26 July 2007

Is buying on a down day market timing?

I'm making a Roth IRA purchase today, and I'm not ashamed to admit that it's because the market took a dive today. I am not a believer in market timing, but if I can snatch an extra 2-3% simply by buying while prices are down . . . I'm going to do it.

Reading across the web, in forums and blogs, I've seen a lot of criticism of this practice, with the True Believers of the Efficient Market lecturing others that they should be watching prices to decide when to buy. I think that this is pretty crappy advice, and that it can cost people money in the long run. Here's a quick look at what happens to your money when you buy during a dip vs. the day before.

Suppose that I have $1000 to invest in VBR, Vanguard's Small Cap Value fund. Also suppose that from yesterday to the end of the year, VBR is destined to rise 2%. It looks like VBR is going to shed about 3% today, providing a discounted purchase price. What's the difference between buying yesterday and buying today?

Yesterday, VBR closed at $72.64, and the current price is $70.26, a drop of 3.28%. $1000 yesterday would have bought me 13.77 shares. At the current price, I can buy 14.23 shares. Under my assumption that VBR would grow 2% from yesterday to the end of the year, the year-end price will be $74.09.

  • If I bought yesterday, at the end of the year my 13.77 shares would be worth about $1,020.
  • If I bought today, at the end of the year my 14.23 shares would be worth about $1,054.
We're all frugal here in the PF blogging world. If I told you I could get you an extra $34 you'd be excited about it, right? So why are we made to feel guilty for buying on a down day in order to squeeze a little more out of the market?

Is this market-timing? Sure it is, in some ways. But we're not changing our allocations based on timing, we're not selling any stocks based on timing . . . we're merely making a decision on when to buy based on the status of the market.

Now, naturally, there is a problem with this. If you made all of your buying decisions based on this, you'd make some mistakes. Some months you're not going to see a 3%, 2%, or even 1% loss in the market on a given day. So waiting for that dip can cost you valuable gains, especially if you choose not to invest that month at all. There is no predicting this sort of thing, so counting on a down time in which to buy is a mistake.

However, buying doesn't have to be either/or. To some degree you can have your cake and eat it too. If you normally invest at the end/beginning of the month, but on the 26th the market drops 3% . . . go ahead and dive in early. Is it possible that prices will actually be lower a few days later? Sure, but often these dips regulate the market and it will rise in the following days. If you get to the end of the month and you haven't seen a dip in which to invest, just throw it in at the end of the month as you had previously planned. You're not keeping money out of the market unnecessarily, you're not pulling funds out . . . you're just taking advantage of an opportunity and investing a few days early.

I see no problem with this, and I think most people would agree. In the long run I think this strategy will make you more money than simply investing on the same day each month . . . but clearly others have a different opinion. What say you, readers?

17 July 2007

Pay my car off? Do I want the relief?

So, I have been pretty adamant that I am not a subscriber to the idea of making financial decisions based on how they affect you psychologically. Specifically, I believe that you should make your financial decisions largely on the quantitative outcomes. If X will make you richer than Y, do X even if it means more short-term debt. So no Dave Ramsey debt snowballing-- high rates should come first, low rates second.

Consequently, I haven't been paying any extra on my 4.5% car loan (at least not in the last year). Instead I've been maintaining my emergency fund and all excess has gone into the market, primarily in retirement accounts, counting on higher long-term returns than the 4.5% I'd get from paying down the car loan.

Included in my emergency fund (which is designed to pay 3 months' expenses) are 3 car payments of $588 each. I've long known that my car will be paid off this December (5 more payments). But it just occurred to me this morning that the difference in my payoff amount (~$2800) and the amount this will lower my emergency fund needs (~$1800) is only about $1k. Meaning, if I paid my car loan off today, it would only cause about $1k shortfall in my emergency fund.

Bear with me. If the payoff amount and the emergency fund reduction evened out, it would be smart to pay off the loan, since I'm losing 4.5% on the car loan and gaining 5.3% (minus taxes, more like 4%) on my emergency fund at GMAC bank. So the question is . . . is the $1k discrepancy small enough that the "relief" of the debt payoff overcomes any risk of falling short in my emergency fund (as well as some small amount that could be geared toward the market over the next 5 months)?

In the end, this is a psychological vs. quantitative question. Quantitatively speaking, it would make sense to wait 2 more payments before paying it off. The small excess, about $500 this month and next, would go to the market under this plan. Under the psychologically-driven payoff, that $500 excess would instead go to replenish the emergency fund, which I raided to pay off the car.

So here's what it boils down to, in risk/reward:

With the optimal plan, I wait two months, netting a potential marginal gain of 2 months' worth of time in the market instead of in a fixed-rate savings account. The only risk involved is that the market over the 2 months will underperform the 4% yield on my savings account.

