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Price of Gold – Is it worth it?

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With gold prices rising, I’m glad to have laid down the cash for gold in Dubai’s gold souk. What I bought about a year ago has now raised its value by about 25%

We were interested in finding an article in the Wall Street Journal entitled, How Much Suits Gold? Leading Gold Bugs See Prices Tripling Someday, But Others Say its Current Level is About Right.

It looks like the word on the street is that folks aren’t sure what the price of gold should really be set at.

It points to the old legend that an ounce of gold should be approximately the same as a top of the line suit, supposedly dating back to Roman times.

I’m less in favor of gold rings or gold earrings, or the like, but prefer my gold in bars. I’m more of a silver or platinum gal for jewelry.

Readers: Do you own any gold? If so, how much did you buy at, and are you thinking of selling?

Cheers,

Miel

Should I Borrow from my 401(k) Plan?

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When times get tough, the question of whether or not it is wise to borrow from your 401(k) plan may come up.

The short answer, unless you have absolutely no other option in the world, our advice would be to absolutely not to consider this as a viable option.

The reasons are pretty clear:

  • Repayment must be made in full, with interest, within five years. If times are bad enough to consider utilizing the value of your portfolio, chances are that it may be difficult to rebound smoothly within that period of time.
  • If the loan isn’t repaid in five years then you’ll have to pay income tax on the outstanding balance, plus an early withdrawal penalty if you’re under age 59 and a half.
  • While there isn’t a fee to borrow from your 401(k), it will cost more to repay it, as this will have to go in post tax.
  • If times get even harder and you lose your job, you’ll need to repay within a set period of time – usually 90 days. Not a good place to be in when you are unemployed and have no chance of building wealth.
  • Additionally, you’ll have smaller portfolio to build on, making your nest egg for retirement that must less to rely on.

Given the relative lack of liquidity for retirement assets, having a chunk of change in the bank for emergencies is really essential. If you’ve got extra money to throw at retirement, that is great, but only if you have enough to float you without dipping in to borrow from your retirement funds.

Good luck to those who are facing hard times in this economy. Keep your head up and try to stay away from borrowing from your 401(k).

Best wishes,

Miel

Living Frugal in America

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Mint.com recently released this chart on America’s Most Frugal Cities. Note that you won’t see DC on America’s most frugal cities, but you will find Michael’s home state of Indiana.
You can also check out what people are spending their money on. I find it interesting that this chart doesn’t really scream real frugality to me. If you are spending a great deal on clothing, electronics, and entertainment, then our entire idea of frugality is different than it has been in decades past. These are things that you can save a significant amount of money on if you are being intentional about frugality.Readers: How does your city rate for living frugal?

Cheers,

Miel

Financial Luminary: Peter Lynch, Part II

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My last post I talked about who Peter Lynch is, while today I’m going to talk about his stock picking philosophy, his successes, and how he has influenced me.

Peter Lynch is most famous for his work with Fidelity Investments managing the Magellan Fund (symbol: FMAGX). And for good reason; during Lynch’s 13 year tenure (1977-1990) heading the fund, it averaged an annual return of 29%. 29%! That number continues to just amaze me; if a man like that has something to say about how money should be invested, I will certainly listen.

As a software engineer I am quite drawn to technology. I’ve read more than a couple books on technical analysis and mathematical approaches to picking winning stocks (in fact, I just read an interesting paper on using Monte Carlo methods for picking options) and I find that I’m very attracted to that manner of investing. Although I know that the markets are too complex and too driven by emotion and psychology to be deterministic, there is still something about formulating a mathematical framework for picking stocks that makes me want to keep buying those books and reading those papers.

Peter Lynch’s investment philosophy couldn’t be more of a 180. Lynch was always a very hands-on investor. His first step was to identify companies that fit his aggressive style. He tried to achieve a certain degree of balance with his portfolio (breaking stocks up into 6 distinct categories) but his real bread winners were his “fast growers”. He liked to find small, aggressive companies with high growth (but not too high; he thought that any annual growth over 30% a year was unsustainable and should be avoided). He liked companies that hadn’t received a lot of attention but who are reasonably priced and perhaps most importantly, carry low debt and are consistently profitable.

This, however, is just the first step towards investing. Generating a list of prospectively worthwhile stocks is nice, but what really made Lynch successful was his exhaustive research. He was famous to spending a lot of time on the road, visiting companies all over the country in person so that he could get a feel about how the company was really doing and where they might be headed.

He wanted to know everything he could about a prospective company before buying into them. Sometimes having a lot of data can be a bad thing (read Malcolm Gladwell’s “Blink” for more on this) but in the case of investing, the more good information you have, the better chance you have of creating wealth. And Peter Lynch was famous for being able to not only acquire good information, but also use that great volume of information to form an opinion as to whether that company is a good investment or not.

