AskDong

As we’ve crossed mid-year, I like many other bloggers, am assessing where I stand. I won’t belabor the details of where I am financially as it’s really not that interesting. I turn my thoughts more to what am I planning for the rest of the year. When it comes to personal finances, the most important thing is to have goals, and then a plan to reach those goals. It’s easy to make up X amount to save, but the point of being cognizant of personal finances is not to acquire riches (well at least not as a goal in itself). Personal finance is really about facillitating the life one wants to live. For instance I want to save 15k more by the end of the year in my savings account. However my goal in actuality is to have enough money for a down payment by some point in the middle of next year. Adding 15k is quantitative measure of a conceptual goal. It’s too easy to get caught up in a numbers instead of clearly thinking through what we want. Beyond just knowing what we want, we should also understand better why. So as you’ll see my goals are not as quantitative as they could be.

So what are my goals for the rest of the year? (more…)

I should post the update on my IRA on a more regular schedule. I t’s been almost 2 months since my last update Given that I’m posting it now, I’ll set my IRA update schedule to the end of each month. As you can see not much has happened with my IRA monies. The only “major” item is that I purchased more shares of AMAT.  Even though the company beat earnings expectations for Q2, the company also issued lower sales expectations for Q3.  Wall Street cares more about tomorrow than what happened yesterday, and rightly slow.  However, I see the pull back as a buying opportunity.  Applied Material is the type of company I want to own in the long run.  It’s a leader in its industry, Semiconductor Manufacturing Equipment, and is solidly profitable.  Currently it’s valued at trailing PE of around 16 and a forward PE of around 16.  It’s PEG is 1.09.  For those who aren’t stock watchers.  PE is price to earnings ratio. So if a stock trades at a PE of 10 that means it’s price is ten times it’s earnings for a calendar year. If that stock has earnings of $1/year per share, it’s price would be $10. PEG is more complicated, but simply stated a PEG is the ratio of the price to growth. The higher the PEG, the higher the expectations for growth.  Here is an article that goes into more detail in explaining what PEG is. A PEG of 1 implies that the price has fully valued growth. At 1.09, AMAT is currently fairly valued.  As I aspire to be like Warren Buffet, I rather buy a good company at a fair price than a poor company at a good price.  A good company is more likely to pleasantly surprise.  I also like the fact that AMAT has diversified into the solar power industry.

The rollover of my 401k from my old employer to my current employer finally went through. I had some initial difficulties with proper documentation. I had confused my distribution notice with a letter that was titled “distribution notice”. The new 401k people wanted a statement of how I took my distribution (direct rollover with no tax consequences) and instead I gave them a notice saying that my old 401k was eligible for a direct rollover. In any case, after 2 attempts, the 401k is finally rolled over.

I’m a little sad to have closed my first 401k ever, but it was about time for me to rollover. I haven’t been employed by that company in over 5 years, and given that I only had a couple thousand dollars in that account it wasn’t the easiest account to manage. That said it was a great account. It was through Fidelity, and I had established something called a “brokerage-link” which allowed me to make completely self-directed trades in my 401k. Brokeragelink is a great feature, but given that I had a rather small amount, barely about the $5,000 required that allowed me to keep the money in the account. A brokerage account of that size is difficult to manage as transactions costs can be a significant drag on returns.

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RK asks,

I need to roll over a state educator’s retirement fund of $18,000 into an IRA when I move from MS to CO. Should I roll over this money in a traditional or Roth IRA? Which one makes the most money?! How much should I contribute each year? What investment company do you recommend?

I believe you are only eligible rollover your state plan into a traditional rollover IRA.   You can later choose to rollover that money into Roth IRA, but would have to pay income taxes at that point.  Currently if you make more than 100k, adjusted gross, you would be ineligble to rollover to a Roth IRA, however that requirement will be dissapearing in a few years.  The contributions to your state retirement fund were untaxed. A traditional rollover IRA allows keep your money in its untaxed state.

As for which one makes more money, it’s a matter of what investment you purchase within the IRA account. The IRA account is just holding account in which you can choose to invest in anything you want. Stocks, CDs, Mutual Funds, Bonds, and even Real Estate (though it gets complicated investing non traditional investments). What an IRA allows you to do is avoid some taxes. In a traditional deductible IRA, you’ve avoided paying taxes on the outset but do need to pay taxes at withdrawal.  With a Roth IRA, you pay taxes on the outset since it’s funded with post income tax money, but avoid paying taxes at withdrawal.  During the time investments are held in either type of IRA, there’s no need to pay taxes on earnings within the account.  Typically in a taxable account, you would have to pay taxes every year on interest payments, dividends, and other periodic incomes which then reduces what you have available to reinvest.  IRAs allows you to avoid that yearly skim and therefore increase your overall return. That tax deferral can make a large difference over extended time period.  Assuming a 6% rate of rate return, a marginal income tax rate of 30%, and 30 year time frame that $18,000 would grow into $77,768 after paying taxes in a tax deferred account like a rollover IRA vs. $61,845 in a regular taxable account.  In reality the tax benefits are more complicated depending on the types of investments you held in the account.  I have posts here and here that discusses what types of investments are best held in different holding accounts for tax reasons.

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I realize I haven’t updated people on the status of my IRA account as I originally intended. I had meant to do it every month. I didn’t do it for March. I have no excuse other than the fact that I forgot. Anyhow below is how my IRA holding have fared since the last/first update. I’m down 3.7% mostly due to my holdings in AHM.

The value of my IRAs also reflect the deposit I made for tax year 2007.  In addition to making a deposit, I made two stock purchases and my holding in KKD were called away by an call option I sold earlier.  I aquired more AHM as it plunged further down due to the ripple effect from sub-prime.  Of course I didn’t purchase at the bottom, just on the way down.  I believe AHM has been unfairly maligned by the taint of subprime, and in addition I decided to purchase as I saw insiders making purchases.  It bottomed around 19, and then roared back up to below what I purchased it :(. I also purchased WM (Washingto Mutual). On the surface, it looks like I’ve exposed myself heavily to the mortgage market. Well with respect to my IRA, I have.  One reason is my effort to bias my tax sheltered accounts toward dividend paying stocks.  REITs such as AHM are ideal candidates as they do not qualify for the lower dividend tax rate.  My view is generally longer term, and feel that both AHM and WM represent solid companies that have good long term growth prospects that are hopefully just temporarily discounted by the current economic conditions surrounding the mortgage markets.  I’m confident that I probably haven’t timed it all that well, but what can I do? Timing isn’t my specialty.

Addition: Right after I wrote this, AHM proceeded to tumble 18% on a profit warning.   Pretty much the same thing happened when I last updated my IRA for my blog.  Maybe I need to stop writing about it.  Oh well.