After a lot of hard work, my new self-hosted website is up and running. I have put a lot of work into modifying my theme (which meant re-learning html), importing my current blog posts and setting up plugins, feeds and stat counters. I’ve updated my about section and hope that I can foster a more personal atmosphere at my new site, which will hopefully lead to a strong community for learning about personal finance.There is still a lot of work to do, but the site is functional and I will now be posting strictly on that site.
After posting my goals for 2009, I began looking into buying a domain name and domain hosting services. For the next few days I will be putting all of my efforts into setting up my new domain, new theme and transferring my blog. For this reason I will not be blogging until after the weekend. I apologize for those of you who are subscribed to this domain, but the new website will be even better and I hope you sign up for the RSS feed at my new site. I will let you know what the new site is as soon as I have it up and running.
The bear market has taken a huge toll on everybody’s investments. I read numerous personal finance blogs, most of which write an end of year financial status round-up. Many of these bloggers are experiencing significant declines in stock market investments, so much that their net worth has decreased over the course of 2008. Fortunately, the majority of my savings was held in cash for a condo down payment. For this reason I didn’t experience too much of an effect from this bear market, however, I did learn a very valuable lesson from this bear market, know your risk aversion.
Risk aversion is how well you handle risk. A risk averse person will trade higher returns in order to lower risk. A less risk averse person will take on higher risk to gain higher returns. Risk aversion is not something that is consistent from person to person. Knowing the degree of your risk aversion is crucial to surviving the ups and downs of the stock market.
If you have never experienced a bear market, which was true for me up until now, you may think you aren’t risk averse, that is until you’ve lost 50% of your portfolio. Everybody can ride the market highs, but can your stomach handle the lows?
Not knowing your how risk averse you are can lead to making one of the largest mistakes of your investing career: buy high and sell low.
Past Bear Markets
Even though I didn’t have a lot of money in the stock market, I have learned that I have a high tolerance for risk. I know that I am just beginning my investment journey and I have over 30 years to recoup any early losses. Studying past bear markets has made me confident that the market will rebound and rebound in a big way.
Investing at today’s discounted prices is the equivalent of investing in 1997, at least according to the S&P 500. Back in 1997, the S&P 500 was in the 800 range, the same as it is right now. That’s 11 years worth of stock investing that I hope to take advantage of when the market rebounds.
Also, a market similar to the current market existed between the years of 1963 to 1974. In 1963, the S&P 500 was in the 60′s. The S&P 500 peaked around 118 in 1972 before taking a nosedive back to the 60′s in 1974. If you had sold your position because you did not correctly know how risk averse you were, you would have missed out on the gains the next 11 years provided. Over the course of the next 11 years, the S&P 500 increased in value into the 250′s.
The stock market is not guaranteed to increase over the short-term. Over the long haul, however, the stock market will outpace inflation and help secure a happy and financially independent retirement. A bear market such as our current market, is the only time to really be able to determine how risk averse you are. Can you sleep at night knowing that up to 50% of your retirement savings have vanished over the past year? Can you sleep easily knowing the loss is only a paper loss and the market will rebound? Are you willing to pump extra money into the market during a bear market? Your answers to these questions will help you determine a suitable stock/bond ratio for your investment plan. I’m confident that the stock market will rebound and if you don’t believe me, check out the history of the S&P 500 for yourself.
Lending Club is a social lending network that connects lenders and borrowers through investing in notes. You may loan as little as $25 or as much as you want. Lending Club makes money by charging a processing fee from the borrower and a servicing fee from the lender. The processing fee is a percentage between 0.75 and 3.00% of the loan amount. The service fee is 1% of each payment from the borrower.
The benefits of investing money through loans is that Lending Club allows you to earn between 6.69 and 19.37% depending on the rating of the borrower. Lending money does involve some risk as the borrowers may default on the loan. Another benefit is the $50 bonus for signing up through my referral (I don’t believe I make any money on this transaction). The following is a step-by-step guide on how to sign up for a Lending Club account and receive your $50 bonus.
Create Lending Club Member Account
Creating a Lending Club member account is super easy. If you are interested in a $50 referral bonus leave a comment or email me (firstname.lastname@example.org) and I will send you an email invitation. I don’t think I get anything out of this, but $50 is enough to fund two separate loans.
Once you receive your confirmation e-mail and have followed it to Lending Club’s website, you can click on “My Account”. You are given two options: Invest or Get a Loan. Select Invest and you are taken to a 4 step set-up process.
The first page is your personal information and a few agreements. For personal information you have to enter the following: first name, last name, SSN, DOB, street address, city, state, zip code and home phone. Additionally, you have to agree to the note purchase agreement, no tax withholding and declaration of trust.
