Category Archives: investing

The True Test Of The Stock Market Lies Ahead

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Last week, the Dow Jones industrial average broke through all time highs.  The Dow hit highs in October 2007, but pretty much fell apart after that, spending the next several months in free-fall before beginning a slow recovery that’s taken the last few years to complete.

So, the first thing to keep in mind, is that while a new record is nice, it basically means that the last five years were a wash.  In other words, don’t pop the bubbly just yet.

Good media

Breaking a record always makes for good news.  Whether it was Michael Phelps breaking all the swimming records ever in the Olympics a few years ago, or the chase for the home run record on several different occasions, a ‘new record’ is always something the media loves to latch on to.

While all that is good information to read, it really doesn’t mean anything to me.  The stock market is just a number

What lies ahead

The true measure of whether this new record is important will be in whether the record stands, and whether it continues to set new records.  In 2007, we set a new record at that point.  People probably felt pretty good about that at the time, just like they do now.  Then, the Dow lost over half of it’s value.

That’s right, over half.

That record didn’t seem all that special back when the Dow was losing a couple hundred points a day, every single day in a row.  Those days sucked.

I don’t think we’re in any danger of that type of event happening now, but I do worry whether this record will stand.

The volatility of the stock market has increased quite a bit over the last couple of decades.  From the tech bubble of the early 2000′s to the increase in accessibility brought on by online brokerages, to the proliferation of computers running high frequency trading algorithms, the amount of information and accessibility has increased exponentially.  This leads to increase volatility.  Just the whisper of something ‘bad’ can ripple through the stock market in mere seconds, and can create a domino effect where, once things start heading down, sell orders kick in and keep things rolling on a downward spiral.

These things rarely happened before accessibility was so common.  Therefore, when I see the market reach new highs, I also know that there’s always a good chance that the market could drop a few percent, and often for no ‘real’ reason.

Europe is still out there

One of the things that constantly worries me is the effect of Europe.  Over two different occasions in the last several years, the stock market has gotten spooked by events in Europe surrounding the various economic problems of countries like Greece and Spain.  These things have largely stayed out of the news, but if Europe starts hitting the news again, you can bet it’s probably not going to be for reasons that will impress Wall Street, and if history shows, the reaction could be swift.  In fact, since the market has gone down that road before, any bad news could have investors and computers lining up to hit sell even faster than they did the first two times.

Such news would likely send the market lower.

Health care is coming

Health care reform is coming whether we like it or not.  Things will change over the next 12-18 months as some of the major laws are put into play.  How these things will play out is a question we really don’t know the answer to.  This does not bode well from the stock market, which does not favor any type of uncertainty.  As we get closer to some of these laws and as discussion starts hitting the waves on what this could mean to the economy, this could spook the market as well.

The deficit is still there

The market has been OK with the $16 trillion and counting deficit, and the Fed has done their part to keep a bad situation from getting worse, but the fact is that the annual deficits could get much worse if interest rates go up.  The Fed has been able to control this, but if they can’t, this would send interest rates higher, leading either to even higher deficits, big cuts in spending, or increased taxes.  All of these things are options that Wall Street looks upon with disfavor.

Am I a bear?

With all this being said, you might think I have a negative outlook on the stock market.  Quite the opposite.  I think that some of these things will come into effect to some degree, and down the line some of these may hit in a fairly negative way, but in the short term I think the items I listed will be held in check, and that the enthusiasm surrounding the market will lead the market higher.

For now.

What do you think about the stock market?  Are you a bull or bear?  Do you think that if triggers do send the market in a negative direction that you could ‘get out’ in time to avoid substantial losses?

Copyright 2013 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Reviewing Our 2012 Financial Goals

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I wanted to take a look back at the financial goals that we had set for 2012 and review how each of the areas that I had targeted actually performed.  The way I handle our financial spreadsheet, the net worth review that we do toward the beginning of the month is how the year is closed out, so even though there’s still some time left in the year, we can give an accurate look at our goals based on how things shaped up with the most recent review.

