Our Race to Retirement: First Month

Financial Fluency: My first Month

BLOGGER: DEBORAH HEISER

Click this link to read the first article: Our Race to Retirement

Click this link to read the second article:  Our Race to Retirement: The Preparation Begins

A bit more than a month has passed since Jackie, Judy and I purchased our first stocks.  Here’s how it happened.  We took a financial fluency course and were inspired to compete (using 1,000) to see who could do the best at picking stocks.

Jackie, Judy and I each set up accounts for 1,000.  Here’s how we’ve done so far…

Debbie:

To start, I decided to use an old retirement account that had been doing poorly for many years (and I mean poorly – when I got it way more than 10 years ago, it had 5,000 in it.  Since that time, it has dipped to less than 1,000).  I wondered if I’d end up owing money on it and figured I couldn’t possibly do worse than the professionals who had managed it.

• I activated the account online and added some money to bring it up to 1000.
• Next, I started reading the Wall Street Journal and my usual news sources each morning.

Then I looked around at what I like personally, and what I use personally on a regular basis. I continued to read the papers and online news: NY Times, CNN, WSJ,  and I added something new.  I looked at what I tend to purchase, what I like, and what I notice others doing and buying.  Since I don’t’ eat out all that often, I didn’t feel comfortable buying fast food or restaurant/coffee shop stocks.  I also don’t have major brand loyalty when it comes to major stores for shopping.  I’ll go anywhere for the basics.  So, that left me with my annual gift that I get from my husband.  A handbag.  If there is a major holiday or birthday, I’m sure to get a handbag.  And, it is from Coach.  Although this didn’t start based on brand loyalty (he couldn’t find the store he was originally looking for and stopped in at a Coach store and bought the bag in the window).  I liked the bag, so rather than try something new, this bag purchase has become a tradition.  I looked around and noticed a lot of other women toting Coach bags and accessories: on the subway, in the grocery store, on the street, and in airports.  They are everywhere!  So, I made my first purchase of nearly 500.00 (I found out you don’t get much for 500.00) and left the rest of the money in the account to see how I did with my first pick.

• Then I watched as it did GREAT – it climbed, climbed and climbed.  I was feeling pretty good, so I threw caution to the wind, and went against my original idea of waiting 6 months to see who I did on my first stock and bought my second stock.  Hewlett Packard.

This was because I’ve always had HP printers, and everyone I know for the most part has HP printers.  I realized this isn’t a good reason to pick a stock, but it worked for Coach, so why not.  Anyway, it did well for a day or two and I felt like a stock picking winner.  Then…the decline.  Day after day, decline in both stocks.  In fact, I kept reading the news and came to find out even Coach CEO and EVPs sold massive amounts of their personal stocks in the company.  So, I am not considering myself a stock picking maven.

I did notice, though, the market has bounced back up and my stocks are about even with where they were when I purchased them.  I’m going to just sit back and wait to see how they do.  I’m not planning to impulsively sell them or do anything for now.

• So, end result, I’m down right now, from my original 1000.00, but not far down.  I’m doing better than the account was doing before I started, but let’s see how it all works out in the long run.

Judy:

Judy has a bit more knowledge than me (she is the smart one) and she bought her stocks when they got to a price per share she was comfortable with .  In her words “I placed orders on all these stocks.  I did a little research, saw the previous days lows and highs, and picked a figure a little higher than the low.  Wouldn’t you know, the stocks kept climbing from that day on!  It took a few days/weeks to secure my stocks at my order prices.”  Judy bought Target, Diamond ETF (I have no idea what that is) and Panera (based on her 18 year-old daughter’s advice).

Target and Diamond ETF went down, but Panera went up.

Jackie:

She opened her account, bought her stock, and hasn’t checked it since, so we have no idea how she’s done.   So, by default, unless she can prove otherwise, she moves behind me in this race.

So far…Race results are :

Judy

Debbie

Jackie

But don’t count anyone out yet.  The race continues!!!!

If you’d like to join in on the “race” leave a comment.

And, we welcome advice!

To read the bio for Deborah Heiser, click here.

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Our Race to Retirement: The Preparation Begins

Our Race to Retirement: The Preparation Begins

BLOGGER:  DEBORAH HEISER

Click this link to read the first article: Our Race to Retirement

On our midlife quest to use our newly acquired basic (and I mean basic) financial knowledge about stocks, bonds, mutual funds and all sorts of other gobbly gook (I mean important information), Jackie, Judy and I have been preparing for May 1^st . The- big day when we use our new financial skills to actually start trading! We’ve decided to take $1,000.00 and see if we can make it grow (and whoever does best…wins. I’m not sure what we win but anyway…).

