Well, I sold my first stock. I agonized over when would be the right time, but then I just pulled the trigger, anyway.
Earlier this year, I started using the “free money” I was getting from this credit card to buy some stocks.
In March, we paid our tax bill of over $3,300 using that card, so the 2% rewards were higher than normal. I asked a friend of mine who knows a lot more about the stock market than me what stocks were catching her eye, and on her unofficial recommendation I bought 60 shares of CAR, the Avis car rental people.
That was April 17th. The stock price was $1.50. With a $9.95 commission at Sharebuilder, I ended up “spending” a total of $99.95.
And then I watched as the stock price just rose and rose and rose.
On about May 20th I started wondering if I should sell my proceeds. We’ve had rather more pet problems than usual and I was a little worried that our upcoming vacation might suffer as a result. The “overall return” on that investment, according to Google Finance, was hovering around 200%, which is a heck of a lot more than the 7 to 9% we’re taught to expect from long-term investments.
So I sold it on May 27th. I was a bit alarmed to see that there was yet another commission of $9.95. To me, that’s like paying a toll over a bridge going in each direction.
Stock proceeds: $282.24
Minus original investment of $99.95: $182.29
Now, if I’m reading this Capital Gains Tax table correctly, we’re going to be hit with a 25% of the “cost basis” come next April. If the cost basis is the amount I spent on the investment, that’d be the $99.95 number again, which means a tax of about $25.
Profit minus upcoming tax: $157.29
So I spent $99.95 and got $157.29, a real profit of 157%. Not the nearly 200% that Google Finance was teasing me with, but not shabby, either.
The other way to look at it is that since the $99.95 was free money in the first place, I made a profit of infinity dollars.
More importantly, when we take our vacation next month, we’ll have $157 that we otherwise wouldn’t have had. That’s one fancy dinner with some very good wine. I’m looking forward to it.
Jeremy Siegel, author of The Future for Investors and Stocks for the Long Run believes that the economic recovery will be faster than expected this year. Siegel has been criticized in the past for being overly optimistic, but he may be right considering stocks don’t have to perform well this year to improve over 2008.
The U.S. economy will recover faster than expected. Unquestionably, the last quarter of 2008 and the first quarter of 2009 will show a significant decline in GDP. But I think the decline in those two quarters, which some are now predicting to be -7% and -5%, respectively, will be milder, and the second quarter might surprise with an uptick. This more optimistic forecast is based on low mortgage rates stabilizing the housing markets and increased lending by banks.
Equity markets will enjoy returns of 20% or higher… U.S. Treasury bond yields will rise over 3% as the economy improves.
A 20% return in the S&P 500 from December 31, 2008 to December 31, 2009 would be a welcome improvement. If this year plays out to be one of recovery in the stock market, then it would make sense to invest more in the beginning of the year to take advantage of as much as the upside as possible. My 401(k) doesn’t work this way; every two weeks, I invest roughly the same amount of money, so I’ll be dollar cost averaging as the stock market increases. For my SEP IRA, and Roth IRA if I qualify or Traditional IRA if I don’t, I’ll likely invest a lump sum in April. I may reserve a portion of that in a money market fund, so I can continue to invest periodically.
Are you planning for a recovery in the stock market this year?
Economic and Market Commentary, by Jeremy Siegel, January 2009
Over the last 36 years whose first five days resulted in a stock market increase, 31 of those years experienced an overall good year for stocks. While that’s a good track record, it’s not an infallible indicator. There are three trading days left in 2008, a lost cause for the stock market.
This method has an 86% success ratio. Will you make any investing decisions based on the market’s performance during the first five trading days of January?
Every Tuesday, Smithee presents an article about his own experiences with credit cards and observations about the credit card industry.
Two weeks ago I introduced you to a new credit card that offers 2% cash back that is deposited into a brokerage account. Then, a few hours later, I applied for the thing. In my experience, online credit card applications always say, “get a decision in minutes!” and then they feign some sort of technical difficulty, so you have to wait for the mail, anyway.
This was no different. But waiting didn’t matter, this time. Because for once, I had no plans to use the card to “extend” my “buying power.” I’m just using it for the rewards.
I’ve long scoffed at those commercials for credit cards which advertise “rewards”, internally thinking, “Sure, whatever, airline miles. But what good is it if you’re spending $100 a month on interest?” For years, that’s what credit cards were to me: devices that stole your current money because your previous self wanted to go out to dinner instead of eating soup at home.