Here is a summary of each goal as well as how things actually turned out:

  1. Home value increases by 1% – The housing market had begun to show signs of stability at the beginning of the year, but it now looks like an actual recovery is taking place.  The formula which I use to calculate the value of our house takes into account a number of considerations, including Zillow’s reported value, comparable houses sold in our neighborhood and surrounding subdivisions, and a couple of other factors.  I’m happy to report that, based on these calculations, the value of our home went up by 5.7%.  There’s still quite a ways to go before we even reach the point of having it worth what we paid for it, but it’s still a great step in the right direction.  Achieved!
  2. Auto value decrease of 13% – Auto values had been holding relatively steady over the recent years, mostly as a result of an increased demand for cheaper, reliable used cars.  Now that the auto industry is steadily increasing sales and the age of the average car increases, the value of used cars has begun a more rapid decline.  Ours actually went down only by about 8% simply because the decline I forecasted didn’t really start until about mid-year (at least according to Kelley Blue Book, which is my estimating tool for our two cars).  Better than expected!
  3. A 25-30% growth in our investment account – I have a few stocks which I believed were ripe for big gains.  Unfortunately, they didn’t do as well as expected and we only realized about a 6% gain here.  It’s still better than nothing but not what I had hoped for.  Fail!
  4. A 15% increase in our cash holdings – We did OK here, seeing an increase of about 12%.  (Our cash holdings allowed us to pay for items and costs that came up, but if cash is not readily available there are options for quick loans that can get you through in a jam)  I had hoped our side income would be a little higher with various things that we do to earn money on the side, but while it was good, it was slightly less than expected.  Fail! 
  5. A fifteen to twenty percent increase in our retirement balance – This one was right on target and I’m happy to say it was toward the high end, as our retirement account balance increased by 19%.  Achieved!
  6. A five to six percent decrease in our mortgage balance – We did not apply any extra to our mortgage payments this year, but the 15-year 3.375% re-finance we got ourselves into last year helped us pay off 5.3% of the balance.  Achieved!
  7. An eleven to twelve percent decrease in our student loan balance – Again, we made minimum payments (thanks for nothing, employer who still hasn’t given out any raises) but this allowed us to pay off 11.3% of the outstanding balance we have for student loans.  Achieved!
  8. An overall net worth increase of 22% – If I were to have hit on all of the targets above, the end number would have resulted in a 22% net worth increase.  As it was, we hit on five and missed on two.  That’s the bad news.  The good news is that the ones we hit on had a bigger impact than the ones we missed on, namely hitting the high end of our retirement saving goal, and the value of our home going up by a few more percent than I had estimated.  With this we saw a net worth increase of 25%.  Achieved!

Am I happy or sad?

Little Boy Beagle is three and a half, so he’s learning right from wrong, and as such, he knows if we’re ‘happy’ or ‘sad’ and if he can’t read the look on our face, he’ll ask “Are you happy?” or “Are you sad?”.  My guess is that if he looked at my face, he probably wouldn’t be able to read whether I was happy or sad with the numbers.

The bottom line number, overall net worth, is great.  Given that we set a pretty high benchmark and we actually exceeded it, I’m very happy about that.  In fact, since I started tracking net worth, it’s the highest year over year increase since 2003, when I had a 27% increase.

That was the happy part.  But, as to the things that made me sad, well first is the obvious fact that we missed on two of the targets.  Even though we had a big upward surprise on the value of our house, it still doesn’t make up for the fact that we grossly missed on our investment accounts.   Now, granted, some of the people that commented on the original goals post indicated that my expectation was pretty lofty, so maybe I shot a little too high.

Or maybe I don’t have a great handle on the actual investments.

The good news on that front is that the investment accounts make up a small portion of our net worth total, so a miss there isn’t going to have an impact as if we, say, missed on the value of the home.  In other words, if we had to miss, I would rather miss on the investment account than the home.

But, in reality, there’s a part of me that wishes that wasn’t true.  See, the investment account won’t grow to a comparable level of importance as our home if we don’t actually grow the investment account.  If it were to grow at 6-7% a year, many would say that isn’t bad, but I am hoping for better than that.  I want it to grow faster and at some point provide a measurable part of our net worth.

