My Personal Finance Journey

Category Archives for Invest & Retire

Options Investing – Does it Deserve a Place in Your Personal Portfolio?

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Out of the numerous investing and personal finance topics we have discussed so far on this site, one topic that has not yet been addressed in any kind of detail is investing in options contracts.


Why has this topic not yet been covered? The answer is pretty easy – because I don’t personally invest in options since I employ a passively managed approach to investing using ETFs and index mutual funds, and do not trust myself to correctly make predictions on price movements of stocks/ETFs/indices.

However, just because I personally do not use options does not mean that learning about this type of derivative investment lacks value. In fact, I believe that it is important to have a sufficient understanding of all investment options available so that you can know how and why markets respond the way they do, and you can then act in a rational manner.

What is Options Investing?

For some reason or another, in receiving my finance undergraduate degree, the professors seemed to REALLY enjoy going in to a lot of depth about options investing strategies. Looking back on it, I hypothesize that probably most of the detail was taught from the perspective that we would potentially use it if we got full time jobs working at investing firms. I’ve since learned that from a personal finance perspective, there is no need to go in to SO much detail to understand what options investing is, and a basic understanding can get you a long ways. So, let’s start there, shall we?

Essentially, an option is a derivative financial instrument (derives its value from the underlying security the option pertains to) in the form of a contract between the buyer of the option and the seller of the option based on price movements of the underlying security.

  • The options buyer pays an upfront price (called the premium) for the right (not the obligation – hence the name, “option”) to execute a future transaction at a specified price (called the strike price) before a specified expiration date.
  • There are two basic types of options – call options and put options
    • Call options give the contract buyer the right to purchase shares of a security (security means that options are not limited to only individual stocks) at the strike price.
      • This generally makes the buyer money if the price of the security increases.
    • Put options give the contract buyer the right to sell shares of a security at the strike price.
      • This generally makes the buyer money if the price of the security decreases.

Let’s just go through a quick example to help illustrate how this process works:

Currently, the price of a call option for the Gold ETF (ticker symbol – IAU), expiration Feb 18 2012, $14 per share strike price is $2.90 per share. The ETF is currently trading at $16.82 per share.

Since you think the price of the Gold ETF is going to increase, you buy this call option for 10 shares, paying 10*$2.90 = $29.00 for the contract in the form of a premium. If, by February 18th, the price per share has increased to $20, you would exercise your option to buy 10 shares at $14 (the strike price) and then automatically sell them at $20 per share for a final profit of $31.00. (10 shares * ($20-$14) = $60 – $29 premium for contract).

On the other hand, if you were wrong about the price movement, and the price actually decreased, you would not exercise the option at all and only lose your $29 premium to the options seller. Make sense?

What Uses Can Options Investing Have in Your Portfolio?

In my mind, options investing can play one of two roles for investors:

  • Making money – 
    • This one is fairly obvious. Since options do not require you to actually have the money to buy the underlying securities, you can potentially make a lot of money if you are good at predicting price movements without much capital cost.
  • Hedging risks for your other investments/operations – 
    • Perhaps a more applicable and fascinating potential use of options to me is that options can be used as a hedge for risk in a person’s investments or business’ other operations.
    • For example, if you run a business operating abroad and have a significant asset stake tied up in the faith that another country’s currency stays strong, you can use a put option to make some money in the event that the currency in the other country gets devalued.
    • Also, a put option could be used to provide some upside potential in the event that huge losses are realized in the long positions in your retirement savings.
    • The put option mentioned here is probably the most basic type of hedge you can create using options. For some additional reading on more complex strategies that are available (covered calls, straddles, butterflies, etc), I recommend the following resources:

How/Where Can You Invest in Options?

If it sounds like options are something you want to try your hand at in your personal portfolio/investing strategy, I’d recommend that you start off with only a small amount of “play” money until you gain more experience and comfort with the process.

When it comes time to actually sit down at the computer and start investing in options, it’s fairly easy to find a brokerage in which to open an options trading account. This is because most, if not all, of the major discount brokerages online now offer options trading accounts.

Whenever you make your final selection of the brokerage that you want to house your options account, be sure to remember to search around the Internet for any promotional account sign up offers that are often available.

How about you all? Do you currently or have you in the past invested in options as part of your investing strategy? Why or why not? 


If so, how did it work out for you? Did you lose or make money?  


Share your experiences by commenting below!

***Photo courtesy of http://farm4.static.flickr.com/3231/2944592688_3f3de8a417.jpg

Pros and Cons of Investing in Gold

 

The following is a guest post. Enjoy! 

Gold investment is a common topic in many television and Internet advertisements. However, it has developed a reputation for being unsafe and uncertain. Recent turns in the gold market make this reputation questionable. Additionally, certain investment strategies can help you avoid losses and risk.

Performance of Gold Investments

Gold has been on a bull-run for the past decade. Investments in gold have been largely rewarding, due to increased flux through the market (through groups like Cash 4 Gold). Additionally, the Euro Zone crisis has helped gold futures following the International Monetary Fund’s agreement to raise additional money for the Euro Zone. In the short term, it appears gold will continue to appreciate in value as the economy turns around and currency equities rise.
However, it also appears that investing in gold has been on the decline recently. This means lower demand and lower prices, but whether this indicates a long-term trend towards gold devaluation is unclear. Gold, therefore, may make a stronger short-term investment rather than a long-term investment. Markets, both domestic and international, need to be watched for trends towards depression or deflation.

What Will the Future Hold for Gold Investing?

In 2012, gold has already seen a rise in value greater than 5%. This well exceeds inflation, and a return on a long-term investment would be positive if this trend continues. Although no market is certain, international debt crises seem to indicate that, until markets show a definite turnaround, gold will continue to appreciate in value. It is a buyer’s market for gold, though how long the window of opportunity will be open is unclear.
However, American jobless numbers are beginning to decline (or at least stabilize), which means gold futures could start to decline. However, if other countries continue to suffer from the recession, gold will continue to be a strong and potentially high-yield investment opportunity. The most difficult determination will be when gold has hit its peak value.
You can more or less be guaranteed a positive yield on a gold investment if you wait long enough. Although the prices fluctuate like any other commodity, gold demand is consistent and gold production is continually on the decline. If the economy takes a strong turn for the better, gold for products like jewelry and decorations will be in higher demand, driving the price of gold upward. Gold is generally reserved for special occasions, such as weddings, for the average consumer. But, when you factor in that consumer gold comprises millions of consumers, small fluctuations in the ring the average consumer can afford could equate to thousands of ounces of gold, driving demand and prices up.
Whether you’re looking for a short-or long-term investment, now is the time to invest in gold, especially with the current convenience of online trading with a leading broker.. Gold as an alternative for currency will continue to be desirable as long as economies are winnowing. As the markets improve, expect temporary declines in gold until consumer demand begins to rise. If you’re looking for an intermediate-term investment, gold is uncertain–the gap between economic upswing and consumer demand may result in temporary declines in the value of gold.

How about you all? Is gold currently incorporated as a part of your investing strategy? Why or why not? What’s the best way you’ve found to invest in gold? 


Do you think gold will continue to go up in price?


Share your experiences by commenting below!


Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article:

  • Fairly frequently, I get asked about my thoughts about using gold as an investment. Unfortunately, I have very little expertise/knowledge about gold, so I cannot provide very much guided assistance. However, it’s good to have another post here to bring this topic to the forefront!
  • @ The future direction of gold – 
    • I do know that gold has been an investment of choice in the past few years since the recession in 2008-2009. As such, the prices of gold have increased drastically.
    • Because of this, I would be very careful about placing a lot of money in to gold due to risk of buying in at the “top” of the upward price swing.
  • @ Whether or not gold is a safe and/or good investment + how gold should/should not be incorporated in to one’s investing strategy – 
    • Personally, I do not have gold incorporated as part of my investing strategy.
    • However, is gold a good thing to have in one’s investment mix? My answer is “probably,” however, I would need to do some more research about this to tell for certain.
    • If I did, I would either use ETFs or precious metal index mutual funds to do this, as opposed to buying physical metal holdings.
    • Additionally, I would ensure that only a small proportion of my total investment holdings were placed in gold/precious metals.
    • One very attractive characteristic about precious metals is that they have relatively low correlation coefficients with the returns of normal equity investments. As such, the addition of precious metals to my investment portfolio would give further diversification and help shifting the efficient frontier for risk/return trade-off.

