Uncommon Cents

As we saw yesterday, the stock market performance in September was horrible; my guess is that October was even worse. Let’s see how the portfolio did in October, reported to be one of the worst stock market months of all time.

The Vanguard Total Stock Market Index (VTSMX) declined a whopping 17.16 percent for the month! But again, that shone compared to the T. Rowe Price International Discovery Fund (PRIDX), which was down a miserable 22.98% for October 2008. Once again (like nearly every time this year), the Vanguard Total Bond Market Index was the star of the portfolio, down 3.23% but still paying a decent dividend. This month the portfolio declined even more than in September, to the tune of a staggering 13.80%! However, the silver lining is that the total performance was, again, better than the total stock market even though most of the portfolio is allocated to the total market and the international market. Bonds again show us their value this month. Now, the question is, these have been bad months…

September was bad, bad, bad in the stock market. How bad was it for my portfolio? Let’s take a look.

The Vanguard Total Stock Market Index (VTSMX) was down a nasty 9.23% for the month. Despite that dismal performance, it was stellar compared to the T. Rowe Price International Discovery Fund (PRIDX), down a horrific 15% for the month! Even the rock steady Vanguard Total Bond Market Index (VBMFX) was down 1.4% but continued to pay its very nice dividend.

The total portfolio returned a negative 8.09% for the month! This would be bad for the year, but is positively horrendous for a month. However, notice that the total performance was better than the total stock market (reflected by the included VTSMX), even though most of the portfolio is split between it and the international fund–again, hooray for bonds and asset allocation! Of course, as you can see, September was bad, but tomorrow we’ll see that it could get worse…

There’s been a considerable amount of discussion here as well as in the personal finance blogosphere on the subject of asset allocation (I particularly like this bit on it by my blogging buddy Mrs. Micah). Asset allocation is, in a nutshell, is how much of your total portfolio (your allocation) you put into, for example, domestic stocks, bonds, or international stocks (various assets). When I discussed the end of year performance of my portfolio, I noted that my goal was to have an asset allocation of 50% domestic stocks, 25% international stocks, and 25% bonds; to explain my model relatively quickly, I took 115 and subtracted my age at the time (40), and came up with the number 75. 75 then became my asset allocation for stocks, 2/3 of which would be in domestic stocks (50% of my total portfolio) and the remaining 1/3 in international stocks (25% of the total). What was left–25%–was to go into domestic bonds.

Looking at the allocation of my portfolio right now, we see this:

Domestic Stocks: 44.54%
International Stocks: 18.94%
Domestic Bonds: 36.52%

What does this tell me? It says that the performance of stocks has not been great this year to date; it also tells me that when it’s time to consider rebalancing my portfolio (which I do once a year), I actually want to put more money into stocks. That’s correct: it’s not telling me to run for the hills from my stock market investments, it’s actually telling me to increase the amount of stocks I’m buying relative to the bonds I’m buying. Why? Because the market is down and I can get more for my money in the stock market (I will look at rebalancing a little later in the year).

This is a large part of the purpose of asset allocation; not only does the bond portion help to prevent the portfolio from having even larger losses when the stock market nosedives, the total allocation gives me an indicator of where to put future investments (and possibly even to move money between the various assets). Asset allocation gives you an idea of where to put your money next. Even when I stick to my 115-age formula, we’re only talking a difference of 1% a year; this year I’d say 74% in stocks and 26% in bonds–not very different than last year.

I’m hoping this example shows the importance of asset allocation to those of you beginning with portfolios!

Just a year after hitting its all time high, the stock market is about 40% off of that high, to levels not seen since 2003. It’s a tough time for many, and if you’re close to retirement and your asset allocation was out of whack, you probably hurt more than others. Looking at current stock market levels definitely hurts.

But just because the hurt happens, don’t make it hurt more.

Pulling out of the market. Selling all your funds and moving 100% into cash. Discontinuing contributions to your retirement savings plan. All of these are ways to ensure that the market isn’t going to just hurt now, it’s going to continue to hurt for a long time to come.

