Investment Playground.NET

What a bloodbath June was. From May 30th to June 30th, the Dow Jones Index tanked 9.3%, ending at the lows of the month of 11,350. We haven’t seen levels this low since August 2006. The S&P 500 fell 8%, and the NASDAQ fell 6.8%. 

When the market tanks this bad, it’s really hard to stay afloat. Your goal is to outperform the markets. And if you’re better than most - your goal is absolute zero (to not lose money). Don’t beat yourself up - absolute zero is VERY VERY hard. Hedge fund managers usually have a policy of absolute zero, and most hedge funds end up like yesterday’s corn on the cob - down the toilet. 

So overall, my portfolio consisting of cash, two stocks, one index ETF, and two mutual funds ended up down 8.5% for the month of June. Essentially - in line with the broader market. I’m not particularly thrilled - but the only way to really gauge your investment ability is by looking long-term. In fact - because you’re so confident of your choices, now is a good time to buy more instead of considering selling at a loss.

• We’re on a regular automatic investing plan with Fairholme Funds (FAIRX), so it gives us an easy ability to take advantage of depressed prices. The fund is down 8% overall since purchasing. Fairholme is non-diversified with a US focus.
• Our T. Rowe Price Africa/Middle East Fund took a turn for the worse, down less than 1% overall. This is the first time we’ve entered the red with TRAMX, but the discontinuity to the US markets make this my strongest pick.
• Hewlett Packard is getting beat like Sisco at a Garth Brooks concert - down 15% since purchased. We had a blog posting about this - which basically says “why oh why would you buy ANYTHING near its 52 week high?” I deserve a 15% loss. Nonetheless - within time I’ll be buying up plenty of HP to offset my embarrassing mistake.
• Brasil Telecom is down 8%. The stock rose to a 10% gain and then I stepped out for lunch. One reuben sandwich later - Brazil’s inflation goes to hell in a handbasket. No worries however - just yesterday I received a tender offer for my ADR shares, so we’re looking at making a handsome profit. I’ll give more details later.
• The new addition to the portfolio is SPY, the S&P 500 ETF SPDR. Flat performance.
• Overall portfolio is down 5.82%. Stick with long-term investing, don’t time the market, and don’t do something ridiculous like selling - and you’re all set.

Separately, a declining home price and car price (yes even your luxury car) has brought my asset value down 1.3%. Liabilities were flat. Overall, my net worth has fallen over 9%. I contemplated throwing myself over the Brooklyn Bridge, but then I remembered - long-term is the way to look at things.

Besides - the East River is disgusting.

Better late than never.

All investments need management. On a monthly or quarterly basis, track where and how your cash is coming in and going out, and how your investments are performing.

Firstly - cash accounts. My cash has dropped this month by a whopping 13%. This is predominantly due to some awful and heart-breaking expenses incurred from my rental property. I’ll be posting a detailed real estate story on this site soon. Consider it a lessons learned and real estate sob story in the making. On the upside, we’ve maintained consistency and dropped an additional $700 into our emergency account at igobanking.com. We’re about $5100 in with a long-term goal of $10,000. $7000 is the priority, $10k is the nice to have. This is particularly for ME and my personal needs. I suggest you examine your own needs and decide how much your emergency fund should be.

Our total asset value fell about 2% (home and vehicle value). Meanwhile our liabilities on these two key assets fill only 0.5%. It’s excellent practice to make sure your liabilities (i.e. debt) fall faster than your assets do, which wasn’t the case in May. However, my story is the same as the rest of America, as real estate value is dropping way faster than your mortgage payments. Nonetheless - if you have the means to make sure you’re paying off loans faster than the value’s dropping, you’re protecting yourself from an awful phenomenon known as negative equity. This refers to when you owe more money than your asset is worth. Most of America has fallen into this problem with real estate. Try and get ahead of it.

Now the meat of our investments. In April, we had investments in cash, Hewlett Packard, T. Rowe Price Africa and Middle East Fund, and my 401K. I allocated an additional $4000 into investments in May.

