Uncommon Cents

One of my favorite companies is Apple, Inc.; I’ve used their products since high school and I believe in their business. In the last few months, I’ve backed this in a very significant way: I’ve become a stockholder. Instead of putting a large amount of money into the stock at one time, my holding of AAPL has been one that’s been built monthly, through Sharebuilder. While this seems like dollar cost averaging (and in many ways is identical), it really isn’t dollar cost averaging. Dollar cost averaging would imply I have a large amount of money available at one time and buy into the stock at a fixed dollar amount on a regular basis (monthly, for our purposes). However, I really didn’t have a large amount of money to put in at once, so this is actually an example of regular investment of a set amount of dollars.

I began buying into Apple early this year, in February. I bought a fixed amount each month, and am continuing to do so. When I started, I got the stock at an effective price (includes the commission of $4) for $118.73. As I write this, the stock closed on Friday at $169.53. I could have had a very healthy gain of almost 43% right now had I bought all of my shares that day! However, since I’ve been buying into the stock regularly since then (once a month), I’ve also gotten shares for the effective prices of $141.78, $164.53, $186.57, $176.63, $155.00, and $176.75, so I’ve bought it above the current price three times and below the current price four times. All told, my investment in AAPL is up 8.22% for the year which is tremendously better than the market as a whole but considerably worse than the nearly 43% had I bought everything in February. So does that mean that investing on a regular basis is a bust?

Not necessarily. While many (including myself) are dubious of the risk reduction claims of the dollar cost averaging approach, it appears to have taken hold here. Yes, my returns were far worse than had I bought in February, but had I bought into the company at the start of the year (well, January 2nd, since markets were closed on New Year’s Day), it could have been at the price of $199.27; instead of having that 8.22% gain, I’d have a 14.9% paper loss!

In the end, I think that the lesson behind investing regularly is that doing it helps to assure that you develop a valuable financial habit rather than reducing risk or maximizing gain. Yes, it’s nice to have big gains and reduce risk, but it’s not clear this approach will do either. What it will do, however, is get you to put away money regularly–which is one of the real keys to successful investing.

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.

It’s been a rough time in the markets recently without question, but also not quite an awful time. One of the things that I like about my Vanguard account is that it quickly calculates one, three, and five year returns for my accounts. While the results right now are far from stellar–market appreciation is negative for both one and three years, and my one year rate of return for my total portfolio is a negative 7.4%–things are also not all that awful.

Despite the fact that the market has been in reverse for awhile (but may have stabilized in July and so far is positive in August) my total returns for both three years and five years are a positive 4.7% and 7.2%, buoyed by positive earnings in the bond market (yes, there is a reason to keep somewhere between 20 and 30 percent of your portfolio in bonds!) during this time. And because I’ve continued to contribute money (and so has my employer) as the market difficulties have gone on, my account is worth more even though the returns have not been great.

One final thing: keep perspective on these things–a loss of 7.4% doesn’t make me happy over a year, but it’s not the kind of losses we’ve seen in the past during bear markets–just remember 2000!

The Federal National Mortgage Association, known by its initials FNMA which are pronounced “Fannie Mae”, is a former government agency that is now a publicly held corporation and government sponsored enterprise. Fannie Mae is the leader in the United States secondary mortgage market; between it and Freddie Mac (the Federal Home Loan Mortgage Corporation) they either guarantee or own approximately one half of the mortgage market in the U.S., an amount estimated to be about $6 trillion. Fannie Mae’s government charter directs it to make it possible for Americans who are not among the highest wage owners to buy homes.

The subprime mortgage crisis has taken a huge toll on Fannie Mae; its 52 week high on the New York Stock Exchange is $70.57. Currently it is trading at just $6.15, meaning that it has lost more than 91% of its value within the past 52 weeks and is dangerously approaching penny stock territory. Unlike the Government National Mortgage Association (GNMA, also known as “Ginnie Mae”) which is directly backed by the federal government, neither Fannie Mae nor Freddie Mac have a guarantee from the government, instead having implied backing from Washington, D.C.

It is not believed that the government will allow Fannie Mae or Freddie Mac to fold, meaning another taxpayer bailout is a possibility. Concern over the difficulties faced by the two corporations continues to drive their stock prices down and weigh on the entire market.