I’ve been keeping track of what I’ve been doing since we took the course less than two weeks ago. Here’s what I’ve done so far:

Day 1

I came home at the end of the course filled with excitement. That evening I opened my binder. Then I closed it.

Day 2

The next day I got up and took out my binder again and opened it. Then I took a break and got a cup of coffee.

I came back and reopened the binder, took a deep breath and told myself it was now or never. I turned to the first tab: Day to Day Financial Planning. That was hard work. I needed another break, so I checked my email.

Once I got a grip on myself, I opened Excel and made myself sit at my desk. This was not easy. I got out the personal budget template, followed the category headings and made one for myself in Excel. Okay, not bad. I emailed Judy and Jackie to gloat…er…let them know I’d actually accomplished my first task. I felt pretty good!

Day 3

I was on fire. I turned the page in my binder and created my Personal Budget. This, I admit was not fun. Rationalizing all my take-out meals and other unnecessary necessities took a lot out of me. Granted, there wasn’t a real RED FLAG anywhere, all the spending just looks bad when it’s in black and white on a spreadsheet. Still, overall ICK.

Day 4

Drained from looking at spreadsheets, I took a day off to slack off a bit and tried to figure out how to rationalize my spending on take-out and eating in restaurants. This was tougher than I thought. So, I took anther day off to gather strength. Note, I didn’t even start to think about how I’d begin the investment part of the project.

Day 5

I still wasn’t thinking about investing, but figured I’d start thinking about the idea of thinking about investing. So, I set out to organize (which means open the file drawer) some of our accounts so I’d actually know what was in them. Lo and behold, I found an account I’d long ago forgotten about – an old Fidelity IRA account I had from a long ago job way before I even started grad school. It was one of those accounts where I received a statement in the mail periodically. I’d usually just throw it away, and ever so occasionally, I’d open it, see the amount had decreased yet again and then throw the statement away. That was the old me.

The new me phoned the company and asked all sorts of questions using my newly acquired financial lingo. I realized that I never called about my retirement accounts prior to this because I didn’t even know enough to know what kinds of questions to ask. I felt empowered.

I decided this account would be used as my starting point. My first steps were made – I have my $1,000 in an account and now I’m ready to start figuring out what stocks to buy. Wish me (oh yeah, and Jackie and Judy) luck!!!

If you have any tips or suggestions for us, please let us know.And…

Who do you think will win this competition?

Are you for Team Jackie, Team Judy or Team Debbie?  Leave your pick in the comment box below and it will be posted!

To read the bio for Deborah Heiser, click here.

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FINANCIALESE SIMPLIFIED

 

Financialese Simplified

BLOGGER:  ARIN GOLDMAN

I’ve noticed that many people are having a hard time keeping up with a lot of what’s going on these days in the financial world.  Even the language seems foreign. Credit Derivatives, mark-to-market accounting, securitization, up-tick rules, what does all this stuff mean?  Why don’t those banks just hold on to mortgages the way they used to?  What’s a muni bond anyway?  I’ve spent most of my adult life immersed in banking and finance, though I am not sure it is safe to admit that anymore, and I frequently find myself baffled by what I hear on CNBC, Fox and Bloomberg. Sometimes that’s because the commentators are even more confused than I am but other times its because the concepts they are reporting are just so arcane.  So here’s my first attempt at simplifying some of the terms and concepts being bandied about these days.  I’ll address more in future blogs.  I am only skimming the surface here and am more of a generalist than an expert so I caution all that my explanations are basic, still I hope they help and at the very least I will try hard to avoid using financialese as much as I can.  If there’s anything else that you’d like me to take a stab at translating please post your question to the comment section and if I have a clue I’ll try to respond.     

Why don’t banks hold onto mortgages anymore?