***Photo courtesy of http://images.cdn.fotopedia.com/flickr-3400039523-hd.jpg

Welcome Enemy of Debt Readers!

Welcome Enemy of Debt readers! Thanks so much for stopping by my site by way of the my guest post today over at my friend Brad’s site listed below. As the picture to the right shows, I’m very happy to have you! 🙂

Using Your Credit Card As Your Primary Emergency Fund – An Alarming Trend in Society?

If you’re stopping by my site for the first time, I just wanted to give a little guide towards what I offer here, since information overload can occur quickly and time is our most valuable asset.

To introduce myself, my name is Jacob. I started this site back in January of 2010, and since then, have poured my heart and soul in to the site to produce a product I am proud of and I think adds value to the world. You can read a little more on my background and even see a picture of me on the “About” or “First-Time Visitor” pages to find out more about us.

What I Write About Here At My Personal Finance Journey

In short, I like to offer actionable personal finance advice with the goal of achieving long-term success. 


Specifically, I really enjoy writing about the following areas (I’ve also listed several posts related to each topic in case you’re interested in reading more):


Articles Similar to My Guest Post Today at Enemy of Debt


Additionally, if you liked the theme of the guest post I wrote for Enemy of Debt today and are interested in similar posts I’ve written in the past, you might want to check out the ones below:


Ways to Stay in Touch with New Content


If after sampling some of the content above you think that my posts will add value to your life, there are many easy ways to stay in touch with new material when it goes up! See below for details:

10% Monthly Blog Income Giveaway

Also, each month, I give away 10% of any income I make from this site, with 5% going to blog readers and the other 5% going to a charity selected by the grand prize winner. You can read about all of the details by clicking here.

So far, we’ve given away:

  • Current total given to charity = $238
  • Current total given to blog readers = $245

If you want to enter in to the January 2012 giveaway for $196, click here. It ends January 31st!

Thanks for visiting! Keep on learning!

    ***Photo courtesy of http://3.bp.blogspot.com/_cP3Pd1BRVXc/S4RnpK8cc1I/AAAAAAAAD0E/gvEpjN8QQBc/s400/smile+dog.bmp

    Investors Who Ignore Valuations Are Like Overeaters Who Ignore the Risk of Heart Disease

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    Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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    Click here to enter my free $196 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is January 31st, 2012.


    The following is a guest post by Rob Bennett. Rob has recorded numerous podcasts on how to invest wisely, addressing such topics as market timing, diversification, and dollar cost averaging. His bio is here if you are interested in reading more!

    Investors Who Ignore Valuations Are Like Overeaters Who Ignore the Risk of Heart Disease

    Jacob (the owner of this blog) and I have had a number of good conversations about my belief that indexers need to move from the conventional Buy-and-Hold approach to indexing (under which the investor stays at the same stock allocation at all times) to the Valuation-Informed Indexing strategy (under which the investor changes his stock allocation in response to big valuation shifts in an effort to keep his risk profile roughly constant. Jacob does not endorse Valuation-Informed Indexing. But, he finds it worthy of further examination. You can read his take here.


    The Risks of Ignoring Market Valuations in Your Investing Strategy

    The difference between Jacob (and the vast majority of investors) and me is that I view valuations as not just another factor to consider in adopting an investing strategy, but rather as the the most important factor by far. The trouble that I have persuading people of the merit of the new approach is that the importance of valuations varies greatly. In every investor’s lifetime, there are time-periods in which valuations are close enough to fair value that it makes little practical difference whether investors consider valuations or not. Investors can go many years without suffering any penalty for failing to consider valuations. 

    Then, everything can suddenly change. One day, the investor wakes up to find himself going with a high stock allocation at a time of insanely high valuations and the insanely high level of risk that applies at such times. Over the next 20 years (in every case in history in which valuations have gone to two times fair value, it has taken that long for stocks to begin providing good long-term returns again), he loses so much of the accumulated wealth of a lifetime that he delays his retirement by many years.

    The valuations problem (lack of paying attention to valuations that is) in the stock market is like the heart disease problem for those of us who eat too much and exercise too little. Physicians often tell their overweight patients that they could extend their lives dramatically by making a few common-sense lifestyle changes. 

    The patients often tune out the advice because they have never suffered any serious negative effects from overeating. Then comes the heart attack. 


    Why I Started Paying Attention to Stock Market Valuations – Safe Withdrawal Rates During Retirement

    I learned about the importance of valuations by studying safe withdrawal rates. The safe withdrawal rate is the percentage amount of a portfolio that a retiree may withdraw each year with virtual certainty that the retirement will survive 30 years, presuming that stocks perform in the future much as they always have in the past. 

    For many years, financial planners told their clients that the safe withdrawal rate (SWR) for a high-stock portfolio is 4 percent. That is, someone retiring with $1 million at age 65 can take out $40,000 each year to live on with no worries that he will run out of money even if he lives to 95. 

    I am the person who discovered the error in the old approach to calculating SWRs — the conventional methodology contains no adjustment for the valuation level that applies on the day the retirement begins. Numerous big names in the field have confirmed my findings in the 10 years since I put forward a series of posts at a Motley Fool discussion board showing that in reality, the SWR can drop to a number as low as 2 percent or rise to a number as high as 9 percent. 

    Please take a look at a sobering report recently posted at the Raddr’s Early Retirement and FinancialStrategy Board. The report examines how a retiree who placed his faith in the conventional retirement studies for a retirement beginning at the top of the bubble is doing today. Please scroll down to the update put up on January 1, 2012 to read some words that I believe will drive home to you why I view it as imperative that those investing in stocks never take their eye off the valuations ball.

    Raddr examines the numbers and concludes that: “The poor retiree’s real net worth has dropped nearly two-thirds (from $1,000 to $367) in only 11 years, and he is now withdrawing about 11 percent of his portfolio per year, which is a recipe for disaster even if the market heads up big-time from here. It looks like his portfolio very likely will fail in the next decade and is virtually certain to fail in the 30-year time frame which was touted as “100 percent safe” by many respectable market gurus and financial planners just a decade ago.”

    There are too many retirement portfolios dying an early death as a result of our decision as a society not to engage in the serious discussion that this critically important topic very much merits. 

    How about you all? Do you consider market valuations in putting together your long term investing strategy and asset allocation? Why or why not? Do you feel that ignoring market valuations in your investing strategy exposes you to unmanageable levels of risk?


    What do you feel is a safe rate to withdrawal your money during retirement?


    Share your experiences by commenting below!

    Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

    • Great post here, Rob! Your articles always get me thinking about what I do in my investing strategy and seeing if there are any places for improvement. 
    • @ The conventional approach to indexing / passive investing that I support  –
      • In the article above, Rob mentions that the conventional approach to indexing involves an investor staying at the same stock allocation at all times. 
      • While this is generally the strategy that I follow and promote, there is one big specification that I want to make clear before we proceed to other points in this discussion.
        • While I do advocate staying at the same stock allocation regardless of market valuations, I absolutely do not recommend staying at the same stock allocation regardless of the life stage you are in. In my opinion, this is far too risky.  
        • Instead, what I advocate is assessing your cash needs for the coming years, your tolerance for risk, your age, life status, etc, and then set a fixed income / stock asset allocation from there based on your tolerance for risk and time to retirement.
        • My belief is that by rebalancing your portfolio periodically, you can properly manage your risk and exposure to stocks.
        • For example, just because right now at age 26, my asset allocation is 75% equity / 25% fixed income, that doesn’t mean that it will be at those same levels when I am 55.
        • Got it? Right! Let’s proceed with some other fascinating aspects of this discussion. 
    • @ Why I haven’t yet been persuaded of adopting Valuation Informed Indexing – 
      • As Rob mentioned in the post, I have done an in-depth analysis comparing the performance of the Valuation Informed Indexing approach to my passive investing approach over the past 20 years. 
      • From this analysis, I found that since the market has been overvalued from a historical perspective for the past 20 years, Valuation Informed Indexing (VII) had the investor shy away from stocks during this time. 
      • Because of this, passive investing outperformed VII during the time period, although VII showed much less risk / standard deviation of portfolio value. 
      • In addition to the under-performance I saw from my analysis of VII, I felt that as an investor, I probably wouldn’t have the will-power to stick to the VII strategy. 
        • If you’ve done much reading about investing strategies, you’ve probably heard that one of the most devastating things that someone can do is bounce around to different approaches, following whatever advice happens to be given to you. While I’m not saying that VII is some shady penny stock newsletter/tip, I feel it would keep me too far from the performance of the market that I might not keep to the plan.
        • Just think for a second – would you really be able to hold to only investing 30% of your money in stocks during the late 90’s through 2008 if you are trying to aggressively save money for retirement? It’s likely that most people would not be able to stick to this plan.
      • Nevertheless, I do hope that we can one day tweak the VII strategy in such a way that I can become convinced enough to switch. As I mentioned in my analysis post, I really do believe it has potential since VII provides a concrete numerical system (using PE10 values, which keeps emotions from getting in the way) and so effectively reduces risk / standard deviation.  
    • @ The current PE10 ratio 
      • Just out of shear curiosity, I wanted to check what the current PE10 (valuation indicator) value was, since I hadn’t checked it since I finished my VII analysis in June of 2011. 
      • According to Robert Shiller’s data, the current PE10 is 20.75. This is down from 23 during June 2011, so this means that the markets are slightly less overvalued. If the PE10 goes below 20, VII dictates moving to a slightly more stock aggressive “base” asset allocation. During this time, the market has gone up overall ~2%.
    • @ The issue of safe withdrawal rates and providing income for retirement –
      • (I will preface this section by saying that I know much less about safe withdrawal rates during retirement than I do about the investing / nest egg accumulation phase – probably due to my age).
      • The concerns about safe rates of withdrawal for providing income during retirement are well-founded in my opinion, as this is a serious issue to consider.
      • In particular, if you had a high-stock allocation portfolio at the time of retirement, I do agree with the fact that you would do well to consider market valuation (because your all-stock nest egg could drastically decrease) when thinking about rates of withdrawal.
      • However, I personally do not believe people should have a high stock allocation portfolio at the time of retirement in the first place.
        • If you follow life-stage asset allocation advice set forth in books such as A Random Walk Down Wall Street, in your mid 50’s, you would have only 55% of your retirement funds in stocks + real estate. In your late sixties and beyond, you would only have 40% in stocks + real estate. The rest would be in ‘more stable’ investments like bonds and cash.
        • By having the majority of your money in secure investments, you actually don’t need to rely on your stock holdings for your current income.
        • Personally, the way I plan to attempt to structure my retirement income is lock in a guaranteed source of monthly payments through an annuity so that it is absolutely certain that I won’t run out of money. Then, any money I have invested in stocks, bonds, and cash will be separated from the income source. 
        • By doing this, I could simulate how people still in the working stage of life have an income source separated from their investments.
      • Overall, if you are using an annuity or another instrument to lock in your retirement income, I do not believe that you need to consider market valuations in your nest egg withdrawals or investment strategy (reasoning would be similar to that used above) during retirement. You are simply wanting to attempt to grow some of your money for your later retirement years and large purchases.   
      • However, what if you don’t have enough saved up to lock in a guaranteed annuity retirement income and will definitely need to withdrawal the money now/later from your limited stock allocation to cover everyday living expenses? Should market valuations be considered with how quickly or slowly you withdrawal your retirement savings? Should you use Valuation Informed Indexing in your investment strategy?
        • This is a much more complex set of questions, and I’ll have to do some more research and come back to you all in a future post about this!  

    ***Photo courtesy of http://farm1.static.flickr.com/41/127076756_efb656e584.jpg

    Financial Goal Setting for the 2012 New Year

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    Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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    Click here to enter my free $196 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is January 31st, 2012.


    Happy New Year Everyone! It is that time again. That’s right – time to set my financial goals for 2012.

    I do this once every year as part of my goal to create what author David Bach calls a Purpose Focused Financial Plan. The goal of this system is to employ money in your life in a way that matches your life values and dreams. It is a very cool idea!

    You can read more about my journey to create this system and some examples of goals at the following links – Creating a Purposed Focused Financial Plan & My Personal Finance Journey’s Investment Strategy.


    As is the case with many things in life, a good portion of financial goals are long-term commitments requiring attention in each passing year. As such, you might see many similar goals that I was trying to or did achieve in 2011 listed for 2012. I am perfectly fine with having some of the same goals year-to-year, provided that I believe in the causes they represent (which I ponder each year, and all of the ones listed below definitely do meet that criteria!). Nevertheless, I’ve tried to call attention to completely new financial goals for 2012 by highlighting them in bold red text for easier reading. 


    So, here goes, the unveiling of Jacob’s 2012 financial goals. Enjoy, and I look forward to reading any comments you all have!  

    Short Term (<1 year) Goals:
    • Contribute $5000 (or ~$420 per month) to my Roth IRA with Vanguard this year (maximum allowed).
      • Reach net worth target for this year (not displayed here).
      • Maintain target 6-9 months of expenses in cash reserve emergency fund in Dollar Savings Direct account.
      • Rebalance mutual fund portfolio to meet asset allocation target %’s (75% equity, 25% fixed income overall). 
      • Obtain 30% ownership / equity in condominium. Pay $500 per month for condo mortgage payment.
      • Put together a will and have it reviewed by a lawyer.
      • Continue to save money for trip to Grand Canyon. Currently, I have $470 saved up for this trip.
        • Invest $500 in Microloans with Microplace.com to support Latin American micro entrepreneurship. This equates to $41.67 to invest per month. 
        • Donate $1,150 to Multiple Sclerosis Foundation in 2012 (5% of take-home pay in my graduate school research assistantship job).
        • Fund raise $7500 for MS 150 bike event in June 2012.
        • Save 3% of take home pay each month (after taxes) for Dream Account.
        • $30 per month save for doing running races as part of health life values account.
        • $20 per month save for buying fresh vegetables as part of health life values account.
        • Save ~33% of blogging income (if any) + untaxed graduate fellowship income from my research job in a high yield online savings account in preparation for 2012 taxes.
        • New Goals for 2012 – Listed below are several financial goals for 2012 that were not in any shape present in my 2011 goal armada. Hot off the press from Jacob’s brain! I’ve also posed several questions I need help on in bold text below. 
          • $30 per month save for trips to visit friends in other states I have not seen in a long time.
          • $10 per month save for purchasing food for backpacking trips in the Blue Ridge Mountains.
          • Contribute 20% of blogging income to Individual 401(k) with Vanguard. Until April, keep contributing to 2011 tax year in order to reduce tax liability. Prioritize these contributions ahead of 2012 Roth IRA contributions for the time being.
          • Investigate and execute any business tax deductions I can for 2011 taxes.
            • Specifically, I am interesting in seeing if I can deduct a portion of home expenses as a business expense since I use a room of my house for a home office. 
            • Any one have any experience with the rules/restrictions on this?
          • Use 1% home value home maintenance fund to fix various small things that are broken around my condo after 2 years of use. 
            • These things include a closet door off the hinges, the light-switch in the bathroom not working all the time, and some pipes under the sink that need to be re-caulked. 
            • Once I get these things repaired, I will then need to replenish the depleted funds in the home maintenance account. 
            • For small things around the house like this, would you all fix them yourself or call a “handyman?”
          • Execute 4 estimated tax payments for blogging + graduate research fellowship income on the following dates – 1) April 17, 2012, 2) June 15, 2012, 3) Sept. 17, 2012, and 4) Jan. 15, 2013. 
          • Organize move in of my girlfriend in to my condo in June-July 2012. 
            • Figure out how to structure move with my condo insurance and decide if she needs renter’s insurance and a rental agreement. 
            • Also, I’m curious to learn about any potential tax deductions I’ll be able to receive now that I have a “tenant.” Should be interesting!
          • Start saving a little money each month to attend the Financial Bloggers Conference, 2012 in Denver in September. 
            • I’m conservatively guessing that the trip will cost $1000, so that works out to needing to save about $111 each month up through September. 
            • I better get started on this soon! 

          Mid-Term (3-5 years out) Goals:
          • Continue contributing $5000 to Roth IRA each year and using dollar cost averaging.
          • Reach intermediate net worth target (not displayed here, but is 2X my current net worth).
          • Own a rental property by 2016.

