Perhaps more difficult to embrace than financial planning is the art of negotiation.
Growing up, I saw two very different approaches to personal finance. Both of my parents were good savers, but that is were any similarity between their approach to finance ended. Dad’s investing style: calm, disciplined, balanced, thoughtful, intuitive, enthusiastic, and confident. Mom’s investing style: undisciplined, impulsive, emotional, intellectually-detached, and timid. Over the years I saw another difference: Dad’s approach was extremely successful and Mom’s was, well, not.
One quick example. Dad was buying a new SUV. He found one he wanted and was negotiating on price. He was making headway getting a $1000 off then another $1000. The sticker price was a joke. They started perhaps $4500 apart and whittled the difference to about $2000. The car salesmen was starting to make pained expressions, but I could tell that they were not genuine. Dad would walk away and the salesman would chase him down like a puppy, only his tail wouldn’t wag. Then Mom lost it. She got mad and told Dad to quit beating up the poor salesman. She said, “Our SUV is shot; we’re stuck here and we need a vehicle today.” OMG, Dad dutifully took the current salesman’s offer. I was stunned. In 30 seconds Mom had managed to turn Dad’s hard-earned position of strength 180 degrees. I had seen my Dad negotiate before and I wanted to see if he would get the full $2000 or just settle for $1500. On the way out the door, while Mom was out of earshot, Dad said, “You know, Mom just cost us $1500?” I nodded yes. I was still in mild shock, but I knew he was correct. I was attending a 12-round prize fight and Mohammad Ali’s corner had just threw in the towel — in the 3rd round!
To be continued…. So many stories. Next story: Making personal finance personal.
P.S. — Cover your eyes, a tiny bit of math. Let’s say that in 30 seconds $1500 was lost. That $3000 in a minute, or $180,000 lost in a hour. Perhaps an odd way of seeing things, but that’s how my mind works. And there is a kernel of Gestalt truth to it.
I went to a get together tonight with some friends, and talked about all sorts of topics. The least popular, by people’s reactions, was personal finance.
People, in my experience, find Madoff somewhat interesting. They sometimes find a bit of Wall Street bashing a bit entertaining. And they find John Bogle and ETFs plain boring.
My issue is that I find the details of ETFs, markets, exchanges, and bonds fascinating. I want to get inside of people’s heads to understand just why is finance boring or even vaguely repulsive? My first thought is that somehow people feel that making money from investments is less morally redeeming than through work. Another thought is that “respectable people don’t talk about money.” Perhaps they find finance and all its jargon overwhelming. Perhaps they have other more important things to focus on than their portfolio.
My mission with this finance blog is to find ways of helping people make better financial decisions. A secondary goal is to bolster confidence in these financial decisions; to help people sleep easily at night with their financial strategy. Finally, if possible, I would like to help people see finance through my enthusiastic eyes… as the minor miracle that it is.
The first two goals seem very achievable, while the third seems ever remote. Really making sound financial decisions, and feeling secure in those decisions is important. Perhaps, making finance interesting is not so important. There are a handful of people, like myself, who find finance intrinsically interesting, while the vast majority of people could care less about money, investing, stocks, commodities, ETFs, options, futures…. hey, you in the back, quit snoring… mutual funds, gold, ETNs, annuities, insurance, loans, equities… oh, crap I think I might have dozed off a bit myself.
Today, the Ivan account closed at $24,060. TOT shares lead the rise with a 1.7% gain to close at $53.95 per share. SPY and JNJ also gained. The only hold to lose ground was the CALL (SPY) SPDR S&P 500 ETF MAR 19 11 $115. Collectively the SPY and its covered call were a net gain (as expected when the market rallies).
This blog is a finance blog. It discusses general financial topics; both personal finance and business finance. I’ve been discussing esoteric financial topics like algorithmic trading, CAPM, hedging, beta computation, fund construction, and long-tail pseudo-Gaussian statistics. These are topics that the average investor probably could care less about. I will try to stop this mostly, at least on this site. For you quants out there I will start posting those types of posts to sigma1.co. This finance blog will focus on more practical topics of personal finance like making good use of low-cost funds and ETFs, savings, investing, and building a long-term personal investment portfolio.
Sigma1 (site for the Balhiser LLC Σ1 Fund) will provide boring reading material that is fascinating to me but boring to about 99% percent of people. This number is likely accurate because only about 1 out of 100 people I broach the topic with show any appreciable interest [pun not intended].
This is in contrast to this blog’s topics which are only uninteresting to 80-90% of people. Yes, verily, I maintain that 10-20% percent of people are actually interested in the practical investing topics on this blog (at least from time to time).
I know one thing; I like discussing finance with people. I like talking with folks that have a job but don’t have a bank account. I like explaining how free checking is better than paying for money orders. I also like talking with folks who have $100,000 in a savings account earning 0.1% or folks who still pay $50-$100 commissions for trades. I love to tell them about online investing options and research tools.
I also love talking about tax-loss harvesting and about the merits and flaws of the Black–Scholes option-pricing model. But, based on user feedback, I will cordon off these snooze-worthy topics on a separate site.
BTW, in closing, CIA is flirting with $24K, at $23,914. Happy investing and Cadillac dreams.
The small investor has some truly excellent options these days. Two in particular are just this side of awesome. The first is index ETFs (exchange-traded funds). The second is low-cost online trading. ETFs and cheap online trading form a powerful combination for the small investor.
