The Art of the Deal

On October 15, 2010, in finance blog, Index Investing, by Dave

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.

To Make Finance Interesting

On October 15, 2010, in bonds, finance blog, by Dave

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.

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?

  1. Start by investing in ETFs.  Consider, SPY, VTI, BND, VEU,  and, now, VOO.  These are excellent diversified ETFs with very low expense ratios.
  2. Want to dabble in individual stocks?  Diversify.  If you buy some tech stocks, also buy some consumer goods, or basic materials, or utilities.
  3. Want to dabble in options?  Try starting with writing (selling) covered calls on your ETFs.
  4. 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.

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