You don’t have to believe me. Warren Buffett is buying stocks. John Bogle is telling investors to get back to the basics of investing. These are two of the most successful finance gurus of our time. Just do the smart thing and follow the plan you made; in the end, you’ll be better off, and you won’t hurt yourself any more than the markets have already hurt you!

Some people discover their risk tolerance is rather low, or lower than they thought, in stock market times such as these. If that is indeed the case, what options do these people have?

The principle of risk/return does not disappear just because someone can’t deal with somewhat higher risk; rather, it becomes very clearly in effect. If someone wants to take absolutely no chances with their money (or just shy of no chance), they can certainly do that, but the returns their money will gain will be quite low–but they will exist. This is unless it’s someone who would rather bury money in coffee cans in their back yard or stuff it in their mattress, of course–but that’s not investing.

Realistically, everyone needs a safe place to put at least some of the dollars they have. An emergency fund needs to be kept away from stock market risk, because emergencies don’t come on a schedule (some would say the market currently is in a state of emergency!). So “chicken money” is something everyone has at least some of–money we’re too chicken to put at any risk at all.

Savings or Share Accounts: These are your typical accounts at a bank or credit union. Right now the rates of interest on them are anemic–in the case of my mother’s bank account, one fourth of one percent of interest! That’s definitely not keeping up with inflation. However, since the account is FDIC insured and she’s well within the limits of the insurance, it’s as safe as the federal government’s word. If you’re going to use one of these, make sure you have insurance by the FDIC or the NCUA (in the case of a credit union). You won’t make much, but your money will be safe, and it’s really high in liquidity, meaning you can get at your money pretty much anytime (provided the bank’s business hours work for you).

High Yield or Money Market Accounts: These tend to be a lot like savings or share accounts but with a somewhat higher rate of interest and possibly more limits on accessing your money. For instance, I have a Capital One Direct high yield savings account that pays me 3.55% interest and allows check writing and ATM access–but limits how many checks I can write per month. Fortunately, it also allows electronic access, which is a bit more liberal. This is a nice place to stash an emergency fund, since it’s almost as liquid as a savings or share account.

Certificates of Deposit: CDs tend to have rates about the same if not a little higher than high yield or money market accounts. In return for offering a little more interest, you lose liquidity. Still, CDs you may be appropriate for an emergency fund with a little planning (having a CD mature every month with 5/6 of an emergency fund means at most you’d be one month away from access, and having that remaining 1/6 in something like a high yield account could do it) but for simplicity’s sake, you may not want to use these for that purpose. Make sure you are wary of the FDIC limits (which apparently will be increasing, at least for awhile) on how much they’ll insure if you really are concerned about safety!

Treasury Bonds or Notes: In many ways considered the safest of investments, there are lots of different bonds and notes you can get; some may offer tax advantages. I have a bit of my portfolio in I series bonds, for instance. There are also government issued bonds or notes from local or state governments that may be worth looking into as well. Again, the rates are not fantastic, but combined with possible tax advantages as well as safety, this could be a viable option.

Money Market Funds: Not quite the same as the money market accounts, these are mutual funds that invest in short term instruments. They are not backed by FDIC or NCUA insurance as they are mutual funds, although they recently had some temporary insurance offered to them with unusual circumstances that led to a “run” on them as a consequence of the Lehman Brothers bankruptcy. Money Market funds nearly always have a stable net asset value of $1 per share and pay a return based on how their investments do. Of course, since it’s a mutual fund, your initial investment will likely need to be more than you can put into a savings account, money market account, or CD, and you may have commissions to deal with.

Bond Funds: In bond funds, you have a ton of choice just as you do with stock funds. If you’re looking for safety, consider the quality of the bonds in the fund; “junk bonds” may offer higher yields, but more risk. Funds that are based on Government National Mortgage Association bonds–Ginnie Mae funds–tend to be both very safe and pay very nice returns. A fund like the Vanguard Total Bond Market Index has offered similar performance and safety to the Ginnie Mae funds over time. Again, these are funds, but unlike the money market funds which almost never move off the $1 per share net asset value mark, these do fluctuate a bit, but historically, nothing like stock funds.