Step 2 deals with identity verification. Apparently, my identity has already been verified, moving right along…
Step 3 requires the necessary banking information to link to an external account. The required information is account holder’s first name, account holder’s last name, name of bank, routing number and account number. Also, a bank account verification and debit authorization agreement is required.
The final step is unique when compared to other investing account sign-ups. Lending Club claims that borrowers are less likely to default on a loan if they feel connected to you. The final step allows you to designate your geography, education, workplace and other associations, which will appear publicly next to your screen name.
Now you are ready to be a Lending Club lender. They use an interesting method of verifying your bank account. Most places send trial deposits into your bank account. Lending Club removes a value less than $1 from your account and puts it into your Lending Club account. You then verify this amount in your account section of Lending Club.
Lending Club uses Secure Socket Layer (SSL) certificate technology to secure website connections. SSL also ensures that all data entered is appropriately encrypted. Lending Club ensures that all sensitive personal and financial data is stored in a highly secure environment.
Creating a Lending Club account is very easy and can be done in about 5 minutes. I have not done any lending yet, but when I do I will write a review. Until then, Jonathan at My Money Blog has written a few times on his opinions of Lending Club. Again, if you are interested in giving Lending Club a shot and are interested in a $50 sign-up bonus either leave a comment or email me at pfstartup at gmail dot com.
The last time I went to the library looking for a new book to read, I didn’t plan it out very well. I have a list of books that I want to read. I didn’t remember any of those books and was forced to search the personal finance archives for something that sounded interesting. In Charles D. Ellis’ “Winning The Loser’s Game” I was hoping to find a book with a different message than the standard “invest in index funds” message that I’ve read in my recently read books. The book delivered that standard message, but in a completely different way.
The Loser’s Game
I selected this book because I was intrigued as to why Ellis described investing in the stock market the loser’s game. In reality, the loser’s game is not investing in the stock market, but trying to beat the stock market.
Ellis contends that trying to beat the stock market has evolved from a winner’s game to a loser’s game. The reason for the evolution is due to the number of professionals associated with the stock market. Investing institutions currently make up 90% of total public transactions. For this reason, in order to beat the market, investors must find and exploit other professional investor’s mistakes. Attempts to beat the market usually leads to active investing, where returns are eroded by trading costs and taxes on top of the already powerful eroding force that is inflation.
Winning the Loser’s Game
Ellis’ solution to the loser’s game is to just not play. If you don’t play you can’t lose. He does not suggest stuffing your money under the mattress for preservation. Ellis believes in applying a long-term investment policy to take advantage of compound interest. He advocates developing a long-term investment policy that is based on selecting an appropriate level of risk. The appropriate level of risk is determined by the highest ratio of equities that you handle during a bear market.
Responsibility of an Investment Client
A large portion of the book is spent breaking down the investment client and investment manager relationship. Ellis claims that the client must play the most important role in this relationship. Most individuals think they are paying an investment manager to make all of the decisions. This is not the case. The client should be responsible for defining an investment policy (optimally a long-term policy), after which the manager must adhere to this policy.
History of the Stock Market
Knowing the history of the stock market goes a long way in developing a long-term investment policy to win the loser’s game and establish a successful relationship with your investment manager. An understanding of the turbulent nature of stocks in the short-term goes a long way towards developing an appropriate ratio of equities, while also tempering your expectations from an investment manager. Ellis argues that you should select an investment manager based on your willingness to double up with him when he is losing to the market based on the reversion to the mean theory.
“Winning The Loser’s Game” can be slightly more difficult of a read than I was hoping. A few times I had to re-read sections to truly understand his argument. Otherwise, it was a very interesting read that put a different twist on the stock market. I had never thought of the stock market as being run by professionals with limitless information. I would recommend this book, but it does not even come close to matching “A Random Walk Down Wall Street”.
In developing a plan for my 2009 goals, I stumbled upon some changes to the 401k contribution limits in 2009. I currently don’t participate in my company’s 401k, but I set up a Vanguard Individual 401k for my self-employed income. Depending on my level of self-employed income in 2009, the following changes may affect my maximum contribution amount.
2009 401k Contribution Limits
The 2009 salary deferral contribution is limited to $16,500 if you’re under 50. If you’re over 50, the 2009 salary deferral contribution is limited to $22,000 ($16,5000 plus a $5,500 catch-up contribution). This results in a $1,000 increase in the salary deferral contribution and a $500 increase in the catch-up contribution when compared to 2008.
Total contribution limits also increased for 2009. If you’re under 50, total annual contributions (salary deferrals and employer contributions) max out at $49,000, which is increased from $46,000 for 2008. If you’re over 50, total annual contributions max out at $54,500, which is increased from $51,000 for 2008.