Lynch is also famous for his championing of “investing in what you know.” He tells stories of investing in companies that make certain products that his wife or kids have used (still exhaustively researching them, of course) and sticking to financial sectors that he has a strong knowledge basis in. This idea of a common person being able to spot trends and know what is a good product out in the marketplace before a fund manager can reach the same conclusion by reading financial data is a powerful idea, and one that has made his investing tips very palatable to the common investor.

I feel as if I personally have benefited greatly from Lynch’s advice. As I mentioned earlier in this post, I tend to gravitate towards the mathematical side of investing, at my own peril at times. But Peter Lynch is a strong example for the opposite approach. He really drives home the point that there isn’t a magic formula; that good stock picking is based on information and making good judgment calls based on that information. His idea of investing in what you know is strong advice that anyone can take and use to build wealth. In fact, we have the best example of this right here with James and Miel and their decision to invest in NOKIA. The quote that I found most interesting from that post was this:

“4) Having lived in Finland, I believe strongly in the Finnish persuasion for frugality and believe that the business is run well.”

What a great idea! Efficiently running your business is such an obvious indicator of success (and plays into Lynch’s emphasis on consistency) and James and Miel made a judgment call based on what they know: their personal experience. So far it seems to have been a pretty good call by our Grand Poobahs. There isn’t a mathematical model on earth that could describe Finnish frugality and how it affected their decision. But it was an important factor when they were considering investing. Peter Lynch would be proud.

Peter Lynch is justly considered one of the best stock pickers of all time; and his investment philosophy, while on the surface it appears simple, could be of use to any investor. It’s hard to argue with someone who averaged 30% annual returns over a 13 year period.

-Michael
Twitter: @michael_dink

Economic Downturns and the Rise of the Financial Blog

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I read a great article in New York Magazine entitled “The Dow Zero Insurgency” (that article can be found here). The focus of the article is primarily centered around investment blogs as opposed to general personal finance blogs but it’s still a very interesting read.

Zero Hedge (the focus of the article) is a financial blog with strong conspiratorial leanings with a healthy dose of “Fight Club” references. It’s an interesting blog in some ways, with a vibrant community. It’s a bit too combative and “let’s overthrow the economy”-esque for me but it has been shown to be an intelligent read, heavy in technical analysis and Wall Street-insider information.

Zero Hedge’s credibility has been bolstered by a couple of statements and predictions that have proven to be true; for example the New York Magazine article talks about statements made by Zero Hedge and the Goldman Sachs “flash trading” controversy.

You won’t find balanced and measured statements on Zero Hedge – there are a lot of conspiracy theories, bleak analysis and nihilistic rants – but the blog has certainly gained a rapid following, perhaps capitalizing on economic uncertainly as well as corporate and government actions that has led some to question the trustworthiness of those in charge, and how that affects one’s ability to build wealth.

Even if the Zero Hedge blog itself isn’t appealing, the New York Magazine article certainly is a must-read.

“The Dow Zero Insurgency: The Rising Power of Financial Blog Zero Hedge” New York Magazine

-Michael
Twitter: @michael_dink

Financial Luminary: Peter Lynch

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Peter Lynch is generally regarded as one of the greatest stock pickers of all time. His fund management is the stuff of legends, and as I started to learn more about him and his financial philosophy, he became a huge influence on me. As such, he will be the focus of my next two blog posts. Today I will be talking about who Peter Lynch is, and my next post will review his financial philosophy, and what I personally have learned from him.

I initially gravitated towards Peter Lynch because my father had given me a stack of his financial books, and had told me that everything I needed to know about money, retirement and investing could be found in those books. Included in that stack was Lynch’s “Learn to Earn” and “Beating the Street”, which I randomly decided to read first. It turned out to be an excellent decision. I loved the book so much I have a notebook filled with notes that I jotted down as I read that book and again when I read “Learn to Earn”. I have often referred back to those notes when looking at stocks, and it’s not too much of a stretch to say that his advice has helped me a great deal.
Peter Lynch was born on January 19th, 1944. His start on the path that lead him to his current reputation for being a world-renown stock picker is a case study in luck and putting yourself in the best position possible to take advance of said luck. He became interested in stocks when he would caddy for financial executives in Newton, Massachusetts. His expressed interest and intelligence eventually lead one of those executives, the President of Fidelity Investments, to offer him an internship with the company. He attended Boston College on scholarship, graduating in 1965. He eventually received his MBA from the University of Pennsylvania’s Wharton School of Business and served two years in the Army.
When his education and armed service experience was completed, Lynch was able to get a full-time job at Fidelity as a research analyst, mostly dealing with the textile and metals industry, making $16,000 a year. Roughly eight years later he was put in charge of the Magellan Fund, a capital appreciation fund worth around $20 million dollars (back in 1977). By 1983 the fund has passed $1 Billion in value, eventually crossing the $5 Billion and $10 Billion thresholds. By the time he retired in 1990 (at the age of 46; not a bad retirement age) the Magellan Fund’s value had increased by over 2,700% (in a period from 1977 to 1990, which included both a strong bull market and the crash of 1987).