          Long-Term (>5 years out) Goals:
          • Obtain a net worth of $1,000,000.

          • Own a home free of mortgage payments.
          • Own a vacation home in the mountains or a ski resort.
          • Accumulate enough funds not have to work, but will probably anyways because I would get bored. 


          How about you all? What goals have you laid out for yourself in 2012? What technique do you find is most effective in holding yourself accountable for your goals you set?  


          Share your experiences by commenting below!

            ***Photo courtesy of http://farm1.static.flickr.com/138/341866875_a0e8c69f1e.jpg

            My Year-End Current Asset Allocation and Net Worth Growth – November-December, 2011

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            Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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            I have to apologize slightly in advance for this week being a little heavy in “progress” posts, as it has has been my “catch up” week in evaluating my financial goals (published Tuesday), net worth progress (this post), and blogging goals for 2011 (on the way soon). Also, on the way soon will be my 2012 goal setting posts. However, since I haven’t reported on these points in about 3 months, there’s definitely much to discuss! So, let’s get started.

            As I’ve mentioned before, the goal of this running net worth progress series is twofold– 1) to share how I (as a fairly normal non-financial professional) approach various financial issues that come at me throughout life so that you can use my learnings to assist you in your financial decision making and 2) to make me more accountable in sticking to my various financial goals that I set forth by periodically evaluating my status and making adjustments. As always, if you have any questions, please ask!

            Overall, the 2nd half of 2011 went pretty well. On one hand, I made a lot of progress towards my personal, professional, and blogging goals, but because of the lack of a strong stock market, my net worth really hasn’t moved much. In fact, in performing a quick 30,000 foot view of my net worth spreadsheet, it appears that it hasn’t moved at all from June to the end of December 2011!

            As for November and December specifically, these were busy months with getting ready for the holidays, traveling, and also beginning to build a personal finance speaking service. More details to come about that project! However, they were also very fun months, filled with running races and seeing family/friends. 

            As far as the overall stock market goes, the situation was looking fairly disappointing during the beginning of the 2nd half of 2011. However, since the last net worth update in October, the market has started to recover and is now in a more “neutral” position for performance in the 2H2011.  

            With all of the up and down that has occurred, let’s take a look and see how it affected my net worth progress…shall we?


            Liquid Net Worth Growth (not including condo nor blog/graduate fellowship unpaid income tax savings)

            In October (just before the last net worth update), I had to make a fairly significant change in how I calculate my net worth and asset allocation percentages each month. The change pertained to the cash I had been saving up throughout 2011 in a high interest online savings account (Dollar Savings Direct) in order to pre-pay self-employed income tax to the government, either in the form of a quarterly tax payment or next April (depending on what levels of blog income I was realizing). What was happening was that the balance in this tax savings account (which was being counted in to the cash portion of my asset allocation) was becoming too large, and it started to skew my asset allocation calculations. 


            To remedy this, this month, I’ve started a system of calculating my liquid net worth, which includes all of my various equity and fixed income holdings but excludes 1) my equity and debt related to my condo and 2) the amount of savings I accumulated so far earmarked to pay the tax man. I’ve decided that doing the analysis in this fashion helps me remain more objective in making financial decisions without being influenced by assets that are needed for shorter-term living/tax expenses.

            Estimated State/Federal Tax Payment Mistake and Lessons Learned!

            I recently sent in the 4th Quarter 2011 estimated tax payment, which included unpaid taxes owed for ALL of 2011 for both blogging income as well as untaxed income from my graduate fellowship. Using my tax savings mentioned above, I was quite prepared for the taxes I owed on the blogging income. 

            However, I failed to take in to account the significant amount of taxes I owed on my graduate fellowship income. Because of this unexpected development, I had to use about $1,500 of my emergency fund in order to cover the additional estimated taxes. Since (I think?) the government can place liens on your assets/income in order to collect taxes, I deemed this an appropriate use of my emergency fund, and I will work towards building up my emergency fund to the 9 months of expenses level before contributing to IRA/401k retirement accounts and/or paying additional principal on my home loan (per the rules of the account hierarchy).

            From this estimated tax payment experience, I learned two important lessons which I will carry forward and practice in 2012:
            1. If you have a business in its first year of profitability, be sure to pay the quarterly estimated taxes throughout the year. Do not wait until tax time to “settle up,” as this can incur penalties on the unpaid taxes. 
            2. If you have multiple sources of income, make sure to take ALL of them in to account in figuring how much you need to have saved up for tax payments. 


            Keeping this important change and lessons learned about estimated unpaid taxes in mind, let’s continue…

            From 19-October-2011 (when the last portfolio update was published – see link below for more information) to 27-December-2011, the S&P 500 index . Overall, in 2011, the S&P 500 index increased 0.69%. Not bad, but not good either!

            My Personal Finance Journey – July-October, 2011 Portfolio and Net Worth

            During that time period (October-December 2011), my liquid net worth (excluding condo ownership and unpaid tax savings) increased 8.06%. As far as the 2011 year overall goes, my liquid net worth increased 8.94%. 


            Overall, I am pretty satisfied with this result. First, it is slightly better than the market’s gain during the same time period, which is always a promising sign. Additionally, this is a pretty good result since the bulk of my excess funds over the past few months have been funneled in to paying off my condo home loan and saving for taxes (both of which are not reflected in this figure).

            Condo Equity Growth

            I am very proud to share that I now currently have 18.17% home ownership in my condo (up from 9.07% at the beginning of 2011), with this accounting for 30% of my real net worth (so net worth subtracting the condo loan – this is different from the net worth above).


            Permanent Portfolio Performance Update

            In November 2011, I became fascinated/interested enough in Harry Browne’s Permanent Portfolio asset allocation strategy in order to give it a small trial run with my own money (less than 1% of my liquid net worth). As such, I’ve decided to start tracking the performance of my small ETF version of the Permanent Portfolio in order to compare it to how the market is doing. 

            While holding the Permanent Portfolio from 19-November-2011 (when I first bought the ETFs) to 27-December-2011, the Permanent Portfolio decreased in value by 1.60%. During this same time period, the S&P 500 index increased by 4.09%.

            We’ll continue to keep an eye on this portfolio in 2012. Should be interesting to see what happens!
            Update on Financial Goals for 2011

            2011 was a great year as far as achieving financial goals goes. Listed below are the financial goals I realized in 2011. Thanks to everyone’s help for keeping me motivated and accountable!

            • Have contributed the maximum allowed by law for 2011 to my Vanguard Roth IRA ($5000).
            • Have rebalanced my mutual fund portfolio to maintain my asset allocation target %’s (75% equity, 25% fixed income overall). 
            • Have donated $1,300 to Multiple Sclerosis Foundation in 2011 (5% of income) and passed my target fundraising amount of $5000 for my MS 150 ride that took place June 11-12, 2011. I will most likely be shooting for raising $7500 for 2012. Rock n’ Roll!
            • Saved 33% of self-employment income from my blog in order to pay taxes for the 2011 year.
            • Have accumulated 1% of my condo value for home maintenance repair expenses that randomly pop up. I read a post a while back discussing that 1% is probably not the best ultimate goal to save for, but it is a start for me to feel pretty secure in being able to fix things that go awry. 

              For a detailed list of my short term, mid term, and long term financial goals, click on the link below:

              My Personal Finance Journey – Financial Goals


              Review of Current Asset Allocation (excludes condo and tax savings)

              • Overall Fixed Income / Equity Allocation
                • Currently, 27% of my net worth is invested in fixed income instruments (cash or bond funds), and 73% is invested in equity.
                • This is only 2% off from my targets for these categories of 25% (fixed income) and 75% (equity) and well within my +/- 5% allowable band limits. So, all looks good here!
              • Equity Allocation
                • In the equity portion of my portfolio, 71% is invested in US Domestic Equities with the remaining 29% being held in international equities. 
                • This is perfectly aligned with my equity breakdown targets of 71% and 29%, respectively, for US Domestic and international holdings.


              While the overall percentages for these categories look fairly good, a detailed look (table below) at the allocation breakdown reveals the real story and provides for better analysis of the current state.

