purchase American Mutual Fund for each of us ($250 -- still the minimum today!). In the early years, he encouraged us to put money we received as presents and for good grades into the fund. When I worked as a waitress in high school, I often saved part of my tips and wages and put it in the fund (not all of it, I was a teenager after all!) By the time I graduated from high school, the fund was worth $3,970. When I graduated from college, it was worth $7,494.

Here's a summary of my contributions from age 13 to 22:
1984 250
1985 150
1986 2,036 (I think 1,000 of this was transferred from my saving acct.)
1987 614
1988 0
1989 310 -- HS graduation
1990 150
1991 200
1992 0
1993 550 -- college graduation
total: 4,260

I briefly considered cashing out some of the shares after graduation to fund a roadtrip around the US, but my parents discouraged cashing it in. Luckily I had enough cash on hand from summer jobs to take the trip.

After I got my first real job, my dad often encouraged me to contribute $50 to the fund every month. There were a couple years I was pretty good about doing this, but mostly I just got busy and forgot. I wish I'd known about setting up automatic deductions from my checking acct back in 1993!

I'm missing some of my records, but I think I contributed around 300-600 every year from 1194-1998. I don't think I've added to this particular fund since 2001, when it was worth $27,115. Today it's worth $38,496.

In hindsight, I didn't learn much about choosing investments from this experience, but having the fund and being encouraged to contribute to it regularly went a long way in impressing the importance of saving and investing in my mind. Plus I have a big chunk of cash that I would not have had otherwise.

So I would urge all of you who have teenagers to scrounge up $250, and consider starting their investing education today.

Common Sense on Mutual Funds by John C. Bogle

This was a very good book on mutual funds, very thoroughly researched, lots of historical information. Gotta warn you, though, it's long and the analysis gets very dense, not for the math-phobic by any stretch.

Here are the points I remember from the book (I don't have it in front of me).

* Although some mutual funds beat the index in any given year, there's no way you can know in advance which ones they will be.

* Over a longer period of time, all funds tend to return to the average performance of their class -- funds that perform higher than average early on tend to do less well, funds that are lower than average tend to improve -- so that over a 10 or 25 year horizon they pretty much mirror the performance of the index. This is known as "reverting to the mean".

* Once you take all fees into account, you're better off just buying a low-cost index fund in the first place.

On this last point, although supported by huge amounts of convincing analysis in the text, it should be noted that the author is very famous for having invented the very first index mutual fund! This may explain why a lot of the getting-started type books like The Complete Idiot's Guide to Getting Rich recommend that you purchase a single no-load index fund -- I think the authors have all read Bogle!

When I asked my dad about index funds a few years ago, he said that because everyone was jumping on the index fund bandwagon, they were becoming overvalued. How ironic if all the advice out there to buy index funds was actually creating a bubble in the stocks that are members of the indexes!

I think I do believe there is value in having fund managers who do research on the companies they are investing in. Warren Buffet made his wealth that way.

After all those cross-posts, I decided that my final entry today (and the one that shows up on the blog page) should get back to my main topic. I really do intend this blog to be primarily about building wealth and investing. There are already so many other blogs out there about budgeting and being a SAHM...and I want to add something different to the mix! On the other hand I do love to hear myself talk.

If you are primarily interested in building wealth, scroll down and read my entry about The Complete Idiot's Guide to Getting Rich. It needs a few edits but the basic info is there. (I went ahead and posted because I wasn't sure I could have multiple drafts open at once. Glad to discover that I can.)

I find it very ironic that my dad is a stockbroker and yet I don't feel I understand enough to pick my own mutual funds. I could title this entry, "The Stockbroker's Daughter Has No Stocks", but it isn't quite true as I do own one stock and a bunch of different mutual funds.

I've made a few attempts to ask my dad to teach me. The first time he sent me a book by Jane Quinn Bryant (not sure if the name is correct) that was exceedingly general about saving for retirement, nothing I haven't read before. Dad left the stockbrokerage firm several years ago and now works for a mutual fund company. Usually he just tells me which funds from that company are currently a good buy compared to their historical performance (I plan to talk about a book that talks a lot about "returning to the mean" in a future post.)

During our last visit I asked him to sit down with me and a list of his company's funds and explain why he would move money in or out of each one. It boiled down to "returning to the mean."

I also asked him for advice on how to split my money between the various catagories of funds. I don't think I should repeat the percentages here as they were very specific to my personal situation and I'd hate for someone else to invest inappropriately based on something I write here. Maybe it would be more appropriate to start a thread asking everyone to comment on their asset allocation strategy and why it is right for them so mine isn't the only one presented? This is the kind of advice you can get from a full-service broker that I have not yet seen much in my reading.

Once a year DH and I sit down with my broker, a full-service broker from the firm Dad used to work for, and get his advice on the mix and where to direct new money. I've been terrible about following up and taking action after the meeting, which I plan to change this year.