Peter Lynch stated that his reasons for retiring didn’t have anything to do with Fidelity, or the stresses of his job. He once quipped: “I get paid extremely well. We had free coffee. I mean, it’s a great place to work.” He felt like the six days a week he was working, plus the insane hours during those days was too much, and he wanted to focus on other pursuits. He’s famous for saying: “When the operas outnumber the football games three to zero, you know there is something wrong with your life.”

His retirement days have been spent working part-time as vice chairman of the investment branch of Fidelity, and organization named Fidelity Management and Research Co. where he has taken a mentorship role, while refraining from actually placing any trades. Most of his time is spent with his philanthropy (saying the charity is a form of investment; an idea that I love). His donations support a variety of causes, including historical societies, religious organizations and medical funding. His ability to build wealth has allowed him to be the philanthropist he is today.

In my next post, I will talk about Lynch’s investment strategy and how he has influenced how I invest my money. Stay tuned!
-Michael
Twitter: @michael_dink

My Obsession With Savings Bonds

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Hi All,

Well. I went ahead and did it again. Despite the rate on US savings bonds being so low, I raided the change jar and cleaned out the corners of wallet and picked up another $25.00 Series EE savings bond.

Seriously, from a financial standpoint, buying these bonds makes NO sense. Their rate is under 1%. So on an investment of $25, the return is pennies a year. Plus, the Feds seem hell bent on racking up the national debt beyond any reasonable expectation of repayment, so there is a good chance that inflation will decimate the return on this asset class. It’s not a good way to build wealth.

That said, I can’t get enough of them. I LOVE buying savings bonds. Series I, Series EE, small amounts of bonds, big amounts of bonds, I just can’t get enough. It’s an emotional thing. The prospect of having something in my mail other than bills is great, as is the fact that you get something physical to represent your investment. It’s tangible and satisfying. I love watching the paper stack of bonds pile up. The whole process makes me happy.

In honor of the 60s when savings bonds used to be cool, here is video starring Elizabeth Montgomery – she was a 60s sexpot who was in the popular tv show Bewitched. For all the guys out there, you’ll be able to appreciate the themes the promoters were going for…Christmas, freedom, investing and hotness!!!

Best,

James

Frugal Reality TV Show

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Are you a frugal moogle? Do you want to show the world your frugal stuff? We thought this looked like a fun opportunity to share with our readers. If you become a big reality TV star, we’d love a shout out to us DINKs. :-)

Seeking THEGROCERYGAME.COM OR TERITODAY.COM BARGAIN HUNTERS
with BIG PERSONALITIES for new REALITY TV show!


Los Angeles, CA (Sept. 9, 2009) – Are you the queen of the coupons? Are you obsessed with finding the best deal? Do you get a rush from getting a better deal than your neighbor? Are you in competition with your best friend and tend to brag about your cost cutting talents?

The Grocery Game and a major Los Angeles based television production company are seeking bargain hunters with big personalities for a new TV show. Casting producers are looking for people who are obsessed with living and entertaining well, but on the most frugal budget possible. We are looking for entertaining people with magnetic personalities who viewers will love to watch and, most of all, are driven by hunting out the best bargains from TheGroceryGame.com and TeriToday.com.

The Grocery Game has been asked to help find those people who are willing to share their compulsion of hunting down the best deal and for entertaining on a dime.

If you or someone you know would like to submit for this unscripted TV show please email the following info to BryanStinsonCasting@gmail.com!

Name:
Two Pictures:
City Located
Phone:
Email:
Describe your family:
Besides TheGroceryGame.com or Teritoday.com, list any organizations, groups, memberships, or websites that you use for your bargain hunting.

Please submit brief bio on how far you go to get the best deals. Also tell us how competitive you are and if any of your friends share your same passion!

Please do not make any inquires regarding the above to Customer Service at TheGroceryGame.com or TeriToday.com.

Couples Finance

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How do couples split up the task of managing finances? James and Miel recently tweeted about this topic and it got me thinking. In many ways, managing your money is no different than any other task, whether it be mowing the lawn or doing the dishes; it’s just another responsibility that needs to be split up between the members of the family. But at the same time, there is an element of doing the family finances that distinguishes it from the other household tasks.

