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Dave Ramsey's Investment Advice

November 17th, 2009 at 11:08 am

I was thinking about Dave Ramsey and specifically his investment advice. He recommends investing in good quality mutual funds (5+ year track record). He also talks about A shares and paying the front end load.

The reason I believe he deals with front end loads is because he advises using a mutual fund broker to help comb through your investments and use as a teacher when questions arise.

By talking about good quality mutual funds, he is talking about actively managed funds as opposed to index or passively managed funds. In the actively managed case, the manager will look at the S&P 500 (or some other index) and make bets (this will be a good year for consumer products but not banks). The passively managed fun will just buy all the stocks in the S&P 500 and keep the same weight of the securities in the S&P 500.

There are pros and cons of each. People say a good manager should be able to out perform their benchmarks but yet only 25% seem to do that in any one year. But there are some who do seem to do it year over year. There is also reason to believe that good manager leave firms to start their own hedge funds or investment firms.

But Dave's basic advice seems to be actively managed portfolios with experienced managers outperforming the market and using a good mutual fund broker to help navigate and educate you on the market and what you are buying.

He goes on to talk about 4 types of funds: growth, growth and income, aggressive growth and international. He says all should be equally weighted. He also mentions on his web site that if this is too risky, you can substitute a balanced fund for part or all of the aggressive growth fund.

So he is recommending a 75/25 US/foreign portfolio that has small, large and medium sized companies. Seems like a pretty well diversified portfolio from the stock side, but you will notice he doesn't have a fixed income piece.

I believe the second part of his investment strategy takes care of that. The second part of his strategy that he talks about is buying paid for investment real estate. You buy the investment property for cash and you have an income stream that should be fairly well adjusted for inflation. As inflation goes up, the rent you charge should also go up.

I will agree that there is probably more risk then in a government bond fund or investment grade bond fund. However, I believe that by investing in the real estate you can have a third party manage it and set up a nice inflation adjusted stable cash stream, and the cash stream would be more stable then a mutual fund's cash stream.

On the surface, everything Dave Ramsey talks about seems to be rather simplistic and overly simplified. When I start peeling back the layers, I generally feel that the advice he gives is pretty solid and well thought out.

I could argue in getting an annuity instead of real estate or dividing international investing into international and emerging markets. I could also argue that passive index is the way to go. You could also argue that his allocation is aggressive, and I would tend to agree, but replacing the fixed income portion with a real estate portfolio is an interesting spin.

But if you feel uncomfortable about investing or don't know where to start, I believe his advice at the end of the day is pretty solid and a good place to start. As you become more educated and confident, you can then tweak as you want.

Goals Review – October

November 9th, 2009 at 06:56 am

I was thinking about an incidence that occurred a few years back. I was at a kind of holiday type party at one of my wife's friend's house. We are both about the same age and same stage in life. At the time, our finances were interchangeable. Be both had credit card debt, mortgage, car payments, school payments, etc.

We were both probably had the same stresses. The balance between work, friends, and family. Never enough money to pay for everything. Always wondering how the neighbors paid for that.

Up until this point, I was always able to out earn my bills but that was coming to an end fast and I didn't even know it as circumstances outside my control would force my hand.

In any case, at that party, we were talking and he said to me "Welcome to the crunch years." What he meant by this was for the next 15-20 years, the job was to survive. There was no way to get ahead. Just survive and then after college expenses, we could prosper. Then, there wouldn't be mortgage and school expenses, just the car loan.

And at the time, I agreed completely. It summed up how I felt to a T – just survive.

Fast forward today. At one point in my life, I thought him and I would be good friends with our families hanging out together on the weekends. In the few years, he has continued down the path that he was on. Mine has taken a different turn.

I may have been forced to alter my path, and in hindsight, I do find it to be a blessing.

In December, it will be a year since I paid off my last consumer debt. Looking back, I am in a place were I see a bright future as oppose to "just surviving". I am no longer waiting for that next promotion or raise.

It’s an interesting place to be.