There are some alternatives–from about as safe as you can get to pretty safe with some amount of risk–to consider for your chicken money, whether that’s just your emergency fund or your whole portfolio. Good luck in selecting one that might meet your needs!

In addition to my various mutual funds, I have a few individual stocks which in total make up less than 10% of my portfolio. Let’s see how they’ve performed year to date.

Some of these stocks I’ve owned for many years; some I’ve bought this year; at least two of them are the result of dividends or spinoffs. Some of them are decidedly long term holdings and some I’m only thinking I’ll hold onto for a year or so (and those get reviewed at the start of a year to determine whether or not I’ll hold onto them for awhile more). In any case, as you would expect, some have done markedly better than the stock market indices and some have done markedly worse. Proceed with caution on individual stocks, but they can certainly be a part of any portfolio. As a reference, the S&P 500 index is down 12.64% year to date, so even if something is down 10% year to date, it’s doing better than the market as a whole!

In no particular order:

Idearc Inc. (IAR): I got this stock as a dividend from, I believe Verizon. It was too small to do a whole lot with (selling it would have resulted in a cost that was substantial on a percentage basis and I didn’t really want to buy more of it). It’s down an astronomical 90.6% for the year.

American Capital, Ltd. (ACAS): I bought this one because I was impressed by its dividend, which is still quite impressive; it had also had a nicely elevating stock price for a few years prior to my buying it. So much for that: it’s down 34.04% year to date.

Amazon.com, Inc. (AMZN): I’m sure that everyone knows these guys. I bought into Amazon just this year, in fact, just a few months ago, making it my most recent stock purchase. It’s down 12.77% this year.

Apple, Inc. (AAPL): I’m just as sure that people know Apple at least as well as they know Amazon. It’s down 14.41% this year (I am actually buying into this stock every month and found that despite it being down for the year, my investments in it are actually up about 10% year to date).

Altria Group, Inc. (MO): The international tobacco king (that also has many other holdings) has been a long term holding for me. It’s been my most successful stock over time. The performance this year seems dismal but it’s due to a spinoff of Philip Morris International (PM) which is up next. For the year, the stock is down 72.18%, which is due almost exclusively to the PM spinoff.

Philip Morris International (PM): Received as an Altria spinoff, this stock is the first one I’m looking at that’s statistically up year to date, a healthy 6.17%.

Google (GOOG): Another household name. I bought into Google in April. While my holding is definitely down, it’s not quite at the level of the year to date figure, which is a negative 33%.

Merck (MRK): A pharmaceutical giant, I’ve liked Merck’s dividend and had it for awhile. Year to date, it’s not doing so hot, down 38.62%.

Verizon (VZ): I hate all the phone companies, but I own one of them. I’ve had a holding in Verizon for a couple of years, and it’s usually done better than this year, when it’s down 19.62%.

Bank of America Corporation (BAC): Yes, I own a financial stock (two, actually, as you’ll see shortly). Bank of America’s fared better than many (this is one I’ve only owned since this year) but it’s still down 24.53% for the year.

RPM International Inc. (RPM): These are the Rustoleum guys if you can’t figure out what they do. Just as the market has only had a few bright spots this year, this is one of the bright spots in my portfolio of individual stocks. It’s up 6.4% for the year.

Toyota Motor Corporation (TM): You know who these guys are. It’s a long term holding of mine that really hasn’t done well the last couple of years but are not going to be sold out of my portfolio anytime soon. Down 15.62% for the year.

Finally, Wells Fargo & Company (WFC): My other financial that is a long term holding. It’s done very well compared to other bank stocks and the market as a whole and is up for the year, but not much: a positive .26% this year.

It’s a tough market year, as you can see in the performance of these stocks. While individual stocks lack the diversification of a mutual fund, they can certainly be a great part of anyone’s portfolio; just keep their totals to a small part of your total portfolio, buy wisely, and hang on!

Did the market’s leveling off in July after several months of freefall translate into a positive August? Let’s take a look at my sample portfolio in August.

The Vanguard Total Stock Market Index (VTSMX), which makes up the majority of my portfolio, was up 1.58% for the month. The Vanguard Total Bond Market Index (VBMFX) was up a meager .3%, but continued to pay its very nice dividend without issues. Finally, the T. Rowe Price International Discovery Fund (PRIDX) was down 3.60%.

