As you guys probably know, the stock market has been taking a major beating. Corporate earnings are weak and therefore dividend payouts are under pressure. Well, along with a lot of other people, we’ve certainly taken a hit.
Here is a quick comparison of our dividend stock holdings before and after last years drop. In a nutshell, our monthly pretax payout dropped from $848.94 to $151.62 between June of 2008 and today. There were three primary reasons for the decline.
First, we sold some stocks, about $14,000, partly to cover James’s overspending and to invest $10,000 in a Friend’s software businesses.
Second, A major source of this drop was a bad investment in Advantage Energy Trust (AAV) – we lost nearly $24,000 on it. AAV’s dividends went from $356 per month to $0. Its been our worst investment ever.
Third, the rest of the decline was partly due to the dividends of pretty much everything else being cut.
Here is the before (from last June). As you can see – a total monthly payout $848.94.
As of yesterday, we are getting about $151.62.
In terms of the takeaway here, we made a major mistake in not diversifying. The objective at the time was to stay focused to maximize our monthly income, obviously it hasn’t worked. Specifically we probably should have diversified both across types of stocks and types of assets. That is bought less energy trusts and more bonds.
Even though we’ve taken some losses on our stocks, things could be a lot worse. We are both employed and despite the economic downturn, the US is still a great place to be an investor or a saver. If we are intentional about building our long-term wealth, we should be fine in the coming decades.
Its looking like a bleak Wednesday for the nations economy, and likely some of this news affects your wealth one way or another.
1) Storage unit auctions are on the rise (yahoo).
2) The Feds are delaying the results of the bank ‘stress test’. (1) This is because bank balance sheets are weak and the government feels the bad news doesn’t need to be publicized.
3) Elizabeth Warren of the TARP oversight council says that the US may need to spend an additional 4 trillion dollars to prop up US banks (here). See above.
4) Commercial real estate is taking it on the chin (WSJ).
5) U.S. State and municipal employee pensions are underfunded to the tune of 40% (FT).
6) The Fed is pumping another 5 billion into AIG (FT). Why?
7) Talk of tax revolts is still simmering in California (Reuters).
8) The TARP bailout funds will be extended to selected life insurers (WSJ).
To keep things in perspective here are some cute puppies.
Last week I was in Portland visiting my twin sister and her family. When I noticed a handful of coins in my pocket I asked my three year old nephew if he had a piggy bank. My sister sheepishly admitted that he didn’t have a piggy bank.
She had her own piggy bank from Denmark out of reach from when he was younger. She pulled it out and said that she could use it in the mean time until they found one of his own. He caught on quickly and was asking for more money until we couldn’t find any more change in the house.
I gave a lesson about piggy banks and told him that when his dad comes home from the office he should ask him for coins for his piggy bank to save for college. Since his dad has his own coin jar on his dresser I figured all he’d have to do is smile to get him to cough over the coins.
As it happened my brother-in-law was in DC on a business trip. My nephew then proceeded to ask him for coins for his piggy bank every time they talked for the rest of the week.
Now that I’ve created a monster I think I’ll have to also be a good auntie and find a good piggy bank for him!
Keep in mind that most things that apply when you are three are still relevant as adults – don’t forget to feed your piggy bank and ask for more money! It will pay out in dividends for your wealth (over time, of course).
According to CNBC (drumroll)…the top holders of US federal debt are:
15. Luxembourg 14. Depository Institutions 13. Russia 12. United Kingdom 11. Insurance Companies 10. Brazil 9. Caribbean Banking Centers 8. Oil Exporters 7. Other Investors 6. Pension Funds 5. State and Local Governments 4. Japan 3. China (Mainland) [Excludes Hong Kong] 2. Mutual Funds 1. Federal Reserve and US Intragovernmental Holdings
I wanted to update our readers on our progress towards our goal of buying an investment property in Portland, Oregon.
My assessment of the real estate situation right now is that while it might not be a seller’s market it certainly isn’t a buyer’s market either.
The bottom line is that things have been slowly progressing. The money has been sitting in the bank since the beginning of the year but the economy is paying its toll.
Last week I was in Portland and took the opportunity to spend an afternoon looking at a shortlist of potential properties. Nothing piqued my interest.
Given the current economic situation no one is putting anything on the market unless they really have to. This means that what is on the market isn’t all that appealing. I’ve been watching the market nearly daily since August and there are plenty of properties that are sitting there unsold.
Those that have any real appeal are few and far between. The good news if you are selling means that anything that has any cute appeal may go faster than you think, as there is a demand for properties that are hard to come by.
Good luck unloading a condo in the Pearl, a new trendy loft district in Portland, but you’d be surprised at the demand for first a cute little bungalow ideal time home buyers interested in the tax credit that Obama has established.