By the by, don't forget to get your holiday budgets together. Christmas is less then 2 months away.

Need for Rebalancing

October 7th, 2009 at 05:51 am

I thought I would follow up on a point I made yesterday concerning rebalancing. Everyone understands the reason for diversification and dollar cost averaging. Basically, don't put all your eggs in one basket and no one can market time.

Think of it this way. Over the past 2 years you had a top and bottom. The top occurred in October 2007 and the bottom occurred in March 2009. If you were out of the market from March 2009 to September 2009, you missed about a 37% return. If you had dollar averaged you would been buying all along the way. At the top, you would have been buying less shares in your mutual funds and the bottom you would have been buying more.

Now, I rebalance my portfolio twice a year – March and September. I could have picked once a year or and other 2 months in the year that are 6 months apart. I just like March and September.

With rebalancing, you need to have an allocation in mind. Let's say simply that you are 60% stock and 40% bond. In the above example as we approach September 2007, my allocations might be approaching 70% stocks and 30% bonds. The first thing to note is that my portfolio is riskier then my original allocation. In this case, I would sell my stock and buy bonds to get the allocation back to the original 60/40.

The second thing I am doing here is taking some profit and investing into my other asset classes. I am doing the opposite of chasing performance. I am buying into asset classes underperforming and selling the hot classes.

So, in March 2009, my portfolio might be 60% bonds and 40% stock. This portfolio is a lot more conservative then my original allocation. So, I sold the stock and bought bonds to get back to the 60/40 split. Last month, I rebalance where I sold so stocks and bought bonds because of the run up from March to September.

To illustrate my point about asset classes, I have attached the picture below. Noticed in 2002, the best performer was Lehman Agg (bond index) and the worst was Russell 2000 growth. And in 2003, Lehman Agg was the worst performer and the Russell 2000 was the best. By rebalancing in 2002, you would have been selling your Lehman Agg (your hot mutual fund) and purchasing Russell 2000.

The other great thing, much like dollar cost averaging, rebalancing on set dates takes the emotion out of your investments. It just something you do.



Source: http://www.swapmeetdave.com/Bible/Callan.htm

Goals Review - September

October 6th, 2009 at 06:47 am

It's been awhile since I last updated in August. I am still updating my sidebar. I have maxed my 401 (k) contributions for the year.

I also rebalanced by portfolio. I do this twice a year (March and September). The theory is that I sell my winning sectors and asset class and purchase my under performing sectors. So in March, I reweighted my portfolio where I sold some bond funds and bought stock funds. In September, I sold some of the stock funds and bought some bond funds.

The easy way to achieve this is to buy a target fund that is close to the allocation you want.

I now used to my higher mortgage payments. It's nice to see over $1,300 going to mortgage as oppose to less then $500. I can see the balance going down and can envision it being paid off.

In February, I was asked (as well as all the consultants) to reduce my billable hours. It was a 20% decrease and I opted to take Mondays off. I was still living below my paycheck, but I knew that the larger financial goals were not going to be tackled. So, I have been generally in a holding pattern, taking a break, and enjoying the family.

Two weeks ago, we received word that we could go back to charging our normal hours. I actually increase my hours by 37%. So that coupled with the 401 (k) deductions being maxed, I have received a little boost in income.

Needless to say, it will all be going to furniture this month. But no new debt.

Also with this, I have found a new fire to start reviewing my other financial goals and start attacking them.

Goals Review - July

August 5th, 2009 at 09:50 am

I am still getting use to the new mortgage. I am not use to seeing the large principal amounts that are being paid. This month, $1,382 went to principal. That's about 3 times the principal I was paying before.

Since I am paying more in interest then principal, it feels like I jumped to the back nine of a golf course. I can more easily see the end. It's still in the distance, but I am halfway there.

Next month, I'll top of the 401(k). I'll have some extra money to go towards some of my other goals. But, truthfully, all of it will probably be going to the new furniture and house stuff. But it does mean no new debt.