              Remember: in order to maximize the benefits of your asset allocation strategy, a red flag goes off if your current % allocation in a category is greater than +/- 5% off of the target allocation. This is my trigger that I need to rebalance that aspect of my portfolio.

              % Cash (money market target 5%) 9%
              % non-inflat. Bond Funds (target 15%) 14%
              % TIPS Bonds (target 5%) 4%
              % International Equity (Target 11%) 9%
              % International Emerging Markets (Target 11%) 11%
              % Domestic Large Cap (Target 8%) 7%
              % Domestic Small Cap (Target 8%) 9%
              % Domestic Small Cap Value (Target 14%) 14%
              % Domestic Large Cap Value (Target 13%) 13%
              % REIT (target 10%) 9%

              Analyzing my current asset allocation percentages, it appears that my current asset allocation is aligned with my target levels within the +/- 5% band limits. Because of this, no rebalancing action needs to be taken at this time.


              Looking back at all of 2011, it appears that I only needed to rebalance one time during the entire year, despite the fact that I analyze my portfolio for if I need to rebalance once per month. This is a very good sign because it tells me that I am keeping a watchful eye on my portfolio without being overall active (which can trigger short term capital gains and/or trading commission fees if you’re not careful).


              My next moves for the January-February 2012 time frame will be to do the following:

              • First, I will need to review/update my life values, life dreams, and short/mid/long term financial goals for the 2012 year before knowing exactly how to take action during 2012. Keep an eye out for that post on the way soon!
              • However, one decision I’ll be facing during the first few months of 2012 that I could use some input from you all on is the following: 
                • Which account should I prioritize funds to first – my Roth IRA or the Individual 401(k) that I opened at the end of 2011? 
                  • Both accounts are located with Vanguard and have the same investing options available (same mutual funds offered). 
                  • However, if I make contributing to the Individual 401k (specifying the contributions as 2011 contributions) a higher priority, I could significantly reduce my tax liability for 2011. 
                  • If I put off contributing to the Roth IRA until after tax time, I’ll most likely still have time/funds to max out the account before tax time for 2012 rolls around. So, I’m thinking I should proceed first with the Individual 401k.
                  • What’s you all’s take on this? 


              Wish List 

              • At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund, whenever more money is needed to increase my domestic large cap asset class holdings. This gives better, broader diversification to the US stock market.

              How about you all? How did you progress with your net worth in November-December 2011? What are your thoughts about the strength of the market right now? 


              Do you think I should prioritize Roth IRA or Individual 401k contributions for the first few months of 2012 (see details listed above)?

              Share your experiences by commenting below!

                ***Photo courtesy of http://s0.geograph.org.uk/photos/02/20/022053_8548f29f.jpg

                Chaikin Power Gauge Stock Rating Widget – 3 Month Effectiveness Check-in and Performance Comparison

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                Three months ago, I investigated and reviewed a stock rating tool called the Chaikin Power Gauge Stock Rating Widget. At the end of the review, I concluded that even though the widget seemed to be very streamlined and easy to use, I didn’t have enough information at the current time to determine whether or not the Chaikin Widget was effective at predicting the movement of stock prices (in order for it to be used as the sole source of information in executing buying and selling stock actions).

                As such, the purpose of today’s post will be to check-in on the performance over the past 3 months of 10 stocks I selected from the Dow Jones Industrial Average and compare that performance to the movement predicted by the Chaikin Widget overall stock potential rating 3 months ago. By doing this, I hope to get a feel for if this rating tool seems to accurately predict price movements of common stocks.

                A Quick Review of How the Chaikin Rating Widget Works

                Once you enter a stock ticker symbol in to the widget and hit the “enter” button, the following qualitative and quantitative details will be generated automatically for you on the widget. 

                • The current trading price per share of the common stock.
                • The Chaikin Power Gauge rating – “This rating is based on market expert Marc Chaikin’s back-tested 20 factor model, which has been proven successful at identifying a stock’s potential over the next 3-6 months.” I personally didn’t yet look in to the details about what 20 factors this widget takes in to consideration.
                • Along with the overall Power Gauge rating, the widget displays the bullish or bearish levels of the following company details.
                  • Financial metrics.
                  • Earnings performance.
                  • Price/volume activity.
                  • Expert opinions.

                3 Month Performance Analysis vs. Chaikin Power Gauge Stock Rating Widget Predictions for 10 Dow Jones Average Stocks


                As eluded to above, three months ago when I wrote the original Chaikin Widget review, I selected a “mixed bag” of 10 of the 30 Dow Jones Industrial Average companies from different industries. Along with noting the name of each company 3 months ago, I also listed the stock price per share, ticker symbol, and the Chaikin Power Gauge Rating at the time. It was very interesting to note that the widget didn’t predict that a single one of the 10 stocks would go up in the next 3-6 months.

                The ten stocks I selected are shown below, along with their stats and overall Chaikin Widget potentials/predictions from 3 months ago on September 30th, 2011. 

                3M (MMM) – $74 – Very Bearish
                American Express (AXP) – $46.45 – Neutral – Trend Down
                Boeing (BA) – $59.51 – Neutral
                Coca-Cola (KO) – $67.39 – Bearish
                ExxonMobil (XOM) – $69.30 – Neutral – Trend Down
                The Home Depot (HD) – $33.72 – Neutral
                Merck (MRK) – $31.04 – Neutral – Trend Down
                Wal-Mart (WMT) – $50.79 – Neutral – Trend Down
                Disney (DIS) – $29.81 – Neutral – Trend Down
                Microsoft (MSFT) – $25.06 – Neutral – Trend Down

                And, shown in the table below is how these 10 stocks have fared in real time in the past 3 months compared with the Chaikin Stock Widget Ratings. 

                Unfortunately, none of the price movement predictions/potentials by the Chaikin widget (in the middle column) correctly forecasted the performance of the stock over the 3 month period. 

                When a stock was rated as “neutral,” the stock experienced significant gains (above 20%). When a stock was rated “neutral, trend down,” the stock gained a minimum of 1.55%, with double-digit gains often realized. A similar result from seen with the stocks rated as “bearish.”

                Overall, the average % price change for the 10 stocks over the past 3 months was 15.46%. This trumped the % increase of 11.48% of the Vanguard Total Stock Market ETF (VTI) pretty nicely. However, the widget didn’t predict that a single one of the 10 stocks had the potential to go up in the next 3-6 months.

                Conclusions

                From this analysis of the performance of 10 of the 30 Dow Jones stocks over the past 3 months to the price movements predicted by the Chaikin Stock Rating Widget, we saw that the widget did not accurately predict the performance of any of the 10 stocks, and seemingly could not predict the movement of the overall market either since none of the predictions were directionally correct.


                While I realize that a study of 10 Dow Jones stocks is by no means exhaustive (the widget may work better for other stocks in certain sectors, etc), because of these results obtained over 3 months, I would still not be comfortable making buying and selling decisions solely based on the results from the Chaikin Stock Rating Widget. Additionally, the low % of accurately predicted price movements gives me cause for concern. 


                To me, these results also reinforce why I avoid individual stock selection for the bulk of my retirement assets, using a passive investing strategy of index mutual funds instead. If a model based on 20 factors developed by an expert that has spent years in the industry cannot accurately predict price movements of individual stocks, what would make me think that I could have more success?


                Lastly, since the Chaikin Stock Rating is “proven successful at identifying a stock’s potential over the next 3-6 months,” I have placed a reminder on my calendar to check the performance again 3 months down the line. It is possible that the results will be a different story then!


                How about you all? Have you ever used the Chaikin Stock Rating widget or any other similar tool for analyzing stocks? If so, which ones? How well have you found that they work? 


                Share your experiences by commenting below!

                  ***Photo courtesy of http://farm4.static.flickr.com/3487/3897338431_579b5556e6.jpg

                  Opening and Managing a Self-Employed Individual / Solo 401(k)

                  So, you’ve decided that you want to open up a self-employed retirement plan for your small business. Next, you spent hours pouring over all of the information you could find from the Internet, personal finance blogs, your accountant, your friends/family, and the IRS (whose information is put together in a coded format that is seemingly more cryptic than a 2000 year old extinct civilization for some reason or another) over the various self-employed retirement plans such as a SEP IRA, SIMPLE IRA, and Individual 401(k).

                  And, after all of that, you came to the conclusion that an individual / solo 401(k) is the option that is best suited for your needs. 