All said, this portfolio was up about a percent for the month, which is much better than it’s done in previous months. Bonds are continuing to be the mainstay, now comprising over 29% of the portfolio (it started at about 25%)–years like this are the reason you keep a healthy part of your portfolio in a high quality bond fund!

We’ll keep reviewing my portfolio to see how it does the rest of the year.

One of my friends asked me this past week about investing in a high tech, actively managed mutual fund.

“What do you know about it?” I asked.

“Only that someone recommended it.”

This is one of the biggest investing mistakes I think anyone can make. If you’re going to make an investment, it’s important that you understand what it is. Would you spend thousands of dollars on something that you didn’t understand? If your answer is no, then why consider spending thousands of dollars investing in something you don’t understand?

We’ve discussed things like mutual funds and indices time and again in this blog and we certainly will again. While I think investing in these is smart, I think it’s even smarter and more important that you understand what they are before you part with your hard earned money. And if you’re going to invest in individual stocks (I do, although with less than 10% of my portfolio), I would suggest even more strongly that you not only understand the companies in which you are investing (Remember: if you buy company stock, you own part of that company!), but you believe in it, too. I don’t know a whole lot about Saga Communications, Inc. (SGA), so I won’t be investing in that, but I do know a lot about Apple, Inc. (AAPL) and Toyota (TM)–I buy their products and believe they are the best in the world in their fields–so I’ve bought into them.

If you don’t understand an investment, stay away! Go ahead and research it and learn about it if you’re interested, but don’t throw your money blindly into a company or product you don’t know anything about. In the end, your portfolio will look better–and you will feel better–because of it.

One of the personal finance blogs I read regularly (I can’t recall which this much later) summed up June’s stock market performance in a few words: “June sucked!”. I can’t agree more. July was better, but still not positive. It’s not been the most fun few months in the markets. How’d my portfolio do in those two months? Pretty poorly, which surprises no one.

The Vanguard Total Stock Market Index (VTSMX) ended the month of June down 7.72%; it continued its fall, lessening its arc, finishing the month of July down another 1.12%. The Vanguard Total Bond Market Index (VBMFX) was its usual pretty steady self, paying out a nice dividend but having its net asset value fluctuate downwards .07% in June and another .02% in July. Finally, the T. Rowe Price International Discovery Fund (PRIDX) ended June down 7.68% and another 3.33% in July.

It’s been a rough couple months, but I’m holding fast, as I think everyone ought to. Let’s see how things go in August!

Welcome to your link payday for June 5, 2008. This week was a great pay week for me because I actually got paid three times (and I’m hoping for a fourth, though likely in vain): once from this blog, once from my part time job, and once from my full time job. The fourth would be my still MIA stimulus payment!

Anyway, some of the better posts of the last few weeks that I’ve read in the blogosphere:

JD over at Get Rich Slowly covers (and advises against) a practice that kills your tax advantages and might indicate you’re in serious financial trouble when he says Don’t Raid Your 401(k) to Make Mortgage Payments.

Mrs. Micah tickles my funny bone when she discusses The Lingerie ROI. Suffice it to say I won’t be investing in Victoria’s Secret anytime soon (I honestly don’t even know if they’re publicly traded!).

Do others judge the frugal? I’m sure there is a lot of that going on; in this intriguing post, SavingAdvice.com discusses The Benefits of Savings Habits that Make You Look Poor. I have a different problem–the benefits of looking old! I really don’t qualify for that senior discount at Jack in the Box (but I’ll take it if they give it)!

Sqawkfox runs a five part series on ways to kick start your job hunt; I particularly like part one on How to Choose a New Career, which addresses something that’s been on my mind a lot recently–pondering your passion.

While it has a rather long title, it has some great points–Trent over at The Simple Dollar discusses Money Magazine’s ‘7 Investments You Need Now’, Portfolio Theory, and My Own Plans for the Future. This discusses some very basic theory on portfolios and covers one of the books I really like, Paul Farrell’s The Lazy Person’s Guide to Investing.

And there’s your link payday for June 5, 2008!