Not much of an update. Still on the straight and narrow. I have a few things to play catch up on like the 529s and maybe add a few more months to the emergency fund. Other then that, I'll me looking forward to 2010 where 529s and 401(k) investing will be on cruise control, I'll probably start putting money aside for a nice vacation, and start adding more principal to my mortgage payment. When I do that, I will probably add pay off date to my sidebar. I think it might be fund to see the date moving closer and closer.

Mid July Update

July 17th, 2009 at 07:32 am

What a month. We have started buying new furniture for the house and some small renovations (crown molding, lights, paint, etc.). It has been pricier then I thought, but we are not going into credit card debt or taking out a home equity loan. We are basically just cash flowing it. All the spare money in the budget that went to car payments, credit cards, and medical bills is going towards the house.

Hopefully in January of next year, I'll be back up to a full work week. This will allow me to have some extra money to pay down the mortgage or invest. So I think I'll just write out my thought process.

From a mathematical side, my payments are set in stone for the next 15 years and I am being charged 4.5% interest. There is no risk of my payments going up. If I were to invest in a risk free invest like cds or money markets, I might get 2% now.

Why am I only looking at cds and money markets? I am basically looking at riskless investments that are highly liquid. Why? My reasoning is that the mortgage is riskless liability. There is no risk of FNMA or the bank calling the loan and the payments are set in the contract, so I am attempting to compare apples to apples.

So, right now I believe I would be better off taking the extra money come January and paying off the mortgage. Now, if I look at the mass amount of debt the Fed is incurring and the monetizing of the debt, I do believe that the future inflation will be higher and the fed will need to raise rates.

If cds rise above 4.5%, I would be better off putting money in cds. Yes, I am not looking at taxes. I believe at the end of the day that taxes would negate themselves. I would save taxes on the mortgage interest but pay of the CD interest.

So, if interest rates on cds climbed to over 4.5%, I would probably switch to investing in cds.

With that said, there is another element of this. Not having a house payment will free up a large amount of cash flow on a monthly basis. And just getting rid of that nut is rather appealing.

So I would probably add a premium to my above statement. In other words, I would probably invest in cds if the interest rate was 5% or higher. Logically, it may not make sense, but I believe that I would have to earn a higher return to justify the higher financial stress I would feel with the mortgage.

Those are my thoughts at this time.

Goals Review - June

July 1st, 2009 at 07:51 am

So I made my first payment on my new mortgage. I was used to putting $480 to principle a month. This month I put $1,376 towards principle. It was actually $50 more then the interest payment. Just think that I am now paying more principle then interest. What a great feeling.

I estimate that 9/2010 I will have caught up with my old amortization schedule, where the principal on the mortgage would be about $330k. So under the old 30 year, I would pay about $9k off the mortgage over 14 months. In the new mortgage, I will be paying off over $21k.

It just nice to see this pay down accelerating, feeling that I am making progress.

As for my other goals. I plan on completing my 401(k) contributions in August. I have about $4,000 in contributions left.

I am getting a little anxious to finally start contributing and setting up 529 plans for my sons. Granted, they are young (4 and 1), but these really need to get started. $18k may be a little too much to bite off this year. But, it's good to have goals that you need to stretch for.

So, if you are following the Dave Ramsey plan, I would be on step 4 planning on attacking step 5.

As for step 6, paying off the mortgage, I keep going back and forth. If I had a 6% 30 year mortgage, I would probably try paying that off quicker. But a 15 year at 4.5%.... I'll have the house paid off by the time the kids hit college, and 4.5% is really more like a 3% loan because the tax write off with the interest. It is getting to the point where you could argue that you could outperform the mortgage for very little risk.

On the other hand, getting rid of that monthly nut does reduce a lot of stress (not that I have a lot of financial stress) and frees up a lot of cash flow. It would allow me to start looking into opportunities that really interest me without regard to income.

Right now, I am kind of stuck where I may not be in my dream job but it does pay some hefty bills. So, when I look for jobs, income is first enjoyment is second.