Individual 401k Maximum Contribution Limit
My Individual 401k maximum contribution limit is roughly calculated in the following way (for a sole proprietor under the age of 50):
- If you’re net income is less than the salary deferral contribution limit ($16,500 for 2009) you may contribute your entire income reduced by 1/2 of your self-employment tax.
- If your net income is greater than the salary deferral contribution limit, you must calculate your net compensation.
- Net compensation is net profit from IRS Form 1040 Schedule C with 1/2 of your self-employment tax removed.
- As a sole proprietor, you may contribute up to 20% of your net compensation in addition to the salary deferral contribution with a maximum value of $49,000 in 2009.
A plan contribution calculator from Vanguard can be found HERE.
Although I doubt I will earn enough self-employed income to reach the salary deferral limit, it’s always good to know what the limit is so you can plan accordingly. Between maxing my Individual 401k and my Roth IRA contributions, I have a lot of work ahead of me for 2009.
For another resource on the new 2009 401k contribution limits:
Increased 401k Contribution Limits in 2009 by Cash Money Life.
Recently, Kevin over at No Debt Plan posted about his daily schedule and if it was appropriate for what he wanted to achieve. His excellent post got me thinking about whether or not a more structured daily schedule would allow me to better achieve my goals for 2009.
Current Daily Schedule
Currently, I don’t have a very structured daily schedule. My employer doesn’t seem to mind what hours I work so long as I get my work completed. In fact, I have a coworker who routinely arrives at 1:30 pm.
Throughout the past year I have arrived as early as 7:00 am and as late as 10:00 am. Knowing that I can show up whenever I want usually leads to a lot of snoozing on my alarm clock and lots of wasted time in bed. I’m hoping laying out a strict schedule will allow me to put an end to this wasted time.
Other than work, I tutor 4 hours every Monday and Wednesday night (at least for the rest of the school year). Most days I like to find time for exercise. Depending on the season, I swim, bike, run or lift weights either immediately after I get home from work or sometime after dinner. The rest of my evenings consist of blogging, watching TV and playing video games.
The following is my proposed daily schedule and the reasons behind each activity.
- Wake up around 6:15 and swim - I’m trying to swim as much as possible to increase my cardiovascular fitness and lose 10 pounds. Ideally I will be able to lose some weight before the end of January when I will start running very very low mileage in preparation for an 8k. I’m planning on swimming to start my day to provide me with extra energy for the day. Also, my only other option for swimming is from 9-10 pm, which really breaks up my evenings.
- Arrive at work at 9:00 am -Between swimming and leaving for work I will have to shower and eat breakfast. I’m hoping that I will have at least 30 minutes to work on my blog post for the day as well. I currently don’t eat much of a breakfast, just a granola bar of something similar. Having a consistent and semi-substantial breakfast should help me maintain a suitable level of fitness for exercising. Arriving at work at a consistent time should enhance my co-worker’s opinions of my professionalism.
- Leave work at either 4:30 or 6:00 pm -On days that I tutor I have to leave at 4:30, but on days I don’t tutor I will leave at 6:00. On Mondays and Wednesdays I will work less than 8 hours a day and Tuesday, Thursday and Friday I will work more than 8 hours a day.
- Personal time after work/tutoring – During this personal time I will complete any blog work that isn’t finished prior to going to work. Otherwise, I will play my video games, watch my TV shows or work to advance towards completing my 2009 goals.
- Get in bed as close to 10:00 pm as possible - Ideally I will be in bed at 10:00 pm. I have a hard time getting myself to bed. I usually decide that working on my blog more, or reading a book, or some other random task is more important than sleep. For some reason I am delusional and believe I can continuously work with very little sleep. Hopefully, this daily schedule will allow me to accomplish everything that I want to and at the same time sleep enough to maintain a healthy lifestyle.
Potential Future Modifications
This daily schedule may or may not apply when I begin running more mileage. At first I will start running on weekends only, however, eventually I will have to run during the week. I have yet to decide how my schedule will work when I start running more since I’m usually way too tight in the mornings to run.
Also, I’m hoping to start tutoring on my own, which will have a less defined tutoring schedule. This will allow for a little more freedom, and might be done on weekends only. Or I might be tutoring an hour here and an hour there during the week. Either way, I will have to take that into account later in the year.
I will try to provide updates every now and then with how strictly I’m adhering to my schedule. The hardest part about following through with this schedule will most likely be getting out of bed so early every morning, but I imagine it will get easier the more I do it. I’m looking forward to this schedule since I’m very motivated to get in shape. Now that I have my schedule defined, all I have to do is follow through. As the great Peyton Manning says “It’s on like Donkey Kong!!”