Making Sense and Losing Cents of the Economy

Like everyone else who has a dime or more invested in equities, I’m concerned about the future of the stock market. Whenever the market looks so bleak, everyone is concerned. And that’s usually the best time to invest. Yet with my yearly investments becoming more sizable, this feels a lot like Las Vegas. Even with diversification, it doesn’t help when all (or most) stocks are on red.

After receiving my paycheck for the past months and reimbursed expenses, I realized that I’m sitting on $16k liquid in my checking account. Part of me hates writing about this because I know I’m so lucky to have the luxury to ask the question “where should I invest?” But this may also be a temporary income boost and I want to invest wisely.

Yesterday, I pulled out my social security statement and studied my yearly income since 2002. Other than last year, I made somewhere between $0 and $25,000 each year. Last year, I broke $60k for a full year’s worth of work. This year as of Sept 1, even with 2 months of unemployment (unpaid), I have earned around $70k this year. And with the way some contracts are shaping up, I expect to make an additional $10k to $30k by the end of the year. So now I face the unlikely problem in a time of economic crisis – what do I do with all this money?

The easy answer is: spend it. Not on wasteful purchases, but things that I need or will need soon. I could buy a new car, or a “new” used car. Or I could invest in property somewhere (though that requires stable long-term income, which I am not confident I’ll have, especially with my plans to go back to school in the next two years.) So where do I put the excess cash?

I’ve already maxed out my IRA and will, within this month, max out my 401k (no match, bummer.) I will likely put another $2000 in my HSA which is invested in very low-risk funds. My IRA is in Sharebuilder and I bought 5 funds – the gold ETF, the silver ETF, two high-dividend ETFs and a REIT ETF. My 401k is invested in a mix of equities and bonds, and I’m not clear what is in it exactly. With a large chunk of my savings this year going into my 401k, I’m concerned that in the next ten years we’ll have deflation, high taxes, and my 401k will turn to mush.

But I’m willing to take that risk with $16.5k because it could be a very good time to invest as well. I’m just not sure I can stomach taking that risk with more money. Not without understanding the real economic situation in this country and the world. History doesn’t always repeat itself, or even if it does it may take a longer time to turn around. I’m young now, I can handle that, but if the next 5-10 years will be lost decade #2, why should I play?

The whole media fueling the fire is disturbing as well. I can’t tell how much of the stocks slipping these days is all the fear stories about how bad the economy is doing. It’s a domino effect that goes in a circle downward. What if all the news resources lied and said the economy was turning around and there’s a ray of sunshine close ahead? If people would invest and spend money than… well, that seems to be the only way to dig ourselves out of this mess right now. I don’t know if I agree with that, but what else can we do? We need people spending again so companies will start hiring again. That’s how capitalism works, right?

But it will take a long time to trickle down to lower and middle classes. The media couldn’t lie for that long. News would get out that the future is not so sunny. And everything would crash again.

Or you can just – apparently – print money until the cows come home and thus make every dollar worth less and less and less. That can’t be a good thing.

Right now lots of big names in economics are saying that we may have a “double dip recession” or – worse? – a depression… because we never actually recovered from the first recession. I wish I understood economics jargon more so I could make sense of this, this, this and this ... and the thousands of other economic gloom and doom stories I'm reading.

Any feedback from those of you out there who are more economically savvy?

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2010: A Fresh Start / Saving $20k in One Year

My goal of saving $20k in 2010 feels within reach. I used Mint to create a strict budget for myself which, allowing for occasional splurges, still should see me saving $1670 per month...

Auto: $300
Bills: $200
Education: $60
Entertainment: $50
Investing Fees: $12
Food & Dining: $200
Health & Fitness: $400
Rent: $633
Personal Care: $440
Shopping: $50
Travel: $50

What's in bold above is the hard part. I can see myself sticking to budget everywhere else, but it's going to take a lot of effort to make sure I spend less than $200 on food per month and less than $50 on shopping. Honestly, the shopping is easier since I can just avoid the mall and therefore not buy anything. I spend way too much when I let myself near a mall, so no mall visits in 2010 except to buy gifts.

I don't know how to spend $200 on food per month, even though in theory that should be easiest. Why can't I spend less than $200 a month on food... I'm only feeding myself (and occasionally my boyfriend.) I eat out WAY too much which is why in 2010 I will eat out ONLY ONCE A MONTH (really?) and this will be an extreme change in lifestyle for me. That means I need to eat breakfast at home (so I don't pick up $13 Starbucks on the way to work), figure out affordable lunch options, go out to lunch with my coworkers just once a week, and eat dinner at home -- or pack a dinner. I honestly have no idea how to eat cheap / frugally. When I shop for food at the supermarket I usually buy too much that I don't end up eating. I try to feed myself in the moment, which is bad, and usually wait to figure out what I'm in the mood for (am I craving protein? Calcium?) to decide what to eat. Well, that has to stop, as my $400 - $500 a month food diet is way too expensive and honestly not at all healthy for me.

If my income level stays the same this whole year AND I stick to my budget, I really feel like I CAN save $20k. It really helps using Mint's planning tool to visualize this. I'm such a nerd but I love adjusting my monthly spending in each category and seeing the yearly savings figure go up. It makes a few dollars saved each month seem a lot more valuable.

Now, chances are I will not remain at my job all year for a few reasons. Namely because I work at a startup and this is our make-or-break year. We may "make" but just looking at the odds there's at least some chance we'll "break." The good news is that with this tight(ish) budget savings plan, I should save $10k the first 6 months, which would at least put me in a good spot when I need to look for a new job (though would completely throw off my goal to save $20k and would depress me greatly.)