With the payoff plan, I pay it off now, gaining some peace of mind. I risk potential gains in the market, instead replenishing a raided emergency fund with a real return of about 4%.

I've been thinking that before November, there would be a dip in the market. A lot of "experts" share this belief. If that happens, paying off the car is financially wise in addition to being the good psychological choice. Of course, counting on that assumes much. It may climb 5% in the next few months. You never know, and I'd be missing out on some gains by doing the payoff. Quantitatively speaking, I'd be missing out on the gains of $1000 over 2 months. If it gains 5%, I'll be losing out on $50, sacrificing that money for some immediate peace of mind and the removal of my only consumer debt from my balance sheet.

Is it worth it? On the one hand, it's just $50 (and that's not guaranteed-- not even likely)-- a small price to pay for peace of mind. On the other, $50 here and there make a difference in the grand scheme. I make decisions based on lesser amounts every day.

Thoughts? Any input is welcome. I have a lean right now, but I can be swayed either direction.

09 July 2007

Frugal boozing

Note: I am in no way endorsing binge drinking, under age drinking, drinking and driving, or drinking in general. This is a light-hearted post to compare the cost of various adult beverages. If you are offended by this article, you'll just have to get over it.

I like to drink. Not to excess very often, but I enjoy the relaxing effects of alcohol, safely and responsibly, with regularity. I can be a bit uptight and a little bit of alcohol can really help me relax. I am generally a beer drinker, but I do enjoy a glass of red wine from time to time. Far less often I'll partake in liquor-- it generally doesn't suit me. And by "generally doesn't suit me" I mean that

  1. I generally start forgetting the events of the evening
  2. I wonder the next day what ridiculous things I may have said, and the volume at which I said them
  3. The liquor generally finds its way out of my body prematurely, via the oraface from whence I ingested it.
I find that wine and beer give me a more reliable and controllable buzz, and I get sick from them far less often.

Now, with that said, assuming all alcohol were the same, what would be the most frugal product for obtaining one's desired level of buzzedness? A good question, if you ask me. Being that I am writing a personal finance blog, a reader somewhere may like to have this information.

Being the resourceful soul that I am, I tracked down a website that can provide precisely that information: AlcoholShopper.com. This site provides the best bargains, in price per ounce of pure alcohol, throughout the US. It will even tell you which state this deal is in.

So, ounce for ounce, what is the best bang for your buck? Here are the tops in each category, in ascending order of price:
  1. Milwaukee's Best Ice (beer) , keg, $0.34 per ounce of alcohol
  2. Fairnoff (vodka), fifth, $0.38
  3. Icebox Really Hard Ice Tea (pre-mixed drink), 1/2 gal, $0.47
  4. Arrow Light (rum), 1L, $0.48
  5. Taaken (gin), 1/2 gal, $0.49
  6. Franzia (wine), 5L, $0.52
  7. Carstairs White Seal (whisky), 1/2 gal, $0.53
  8. Pancho Villa Rojo (liqeur), 1/2 gal, $0.59
  9. McCormick Old Style (bourbon), 1L, $0.62
  10. Gaetano Blackberry (brandy), 1L, $0.63
  11. Everclear (grain alcohol), fifth, $0.64
  12. Old Mr. Boston's Egg Nog (other), 1/2 gal, $0.67
  13. Barristers (scotch), 1L, $0.69
  14. Tribuno Sweet (vermouth), 1.5L, $0.74
  15. Tortilla Silver (tequila), 1L, $0.74
  16. Croizet (cognac), 200 mL, $1.31
So the most bang-for-your-buck comes from buying "The Beast" Ice in a keg, though this is easily the lowest alcohol-by-volume product in this list. In other words, it'll get you where you want to go, but be prepared to make a few bathroom stops along the way.

I am a little surprised at the result. First off, I thought Vodka would be far-and-away the cheapest, since you can get it cheap in large quantities and it is at least 40% alcohol in most cases. It was close, but The Beast beat its best price by a few pennies.

Also surprising is how far down the list grain alcohol is. After all, it's just super-pure vodka, essentially. It has no flavor of its own, so it should excel in a list like this-- where alcohol content is all that counts. But it seems to fail miserably. So next time you think it's a great idea to buy some Everclear to add some bang to a mixed beverage, forget it. Use vodka instead-- it's just over half the cost and will do exactly the same thing in your drinks.

What do you drink? How much does it cost? I drink cheap beers, generally (Miller Lite more than anything else-- according to this source it is 74 cents per ounce of alcohol in a keg). But I think I'd stop short of drinking something so nasty as The Beast, and especially something as ubernasty as The Beast Ice.