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 July 20, 2008. It’s been a busy few weeks as I get ready to head out of town for a week on Monday, so I’ve been hustling to blog as well as to complete some other projects that need to be done for my trip (I imagine I’ll be working on them on the plane!). Here’s some of my favorite blog posts from the personal finance blogosphere over the last couple of weeks:

The always great JD of Get Rich Slowly asks his readers: How to Get Started with Investing? For many it’s a daunting and intimidating task at the onset, even though it really isn’t that hard.

The turbulence in the financial markets (and yes, June was an absolutely horrible stock market month, which we’ll look at soon) may have folks considering getting out of the markets altogether. Fortunately, All Financial Matters warns us wisely: Don’t Run from the Bear.

Much has been made of the disaster known as subprime mortgages; we’ve looked at what subprime means before, and recently Debt Free looked at The ARM: What is an Adjustable Rate Mortgage Loan, and How Did it Get So Many Homeowners Into Trouble.

My buddy Kyle over at Rather-Be-Shopping ponders How Bad Can the Economy Really Be? when people are waiting in line for hours for new iPhones. While as an Apple stockholder I certainly condone the purchase of their products, I worry that people aren’t considering the financial consequences of high end purchases.

And finally, the ever brilliant Mrs. Micah asks What Happens if Your Bank Fails? I had Netbank fail not too long ago and while ING Direct is okay, it’s not exactly the same as Netbank was. Fortunately, I didn’t lose a cent.

And there’s your Link Payday for July 20, 2008!

Welcome to your belated Link Payday for June 23, 2008 (since the fabulous Kyle of Rather-Be-Shopping.com returned and wrote his usual Friday post for us–which fell on the 20th–we delayed this payday a few days). Here’s some of the better posts I’ve read in my RSS reader the last couple of weeks.

The always entertaining JD of Get Rich Slowly discusses Why it Pays to Ignore Financial News. This article puts pretty succinctly one of the key tenets of long term investing: daily stock market fluctuations aren’t meaningful to your holdings over the long term–unless you act on them. Pay more attention to the things in your life that give you joy rather than your retirement account.

Can I Get Rich on a Salary asks how to Teach Yourself to Invest In Stocks? by covering MarketWatch’s daily money tips and offers a few suggestions of their own. I wholeheartedly suggest that people learn about investing in stocks, bonds, and funds; if you have the tolerance and taste for stocks, I suggest checking this piece out.

All Financial Matters asks the question that I wish everyone in this country–particularly those in Washington–would ask: What’s the Solution to Our Energy Needs? Gang, ethanol is not the answer (at least not corn based ethanol), but a combination of other types of alternative energy including (yes, I say this as an environmentalist) nuclear is. Let’s all work seriously to do whatever we need to do to get this resolved and get our country off of its dependence on foreign oil.

I’ve Paid For This Twice Already asks How Do You Decide When “The Time Comes”? In this case they are considering if it’s the time to replace their car. This is definitely worth looking at for making financial decisions with regards to some of the things we use every day, like computers.

Finally, Trent over at The Simple Dollar discusses Addiction and Personal Finance. As a professional in human services, I have to say that addiction can be a huge threat to your finances–if not your family, your relationships, your freedom, and your life.

And that’s your Link Payday for June 23, 2008!

May seems to have been another positive month in the stock market; my initial belief just looking at (but not actually running) the numbers is that it was not quite as positive of April but it was quite decent in and of itself. Let’s take a closer look:

The Vanguard Total Stock Market Index Fund (VTSMX), which makes up the largest portion of my portfolio, ended May at $34.16 a share after closing April at $33.46, a gain of a bit over 2%. The Vanguard Total Bond Market Index Fund (VBMFX) closed May at $10.07 vs. $10.18 at the end of April, down just over a percent but putting out that nice 4.86% yield for the fixed income portion of your portfolio. Finally, the T. Rowe Price International Discovery Fund (PRIDX) finished May at $46.23 versus the $45.28 it finished April at, a nearly identical gain of a bit over 2% to VTSMX.

Hopefully, the market continues to stay on course for a positive end to 2008!