Everyone, from Robert Kiyosaki to Ben Bernanke, from Alan Greenspan to yours truly, has been speculating recently about whether we are heading for a recession. The answer is certainly yes, but the big questions are when, how severe and what to do about it.
Meanwhile, my son gave me a copy of "The Intelligent Investor", the definitive book on value investing by Benjamin Graham. In the preface, Warren Buffet says Graham was had more influence on him than anyone other than his father. I'd heard of Graham before, of course, but had never read any of his work. I'm only part way through, but I'm already absolutely amazed to see the similarities between Graham's philosophy and what I've been writing here in this space.
And right there on page 2, written over 50 years ago, he quotes an example that sheds more light on the recession question than anything I've seen from the illustrious names above. It is set in 1929, the year of the penultimate recession/depression. The DJIA was at 300. The crash came, followed eventually by a recovery. But, by 1949, the Dow had recovered to only 177. Ouch, that is a serious depression!
Here's the kicker...If you had invested equal amounts each month during this same time frame, by 1949, when the Dow was still down 41% from your starting point, you would have gained over 8% annually on your money, more than doubling it. How is that possible, you ask? It is the result of dollar cost averaging.
Those who have been dollar cost averaging over the past several years have already seen even better results. So, if you are just starting out, quit worrying about a recession and jump in. The results from 1929-1949 demonstrate majic that is rare in financial circles.
Unfortunately for those of us who have accumulated substantial nest eggs, things are not quite so simple. We still have to worry about the potential 41% reduction in our starting balance. Besides, today we have the option of investing in several different markets. And those are the reasons I developed the "Dollar Cost Averaging on Steroids" system. I'm still hoping to find something similar in the later parts of the book, but I can see already he would approve of the concept.
It takes maximum advantage of the diversification available today to extend the majic, even in the face of significant correlation, especially for those with significant portfolios. If you are interested you can read about it in my prior article (March 12, 2007). I suspect Graham had something similar in mind when he talks about going to a cocktail party and enjoying the opportunity to participate in the market discussion with "I don't know, and I don't care. If it goes up I'll make money and if it goes down I'll buy at better prices." Yes, whether he invented it or not, he would have been a fan! I think I've used some similar words in decribing my process.
It may not be quite as simple, but it is not far from it. And it extends the basic dollar cost averaging principal to meet the needs of those who already have a substantial portfolio.
Friday, November 30, 2007
Wednesday, October 24, 2007
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.
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.
Sunday, August 5, 2007
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.
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.
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