                  This was my conclusion as well, after having done the legwork of deciding which self-employed retirement plan was right for me. After coming to the conclusion that I wanted to open up an individual 401(k), I figured that the actual opening process would be a breeze. After all, I’ve opened many online savings, checking, and IRA accounts in the past several years, and it usually only takes about 10 minutes each go-round!

                  However, what I found was that there was a significant lack of clear, no-nonsense information on the Internet regarding what I actually needed to do to physically or electronically open an individual 401(k). As such, the purpose of this post is to guide you through the individual 401(k) account opening process, using my experiences as a basis for helping you move forward with opening your account.

                  Before we get started, I would like to commend you for having made it this far in the self-employed retirement account decision making process. As confusing as the account opening process can be, I do have to conclude that actually deciding which self-employed plan to choose in the first place is much harder than the steps needed to open an account. So, pat yourself on the back!

                   

                  Step 1 – Decide What Provider You’ll Use for Your Self-Employed Individual 401(k)

                  Naturally, a logical place to start setting up your new individual 401(k) account is deciding what company/brokerage/investing house will serve as the “home” for your plan. This is a very important decision, and you’ll want to make sure that the investing house you choose to hold your 401(k) is 1) a reputable name and 2) offers the types of investing instruments you prefer.

                  Personally, as a passive investor, I believe that 95% of business owners are best off placing their retirement funds in low-cost index mutual funds or ETFs. My two favorite investing houses for this application are Fidelity and Vanguard. For me personally, Vanguard was the natural choice since I had compared Vanguard vs. Fidelity previously, and had came to the conclusion that Vanguard offered lower-cost mutual funds and ETFs.

                  However, you should choose an investing house that you are comfortable with. Surprisingly, it’s very difficult to determine from the normal “individual investors” page that first shows up on most brokerage websites whether or not they offer self-employed retirement plans. As such, the best way to find the self-employed plans that a brokerage offers (if any) is to do a Google search for “PLACE NAME OF BROKERAGE HERE small business.” For example, I had trouble finding the listing of self-employed plans on the Schwab.com and T Rowe Price websites, but I very quickly found the relevant sites listed below when I performed the Google search.

                  Schwab.com – Small Business
                  T Rowe Price – Small Business

                  Step 2 – Download the New Individual 401(k) Account Application Form

                  After deciding upon an investing house in which you want to place your individual 401(k) retirement funds, it’s time to get started filling out the actual opening application form.

                  It is my understanding that unlike regular individual IRA’s, taxable investing/stock trading accounts, and online savings accounts, individual 401(k) account application forms CANNOT (unfortunately) be filled out and submitted online. Thus, you must locate and download a copy of the account application on to your computer.

                  Note: Once you download the application, don’t automatically just print out the entire document. See below for more details.

                  The individual 401(k) account application download link generally is found on the same page that gives a description of the retirement plan. For example, the link (listed below) to download the account application form for Vanguard can be found on the individual 401(k) account description page. Generally, there will be two account applications – one for employees, and one for employers. Since you’re the business owner and are setting up the plan, you’ll want to fill out the one for employers. If you decide to add your spouse to the plan at a later date, you’d download the employee application.

                  Vanguard.com – Individual 401(k) Account Application

                   

                  Step 3 – Locate the Summary of Instructions for Filling Out the Application and Apply for an Employer Identification Number (EIN) Online

                  In these instructions, one key thing to notice is that generally, in order to open a self-employed individual 401(k), you cannot simply use your Social Security Number for identification purposes. Instead, you have to either have or newly obtain what’s called an Employer Identification Number, or EIN. Essentially, this number serves as an identifier for your business with the IRS, much like a Social Security Number does for a normal employee.

                  If you already have an EIN, great! If not, you need to get one before you even think about proceeding with filling out individual 401(k) account application. I’ve listed some guidelines below for how to go about getting an EIN.

                  • First, read this web page from the IRS that documents what an EIN is, why you need one, and the responsibilities that come with having this identifier.
                  • Then, click here to visit the IRS’s online EIN application service for obtaining an EIN.
                  • When you are filling out the EIN application (either online or on the phone), be prepared to provide the following information about your business:
                    • 1) What will the business’ legal name be for tax purposes? This may seem straight-forward, but I actually hadn’t thought about this before calling the IRS to obtain an EIN. Ultimately, I decided to simply keep the legal entity name as my name, since with my business, I could possibly be offering multiple services under the same tax-reporting entity.
                    • 2) What date do you want to set as when your EIN will go in to effect? They will also ask you what you want to set as the effective date for when your business started. For this, I simply used January 1st of the year when I first started earning income from my self-employed business.
                    • 3) What legal address do you want to set up for your business? Here, you have the option of designating what address you want to have linked up for reporting purposes to your EIN. You’ll need to decide if you want to set this as your home address, office address, P.O. box, or a small-business mailbox at a UPS or Fedex shipping center.
                    • 4) Do you want your EIN to be set up for your business in general, or just for your self-employed retirement plan? Yet another thing that I didn’t know about before obtaining an EIN myself was that EINs can be set up for a range of entities. For example, you can choose to have the EIN set up only as an identifier for your self employed retirement plan, or, you can choose to have it represent your business from a more general tax-reporting standpoint. Personally, I choose to have my EIN be linked to my business in general, not just as an identifier for my retirement plan, since I’d want to use it to report self-employed income on the 1040 Schedule C.
                    • It’s important to be careful in choosing the details selected above, as these exact elections will need to be used when reporting your taxes from self-employed business operations. 
                  Note: If your business is set up as a sole-proprietorship (like mine is) and you have already requested/obtained an EIN for a previous business, you’ll obtain an error from the online system since an EIN will already be linked to your Social Security Number. If this happens, simply call up the IRS’s EIN hot line and obtain an EIN that way. The calling process only took me about 20 minutes, and I received an EIN that was activated immediately, so it wasn’t too painful of an ordeal by any means.


                  Step 4 – Determine If You Can Legally Avoid the Annual Account Maintenance Fee

                  After obtaining your EIN, you are armed with all of the information you need to fill out the account application. Nice work! However, by now, you’ve probably noticed that most of these self-employed retirement plans involve a yearly fee in order to keep your account open and in good standing. This is a fee in addition to the normal expense ratios carried by the individual investing instruments you choose for your account. For example, Vanguard charges a $20 annual account maintenance fee for self-employed retirement plans.

                  However, the good news is is that the brokerage houses often provide ways to get out of paying this annual fee. For example, you can often qualify to be “excused” from this fee if you meet one of the following criteria:

                  • You have had an individual account with the investing house for X number of years.
                  • Your individual (not self-employed retirement accounts) accounts have a balance of greater than $50,000-$100,000.
                  • You sign up to receive electronic account documents, saving the investing house the cost of sending you these documents via hard-copy in the mail.
                  The specific criteria required by each investing company will be different, and these specifications can be found in the “fine print” on the individual 401(k) description page.
                  If you do meet any of the criteria for getting out of paying the annual fee, I would recommend typing up a very brief note explaining EXACTLY AND DIRECTLY why you qualify for being excused from the fee to mail in with your account application. This is what I did when I mailed my account application in to Vanguard (I met the account balance minimum they required for waiving the annual fee).


                  Step 5 – Discard Overwhelming Amount of Excess Paperwork Included in Individual 401(k) Account Application

                  As I mentioned briefly in Step 3 above, once you download the account application, your system will almost go in to shock upon noticing that the entire application is something crazy like 104 pages!

                  However, the good news is is that only about the first 20 pages or so of the application actually are required for you to fill out.

                  The remaining 80-90 pages contain page…after-page……after-page…..after-page……of tax code amendments, self-employed retirement plan rights, and plan descriptions that your brokerage is required by law to provide to you. They mention (only officially because they are required by law to do so) that you need to “read the entire packet.” However, I did NOT find that to be necessary one bit. Instead, what I did was flip through the 80 extra pages once and then narrowed my focus to the first 20 pages that matter.

                  Step 6 – Fill Out ONLY The Sections of the Account Application That The Instructions Explicitly Ask You For

                  Having narrowed your focus to the areas of the account application that actually matter, you’ll want to again locate the account application instructions. These generally can be found on the first two pages.