With my wife and I, managing the finances is a task that falls on both of us, but in different ways. I am the one who does most of the “work” – i.e. the one who likes generating fancy reports with Quicken – but my wife is involved at every step. Most of my investments outside of our 401(k)s were made before we were engaged and hadn’t integrated our finances yet, so I made those decisions independently; but when it comes to budgeting and planning for the future, it’s an ongoing conversation between the two of us.

When I sat down to analyze how we as a married couple discussed financial matters, it really dawned on me that the dynamic that we’ve created is a reflection of our individual personalities. My wife is more emotional, whereas I am more analytical. But at the same time, my wife likes hard deadlines (when are we going to do this, what sort of timeline are we looking at, etc…) and I’m more of a let’s-cross-that-bridge-when-we-get-there type of a guy.

I prepare for the future (i.e. automatic deposits into savings and investment accounts, weekly budget monitoring, etc…) without specifically planning for the future (i.e. we’ll have this much in this account by this time, allowing us to do this, etc…).

Conversely, my wife is less concerned about how the sausage is made so to speak, and more focused on where our current plan of action is taking us. This has lead to a push/pull relationship when it comes to discussing finances, as we both approach this issue from two almost opposite sides.

However, the more I think about it, the more I like how our personalities shape our discussions on money. She forces me to keep tangible long term goals in mind and I in turn force her to consider the realities of our daily financial situation, and give her more perspective on the steps we need to take to reach our personal and financial goals. Our skills and personality complement each other in a way that I personally feel has benefited us greatly.
A lot of financial experts are more than willing to tell you how you as a couple should run your household finances, telling you what you should and shouldn’t do. And that’s all fine and great, and there are a lot of excellent suggestions out there that should be utilized that will allow you to build your wealth together. But at the end of the day, the two of you, as a couple, need to do what works best for you, whatever the system may be.

The only suggestion that I would stress would be to communicate with your partner; let them know your goals and get to know theirs. When my wife and I started talking about our approaches to money, it really allowed us to work more efficiently towards our goals, and hopefully has put us in a better position to achieve them. We still have work to do; I still need to come up with more tangible goals (and timelines for those goals) and my wife needs to work to understand the day to day a little bit better, but hopefully as our marriage matures we’ll improve in our respective areas.

Readers: How do you approach finances with your spouse/significant other?
-Michael
Twitter: @michael_dink

The Power of Mobile Money

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Miel called buying Nokia! In a world continually shrinking by the power of technology, mobile phones are arguably the front runner for driving change and offer investors a great chance to create wealth.

The Economist this week (see magazine I’m holding) has dedicated a special report to The Power of Mobile Money, about telecoms in emerging markets.

My first international trip was in 1993 as an exchange student to Finland for a year (explaining my love for the homeland of Nokia). At the time Finland had the highest usage of mobile phones in the world, and America would have been seen as an emerging market for cell phone usage.

In the early 90s, Americans like myself were still asking, what would I do with a cell phone anyway? Now what was once seen as a luxury item has now become a tool of global development. Along with that, the prices have dropped, from a basic model going for about $250 in 1997 to $20 today. Developing countries were also early adopters of text messaging, picking up the habit well before Americans took on the craze.

As much as mobile phones are now normative and “land lines” are virtually non-existent in many parts of the world – that demand just keeps on booming. For example, in the last year alone, India has seen a 52% increase from the previous year, and 32% in Africa.

Most common in the developing world, in addition to widespread use of mobile phone users overall, is the use of village mobile phone operators. This basically means that one, or several, people will purchase mobile phones and credit and then rent these out to users as was commonly the case with landlines previously. When I was a Peace Corps Volunteer in Ghana I had to travel minimum of an hour to reach a phone and then call from a similar phone shop, but with landlines back then.

Mobile banking (though not technically considered banking for regulatory reasons) is also on the rise. Since this is a new phenomenon for many people in developed nations, I’ll give this a bit more of an explanation.

Mobile banking works like this. Say you want to send money from the city to your family back in the country. You could spend time and money to go deliver them money, or you could give the money to a bus driver or the like, but that has some inherent risks. Now one can by a card with credit, call the local village phone operator or shopkeeper, read out the code on the card. The credit will be applied to the “bankers’ phone and they can then distribute the funds to your family.

According to forecasts, mobile-broadband subscribers will out pace and steeply overtake the more traditional use of fixed-broadband users by 2011.

Now mobile phones are simply a way of the world, and most particularly in the developing world. Given Nokia’s dominance in this market, I figured this would be a got place to put a bit of my money.

Best,

Miel

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