But for that reason, I am leaning towards paying off the house early. Of course, I still have time. I don't plan on coming to a decision until the 529s are fully funded. Just mulling it over in the old mind.

Don't forget, we are half way through the year. Are you still on top of your goals for 2009? What are you planning to accomplish in the next 6 months?

Mid June Update

June 16th, 2009 at 11:10 am

July 1st is the first payment to my new mortgage. And for once, I am excited. It seems kind of weird. Some of you may be dreading pay your bills because you don't have a budget (or one that works) or you and your spouse aren't functioning as a team.

I like getting my paycheck every week and allocating my pay to expenses and other savings. I like tracking the spending and making sure the budget is working.

But most of all, I like updating progress towards my goals. I like updating my 401(k) savings and trying to determine when that will be maxed; and most of all, I like updating the principal on the mortgage and watching that go down.

Sure I like having a plan and executing on that plan. But even more, I like watching goals being achieved, perhaps even more then the achievement itself.

As for my goals, I'm moving forward. The 401(k) will be finished around the end of August, then I'll be able to achieve more of my goals. One of the big goals I am looking to start is to start saving for college for my kids. I have a lot of time (14 years before the oldest hits college), but why wait and make excuses.

Goals Review - May

May 29th, 2009 at 06:57 am

What a month!! The big thing I accomplished this month was the refi. The net of the refi is that I will pay it off 11 years early, I will be putting $1,000 more towards principal a month, and it costs me less then $700. If you have a good credit score, equity in the house, and a job; I would look at refinancing.

I also noticed that I have contributed $10,600 to the 401(k) already his year. Looks like I'll max the 401(k) in August or September. Just in time for preschool bills and holidays. Maybe I can also start paying down the principal on the mortgage. We'll have to see how the year shapes up.

Speaking of that, I'm still only working 4 days a week. We haven't had any more layoffs since March and we have had a new hire. I think in a quarter or two I'll be able to work 5 days a week. But, it's just a feeling. In the meantime, I'll work 4 days a week and enjoy the family.

This brings me to another interesting thing I noticed over the past month. I have become more content. It wasn't like a switch, I think it was more a gradual thing. It's kind of like that story about the grasshopper and the ant. The ant works all summer and has food to last the winter and the grasshopper just wastes the summer away.

Last year, I had the nose to the grindstone reducing debt. This year I saved a 3 month emergency fund. I still budget and live below my means. I am just sitting on my pile of dirt enjoying the sunset while everyone around me is feeling all this financial stress and uncertainty. It really is surreal.

I think what has really started to click is that it's not what you make but what you save. I can't stress that enough.

And remember, get you will done and get life insurance, if you haven't already.

Mid May Update

May 13th, 2009 at 10:40 am

Wow!!! What a month so far. Things are finally calming down. I had a few interviews in New York and California. At the end of the day, I like where I am currently and where I am heading at the moment.

By paying off all my consumer debt and medical and having an emergency fund, I have this sense of content in my life. I no longer feel like a hamster on a wheel, trying to out earn my spending. For those of you where I was, it is worth the struggle and sacrifice to be debt free.

The way I would explain it is you are at the bottom of a hill and there is a path going up the hill. It is heavily wooded, sometimes you can get a glimpse of the sky but the view is obscured. Its buggy at times and dark, sometimes you slip on the loose gravel. When you get to end, you see this spectacular scenic view and for that moment you feel in awe of what you have accomplished. That's what getting out of debt felt like to me.

Now, I am back at the bottom of that hill and looking at a much steeper longer journey – paying off the mortgage. At first like the last hill, it looks daunting. I can't even see the top. I am standing at the bottom in the shadows and am in awe, is it too high, am I ready for this, maybe I can just rest a little more?

Then my inner voice speaks up, "What are you waiting for? There aren't any escalators here."

And with that I continue my journey.

(My refinance went through. My mortgage will be 353,000 at 4.5% for 15 years. I have shaved off 11 years and around $267,000 in interest.)