• For HPQ - I was up 1.5% for the month of May. This is great but unfortunately this stock is weighing on my portfolio, down 9% since the purchase. We’re down quite a bit, but as a long term hold I’m very happy to be a shareholder.
• My T. Rowe Price Fund gained 1.3% in May. Overall we’re up 3% since the purchase in April. Emerging markets all the way!
• We opened up an account at Fairholme Funds with $2700 plus additional investments monthly. We’re up 2.2% for the month.
• My Brasil Telecom was up nearly 10%for the month. Of course since then it’s plummetted along with the rest of Brazil. Brazil and all other emerging markets are volatile areas - don’t invest unless you have the ability to walk away and be confident of your choices.
• The 401K was up 1.2% in May. After a 9% drop in the first quarter of 2008 and a 7% rise in April, I welcome the slow growth of 1.2%. In total, we’re up 3.6% for the year to a shade over $6,000. I deposit 6% every pay period as my company matches 100% up to 6%. You can’t get much better than a 100% return.
• None of our investments lost money during the month of May.
• Total return for the portfolio was +2.7%.
• Total net worth fell 6% including real estate; excluding real estate we were up 19%.

I’m pleased with our progress this month despite such a rocky economy.

April’s been a busy yet a fantastic month. I had to write down some major losses on my investment property in 2007, and therefore got a windfall on my tax return. Thanks to that - I’ve made some major moves in building wealth (net worth).

First thing I did was paid off a credit card. $1200 balance carries somewhere around $12 monthly interest charges. Yikes. I now carry a much more manageable $120 balance, and pay off my credit card in full every month. Leverage is NOT your friend people. Leverage is the single most blameworthy outlet that’s causing the downfall of the American financial system today. You carry debt only when you need to. Affording homes and cars in all cash isn’t easy - that’s where debt comes in. But that $1 pack of gum ends up costing you over $3 in fees over several months. Knock it off people. Use an ATM for crying out loud.

I’ve also beefed up my emergency fund from $3100 to $4300. By year end I’m comfortable with a bit over $5000 - so we’re well on our way. On a side note - a close friend of mine who’s pinching pennies and living paycheck to paycheck with a new baby in his home recently got a $5k price tag on repairing his damaged car. Aren’t you glad you had an emergency fund sitting around (if you’d rather put a bill like that on your credit card, then just stop reading my website and leave).

As you know I’ve also purchased roughly 200 shares of the T. Rowe Price Africa and Middle East Fund. This is one move I’m particularly proud of. It’s a high risk/high reward situation so I don’t count on being in it for more than a few years. But let’s say over the next three years the fund returns 15% per annum, my investment has nearly doubled or given me a 17% CAGR. Not bad for vesting your tax return.

My $75 annual fee to be a AAA member has just paid off. I found out that AAA was offering refinancing car loans at great rates (about 5%). I recently splurged and bought a car and was offered the gracious 7.2%. I was comfortable with the payments - but nonetheless to drop the rate by two points was obviously a smarter move. Give them a call and see if they can help you out. For a $200 loan fee, they secured a 5.6% loan through Sovereign Bank for me - $460 per month - saving $100 per month (that’ll go right into an investment). By the end of the payoff - I’ll have saved a few thousand dollars. And having a lower monthly payment just makes it easier to pay off debt early.

Lastly - I’m pretty sure that my investment property’s furnace is about to go. Once it does, I don’t want to run around looking for four thousand dollars at the last minute. Budgeting for large one-time purchases is always a good idea. I allocated nearly the full amount towards it and locked it into a separate account - opened solely for the rental home. If and when my furnace goes - I’ll get a new one without having to break a sweat.