In fact, our real estate agent reported that times were busy for their office. They have a record number of sales in escrow, 12 as opposed to the 8 they had in the height of the real estate boom. She says that people are there to buy, but it is hard for anyone to put something up on the market unless absolutely necessary.
Right now patience is the name of the game. We want to make the right choice for our long-term wealth, and especially not make a poor purchase that will haunt us for years to come.
I gotta tell, you sometimes I read a story that warms my heart. It often has to do with extraordinary individuals who manage to beat the odds by virtue of their own wits. One of those individuals is Andrew Beal.
If you haven’t heard about Beal, he’s a got a great write up in Forbes. Evidently, Beal, sole owner of Houston based Beal Financial managed to duck the real estate meltdown. His company stopped making loans in 2004. In 2004 he switched to focus on raising capital by increasing deposits. By 2008 he was sitting on a huge pile of cash, $2.9 billion. When the bloodletting started, Beal was there to pick up the pieces. His bank is currently on track to becoming a $30 billion dollar organization – all largely without TARP or other forms of federal assistance. Talk about creating wealth.
So, he’s just another rich banker – so what? Well, Beal is also an amateur mathematician and is responsible for a contribution to number theory based on Fermat’s last theorm – the Beal Conjecture. Beal also launched an Aerospace company – Beal Aerospace in 1997 which later folded in 2000, due to regulatory intransigence. Andrew is a champion gambler and has been cited as participating in some of the highest stakes poker of all time. To top it all off, Beal is frugal. He drives a used Ford and flies coach – despite having a networth of over $300 million dollars. Interesting guy, sure knows how to live frugally.
More importantly, his bank – Beal Financial – has been rated by bankrate.com as offering 1.1% on 1 and 2 month CD rates, the best rate so far of 2009. So, if you are looking for a good short term to spot to stash your cash, check it out.
Its Monday, time to get the week started. Among the usual flood of financial news is an interview with noted analyst Meredith Whitney. If you don’t know who Meredith Whitney is, she’s a star stock examiner who gained some notoriety for issuing sell ratings on several of the major banks before last years meltdown (1). She’s now regarded a someone who has a great deal of insight into the economy.
Whitney gave a recent interview with Steve Forbes. Relevant to your personal finance, Whitney argued that credit card regulation will encompass the following changes:
1) Requiring a 21 day grace period before repayments must be made. Right now, the grace period for repayment of credit card balances is subject to whatever terms the credit card companies want. After the latest reforms get implemented, the credit boys will have to give you 21 days to fork over the payment.
2) Mandating that payments be applied to high interest portions of debt. Right now, if you get a teaser rate on a card or balance transfer, the credit card company applies the payment to the lower teaser rate. The new rules will mandate that payments go towards the part of the loan that carried are higher rate.
3) Universal default will be forbidden. Right now if you are late on any of your obligations, the card company can raise the rate on your debt – this is called universal default. The new rules will forbid this.
These all sound great, whats the downside? Whitney predicts that the banks will cut the amount of available credit they offer. Why? If someone does start having problems, the banks can’t use universal default to raise their rates, so they will cut credit lines to avoid being stuck holding the bag.
There has been some interesting dynamics in Washington the past couple of weeks. If you’re keeping an eye on the financial news, you probably know that President Obama met with the heads of many of the major banks last week. By all accounts, the meeting was NOT cordial. The politco speculates that it was a power play to show who is boss (1).
Now, I am bad a political speculation, but since its marginally related to finance, I’ll take a stab at making some predictions. When the dust from this big economic mess is settled, the big banking houses will come out of this with much reduced clout. Why? The Politco was probably correct. I think Obama will move to break the power of big finance in Washington.
A) The banking industry typically funds both Democrats and Republicans, but generally gives more to Republicans. Click over to opensecrets.org to see what I mean.
B) Most senior bankers will oppose his budget and social policies. By weakening their power, Obama increases his chances of implementing his long term agenda. Think about it – who is going to get nailed by the new tax brackets in the presidents 2010 budget? One things for sure, its not joe main street. Instead, Wall Street executives are probably going to fight it tooth and nail via their proxies in congress. Its HARD to get a new, even moderately fresh agenda passed in DC, and Obama has the stated goal of getting single payer health care enacted and making the US more environmentally friendly. Not easy.
C) Right now, the administration is stronger than the banks. Power changes hands fast in Washington, but currently public opinion is running against big finance – heck, even big finance is against big finance at the moment. So, the public and the business community will probably support tougher regulations on lobbying, regulation and more federal oversight.
An additional thought, if Obama does decide to break Citi, Bank of America, JP Morgan, etc., the administration will have to use political force. So if I am correct, I’d look for comprehensive legislation to come out of DC along with spending caps on executive salaries, some anti-trust components, etc.
