How privileged would you feel if you were attending the Berkshire Hathaway annual shareholder meeting? To be in the presence of the world’s most successful investor, the world’s richest man. Warren Buffett. Gasp. Tim Ferris of the blog Four Hour Work Week wrote great notes he took from the conference. I think one of my favorite answers from Mr. Buffet was:
“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”
Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”
“…Put it all in a low-cost index fund like a Vanguard 500.” M: “Professionals take croupier profits out of the system. No one will give you this advice [index funds] because no one gets paid for it.” M: “The whole secret of successful investing [full-timers] is non-diversification. If you know nothing —> diversity.” B: “There are situations, for the full-time investor, where it’d be a mistake not to invest 50% of your net worth in one business.” If more aggressive: small stocks and specialized bonds, but no currencies.
Now doesn’t this all sound familiar? Index funds = Boring but brings in the $$$. Read the rest of Tim Ferriss’s article - Picking Warren Buffett’s Brain: Notes froma Novice.
I was sitting at work today looking over the market news and surprise surprise…the market’s been acting like it’s the apocalypse. There seems to be no good news concerning the market. I’ve watched my Vanguard Star Fund fluctuate up and down - and then down some more. Being a new investor, it did draw some concern. I thought “should I put more money in my fund if the market is looking so poor?”. I’m sure many of you have thought the same thing. Despite how we feel…the answer is YES! I must stick to the advice and info I’ve learned and blogged about, because if I didn’t, I’d be a coward who says one thing and does the opposite. Dollar-Cost Averaging and Long-Term Investing type of strategies is the key to wealth. Block out the noise, and keep on your course.
I was at the grocery today waiting to buy a lotto ticket when I saw a mother and daughter using one of those Coinstar machines. If you don’t know what a Coinstar machine is, you basically drop all your coins into the machine and it will count it up for you and pay you back in cash for a small fee. The mother cut open her daughter’s red plastic piggy and started dumping the coins in. How exciting it was for the little girl to have her first taste of the benefits of saving. I had a flashback. During my High School years, I used to dump all the coins I had in a big soup jar and when it was full, I would put them in coin rolls and cash them in at the bank. I would pull in about $130 each time. I essentially turned my pocket change into something substantial. I have change lying all over the place, so you better believe I’ll be breaking out that dusty soup jar again. Lesson learned - Piggy Banks are not just for kids.
In the journey to learn more about personal finance and investing, you more than likely have heard someone preach about “the power of compounding”. They talk about it with such praise and conviction, but it’s not until you see actual numbers and graphs that you stand there in AWE at the true power of compounding. With compounding…time is your friend. The earlier you start, the better off you will be with your investments. I’m twenty-six and I feel like I started very late. Below is an animated visualization (courtesy of Vanguard) that shows the true power of time and compounding. Honestly, I wish I had seen this earlier in my life before I meaninglessly squandered any money I had. Want to help your spouse/child/family member/co-worker/student/etc.? Show them this, I bet it will open their eyes and change their outlook on money.
click to play
In my first post Financial Tracking - Software beats Paper I mentioned:
Aside from Quicken and M$ Money, there were online options available such as mint.com, wesabe.com and yodlee.com, but I’m still a little hesitant to use such services. I guess there’s still a little old fashioned in me, but who knows…maybe one day.
Well it looks like “one day” came sooner then I thought. Instead of impulsively going to the store and spending money for Quicken, I’ve decided to give the free online alternatives a try. It may not offer an all-in-one solution for scanning and encrypting my financial documents, but that can easily be done on my own using other excellent (free) software. I’ve decided to go with the flavor of the month…Mint! The setup for Mint was easy and took less than 15 mintues to get fully up and running. The only issue I had was adding my American Express credit card to Mint, but that was quickly resolved. Here are a couple of things I thought about my experience with Mint:
- Free to use!
- Suggests money saving ideas and offers without ads harassing you.
- Updates all your accounts automatically, showing clearly and concisely your total assets vs. total debt.
- Able to setup instant alerts, and weekly or monthly financial summaries that can be sent to your phone via Text or E-mail.
- Clean and easy to use interface.
- Available wherever you have access to the internet.
- Logs you out of your account if inactive for 10 minutes
- Can be annoying to setup transaction categories if you are a detailed/OCD budgeter and organizer.
- No setup for bill pay
In my experience so far, Mint.com’s online financial software has been incredibly useful. My only gripe would be the lack of paying bills online through the site, but thats petty compared to what they offer. I wouldn’t be surprised if it’s already in the works. Eventually, I will give Wesabe and Yodlee a chance so stay tuned for those reviews. Mint.com gets Cashola’s Stamp of Approval!
Peer-to-Peer Lending seems to be a controversial subject in the personal finance world. Sites such as Prosper and Zopa offer Peer-2-Peer Lending, allowing individuals to engage in financial transactions such as lending or borrowing without the intermediation of a traditional financial institution. Prospective lenders bid on borrowers ebay style - The borrowers post the maximum interest rate they are willing to make on their loan, and the lenders go to a bid war trying to offer a better interest rate. Borrower’s credit history and debt ratio are appraised by the site and are given a credit score on their profile ranging from AA all the way to D, so lenders can have a general idea about the person they are bidding on. Some Lenders are claiming returns of up to 10-19%. Sounds great so sign me up! Wait just a second. I needed to research a little more and with all the good that I found, I found an equal amount of bad. There were a fair share of horror stories of borrowers defaulting on their loans and failure of the company to collect. Ugh. There were also lenders who mentioned that their returns were no better than your average CD after fees and tax. Why all the risk, when you can go with a secure CD? I personally haven’t dabbled with P2P lending, but despite all the negatives, it still has me interested. I don’t think that this can be used as a viable means for alternative income or investing just yet, but it can be something FUN to experiment with your play money. Depending on my expenses this month, I may throw the minimum $50 to test it out so I’ll keep you posted.