Here’s the grand totals:

• My cash in hand, thanks to Uncle Sam, has increased 78%.
• With my TRAMX purchase, my investments have over doubled. I’m particularly proud of this as the first way to start building wealth is to JUST DO IT. Next month we’ll see a similar move as I’m buying another fund (stay tuned for details).
• Total assets excluding home increased 8%.
• Paying down my credit cards has resulted in my total liabilities down 5% this month!
• All in all - I’ve seen my net worth increase by 20% in a month. Don’t expect to see your net worth increase like this regularly. In fact if it does one could argue you’re in way too volatile territory. An average monthly increase of 1% is all you need to be rich in the long-term future.

Again - feel free to email me for details or a template. I write this blog to help frame my investment plan - and help you do the same. Don’t hesitate.

Building a personal net worth statement is fundamentally important - regardless of if you’re a high swinging investor or a passive-fund-kinda-guy. It’s easy for us to look at our bank statements every month, agree that they look right, and then move on. Investments take time - and the only way to truly track your investments is to closely monitor them over a long period of time. Corporations are constantly assessing and reassessing their balance sheets (assets and liabilities) as part of their overall long term strategies. Individuals should treat their own homes and wallets as mini corporations, with just as much rigor and analysis.

You should be using Excel to create your net worth statement for ease of calculations and ratio analysis. Feel free to email me and I’ll send you a template. What we’re going to do next is list out all our money, and then all our things that are worth money, and then all our loans.

1. Start with a section called Liquid Assets or Short-Term Assets. Under here – start a subgroup called Cash Accounts or something similar. List out all your cash bank accounts - checking, savings, emergency fund. Remember to include your spouse’s accounts - generally you want to calculate your family’s net worth.
2. Next, also under Liquid Assets, you’ll want a subgroup called Possessions or something similar. Here, you’ll want to list out what you own. A word of caution - don’t waste the time trying to inventory your entire house - its not the focal point of your net worth statement. What possessions do you own, other than vehicles and homes, that carry value? In my statement - I have only two lines here - Jewelry and Furniture. The latter is really negotiable. But my wife’s jewelry collection does indeed carry value. And its important to count this as part of your own worth. Forget about clothes and toys and books - when it comes down to selling them they carry very little value. Enter the total value as of TODAY - not the purchase price. Basically - if you had to sell everything you had in a jam - how much could you get for it?
3.  And now you’ll want to itemize your liquid investments. This means investments that you can sell right away. Not everyone creates an investments section on their net worth statement. Seeing as how I and my readers probably do so or at least plan to do so, this section carries the added benefit of being able to track investment portfolio performance. Itemize each single investment of yours - HPQ Stock value, TRAMX Fund value, etc. Enter the value as of today.
4. You’re now complete with your Liquid Assets section. So start a header called Illiquid or Hard Assets. Again - I separate this based on hard assets and illiquid investments. Hard assets refer to your vehicles, homes, and boats, and don’t forget to include all the hotels you own and the private island by Mauritius. (Disclosure: I’m lying). And your illiquid investments are basically your 401k and IRA accounts, or anything tied up for a long time.
5. Now you’re ready to total them all up. Get creative - what do you really want to know about your assets? I added five new lines here:

   TOTAL LIQUID ASSETS

   TOTAL ILLIQUID ASSETS

   TOTAL ASSETS ex home

   TOTAL ASSETS

   Total Investments

   The first line tells me what I’ll have if I need to liquidate in a hurry. The second tells me how smart my investments are. You don’t need to use my template - but definitely try and add value the best way you can.

6. Now you can create your LIABILITIES section. I won’t expound as much as I did in the Assets, but list out your Short Term Liabilities, which essentially are all your credit cards (hopefully few), followed by your Long Term Liabilities (home, car, and student loans).
7. Your total net worth equals your total assets minus total liabilities.

There’s no point to working at all if you can’t increase your net worth. We work too hard and spend too much time if all we’re going to do is somehow magically spend it. For every dollar that you earn and can avoid spending, it should contribute to growing your net worth. Perhaps in a high interest account, or perhaps in a winning investment. I urge everyone to have a personal net worth statement - without having one mapped out on a quarterly or monthly basis - money seems to just slip through our fingers.

Want to get started? Email me for a template!