AskDong

2008 was awful year for investing, but the last month did at least end on a high note.   December showed marked improvement from November.   These small gains however are dwarfed by the lost ground from the previous 12 months.

The fact that I’m only down 17.3% across my portfolio is truly a bullet dodged.   The S&P is down about 40%.  Of course, when the market eventually rallies I will probably not participate in those gains as much.  I have still have my puts in place, and much more in cash than I really want to be.   I’m beginning to outline my plan for investing in the next year.  That investment plan does not involve dumping everything back in the market all at once.

Let’s hope this year’s chart turns out much better for all of us….

I have been living in this country for the last 7 years and I’m now ready to start investing. I don’t have clue where or how to start. I’m very risk adverse and I have all my $ on a saving account ( I know..it is no good). Can you give tips for real beginners? How to even think what % of your income should go to investing while you have your 6 month cash in case of a rainy day.

Thank you so much!

-Andrea

Great question.  Starting to invest is hard to to do, especially if you’re risk averse.  There’s no simple answer as how and what should invest depends very much on what you’re planning to do with the money.  A 25 year old who’s saving for summer house versus a 60 year old who’s putting the last few dollars toward retirement are going to want to do very different things.

I’m going to make a few assumptions:

• You’re relatively young (25-35?)
• Already have at least 6 months of an emergency fund

I don’t mean to be trite, but you should save as much as you can.  More importantly set goals for your savings.  Don’t save just to save.  Save for retirement, save for a house, save for charity.  It doesn’t matter what your saving for, but having number is important.  By setting a goal, you’ll not enjoy the process of saving more, but have a better idea how to manage your investments.

Given that it sounds like you’ve already managed to put money to savings, I would first max out your retirement accounts (401k, Roth IRA), and once that’s done funnel what extra savings you have towards brokerage or mutual fund account.  Another reader asked me a similar question a few months ago and I gave my rule of thumb how to prioritize investment accounts.  Since you’re starting, I would recommend opening an account with either Fidelity or Vanguard.   I opened a Vanguard account last year myself to take advantage of their low fee index funds.

Once you have an account open, it’s a question of picking funds.  The best place to start is with a total stock market index such the Total World Market Index, VTWSX. A fund like that gives you instant diversification.  After you get the hang of mutual fund investing, you can then start diversifying with other funds and making sure your asset allocation is good.  i.e. you have enough stocks versus bonds.

The one other issue I want to address is that your risk aversion.  Most people are risk adverse.  I’m risk adverse.   However, I do want to warn that often what seems like the safe choice is actually the riskier choice in the long run.   Remember your time horizon.   If you don’t need the money for 20 years, the volatility should not really be an issue.  This is not to say that I’m strict adherent to the buy and hold strategy as I think it’s a little foolish to just “buy and hold” without any concern to what’s happening in the world or your personal life.  Rather, I advise to make measured choices (or have a good adviser) and don’t be afraid to invest just because something can lose value.

I hope this helps.  However, in truth while starting to invest is easy, taking the time to do it properly takes some time.   I’m not even talking about picking stocks, but just getting a feel for where you want to go.

As I write this update with data I put together last week, my charts do not reflect the rally of the last few days.

In the last few days my accounts have probably gone up less than 3% while the market is up over 10%. Relatively speaking, I’m not all that in the market.

I do not personally believe this is the beginning of a V shaped recovery.  Fundamentally there are too many problems in the economy.  That said, I do think there are quite a few good values in specific companies.   Personally in the last few weeks, I’ve put money into BAC (Bank of America) and GE (General Electric).   I believe we are in a time of great economic transition.    There will be companies that do not survive that transitions, some have already failed (Lehman), and others are on the verge (General Motors).

I don’t know if you caught the “breaking news,” the Dow Jones Industrial Average posted it’s 4th consecutive day of gains.  Woohoo, good times are here again.  If you can’t tell I’m be sarcastic.  I think it’s great that the Dow is up 4 days in row, but it means absolutely nothing.   The U.S. and the rest of the global economy has not forded the current financial and consumer crisis.   We are waist deep in the rapids.

While the immediate cause of the current crisis is the collapse of the housing bubble, we in some ways can stop worrying about the cause and really just concentrate on what that collapse has wrought.   

• The Banking Sector is still in shambles.  The banks and everyone else is still being tightfisted with their cash.  Is this the wrong thing to do?  Not for any individual bank, but a disaster for the economy.
• Job losses continue to mount.
• Consumer Spending is down and continuing to drop.

Until the factors above start easing, we will not be out of the rapids.   Personally,  I’ve been very apprehensive of the calls for another economic stimulus.  I’m both leery of additional debt, and not a fan at all of tax rebates (the form of the last stimulus package).   Long term economic growth does not come in the shape of an flat screen TV.   However, I do see a need to restore confidence.   Sometimes, you have to kick a economy in the pants to get it started or else it migh slump over in depression.

On the investment side, I’m personally not substantially getting back into equitities.  I’m keeping my hedges (puts) in place, and only selectively adding.    I’m a bit more in cash now than I was 3 months ago.   I’ve sold quite a few shares, shares that I thought I would not sell before retirement, to harvest tax losses.   Until, I observe a solid economic base formed, I’m sticking to conservative plan with the exception of my speculative brokerage account in which I’ve been buying a fair number of put options.

p.s. I haven’t forgotten about Thanksgiving.  I hope everyone is spending the holiday with family and friends, and enjoying what is still very much a country of plenty.

Michael Lewis of Moneyball and Liar’s Poker fame has an excellent article in Portfolio magazine detailing the fall of subprime.   For him, he has come full circle.  Mr. Lewis’s writing career tookoff on the back of his autobigraphical experience detailed in Liar’s Poker.  He was a bond salesman, specifically a mortgage backed bond salsman at Saloaman brothers in the heady days of the 80s.

In the 80s, he wrote of the excess, greed, and blind risk taking that marked days when “greed was good.”  I like Gordon Gekko do believe generally speaking that “greed is good.”  However, I feel greed is best when balanced with integrity and compassion.   Warren Buffet is greedy.  He’s built an enormous financial empire upon his own ambition and greed.  Warren Buffet, is also however, a man who believes in integrity and compassion for his fellow men.  Greed need not live an isolated existence.

Michael Lewis returns to Wall Street and realizes in his time away that nothing has changed.   The problem is not greed alone, and never has been.  The fundmental problem has always been that bankers on Wall Street bet with other people’s money.   Gordon Gekko was right.   Company executives do not serve the interest of their shareholders, and too often shareholder are not interested in long term profitability because too often their positions are only transient.