Now, I just need to figure out what to do about my 2010 Roth IRA. Over the past three years my IRA plan as been pretty simple... save up enough the year before to put in $3k on April 16 for the year, then put in a few hundred dollars a month until hitting $5k. It probably makes more sense to just max it out right away since I think I'll have the money and the market looks like it will recover more in 2010 (though it could do the opposite, but how much would dollar cost averaging $2k over a year really help?) Additionally, at my current income tax bracket, I'm unsure if I should be doing a Roth IRA or if I'm at the point where a traditional IRA makes more sense. With no 401k to speak of (I've never worked for a company with a 401k, let alone one that matches) the Roth is my only pure investment vehicle. So I need to be smart about it.

After a really awful December in terms of spending (vacations, gifts, dining out) I'm so ready to turn a new January leave and live a semi-frugal life in 2010. With the help of this blog and Mint's budget tools to keep me in check, I think I can accomplish this. This should be do-able if I keep myself in check every day. No more impulse buys. No more $1500 days at Bloomingdales to cure my temporary depression and need to feel free and reckless. No more alcohol. If I feel the need to do something impulsive - ever - I'm going to the gym.

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Risk vs Reward

I always thought that when it came to risk, I'd avoid it at all costs. Skydiving of the body or the spirit was not for me. Sure, I moved a lot and took tiny little risks like living on my own with no job, but nothing beyond riding a roller coaster known for its safety record.

Now that I'm getting into the stock market, albeit very slowly, I'm ever-so tempted by risk. Yesterday I found the blog of Timothy Skyes who is famous for turning his $12k of Bar Mitzvah money into more than $1 million. He loves the thrill of day trading and obviously it has paid off for him.

I don't think I'll ever be able to take my entire savings and make some educated guesses about where to place my bets on Wall Street, but I am getting more and more interested... and risky... when it comes to my relatively small stock and ETF purchases.

It surely is an addiction. A year ago, I finally took the "leap" of putting a huge chunk of my savings into a Vanguard index fund to open a ROTH IRA. But index funds, especially ones that cover multiple industries with no specific focus, have already started to bore me. Additionally, with the way the overall stock market is performing, watching my "less risky" investments tank makes me want to take more risks so I feel like the failure is, uh, much more deserved.

I started out a month ago buying a few shares of GLD, the Gold ETF. Everyone is screaming "gold" these days, as with the recession such commodities seem to thrive. GLD is the main gold ETF available for purchase. I started out buying about 4 shares of GLD and adding some more funds to that ETF. I'm not sure if I should buy more.

This purchase was followed by investing in McDonalds and Comverge (COMV). I figured why not start with one large cap, and one small cap. They ought to balance out in the middle, or something like that, right? Comverge was a company I had covered in the past as a cleantech reporter while they were still private, and I liked what I knew about them. However, I also acknowledged the fact that I had no idea whether they could turn their good idea into a profit for the company. But I always wanted to buy shares in them just because, well, I felt like it was one company I had been following from near-birth, and if anything I wanted to watch them grow (or fail) with a small amount of my money attached.

Meanwhile, McDonalds, I read, was a good buy because it offers yearly dividends to investors AND its price right now has gone down with the current recession.

After a few days it became clear that my Comverge purchase, although not the end of the world, should have been spread out over time so I could have "cost dollar averaged" and saved money. I bought a few shares of the stock for $23 each and since then they've gone down to $18 a piece. Now they're at about $19.50. I'm considering waiting (hoping) they go back up to $20-something again and then I'll sell them so my loss isn't that huge and instead invest them in another stock or ETF that might actually perform well. Or I can keep the $100 in COMV and watch it disappear. Who knows, maybe the stock will soar one day. I'm waiting for the quarterly earnings to see how they've done, and see what that does to my four shares.

Meanwhile, I found that I'm now hooked on investing. I quickly signed up for Sharebuilders "$12 a month" 6 "free" trades plan and started to pour about $300 a month into a variety of stocks and ETFs. This time I did a bit more research and picked the following three stocks/ETFs to invest in:

KOL, EWZ, WFM

What do all those letters mean?

KOL: An ETF of coal. Why coal? It's terrible for the environment. Yet with the prices of oil rising, and other cleaner alternatives far from being able to provide the energy needed in the world, I think coal has (for better or worse) a pretty strong future. I was excited to find the fairly new ETF that would allow me to get into coal with a little less risk. I plan to keep putting about $60 a month into the ETF to see if I can prove myself right. Also, a lot of the ETF is invested in Asia (coal is huge there and growing), so this gives me the Asian diversification I've been seeking.

EWZ: This stock symbol doesn't give one a clue of what the stock is! It's actually an index fund of companies in Brazil. A lot of advisers seem to be recommending it, and I want to diversify my overseas investment so it's not all in coal and Asia. Brazil has a lot going for it and the ETF has performed quite strongly in the past. Will it perform as well in the future? Beats me. I'm investing most heavily in this index fund right now, putting in about $150 a month to EWZ.

WFM: Whole Foods. I spend enough money shopping here! This is another dividend-paying, large cap stock. Not that interesting. I doubt I'll make a fortune on it, but it might at least grow slowly and calmly. Or I'll lose some money but I'll try to get out before it tanks.


One thing I've learned is that in order to make a stock purchase worth it, I eventually need to own a lot of that stock. Even if the stock goes up $10 from $10, a 50% increase, if I only own one share and have to pay $9 to sell it back, that amazing performance will only make me $1. So I've decided to try to focus on these six stocks for now, and if needed to sell one of them and replace it with another. Six seems like a good number to start with, and I'll let my portfolio grow as needed or merited by my income and thirst for risk.

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