In addition, the wealth of online investment information is voluminous, and in many cases free.
So for the small investor (whom I define as someone with < $1,000,000 of net assets to invest), 2010 is a pretty great starting point to get serious about personal finance
I recommend that before you embark, that you have at least a 3-month emergency fund and little to no credit-card debt. If this doesn’t describe your financial situation, this article doesn’t currently apply to you. [Please consider paying down those credit cards and then saving up a modest rainy day fund!]
However, if you meet these basic criteria consider the following suggestions:
- Open a Vanguard account with a minimum of $3000. Put those first funds in either the Prime Money Mkt Portfolio or the Tax-Exempt Money Market
- Keep putting spare money into Vanguard. Once you hit $10,000 to $25,000, consider other Vanguard offerings. If you are unsure of what to invest in, call a Vanguard adviser.
- Consider maxing out your 401k contribution, if your income permits. Keep that “rainy day” fund in mind. A rainy-day fund is cash, money market, or diversified short-to-intermediate AA or better rated bonds or CDs. Stocks, mutual funds, etc. don’t count for rainy day cash.
- Keep that Vanguard account. If your tax situation permits, consider making Roth IRA contributions. Vanguard is a good place to hold these, Fidelity is another.
- Once you’ve got your rainy-day fund to 9 months or more, and can maintain solid 401k and Roth IRA contributions, congratulations. You may be read to become a “big-time small investor”.
Enough preamble. Let’s assume you are ready. Now what?
You can select any number of online brokerages and invest for less than $9 per trade. That includes option trades. Some even allow futures trades. So, the world is your oyster.
However, prudence is crucial. There are just so many opportunities, options, pitfalls. May I make a few suggestions?
- Start by investing in ETFs. Consider, SPY, VTI, BND, VEU, and, now, VOO. These are excellent diversified ETFs with very low expense ratios.
- Want to dabble in individual stocks? Diversify. If you buy some tech stocks, also buy some consumer goods, or basic materials, or utilities.
- Want to dabble in options? Try starting with writing (selling) covered calls on your ETFs.
- Futures? Think once, think twice. Do some research and think a third time. The just maybe you might given them a try. But, please, please do so with caution. [Note futures contracts require a margin account... please tread carefully with margin (aka leveraged) investing.]
That is just a start. Might I also point out that an investor today could construct an excellent life-long portfolio with just VTI, BND, and VEO… re-balancing annually as age and situation dictate? As age 60 approaches, mixing in a few laddered CDs (bank certificates of deposit) is not an unreasonable option. Owning and paying-off a home is also a reasonable retirement goal.
I, however, am now content to fully adopt a reasonable and prudent approach. I also dabble with a small Crazy Ivan Account (CIA), and with (limited) option strategies. I also incorporate rental real estate into my investing mix.
The point I want to emphasize is that there are so many opportunities for the modern small investor. It is easy to feel overwhelmed by the choices. But, by starting with the basics — Vanguard mutual funds, low-cost diversified ETFs, and online investing — it is possible to construct and manage very solid personal portfolios.
Best wishes.
Today’s best: BK bacon double cheeseburger for $1.49. Yum! Today’s worst: learning that Terminator: The Sarah Conner Chronicles only had 2 seasons. Today’s honorable mention for best: The Web, Google, and Wikipedia that allowed me to learn that info in about 1 minute.
My employer has generously given our lab the day off to celebrate some of our recent successes, giving me a four-day weekend. What a precious gift — time. Time to relax and see a concert, time to clean the house, time to blog at balhiser.com. This gift off one day plus the Labor Day Weekend got me thinking about time and investing and how the two relate.
Time is a critical factor in investing. Interest and dividends are paid out over time. Inflation adds up over time, as does compounding. Annuities pay out over a lifetime. And, of course, pundits debate whether it is worth it to try to time the markets.
Time shows up in just about every financial formula, starting with the basic time value of money computations.
And, naturally, savings accumulates (or debts) over a period of time.
Putting this all together time is generally on your side as an investor. Especially if you are in your 20′s, 30′s, 40′s or even 50′s and investing in retirement. Having a 20-year plus time horizon is very likely to help smooth out the huge market ups and downs.
The biggest gotcha about time is inflation. Certainly inflation is my greatest concern. A dollar today is not worth what it was 10 years ago. I paid $1.00 for a Hershey Bar this week. 10 years ago I could have bought 2 for $1.oo. The other big gotcha about time is uncertainty. What will taxes be for IRA and 401(k) withdrawals? What will the economy look like? Will I have a job and will my pay keep up with inflation and taxes?
That said, I still believe time is on the side of long-term investors. Tax-deferred compounding of IRA and 401(k) assets is very helpful. The tax deferral of unrealized capital gains in taxable accounts is another investing boon. Finally the tax-free advantages of Roth IRA and 401K assets is another helpful option to help leverage the power of time.
Enough about that. A quick Crazy Ivan Account update: $21,750. Nice appreciation of late. Even my Barclays ADR (BCS) is up from the initial purchase price. Quite wild ride on the banks. The covered call I sold on SPY is in the red, but the 100 shares of SPY are in the black by more. That how covered calls generally work out — smoothing the volatility out of both the ups and the downs.
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