                  Once you locate the instructions, simply follow what they instruct you to do to complete your application. The account applications for Vanguard’s individual 401(k) that I had to follow are listed below:

                  • Fill out Individual 401(k) Plan Adoption Agreement
                    • Essentially, the purpose of this section of the account application is to say, “Hey, I am a legitimate self-employed small business, and I would like to open an account with your brokerage.”
                    • Filling out this section requires you to provide the following types of information:
                      • Adopting employer name (name you chose when getting an EIN).
                      • Address.
                      • Employer Identification Number (EIN). A Social Security Number CANNOT be used.
                      • Legal business structure (partnership, sole-proprietorship, etc).
                      • Name of plan.
                      • Effective date of plan
                      • Attachment A – Vanguard is legally obligated to provide each plan adopter with an Attachment A that allows for space in which you can claim any additional provisions or account benefit protections. However, if you are not a tax-professional, do yourself a favor and throw this page away. If it is sent in with your application, it will not be accepted. 
                  • Fill out Individual 401(k) Plan Authorization Form
                    • The purpose of this form is to designate WHO within your organization has the power to administrate the plan, access private banking and account information, and who can contact Vanguard on behalf of your retirement plan.
                    • This section is somewhat confusing because for many common-folk self-employed business owners (such as you and I), it’s not entirely clear whether you have the power to be this all-mighty “plan administrator.”
                    • However, this is exactly what is appropriate to do! Place your name (as the business owner) as the plan administrator. You have the absolute power! haha
                  • Fill out Individual 401(k) New Account Form for Each New Plan Participant (Only You, if You Are the Only One in Your Small Business)
                    • Having filled out the two forms above to request to set up your plan and designate who can administrate it, it is now time to open the sub-accounts within the plan for all employees.
                    • For the most part, people reading this will probably be single-person run business (or maybe run a business along with their spouse). If this is the case, you’ll just fill out one New Account Form to open up your “employee” sub-account in the self-employed retirement plan.
                    • Remember: In an individual 401(k) as the sole business owner, you have the ability to contribute to retirement both as your sole-employee and also as the employer. It’s quite a nice set up for achieving tax benefits!
                    • To fill out this section of the application, it’s good to have the mindset that you will remove your business owner “hat” for a moment and place back on your employee “hat.”
                    • The following information is needed to fill out this section of the form:
                      • Name, address, Social Security Number, etc.
                      • Which mutual fund you want to invest in and what amount (you’ll actually link up your bank account and fund the account later on once your online profile is established in the Vanguard system).
                      • Primary and secondary beneficiaries.

                  Step 7 – Mail In Account Application and Wait

                  After filling out the three sections of the application discussed above, simply mail the forms in to the mailing address provided multiple times throughout the application. In about 10 days or so, you’ll receive an email from Vanguard saying that they’ve received your application.

                   

                  Funding and Managing Your New Individual 401(k) Account

                  In this same email you’ll receive from Vanguard after the 10 day waiting period, there will also be a link that you can click to go to Vanguard Small Business Section of their website where you’ll set up your Individual 401(k) administration account.

                  Setting up Your Individual 401(k) Small Business Account

                  Setting up your 401(k) account in the Vanguard Small Business system is not completely straight-forward.

                  For example, if you already have a Vanguard Individual account(s), you will be unable to use the same user name and password that you used for your Individual sign-on with your Small Business Account. Additionally, you’ll be unable to view your Individual Vanguard holdings from your Small Business account profile. In most cases, you actually have to sign out, clear your browser cookies, and then log-in to the Individual Vanguard page in order to view your personal holdings.

                  Funding Your Individual 401(k) and Viewing Your Account Positions

                  Funding your 401(k) and viewing your investment positions is also not entirely straight-forward.

                  In order to fund your Individual 401(k) either with employer contribution or employee-salary deferral funds, this action must be done while logged in to your Vanguard Small Business administration interface. The process of selecting the investment you want is much like using the normal individual Vanguard interface.

                  However, once the money is taken from your bank account and the mutual fund is purchased, you are only able to view the overall account balances from your Vanguard Small Business interface. In order to actually see what mutual funds you are holding and the value they possess, you must be logged in to your normal Individual account. This makes it sort of a pain to manage multiple accounts. However, it is set up this way with larger companies in mind in order to protect the privacy of the individual employees and what investments they are holding.

                  How about you all? Have you ever opened an Individual 401(k) account or another type of self-employed retirement plan? If so, where did you choose to invest the funds and why? Did you find the account opening process overly cumbersome or pretty straight-forward? 

                  Share your experiences by commenting below!

                  Also, if you’re wanting to read more about the individual 401(k) account opening process, Flexo from Consumerism Commentary wrote up a great piece on this which can be accessed by clicking here. It definitely helped give me a guide to opening my individual 401(k) account. Thanks Flexo!

                  ***Photo courtesy of https://www.flickr.com/photos/cafecredit/30994123601/sizes/l

                  Home Ownership and Mortgage Insurance

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                  Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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                  Click here to enter my free $74.52 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is December 31st, 2011.


                  The following is a guest post contributed by Genworth Financial. Enjoy!

                  Home Ownership and Mortgage Insurance

                  Many homebuyers going through the mortgage acquisition process for the first time are slightly surprised at the various costs that they encounter (and have to pay) that are not actually included in the loan principal or interest itself. For example, there are often one-time costs such as origination fees and mortgage points, but, there is also a monthly fee that must also be paid for something called ‘private mortgage insurance.’


                  Private mortgage insurance (or as it is often abbreviated, PMI) protects the home loan lender in the event of a loan default. Essentially, it acts as a form of protection for the lender if the home buyer gets in to trouble and can no longer pay their mortgage. 

                  Some Often-Forgotten Benefits of Private Mortgage Insurance

                  I know, I know. At first glance, this coverage called private mortgage insurance might seem like nothing more than yet another monthly fee that you have to pay on top of all of the other fees you’re already paying as a home owner. However, the bottom line of the matter is that at the end of the day, the bank is the one lending you the money to buy your house, and therefore, you must play by their rules. 


                  As such, for the many individuals looking to obtain traditional loans from banks to buy a house, it’s good to know some of the benefits provided by having private mortgage insurance. I’ve listed a few of these below:

                  • Lower interest rates / monthly payments:
                    • As we’ve discussed previously on My Personal Finance Journey, your rate of return depends upon the amount of risk you’re willing to take on. From the perspective of a bank, this is no different. If the bank is going to be exposed to more risk, they are going to demand a higher return from you in the form of a higher interest rate. 
                    • Thus, it makes sense that having this type of insurance to shelter the lender will save you some money. 
                  • Lower down payments:
                    • Without mortgage insurance, the lender requires that you put down more than 20% of the home’s value up front. 
                    • If you’re buying a $200,000 house, this adds up to $40,000. Do you think most people have that type of money?
                  • Mortgage insurance is tax deductible:
                    • This is something I didn’t know before researching for this post! PMI is tax-deductible, right along with your interest payments on your home loan.
                  • Job Loss Protection:
                    • Many mortgage insurance providers these days are offering programs to work with you during periods where you are temporarily unemployed to help you keep up with your monthly home payments. 


                  For the majority of regular home-buyers, I imagine that private mortgage insurance will be required in order for them to purchase a home, especially since it’s rare for people these days to have cash reserves equivalent to 20% of a home’s value.


                  However, if you decide that mortgage insurance is not suited for your personal needs, it’s also good to know of ways to obtain a home loan that do not require PMI. Some of these methods are discussed below:

                  Putting Down a Large Down Payment

                  Private mortgage insurance is required on most loans made by banks and financial institutions. That is because most borrowers fail to put down a significant down payment. You can avoid paying private mortgage insurance altogether by putting down a large enough down payment. 


                  Putting down at least 20% of the home’s value in the form of a down payment will eliminate the need for you to buy private mortgage insurance.


                  Getting a Special Loan


                  If you are a former veteran that served in the armed forces, you can skip getting mortgage insurance altogether. The Veterans Administration offers loan programs that do not require you to purchase mortgage insurance. VA loans give borrowers the best of both worlds. You can get a low interest rate VA loan and put down a minimal amount of money to purchase a home. 