Getting there is the challenge.

Right now, adding a lot to investments isn’t really in our cards.  Most ‘net new’ investment into stocks or mutual funds goes via our retirement accounts.  Outside of that, we’ve been squeezed on several fronts.  I will say up front that these are things we have made conscious choices upon.

  • We are a single income household – We made the decision even before we got married and were years away from starting a family that we wanted to have Mrs. Beagle stay at home.  Her income was in that area where her working wouldn’t have resulted in a big net pay increase after you factor in child care, and when you add the fact that our kids are getting great care, I know this is the right choice.
  • I haven’t gotten a raise in a number of years – Our company was bought out by a venture capital firm several years back.  I knew what that meant and expected that raises and such would be impacted, and they were.  While the company now makes money (they hadn’t before the buyout), apparently it’s not enough to allow for raises to be given out.  This diminishes our spending power as inflation erodes the paycheck.  This is a choice we make for me to stay at the job.  The reason I do?  Mostly the non-paycheck benefits.  I get over five weeks of paid time off.  I work five minutes from home.  I have managers and team members who support each other. I like the job that I do.  At a certain point, these things may not be enough, but at this point, my satisfaction with the job and the complete package is enough (though I do have my moments).
  • We re-financed last year – From a net worth perspective, last year’s re-finance from a 30-year 5.875% mortgage to a 15-year 3.375% mortgage was awesome. Our payment went up $150 per month, but our contribution toward principle went up $500 per month.  That’s a pretty good return on investment.  Still, from a simple cash flow perspective combined with the fact that I refuse to cut our retirement contribution and my employer refuses to give me any more money, it takes money off the table at the end of the month (though to be fair, there’s no way I could get that return in the market).

So, while all of these choices are ones that I have made actively or passively, there’s a part of me that is still frustrated by the slow growth in the area of our investments.  In the long run, I will have to adjust my expectations and continue to focus on the bigger picture.  I know that I am reasonable enough to know that if I were to get a few more years in a row of 25% returns that I would be more than happy.

One can only hope, right?

Readers, how did you do on your 2012 financial goals?

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Is Our Emergency Fund Redundant?

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For years, I’ve kept an emergency fund.  This is split between an ING Direct (soon to be Capital One Direct) and Ally Demand Notes account.

Along with the emergency fund, we have money set aside for other savings goals.   These include things like:

  • New Car – Eventually we’ll need to replace one or both of our cars and this would be so that we could avoid or reduce a monthly payment obligation.  This should probably, in reality, say ‘Car Replacement’ since new car implies that we would buy a brand new one, which in all likelihood is not something we would probably do.
  • Home Repairs – Right now we have a good chunk of money in here but will probably be depleted next year when we have to replace the roof on our home
  • Car Repairs – A fund that I keep for things like brake jobs, new tires, and if we would ever have to pay a deductible if there was an accident
  • Cashback Rewards – When we cash in our checks from our cashback reward credit cards, we stash the money here.  So far, both of the flat screen TVs we’ve bought have been funded entirely out of this account.
  • Next Years Tax Refund – When we make withholding adjustments to avoid giving the government a big free loan, I stick most of the money here, and then we divvy it out come tax refund time next year.  This is pretty boring and generally goes to bulk up most of the other accounts here.

There are a few other categories here, but I guess after thinking about it awhile, I’m wondering if our emergency fund is entirely or partially redundant.  It seems to me that if there were an emergency, the funds could be used from other allocations to cover the immediate needs that would be required.

Let’s look at a few potential emergency situations which could require access to these funds:

Job Loss

Say that I lost my job. This would take away all income from our family.  If this were to happen, we could tap into the fund for a replacement car to cover bills until I found a new job.  The reason I would consider this is because if I have just lost my job, there is no way I’m going to be putting any thought into buying a new car, so wouldn’t that, in a sense, free up that money for immediate use?