For what it's worth, the most expensive source of alcohol would be Mazzeti Grappa-chess Set, a brandy. $1,499.97 will buy you 50 mL-- a whopping $2,063 per ounce of alcohol, and nearly four times the cost of Courvoisier L'esprit cognac.

05 July 2007

Got a credit card or 4? Raise your limits!

Today I was looking at my online account page for one of my credit cards, and thought, for curiosity, I'd click on the "request a limit increase" button to see what the options were. To my surprise, on the next page I was already approved for an increase that amounted to about 20% of the previous limit. I was then given the option of accepting the increase, canceling, or asking for more. I don't need a limit increase, so there's no point in the extra hassle of asking for more. So I accepted the increase and moved on.

As I was thinking about what just happened, it occurred to me . . . do people realize that they're better off with higher limits? Well, most people are. The exception is if you cannot control your spending to the point that a higher limit just means more spending . . . and in your case you don't need a credit card at all. But if you are like me and carry no balance (or even a small balance) from month to month, raising your credit card limits is a great thing to do. The reason? Your credit score, of course.

Specifically, how much credit lenders are willing to grant you (as well as how much of that credit you utilize) says a lot about your creditworthiness. If your lenders see you as a low enough risk to give you a large credit limit, that reflects positively on you as a borrower. Further, if you have a large cushion between your balance and your limit, it indicates that you can responsibly manage your credit.

For example, Bob and Joe have four credit cards each, and both have a total limit of $50,000. Jim also has four credit cards, but his total limit is just $12,000. Suppose both Joe and Jim carry a balance of $4,000 each month, while Bob carries no balance. Which man has the most attractive credit profile? The least attractive?

Bob: $50k limit, $0 balance
Joe: $50k limit, $4k balance
Jim: $12k limit, $4k balance

  • Clearly, Bob is the most attractive borrower. He has access to plenty of cash, but is financially stable enough that he doesn't need to access it at all.
  • Joe has access to plenty of cash, but unlike Bob he needs to tap into it to some degree. His utilization ratio is $4k/$50k, or 8%. Not bad, but not as good as Bob.
  • Jim hasn't been given the leeway by his lenders that Bob and Joe have, with only a $12k limit. Additionally, he needs to tap into it, like Joe does. But Jim's utilization ratio is $4k/$12k, or 33%. Of the credit available to him, Jim is using 1/3. To some degree, Jim looks like he "needs" money. As such, he is considered to be the borrower most at risk to become delinquent and ultimately default on his debt.
See, a portion of your score relates directly to these two characteristics-- how much you can borrow and how much you do borrow on revolving accounts. The less you borrow and the more cushion you have, the more financially attractive you are as a borrower . . . and the more likely a lender is going to want to do business with you. This can make the difference in a mortgage rate, terms, or points, saving you a substantial amount of money in the process.

It's unfortunate that Jim has to borrow $4k from his credit card companies . . . but his situation would certainly appear better, on paper at least, if he just had a higher limit. Sometimes credit card companies will grant you a higher limit to entice you to do more business, and sometimes you have to ask for it. Either way, as long as you don't use the extra credit, having your limit bumped up is a positive for your score. To make sure you're getting the most on paper for your responsible behavior in reality, see if you can get your credit limits bumped up. Your FICO score will thank you.

July Net Worth Update

It was a rough month for my investments (I calculated these on July 2nd, so it has recovered some since). As the market dipped, so did I-- almost 1.5%. Still, my net worth chugged along, fueled primarily by new savings and investments. Debt reduction helped with a chunk of that as well. In total, my net worth climbed 1.5% over my June figure, the equivalent of 1.8% of my February benchmark. This is definitely a major slowdown from the hot growth that happened earlier in the year, but even at this pace I should reach my goal by February. It's nice to know that the market can struggle and my net worth can still simultaneously rise; although, this is a feature that is only possible because my net worth is relatively low compared to my savings level. At some point the earnings from current investments will hold much more power over my net worth than additional savings and investing, and a 1.5% loss will set my net worth back despite adding new money. I don't think I'll complain when my assets are that big, though.

Here is what my goal chart looks like with July added (and a June revision):

Looking good. Once nice thing about the market dip was that it waited until Monday to come back-- just in time for my retirement accounts to buy in at a discounted rate! I'm not into market-timing but I still like to see the market take a step back at the end of the month when I know more money is going into my accounts.

As I said above, the growth comes entirely from debt reduction and new investment, and was held back by market losses. I have a few more months of serious debt reduction before I'm out of all debt except my mortgage.

My net investable assets rose by about 2.5%, and my net liquid assets rose by about 12.4%. Both were hurt by market losses, but my liquid assets are so small that the loss was vastly outpaced by some new investment money. Since February, net investable assets are up 30.6%, and net liquid assets are up 134.4%. Debt reduction makes a huge difference for this measure.