                  You can also qualify for special federal loan programs due to your occupation that will take care of any mortgage insurance for you. Doctors, nurses, and teachers are eligible for these programs in many states because of the demand for the professions.


                  Have the Seller Pay Your PMI


                  Mortgage trends in the real estate market show that this is clearly a buyers market. You can use this to your advantage by negotiating favorable terms in your real estate contract. You can get the seller to pay your private mortgage insurance for you by adding it into the seller paid closing costs. You can add in an extra 3 to 5 percent to cover the amount that your mortgage insurance will cost you over the first few years of your loan. This way you get PMI insurance and do not have to pay for it at all.

                  How about you all? If you’ve gone through the home-buying and home-loan acquisition process, did you have to pay for private mortgage insurance on your home loan? If not, how did you avoid paying this fee? 


                  Do you think a 20% down-payment is too high of a level to pay in order to avoid paying private mortgage insurance?


                  Share your experiences by commenting below!


                  Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

                  • @ Special federal loan programs based on your occupation – 
                    • I admit that I wasn’t aware of any of these special programs that you could use if you have a certain occupation to avoid paying private mortgage insurance. 
                    • Does anyone else have any experience using these?
                    • Additionally, I have heard of some companies helping secure favorable mortgage terms with employees that move for a job change. These people usually can secure a pretty sweet deal too! It’s possible that in these cases, the company could in some way help with paying the mortgage insurance. 
                  • @ Getting the seller to help you out with paying private mortgage insurance – 
                    • This is truly an amazingly opportunistic idea! Kudos for coming up with it!
                    • It really is hard to imagine that just several years ago, houses were being bought and sold like crazy and now, 4-5 years later, sellers are SO DESPERATE to sell/find buyers that they’ll even bend as far as paying mortgage insurance for the potential buyer. 
                    • However, as a buyer, it is my personal opinion that you have an obligation to use all of the tactics at your disposal to try to get the best deal for yourself and your family! Therefore, this strategy of getting the seller to potentially pay for your PMI is worth a shot at the very least!
                    • It also reminds me of how ALMOST EVERYTHING in the home-buying/selling process is negotiable – inspection fee, home repairs before sale, real estate agent fees, closing fees, ALL OF IT! And, it never hurts to at least ask if the seller or buyer is willing to cover certain non-traditional costs if you have the “upper-hand” in the transaction process.

                  ***Photo courtesy of http://farm6.static.flickr.com/5014/5547563982_d4d6bedafe.jpg

                  How to Ignore Market Volatility

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                  Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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                  The following guest post comes to us from Rob Berger, the founder of the popular personal finance blog, The Dough Roller. It’s an honor to have him guest posting on our site today! Enjoy the article!

                  How to Ignore Market Volatility

                  “We have met the enemy, and he is us.”— Pogo

                  You’re no doubt familiar with the above quote. It comes from a comic strip character, Pogo, created by cartoonist Walt Kelly. The quote appeared in an anti-pollution poster on Earth Day in 1970. And boy does it apply to investing as well as the environment.

                  Study after study shows that investors are their own worst nightmare. We buy when the market is on the rise with big fat dollar signs in our eyes (investing can be addictive!), only to sell when the market goes down out of gut-wrenching fear. In other words, we do exactly the opposite of what famed-investor Warren Buffett preaches:

                  Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.

                  —— Warren Buffett in his 2004 Berkshire Hathaway Chairman’s Letter.

                  Of course, buying in down markets and selling in up markets is much easier said than done. Having managed my family’s investments now for twenty years, here are some tips on how I ignore the market’s ups and downs.

                  Asset Allocation:

                  Having a sound asset allocation (think stocks versus bonds) won’t insulate you from market losses. In fact, with any asset allocation that includes equities and debt, periodic losses are certain. But, a portfolio consistent with your investing goals will give you confidence that over the long run, your investments will grow.

                  The single biggest asset allocation decision an investor will make is how much to invest in stocks and bonds. As an investor nears retirement, his or her exposure to equities should give way to more bonds and fixed income securities. Taking unnecessary risks often cause investors to react negatively to market volatility.

                  Index Funds:

                  Over the long term, index funds generally outperform managed funds. They are also less expensive. And these are the two reasons index funds and ETFs are trumpeted as the preferred investment vehicle. But there is another reason to favor index funds—stability.

                  Managed funds depend on the stock-picking prowess of the fund managers. If these funds start to underperform the market, investors often sell and search for a different manager. This realization led me to leave Bill Miller’s Legg Mason fund in the 90’s when it was still trouncing the S&P 500. I knew his winning streak couldn’t last forever, and I didn’t want to sell when the fund was taking a dive. So, I moved my money to an index fund.

                  With index funds, there’s never a concern that poor performance is the result of human error. Knowing that the fund simply tracks an index can help an investor stick with the fund through thick and thin.

                  Minimal Debt:

                  This may seem out of place, but I’ve found that too much debt can cause some to make bad investing decisions. Particularly for those nearing retirement, too much personal debt may cause investors to sell investments in retirement accounts at any sign of a market decline. A family member of mine with significant debt made this exact move following the market declines in 2008. The result was that she missed out on the market gains in 2009. And, this move was made shortly before her retirement.

                  Low Investing Costs:

                  Finally, keeping investing costs down can help investors stick with their investing plan. Of course, low costs are important in their own right. But, I’ve found that investors who put cash in high cost mutual funds are more likely to sell when the market declines. These high costs may seem palatable when the market is on the rise and the fund is booming, but they sour quickly during a bear market.

                  As a rule of thumb, I try to keep the weighted average cost of investing below 50 basis points (0.5%). With ETFs and index funds, the cost of investing can be even lower. And for stocks, I always trade with an online discount broker (Scottrade is my choice, but there are number of good options).

                  How about you all? How often do you keep track of the overall position of the market? Does it bother you to find out the market has decreased several percentage points in a day, or do you shrug it off pretty easy?

                  Do you find yourself falling prey to selling when the market is low and buying when it is high?  What techniques do you use to maintain a long term investing perspective and not allow sudden dips and increases in the market bother you?

                  Share your experiences by commenting below!

                  Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

                  • @ Investors being their own worst enemy –
                    • Thanks so much for sharing this article with us Rob!
                    • As a big fan of passive investing myself, I am a believer that for the majority of individuals, selecting individual company stocks to buy and sell (or buying in to a mutual fund that picks individual stocks in an attempt to “outperform” the market) will ultimately result in a loss of money in the long run.
                    • As Rob mentions, this often happens because investors are not confident enough in their investment selection in order to stick with it once they start to lose money. 
                  • @ Warren Buffett –
                    • It’s no secret that Warren Buffett is arguably one of the best (if not THE best) individual stock investors of all time. 
                    • However, in a quote I found while putting together the Festival of Frugality in September of 2010, he mentions that even though he does not believe the market is ALWAYS efficient, he does believe that the majority of individuals would be better off buying an index mutual fund instead of trying to buy/sell individual stocks.  
                  • @ How to determine your asset allocation –
                    • Determining the appropriate asset allocation for your personal situation is a big decision. There’s no way around that. 
                    • One exercise that helped me to develop my investing strategy was to consider having a $100,000 investment. From there, ask yourself how much of that investment you would be able to emotionally tolerate losing in a single year time period?
                    • Your honest answer to this question will help you take the first step in determining an appropriate level of fixed income asset allocation. 
                  • @ People in debt investing significant amounts of money in stocks/mutual funds –
                    • I would definitely agree that people that have large amounts of debt would be more prone to overacting to market downturns by selling prematurely. 
                    • This is logical, since I’d imagine that people in debt would have less of a safety cushion as far as how much money they can afford to lose temporarily.
                    • I think it’s also important to note that if people are in large amounts of debt (particularly credit card debt), they should remember the account hierarchy priority order of financial needs and make sure to save up enough money for a cash emergency fund prior to investing significant money in stocks. 
                  • @ Choosing an online discount broker for trading individual stocks and ETFs –
                    • When I first started investing, I was a customer of Scottrade for several months.
                    • However, I found their trading fees/commissions ($7 per trade) to be higher than Sogotrade ($3 per trade) and Zecco (the ones I currently use, if I use any play money to invest in individual stocks). 

                  ***Photo courtesy of http://www.flickr.com/photos/rwhitlock/4931419824/sizes/l/in/photostream/

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