Medical Emergency

The same goes with a medical emergency that required a large payment.  If one of us were to get sick or severely injured and have a large medical bill, chances are your entire focus is going to change anyways.  The ‘new car’ fund could again be looked at as that wouldn’t be an immediate need.  Buying gadgets and such with the money in our cashback rewards allocation would no longer be a priority and that money could be put toward the purpose of covering us in the event of an emergency.

The Car Gets Totaled

If we were to get into an automobile accident to the point where the car would need to be replaced, the insurance company would likely give us a check for the value of the car less our deductible.  We could use this to buy a similar year and model type car, or use the money in our new car fund to buy a newer car.  Either way, unless there was an associated medical or legal cost involved, the subcategories that we have allocated would seem to cover most of the potential expenses here.

To summarize, if we were to change direction here, we wouldn’t be eliminating our emergency fund, we would just be giving multiple purposes to the funds that we have allocated for other items, keeping those allocations the same, but adding a secondary ‘emergency’ fund to many of the categories.

Allocation

If we were to take these funds out of ‘dedicated’ emergency duty, the question would be what we would do with the money.  We could go out and take a great big vacation or do a big project around the house or find some other way to spend it…but if you know me well enough, you know none of those things are going to happen. Spending the money is not an option.

We would look at doing something along the lines of:

  • Investing it in a standard brokerage – This would give greater opportunity to increase the value of these funds (of course increasing the risk of losing them, as well).  It would also be pretty easy to access these funds should the need arise.  We could manage the money ourselves or see about setting something up with a financial adviser.
  • Investing it in a retirement account – We could boost our retirement savings with this money.  This would keep our net worth the same, but would reduce our cash liquidity, and the rules surrounding retirement accounts would make it so that these funds would be pretty much inaccessible for many years.  There could be tax advantages or other reasons where this would make sense.
  • Pay off debt – The only debt we have is our mortgage and one remaining student loan.  The student loan could be paid off in full, which would free up around $100 per month.  This could, in essence, be used to re-build the emergency fund over time if I wanted to stay somewhat conservative, or that money could be funneled toward investment, retirement, or saving for some of the other goals I already mentioned.

I’m a pretty conservative person when it comes to our money, but at the same time, I don’t want to have money that’s sitting around doing not much of anything if there are opportunities to grow it faster.  Back in the day when the rates were 5-6%, you could justify having this money sitting there, but with the average rate between our two accounts at barely over 1%, it’s probably not even holding its value over time if you consider the effect of inflation.

Readers, I would love your opinion?  Do I keep things as is, make the other funding categories dual purpose or do you have some other potential approach that I haven’t yet considered?  I’m always up for new ways of thinking.

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I Knew That Facebook Would Be A Failed IPO

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Not that many people asked me, but I felt that the Facebook IPO was a bad idea from the beginning.  Mrs. Beagle can attest to the fact that I was never excited about.  She asked if I thought it would do well.

My answer was clear: No.

After the initial price and number of shares was released the evening prior to the IPO, I had to do a double take.  Not only would this not go well, I thought, but this was a disaster in the making.

Of course, I really didn’t define disaster very well, because after an initial offering price of $38, I thought $25 would be a disastrous level, and of course it has gone well below that, touching below $19 its lowest point so far.   That’s half of it’s IPO value gone.

Here are the reasons I never felt that Facebook was a good buy, and why I still don’t to this day, even at what many would consider ‘depressed’ levels.

They took out any and all upside.

As I mentioned above, when I heard the pricing, I knew this was a recipe for disaster.  Long story short, at the last minute they decided to raise the price of each share higher than what pundits had been forecasting, and they decided that demand was enough that they released more shares.  This was great news for the company because it milked out every last cent of valuation.  The only problem is that, from an investors point of view, it’s all about upside.

When Facebook and their underwriters took every dollar for themselves, it left no upside to the stock.  Investors want upside, they want growth, they want potential.  When that was off the table, it became an instant ‘Sell’ because nobody wants to be sitting around holding onto something with no upside.

It was just too late.

