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February Month-End Financial Update
By Jay | March 2, 2008
I just updated my NetIQ financial profile.
btw I have a separate account for my book business & don’t include this in my financial profile. My business account is at about $100 now, because I’ve been buying new inventory with my profits.
At the beginning of February I wrote that I’d be happy if I were to just tread water for the month. I did a bit better than that: I have $1000 more in cash than I did at the start of the month, and my debt is down by over $1000. My net worth is down too though, as my retirement fund took a $3000 hit.
March will probably be another “Treading Water” month. I hope to pay off about $1000 of debt, and maybe add $500 to cash.
I moved the majority of my retirement money out of stocks and into an investment grade bond fund, and a stable value fund, so my retirement fund will be flat regardless of what the market does.
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Stumble it!
March 2nd, 2008 at 10:17 pm
You’re still making headway - the markets nosedived though they are bound to recoup some of their losses. Look at the overall performance of markets its an upwards trend and there are rarely any sustained periods of negative growth. The scaremongers might say otherwise but after a recession there is growth and a year or two later you’re back in the clear.
March 8th, 2008 at 11:20 pm
Yes, I guess treading water is a good thing given the current markets. It’s hard to see the end of this credit crunch, but I keep remembering the old Rothschild maxim that it’s always best to buy when there’s blood running in the streets. We’re not quite there yet, but we’re getting close to the bottom. I think we’ll hit it later this year or early next year.
March 13th, 2008 at 9:21 am
Jay,
congratulations on staying on target and on building your business. That takes effort and dedication.
But I want to warn you that Bond funds are not really “safer” than equity mutual funds. In both cases, you own a stock in an investment company.
This is quite different from owning the bond. If you own the bond and don’t care to sell it and the bonded does not default, market swings are irrelevant to you - you get your interest and your principal repaid when due.
With the bond fund, it simply doesn’t work that way. True enough, the investment grade bonds are likely to have much less volatility than the stocks - and may even gain value if interest rates fall. But you can be hurt by temporary changes in the market prices of the underlying bonds, because your bond fund trades at NAV.
So if there is more panic in the credit markets and investment grade bonds decline by 10% pushing up yields, you will still experience the 10% decline in your balance. This may recover, of course, if the panic is temporary and your fund manager doesn’t feel compelled to sell into the declining market.
But he might feel compelled to do so, because very often he wants to have RELATIVE outperformance. This means that if he can only lose 3% instead of 10% he will try and exit. But now you are invested in cash which is not what you asked for - and have fees to pay. Worse yet, other fund holders may decide that THEY want out, so even if he is holding on and waiting for the recovery in prices (or simply the interest), he may be forced to sell to meet their redepmtions.
And of course, the strategy of “sell now and avoid the downturn” is a nice one, if the timing works. Often, it doesn’t, so you may find yourself underperforming the market (then others holders will REALLY want to sell).
I realize that investing in individual bonds requires a significant capital base. But consider finding a CLOSED END bond fund (one where rather than selling shares to and redeeming shares from investors, investors sell their shares to each other). This eliminates redemption risk, at least. Plus, you can often find them trading at a discount to NAV, which is likely to increase your yield. But watch out: many closed end funds use LEVERAGE - so they can receive margin calls and be forced to sell by their prime brokers. Just ask several high-profile hedge funds with large positions in investment grade bonds.
March 13th, 2008 at 6:55 pm
Thanks for the advice, Strategic Investor, you’re absolutely right — as the 5% decline in my bond fund in the past 3 weeks would confirm. Fortunately I’ve allocated only 25% of my 401k to this account — the rest is in the cash equivalent fund that we are offered, although God knows what that’s backed with……
March 13th, 2008 at 11:55 pm
Jay,
you got that right. The “cash” accounts often hold commercial paper.
This reminds me - I need to check my cash account, too!