Banks haven’t held mortgages to maturity for a long time.  In fact, previous banking crises have been caused by financial institutions going long low yielding mortgages in the face of rising interest rates. Since low yielding debt decreases in value when interest rates rise, mortgage lenders who held onto their portfolios sustained some huge losses.   Securitization initially came about to help  banks sell their mortgage portfolios, freeing up funds for additional mortgage loans.  A good deal of the problem in the current crisis is related to credit quality rather than interest rate volatility.  Many mortgages were made to borrowers with weak credit histories or previously solid borrowers who were stretching themselves too far.  Many of these borrowers either couldn’t or never intended to repay their loans.  At the same time the value of the property securing some of these mortgages was either overstated on day one and/or assumptions that increasing property values would bail out weak credits proved ridiculously optimistic. Further complicating all this, there was opportunity for unscrupulous behavior all the way along the line in the mortgage origination process as even legitimate borrowers, mortgage brokers, appraisers, securities firms and rating agencies all pressed the edges  of their collective envelopes. When the real estate bubble burst everything came crashing down at once. 

Just what is this securitization thing anyway?

In the old days, when a bank or other financial institution wanted to sell a mortgage loan they bundled it with other loans and sold thousands of them together as a package.  Overtime, the banks got more sophisticated and realized that they could deposit these bundles of mortgage loans into some type of trust instrument, hire one firm to service the borrowers and sell the collective cashflows.  Although the action of an individual homebuyer is hard to predict the collective behavior of thousands of borrowers is fairly predictable.  Bankers were able to allocate these predictable payment streams  to debt instruments with different maturities and/or different credit ratings.  They then sold these new securities to institutional buyers (insurance companies, pension funds, money managers, etc) with distinct credit and maturity preferences.  Since these securitized transactions maximized the value of the pool of loans, securitization became the favored way for banks to sell their mortgage loans.  After a few years this securitization technique was applied to other types of loans including car loans, corporate loans and just about any loan out there.  Anything that had a reasonably predictable income stream became a possible securitization candidate.  Securitization remains a useful tool. The problem comes about when the underlying loans don’t behave as predicted because of unexpected delinquencies and defaults or in the worst case, because the loans shouldn’t have been made in the first place.     

What’s the story with the uptick rule?

When you sell stock you don’t own you are “shorting” the stock.  Although shorting can be risky it is a legitimate financial tool.  For a long time rules governing the shorting of stocks required that a short sale could only be completed following a trade that had been completed at a price higher than the  the one that had preceded it – in other words  you couldn’t sell stock short unless the price of the stock was moving up or was reasonably stable. I am leaving out some details about the actual rule, but hopefully have gotten the concept across.  The uptick rule had been put into effect after the market crash of the twenties in an effort to stabilize the market and prevent bear runs on specific stocks.  Whether or not it worked is debatable but it stood until a few years ago when it was eliminated.  The SEC is now considering reinstating the uptick rule because many people believe that the absence of the rule accelerated the demise of companies such as Bear Stearns and Lehman Brothers last year.  Others argue that the uptick rule won’t do much given current technology and volumes.        

Mark-to-Market, not to be confused with a shopping spree with your friend Mark.

This is a concept that’s gotten a lot of press lately.  Rules governing how banks value their financial positions were rewritten a few years ago by the accounting standards guys.  Basically, rule changes required banks to adjust their financial statements to reflect the market value of all their securities positions, even the ones that weren’t in trading accounts.  This sounds pretty straightforward.  If you buy some US Treasury securities for $100,000 and interest rates move so that you portfolio is now worth $95,000 why not show them on your books at the lower, more accurate value?  Well, when it comes to US Treasuries and other highly liquid securities, this is pretty easy because the securities trade all day and everyone knows what they are worth. But it gets harder and harder to value securities that are further down the liquidity and credit scale.  Corporate bonds are harder to precisely value than Treasuries. Mortgage securities are significantly more challenging with their mix of credit issues and funky payment characteristics and subordinate subprime mortgage backed securities are among the toughest to value and sell.  Not surprisingly, it gets even harder when everyone needs to dump their positions of those unusual securities at the same time.  Even though many of the illiquid securities are still generating significant cashflows, their market values have gotten so low that these cashflows may not be fairly valued.  The banks argue that given time and the return of some market stability many of these securities will regain a significant portion of their value.  The mark- to-market guys argue the value is the value dictated by the market, period.  Since a number of very smart hedge fund managers are anxious to have the opportunity to buy the so called toxic subprime paper at current “market” prices its fair to assume that the banks probably have a point.  These securities are probably undervalued at the current time; just how undervalued remains hard to assess.  Recent changes in mark-to-market accounting seem to be geared to finding a bit of a middle round.    

To find out about Arin, click here to read her bio. 

 

 

 

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