So what does this mean for your personal finance? Well, probably not a lot, but it does suggest that big finance is going to be out of favor for the next couple of years. It could have an unexpected ripple effect, though, where companies that deal with big finance are hit hard. You might consider factoring this into a buying or selling decision if you’re dealing in stocks of some of the major financial giants. Otherwise, just sit back and enjoy the fireworks.
In response to a comment from one of our readers, I wanted to take a moment to discuss the ins and outs of establishing an emergency fund.
The first thing is that emergency funds are unique to individual circumstances.Everyone has different needs in terms of their regular budgeted expenses, general financial solvency, and perhaps most important, comfort levels.
The reason for establishing the emergency fund also makes a difference.For instance, you might want a bit of liquid resources so that you have a bit to fall back on if an unplanned trip for family illness or the like comes up.Many people also establish emergency funds to ensure that you’ll have enough in case of job loss.For the sake of covering all of the bases, we’ll look at aspects related to emergency funds for a variety of reasons.
Regular Budgeted Expenses.Obviously you’ll have less of a need to dip into potential ‘emergency’ funds, if you have good control over your regular budget.This means budgeting for intermittent expenses such as property taxes, tires, insurance, etc.If you’ve already got these sorts of items built into you budget, then you’ll feel the crunch less when they arise.
Account Cushion.I’d also say that it matters on how much extra you keep in your account. James and I tend to save and invest any remaining funds in our checking accounts pretty regularly. This means that there is a less of a cushion for unexpected expenses. However, you might already have a bit of a cushion available for smaller emergencies without having a specific account for such occasions.
What you Actually Spend.Another thing to keep in mind is that when people say you might want six months of money to fall back on, in case of unemployment or illness, this means your actual expenses, not what you make.Thus, you should budget out what your minimum expenses are each month – not including investments or optional payments. You will obviously have to cut back and live much more frugal if you do find yourself out of work.
Probability of Finding a Job.This one may be harder to measure, but generally it isn’t hard to get a sense of what you might have to plan for in terms of finding a new job.This will depend on where you are looking, as well as the field you work in.For instance, in Portland, Oregon in a bad job market it took me three months to find a job.In DC, a year later, it took me a month.The general average that is suggested, is between three and six months to find a new job.
Financial Solvency.This factor also plays in heavily, because while you may not have liquid resources, you might not feel the need to have as much set aside if you know you have the option to sell stocks or dip into other means of savings in a relatively short period of time.For instance, for us we have enough in stocks to last us several years, thus not making this as much of an issue for us.
Comfort Level.This is also key, because you want to feel secure.For James, he would be fine with having nothing liquid, as well as not having a credit card.For me, however, I feel more of a need to have a bit of a reserve and definitely carry a credit card with all of my travel.When you travel as much as I do, it doesn’t take long to learn that one delay may cost you a bundle.
In establishing our emergency fund, we’ve mixed all of these factors to make a plan that works for us.
Given our financial resources that we could tap into if needed, we don’t have a specific emergency fund in case of job loss or illness.
We’ve established $5k as a good bench mark that most emergencies would fall under this threshold.
Once we have met our goal of establishing an emergency fund, we will divide up the funds where they make sense to us.
We will put $500 in Miel’s Electric ING checking account so that this can be truly liquid.If the funds were elsewhere they couldn’t be accessed without logging on to the internet; not always an option while traveling overseas and in the case of an emergency.Credit cards will help as a cushion, but they don’t provide cash.
We will put another $500 in a regular money market account in ING, making a bit higher interest rate than the checking account.
Lastly, we will put the remaining $4k in an ING Money Market Fund, making just under 5% and still being easy to convert to cash when needed.This will make me feel better for having something specifically set aside, while at least beating inflation.
Overall it comes down to looking at these factors and seeing what makes sense for you.I wouldn’t blindly accept the advice of a financial advisor if you don’t feel that their suggestion is meeting your needs. I would however make sure that you’ve got enough of a safety net to make you feel safe.
Readers:We’d love to hear from you on how much you might keep in an emergency fund, how those funds are kept, and what you use them for.
Appearing in today’s Wall Street Journal, anti-tax advocate Arthur Laffer has the following to say about the estate tax:
In most cases, people who inherit wealth are lucky by an accident of birth and really don’t “deserve” their inheritance any more than people who don’t inherit wealth. After all, few of us get to choose our parents. It’s also arguable that inherited wealth sometimes induces slothfulness and overindulgence. But the facts that beneficiaries of inheritances are just lucky and that the actual inheritance may make beneficiaries less productive don’t justify having an estate tax
He’s got an interesting point, and this obviously affects all of us who are in line for inheritance.