I had $0.20 when I graduated college. But at least I got to go to college. I found a job quickly, but getting there meant spending money that I hadn’t earned yet. And the job did not pay well. Overwhelming credit card debt kind of snowballed from there. That was 11 years ago.
But later came ambition, smarter living, and marketable skills. Now I’m able to pay off my remaining credit card debt (roughly $6,400 right now) at a rate of $1,000 / month. It’s on a 0% card. I never charge anything on that card. But I do still pay for things. I set aside a little bit every month for lunch and movies with my wife. And lots of dog food.
So, I figure now’s an okay time to start getting in the habit of paying off one card in full every month. If it means 2% of what I’m charging gets redirected toward our future by way of investments, I can be that smart. The problem now is that I have to start learning about investing. But 2% back on my monthly charges will probably give me about a year before I have enough to buy a single share of anything. Got any advice for me that will still be good a year from now?
Warren Buffett, a rock star in the world of investing, has noticed the pattern of panic in the stock market recently and is using this volatility to his advantage. I am still buying into the market; the only change I’ve made is to buy more stocks, even if I don’t get the price at the lowest point on the curve.
Buffett is filling up his personal portfolio with American stocks with the goal of having an asset allocation 100% in equities in a short time. He sees fear in the market now, and he is sticking to a mantra that has worked well for him throughout his life: “Be fearful when others are greedy, and be greedy when others are fearful.”
You might think it would have been impossible for an investor to lose money during a century marked by [a gain of 17,320% in the Dow]. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
This is an opportunity that comes around only once every few decades. If you want to have the long-term gains that financial advisers claim stocks can provide, you have to buy low and sell high rather than buy happy and sell afraid.
Photo credit: TEDizen
Buy American. I Am., Warren E. Buffett, New York Times, October 16, 2008 via ramit.
Money Magazine has interviewed eight professional money managers to determine how the current economic crisis is affecting their own financial and investing decisions. In many cases, the professionals are not making modifications to their plans. In a few cases, the professionals believe staying the course is the right decision but they’ve made some small changes to their portfolio.
Here are some quotes from those who indicated they are doing more than nothing:
“I’m putting more money into foreign stocks, especially emerging markets, which often rebound faster after a U.S. crisis or recession. I’m also buying hard asset stocks like oil and precious metals…”
“I have purchased some financial company stock of late as well. So far, that was a mistake.”
“The only changes have been to add cash into S&P 500. I bought the Russell 2000 and a U.S. large-cap fund. I added a little to an international fund. Prices are low right now.”
“I’m not making many changes [to my portfolio] because I’ve been well positioned for some time. But I recently bought some additional bonds because I found some good opportunities…”
Where pros are putting their cash, Money Magazine, October 7, 2008
The Dow Jones Industrial Average, a measurement of the stock market at large, ended below 10,000 yesterday. That’s the lowest closing since 2004 and it’s quite a drastic change from a year ago, when the market closed above 14,000, the highest watermark for the Dow.
It’s tempting to just stick my head in the sand. I have been looking at my investment balances, though. While it’s hard to separate my emotions as my 401(k) balance quickly moved from about $50,000 to about $40,000 despite contributions, I try to keep in mind that my time horizon is decades in the future.
When the market is in turmoil, it should put asset allocation into the front of any investor’s mind. For people who have a long time before retirement like me, it’s not a good idea to run for cover. It might be a good time to ask yourself if you’ve accurately thought about your risk tolerance. It’s much easier to say you’re willing to accept more risk in return for a higher return over the long term while the market seems to be increasing without bounds. But if you freak out when you lose 20% on paper and consider evacuating your money, either you underestimated your ability to accept risk or you just need to work a little harder to separate your emotions from your financial decisions.
I’m sticking with my “aggressive” retirement portfolio of 100% stocks. My contributions are split evenly between large cap growth, large cap value, international, and commercial REIT, while my current balance has more of a mix including mid cap growth, mid cap value, and small cap stocks. Half of my employer matching contribution is in company stock, and I exchange out of that stock when I’m in a good position to do so.
And my performance this year through September 30 is a loss of 20.85%.
On the positive side, I’m purchasing my investments at a much lower price now than I was last year at this time.
While some pundits are calling for a Dow as low as 8,000 before we hit bottom, it doesn’t make sense to make reactionary decisions, particularly when the money is invested for the long-term. It does help to review your risk tolerance to determine if you can face downturns and to find a way to strive to separate your emotions from financial decisions. Emotions are there to guide us, to let us know what may be right for us, but when emotions form the basis of financial decisions, investments suffer.
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