Tracking your finances accurately is a necessity. The thought of organizing and tracking your finances brings on thoughts of sifting through piles and piles of paper work just to find any relevant data. The keyword here is data. You still need to process, organize, and structure all this data, by busting your brain and pulling your hair out, to make it useful to you. I know there are some people that are old school and don’t like change, but we are living in the age of technology and computers…let’s put it to good use! The ability to see ALL aspects of your finances put together in a processed and organized manner is a godsend, giving you the ability to make smarter financial decisions. Today I decided to take my financial planning to another level…digitizing it. I did some research and decided I would choose Quicken over Microsoft Money. I’m a sucker for cnet reviews, plus I’m not much of a Microsoft fan boy. With Quicken you can connect to your financial institutions (banks, mutual fund companies, credit card companies, etc) and it will update your info seamlessly. You also have the option to scan your paper work and encrypt that information locally on the hardrive. Let me tell you now, Paperless is the future! Aside from Quicken and M$ Money, there were online options available such as mint.com, wesabe.com and yodlee.com, but I’m still a little hesitant to use such services. I guess there’s still a little old fashioned in me, but who knows…maybe one day. Regardless of what you choose to track your finances, the goal here is to do it (easily) and stick with it!
If reading investing books isn’t your thing, there are seven words that can sum up how to invest well. Those words, offered by Michael Pollan, are:
Index (mostly). Save a ton. Reallocate infrequently.
The book I’m reading now, Bogleheads’ Guide to Investing, and most investing/personal finance information sources I’ve read point readers in that direction. Index Funds, with lower operating expenses and low portfolio turnover, have generally kept up or even out performed actively managed accounts. If Warren Buffett recommends Index Funds, you better listen! Saving a ton is just common sense. You can’t build wealth if you spend more than you earn. Lastly, Reallocating infrequently (every 6 to 12 months) will discipline you to stick to your guns with your investments, keeping you from impulsive decisions and needless costs. You can read more financial basics offered by Pollan in the full article - Five Basics for Building a Solid Financial Future
The time has finally come for me to take my dive into the world of investing. This weekend, I’ll be opening my Roth IRA with Vanguard and investing my money in the Vanguard Star Fund (VGSTX). J.D. of Get Rich Slowly wrote a helpful article - “How to Start a Roth IRA (and Where to Do It)” which opened my eyes to what’s available. J.D.’s article featured “The Big Three”:
Fidelity Investments offers a no-fee IRA. There’s a $2,500 minimum initial deposit, but this is waived if you commit to $200/month automatic contributions. They offer 4,500 mutual funds, about a quarter of which have no transaction fee. In short, you can open a no-cost IRA at Fidelity with a $200 starting investment if you invest in mutual funds and you agree to contribute $200/month. Apply for a Roth IRA with Fidelity.
It’s also possible to open a no-cost Roth IRA at The Vanguard Group. To do this, you must elect to receive electronic statements and start with $1000 in the company’s STAR fund. (The STAR fund is an mutual fund of mutual funds, a safe choice for beginners.) Additional contributions require a minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50. There are no fees to purchase the STAR fund. Start a Roth IRA at Vanguard.
T. Rowe Price charges $10/year for Roth IRA accounts until you have a balance above $5,000, after which there is no fee. You need $1,000 to open your IRA, but this minimum goes away if you sign up to contribute at least $50/month with the Automatic Asset Builder. There are no sales fees or commissions to invest this money in T. Rowe Price mutual funds. Open an IRA at T. Rowe Price.
All these investment houses are great choices for the beginning investor, but I’ve always been somewhat infatuated with Vanguard and decided to hold out until I could hop on the Bogle boat. What attracted me to Vanguard is their low expense ratios and great overall performance. Now the STAR fund may not be that impressive, but it’s great for the beginning investor who doesn’t have much money to initially invest. With regular deposits, your Vanguard STAR fund is a great stepping stone to the higher priced Target Retirement Funds which require a $3000 minimum. My projected date to transfer out of my STAR Fund into a Target Retirement Fund is January 2009. How’s that for a goal? In the end, you can’t go wrong with what you choose. Do your research and find out what suits you best.
Yes, Ben Bernanke has run out of ammo, leaving him to sit there with his fingers crossed as he lets the market take on it’s own course. The Federal Reserve released minutes and has announced yesterday that our economy hasn’t seen the worst of it yet. The economic growth forecast for 2008 is as hopeful as Gary Coleman hitting 5 feet tall. Bring on the inflation and unemployment. Want to see the numbers? Taken from an article on Forbes.com:
“the central bank now expects 2008 GDP in a 0.3% to 1.2% after the downward revision, unemployment of 5.5% to 5.7%, and inflation of 3.1% to 3.4%.”
After the release of the Fed’s minutes, the already struggling market took another blow.
“The Dow dropped 189 points, or 1.5%, to 12,640, with much of the decline coming after the Fed minutes hit. The S&P 500 lost 17 points, or 1.2%, to 1,397, and the Nasdaq shed 35 points, or 1.4%, to 2,457.”
Not only that, but travelers will be feeling the heat immediately. Due to rising gas prices, which by the way oil hit a record breaking $134 a barrel today, airline stocks plummeted. American Airlines cut their fourth quarter capacity by up to 12% and put 75 planes to rest. American Airlines will also be raising passenger fees and charge $15 for your first checked bag. With news like this, it makes me apprehensive to start my investing plan at the end of this month and revert to strictly saving, but I must practice what I preached in my previous post, “Psst! Want to know the best time to invest?“. Wish me luck.