I first joined Facebook in December 2007.  That was roughly 15 months after they opened registration to anyone and everyone.  Prior to that, it was only available at colleges.  Once they opened the registration for everybody, subscriber count exploded, and remained in growth mode for about three years, before starting to level off.  Leveling off is never, ever good for a stock whose investors are counting on growth.

They got to over a billion subscribers recently, and while it might be possible that someday they get to two billion, it’s going to take much, much longer for those second billion to join the ranks than it did for the first.  Slowing momentum is not something that impresses Wall Street.  They likely would have raised a lot less money in the IPO, but if they would have done an IPO a few years ago when subscriber counts seemed limitless, they could have had amazing buzz and might have been one of the more successful IPOs in history, instead of being what many are calling the worst IPO ever.

The MySpace factor

Before I joined Facebook, I had a MySpace profile as did many people back in the day.  I even remember telling Mrs. Beagle that, no, I did not want to join another community based site.  She convinced me, and like most that had both profiles, I eventually deleted my MySpace page once Facebook became the place to be from a social networking standpoint.

(Does MySpace even exist any more?  If it does, who uses it?)

The problem with any of this is that obscurity and irrelevance could happen to MySpace, why couldn’t it logically happen to Facebook?  What if the next big thing is/was being developed that will someday have Facebook members deleting their accounts in droves?

Before you argue that Facebook is just too big and too dominant, let’s look at other technology based products that once ruled the marketplace:  AOL ruled the connectivity market for years, now is an afterthought.  Yahoo once ruled the search engine space, now holds around 10% of that market.  Netscape was once the biggest web browser out there.  So, unlike in the banking industry, within the technology space, there doesn’t seem to be anything that’s ‘too big to fail’.   I believe Wall Street investors are cautious and have to factor this into their valuations, meaning a crazy market value just isn’t logical.

Going Public Puts The Cool Factor At Risk

Love them or hate them, many of the changes that have rolled out at Facebook over the years have generated a lot of buzz.  Every time they change a feature, or how you like something, or introduce a feature like ‘Timeline’, it was instant news.

Innovation was key for Facebook, but when you go public and you have to focus on profitability and growth and revenue, and your focus is on the investors and not on the users, the buzz gets a lot less cool.

Who in their right mind is going to think that whatever new advertising model Facebook has come up with is ‘cool’?  Probably not many.  Yet, that’s where Facebook has to commit resources now.  Does this potentially divert from innovations that users will actually appreciate?  It’s hard to say, but so far, the user community of Facebook has seemed pretty underwhelmed since the IPO.

The biggest ‘innovation’ that I can think of off the top of my head is that you now have the privilege of promoting your post (to make it appear higher on the feed of your friends) by…paying for it.  How cool is that….not?

See what I mean?

So did I follow my gut?

It’s easy to write these things down now and say that I could see them, and I guess you’ll have to trust me on it, but I really did feel these things and felt that it would lead to a definitive lack of success for the Facebook IPO.

My biggest regret is that I did not act on this.  Unfortunately, I did not invest any money in shorting the stock, though I probably could have and made a good chunk of dough.

Readers, did you get caught up in the buzz that led up to the Facebook IPO?  Were you surprised once it began its downward trajectory or did you foresee it

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Why I Admire The Heck Out Of Mark Cuban

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For a good long time, my opinion of Mark Cuban could be boiled down into two main points:

  • He got lucky selling Broadcast.com to Yahoo for billions before the dot.com bubble burst
  • He was annoying as an outspoken and brash NBA owner.

If these are thoughts you have, I’m here to tell you that you need to think again!

Since forming those opinions in the early 2000’s, I’ve done a lot more research and have become a lot more aware which now leads me to have a great deal of respect and admiration for him.

What changed?

