Pinching Pennies

When I talk to folks about personal finance, I have the feeling than many people want to get ahead but don't know where to start. And, all the info about mutual funds, dollar cost averaging, etc seem meaningless if you don't have the money to get started. This got me to thinking about how I got my start.

Some of my earliest memories were of our family worrying about where money for groceries or the mortgage would come from. I remember vividly when I was about 5 years old when they got out a jar of pennies to pay a bill collector at the door. Out of that came a determination to attain a degree of financial independence that would largely insulate me from these worries. But how do you get from there to independence? The answer for me was to work hard and save as much as possible, paying attention to the details...a philosophy that has stuck with me to this day. My first job was moving trash for 10 cents per hour. And, I still pick up a penny when I see it on the ground. The penny may be a small amount of money, but the time involved in picking up a penny is approximately 1 second, so the work pays about $36/hour, tax free. Not bad for unskilled labor. And, besides being good exercise, the mentality of paying attention to details at this level is the start of financial independence. Interestingly, I've noticed an inverse correlation between the wealth of the neighborhood and the amount of change you are likely to find. In a low rent apartment complex, pennies are everywhere. In a neighborhood of multimillion dollar homes you'll rarely see one. I suspect this is because the rich got that way by paying attention to the details.

From there, you are on your way. Is the dinner out worth a couple thousand pennies? Is the Beemer worth 50 million pennies? Better to camp for the night than spend the 5 thousand pennies for a cheap hotel? At least until you are well on your way to financial independence, consider taking the cheap way and investing the resulting change.

Each penny not spent will be with you for the rest of your life, multiplying through compound interest to give you space between worries about running out of money. I'm not saying you shouldn't spend the money. Just pay attention to the details and make a conscious decision, and if you make the frugal decision, one day you'll realize you are well on your way to financial independence.

I like to think I'm frugal, but others have had less complimentary descriptions. Penny pincher is one I can't dispute, and it got me started on the way to independence from most money worries.

Finally, some volatility...the opportunity to outperform the markets

In my last post, I noted that the market felt a bit bubbly and that my system was flashing sell. While I couldn't predict the market's direction, I did predict, and look forward to, increased volatility. And boy, have we had volatility!!

Since that post, markets are down about 7-8%, and have been very volatile in the process. That has provided my "Dollar Cost Averaging on Steroids" system with an opportunity to shine, selling at the highs and now buying back the indexes while they (at least relative to a few weeks ago) are on sale. As usual, the system is forcing me to do things that feel uncomfortable, like selling on the euphoria of market highs and buying into down markets. Of course, only time will tell whether the market will continue downward from here or recover. But it is certain that this volatility has provided an opportunity to outperform the markets.

You see, outperforming the markets is relatively easy, with some simple systems and tools, as long as you have uncorrelated and volatile markets. When I talk about outperforming the markets, I'm referring to the weighted averages of whatever markets you are in. For me, that includes a wide range of US and International Stocks and Bonds, but the principals apply to any market.

I don't want to be repetitive with previous posts explaining the system, but the key is as simple as dollar cost averaging and aggressive rebalancing.

Markets at All Time Highs - Should you be worried?

The markets seem a little bubbly these days, hitting all-time highs in several indexes. Most of the experts suddently seem to have become bullish, despite their agreement that the market has been climbing the proverbial "Wall of Worry" recently.

So, should you be worried or euphoric? I've traded thoughts with a few friends recently and the insights might be worth sharing.

First of all, keep in mind that the new highs are over those of about 6 years ago, when euphoria was high but earnings were much lower. Thus, while the market is certainly not cheap today, it does not seem wildly overpriced either. Assuming some of the worries dissipate, it would seem the market has room to run.

On the other hand the bull run is over 4 years old, so the market is a bit nervous. Any sign of new worries or worsening of those now being mentioned are causing traders to keep a finger on the sell button.

As I've said to my friends, I'm neither optimistic nor pessimistic on the market. It does seem a bit bubbly now, but it could well go higher over time. The most likely result is increased volatility. That is great news for me, since my system depends on volatility to outperform the markets (see previous articles for an explanation if you are not a regular reader).

In accord with all this, my system had me buying a few weeks ago but is flashing a sell right now. Of course, this is the short term response to the volatility. In the longer term picture, my system has me holding a significant cash position, meaning I'll be ready to capitalize on any volatility, whether it be short term or a significant bear market. That's the beauty of the system...you don't need to know what the market will do to ourperform the market. Check it out in posts on "Taking Advantage of Volatility" or "Dollar Cost Averaging on Steroids".