Starting Out...

One of the questions that I get asked by folks staring their investment journey is...How do I start ?

My advice:

--Start by investing in a Balanced Mutual fund at one of the premier fund families like Fidelity, Vanguard or Trowe price. First time around you have to pony up enough to meet the minimum requirement. This is typically around $2500. More on balanced funds later in the post.

--When you open an account, choose Automatic Investment Plan, where fund withdraws $100 every other week from your bank account or whatever small amount that you can budget.
As time goes on, increase this minimum amount.

So why this advice ? First let's start with Balanced fund. What is a balanced fund ? A balanced fund is a fund that would invest certain portion of portfolio in equity (i.e. stock market) and certain portion of portfolio in bond market (fixed income). Balanced funds provide you with a decent upside potential with less volatility. It also fares well in bear market years.

Next let's talk about Automatic Investment Plans. This is great for many reasons.
--Forces you to save
--dollar cost averaging. It is very hard to time the market. If you could time the market then you should be running a hedge fund.

Most of the new investors look at only year to date performance data of a mutual fund. Don't !! Look at the performance data provided by sites like http://finance.yahoo.com. Look for 10 year performance. Look at how funds behaved in last bear market.

Some of the balanced funds that I have owned or still own are:

• Fidelity Balanced Fund
• Vanguard STAR fund
• Vanguard Wellington Income Fund
• American Century Equity Income Inv.

T Rowe Price also has T. Rowe Price Balanced.

I recently read an article on Yahoo Finance site that reflects this sentiment.

Speculative plays..

To make investing fun and expose myself to different financial instruments, I dabble in Options trading every now and then. I usually do this with few Ks at a time.

My current option plays are:
--Jan 45 call options of CROX
--Jan 220 Call option on GS

This year I have made some money with options in CVS, TMO. Last year I lost money in BBY and TRID. That's how it goes with options trading.

Given that rest of my portfolio is very conservative, this may be little puzzling. Even I don't get it :-)

Value investing

I am looking at increasing exposure to value plays as market may be getting little frothy. I have been holding Berkshire Hathaway Class B shares BRKB for 9 years. Return so far has been 64% over that time. Not great. But this is a long term investment that provides cushion in bear market years and still beats S&P over that time.

I recently added US Bank USB. I like their track record. It is going to be an investment taht I will hold for another decade. Financials are out of favor right now because of rising interest rate concerns and sub-prime fiasco. But that's ok. This will resolve over time.

Other names that I am watching are:
--Fairholme funds (FAIRX). They have same philosophy as Buffet. They hold a large chunk of BRKA and they also invest in companies that Buffet invests in like Wesco and USG.

--Brookfield Asset Managment (BAM).

I may sell some of my investments in CSCO and get into these names or use new money to get into this.

Mortgage Vs Stock Market

In 2003, mortgage rates as well as short term yields were at historically low. I also had enough cash to pay the mortgage resulting from my stock option sale in 2000.

When I bought my home, I had a 30 year loan at 5.8%. Six months later, I decided to go with a no cost 5/1 ARM with interest rate of 4.125%. My thinking back in 2003 was this:

• If you take into account mortgage interest payment deduction, real rate I would have to pay would be ~3%.
• I could make 3% or more in short term yield at that time.
• Over remaining 4 years, I would be able to generate more with the short term yield instruments.
• Once I approach end of 5 years when ARM reverts to higher rate, I would either pay it back or re finance.

Well in subsequent years, I have been able to use short term yield instruments like I-Bonds, treasury bills, Tax Free MUNIs, CDs, money market accounts, high yield accounts at ING, HSBC and most recently FNBOdirect and generate more return then cost of ARM.

July 2008 is when I will face the music. I am torn between three options:

• Pay off the mortgage
• re finance the mortgage and invest the money into equity market
  
• Pay off half the mortgage and re finance the other half. This means that half of the money will be invested in equity market.
  

There are many different opinions on this subject. Recently I came across an article by Ben Stein who suggests on investing rather then refinancing. Here is a link to the article.
http://finance.yahoo.com/expert/article/yourlife/37252

Many of my co workers and friends have been talking about peace of mind of not having the mortgage. I am not one of them. For me it is going to be strictly a financial decision involving things like risk/reward, asset allocation and rate of return. If mortgage interest rate hike up to 7%, decision will be a no brainer. I would pay off the mortgage as this would translate to risk free yield of 6%.

What are your thoughts ?

June 2007
tech-finance guy

Personal finance

2007 has been a good year for those investing. Short term Yields are up as well as stock market.

I used 2007 to invest most of my money that I had made during last bubble. Specifically I have done three things:

• Invest with Merrill Lynch financial adviser. My portfolio at Merrill includes mostly ETFs that cover diversified sectors and countries. I also have AMT free MUNIs to provide bond market exposure (mostly short to intermediate term)

• For earlier part of decade, I have been dollar cost averaging into Vanguard STAR fund. This is a fund of funds that covers large portion of equity market, both US and international, as well as basket of bonds going fro short term maturity to long term maturity. Last month I took the profit and re invested with Vanguard Wellington, another balanced fund with both equity and bond exposure.

• I cleaned up my personal stock portfolio at Scottrade. Got rid of losers that I was holding on to since 2001-2002 time frame. Added GOOG, T, USB and TYW.

On the yield side, I have recently moved to www.fnbodirect.com from hsbcdirect.com to take advantage of 6% APR until end of September. I also have a CD with 5.4% yield at Worldsavings. Recently I have established position in HLFAX which is an interesting floating rate fund yielding > 6%.

My goal is to keep adding to this blog to share my financial journey. Hopefully it can help folks looking for investing ideas. I will try to respond to all questions to educate folks.

June 2007
tech-finance guy