Let me give you a few things which have helped me re-shape my views:

  1. Shark Tank – I first became a little more aware of Mark Cuban when he debuted on the ABC show, Shark Tank.  Even though there’s a lot of glom and production that goes into making it interesting to watch for viewers, the fact is that the ‘sharks’, who purchase stakes in ideas that they see as moneymakers, are savvy and have business knowledge.  After watching him on a few episodes, I realized that can pick through an idea and determine if it makes good business sense.  What really won me over, though, was seeing that he takes it one step further, often passing up on ideas that he sees as moneymakers, but that aren’t suited to his expertise.
  2. He Wants To Be A Champion – In 2011, his NBA team, the Dallas Mavericks, won the NBA championship.  After owning the team for over a decade, he got what he wanted: To be on top.  I started looking at all the ‘trouble’ he got into over the years and realized that he was that way because he wanted to be successful, and he was setting the standard for his team.  When his team wasn’t performing, he wasn’t afraid to call them out.  He expects and demands success.  In short, I used to roll my eyes when I saw news articles about his involvement in the NBA.  Now, I think he’d be a welcome addition to other leagues (it’s been rumored that he wants to buy a baseball team)
  3. He Didn’t Just Get Lucky – For a long time, I dismissed the billions he made with Broadcast.com as dumb luck.  He sold his company to Yahoo for billions, only to watch Yahoo take it over and later shut it down, basically getting nothing on their investment.  It’s easy to think that he just happened to get lucky, but let’s face it, he knew what he was doing when he sold.  We can all think that if someone came to us and offered us a ton of money for something we were working on, that we’d sell.  This is even easier when you have the retrospect that comes after the dot.com crash.  But, let’s think back to those days before the dot.com crash.  Everything was going up, up, and away.  How many people would have taken pause at Yahoo’s offer, figuring, “Hey, if I can get $5.7 billion today, maybe I should hold out and get $10 billion in a few months.”   Bottom line: Many people don’t know when to cash in their chips.  Mark Cuban did and that is something worth noting.
  4. He Works Hard.  Really, Really Hard – Doing more research into the companies and endeavors he’s taken before and after making his billions, it’s clear to see that he’s driven.  Back in the early 2000’s, I sort of figured him the type that just took the billions, bought his basketball team, and sat back soaking it all in, taking the occasional time off from lounging by the pool to annoy the NBA by spouting off about this or that.  In reality, nothing could be further from the truth.  He put a ton of effort into Broadcast.com and other companies he had before then.  He works hard as an NBA and business owner.

Long story short, Mark Cuban didn’t just get lucky.  He’s intelligent, hard working, and expects nothing short of full success, putting everything he has into achieving that success.  I admire him and look forward to seeing what else he accomplishes in his career.

What do you think of Mark Cuban?

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Things to Think About Before Trading Forex

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Forex trading, or FX for short, has become a popular investment option over the past few years for a variety of reasons.  The biggest reason for this is because it is a huge market – currencies are the most traded (liquid)  asset in the world, and as such, there can be huge profits to be had.

Many traders also like Forex because it is traded on margin, typically 1% or 100:1 leverage.    That means that with as little as $100, you could have a $10,000 currency position.  However, that highlights one of the many risks of Forex trading, which you can read below.

Things to Consider

Trading in the Forex market involves substantial risk, and here are some of the main ones.

Exchange Rate Risk: This refers to the changes in currency prices over a trading period.  Prices can change quickly, causing substantial losses if not planned for.  These risks can be mitigated by using stop loss orders.

Interest Rate Risk: This refers to the potential discrepancies in interest rates between two currencies in a pair.  Many invest in this using the carry trade, but the risk of change still remains and you can lose money on the trade.

Volatility: This refers to the risk that at some times, the currency markets can be highly volatile, with prices moving extremely quickly. This can increase the risks of you encountering a loss.

Leverage: Since positions in the Forex market are leveraged, you can take on substantial positions without requiring to deposit a large amount in your trading account.  If your position turns on you, you could be facing losses that exceeds your initial deposit amount.  That is why you need to use trading tools like stop loss orders to help you preserve your capital.

Forex and Leverage

If you want to trade Forex, City Index is a great place to start, because they can help you manage these risks.  No matter what, you need to pay close attention to your margin requirements, and place stop loss orders for all trades so that you don’t exceed your margin limits.  Positions can change quickly, and you may not be able to react as quickly.  As such, a stop loss order can save you from going broke.

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