Reviewing Our Risk

"I have a million dollars in the stock market, because if I lose a million dollars, I don’t personally care." Suze Orman

Unlike Suze, I can't afford to lose a million dollars :-) Therefore, I like to give due consideration to my investments. Not only do I think about the potential gains, but I also think about the potential losses. This approach has theoretically kept me from scoring big wins (e.g. tech gains in the 90s), but, more often than not, it has probably kept me from experiencing big losses. The following three risks help me remember to consider potential losses:

Downside Risk. I feel it is good practice to consider the potential downside of any investment I make. For me 20% is a reasonable downside possibility. If a greater loss is possible, I try to avoid the investment. Of course, one never knows the true possibility until it happens. However, it's easy to check the historical results to learn what to avoid. I've had several stocks lose between 50 to 100%, permanently. These were typically stocks of turnaround companies or "unproven" companies with a potentially great idea. I've learned to avoid these types of investments. While I may miss a future 100 fold gain, I am likely avoid many more significant losses :-)

In the short term, I think the downside risk of most stocks is very high and, therefore, am not making any new stock purchases.

Concentration Risk. It's been said that wealth is built through concentration and preserved through diversification. Concentration is how Warren Buffet, Bill Gates and Michael Dell amassed their wealth. However, concentration can be a two edged sword, leading to wealth destruction as was the case for Enron employees and, perhaps now, Bear Stearns employees, who were heavily invested in their company's stock.

In my case, the company from which I retired also invested our retirement accounts primarily in company stock. While working there, I had limited diversification choices and chose to put some fund in a money market account. When I retired, 44% of our total savings were in company stock. My plan was to diversify the funds in the company retirement account by selling some stock through a covered call strategy. Unfortunately, the market drop in late 2007 and early 2008 caused the stock to fall below the call strike prices. At this time, my company stock is 45% of our total savings.

This post is a good reminder that our original diversification plan didn't execute as planned over the last few months. Over the rest of 2008, I'd like to reduce the amount of company stock to 33% of our savings. While 33% is still high, it will be a good start.

Perfect Storm Risk. The current U.S. economic crisis is what I would call perfect storm risk. The combination of low interest rates and collateralized debt obligations led to a housing bubble which burst and caused the subprime mortgage and foreclosure crisis. That in turn has caused the failure or imminent demise of some mortgage companies, bond insurers and investment banks. Any one of the events by themselves would have been easily survivable. However, the combination of all these events have made the economic situation very challenging.

My main concern at this point are the municipal bonds that I purchased in 2005. While these were all insured, Aaa bonds when purchased, the insurance companies and the municipality default risk is now higher due to the credit crisis. Fortunately, the bonds are only 4% of our investments began maturing at the end of 2007, with 85% maturing by 2010.

While I was comfortable with our investment situation six months ago, I am now more concerned with each of the risk areas due to the current economic situation. We have addressed the downside risk and the perfect storm risk by not making any new equity or bond investments. However, we will need to implement a new plan to reduce our allocation in company stock.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Market Recovery?

Market experts see signs that the bottom may be near shares the perspective of several economists and strategists that the market bottom is likely in the second quarter of 2008. In addition, the Fed intervention in the Bear Stearns liquidity crisis and today's 0.75% Fed funds interest rate cut has given stock market investors some confidence, based on the 420 point gain in the Dow.

I think I am still going to wait before putting any additional funds in the market and will continue holding current investments. If I do sell any positions, I will keep the proceeds in cash. At this point, I think the market and economy is still on an overall downward trend with occasional rebounds like today's 420 point bounce. Here are my reasons for being skeptical the bottom is near:

1. The market rebounds have not been sustainable. While each Fed intervention has helped slow or reverse the market decline, the impact has been relatively short lived and requires a bigger action for each successive intervention. As this chart shows, Fed actions have been not changed the direction of the market.
   
   In addition, based on the new highs/new lows data, I believe today's rally was more due to short covering than investors jumping back into the market.



2. More or bigger issues are still to come. The credit crisis will continue to be wider and deeper than expected. What appeared to be only a mortgage and foreclosure issue quickly grew to be a crisis for businesses. First it was only mortgage companies (e.g Countrywide and Thornburg), then came the bond insurers (e.g. Ambac and MBIA) and now an investment bank, Bear Stearns. I wouldn't be surprised if there is a bank or municipal bond crisis before the bottom happens.
   
   



3. There is still not enough fear. The Bear Stearns collapse is being positioned as an isolated incident and the Goldman Sachs and Lehman Brothers earnings reports have given people more confidence the issues won't spread. Yesterday, someone told me that equities seemed cheap and his plan was to use a home equity loan to invest in the stock market. Overall, there seems to be concern, but a belief that the government will save us.

In 2002, I learned the pain of continuing to buy during a market downturn. Two of my lessons were: 1) Cheap stocks can get cheaper and 2) Some stocks will never recover. While I did buy some stock in January and February, I will not purchase any additional equities until the market has clearly achieved a turn around. We will continue maintain our investments with our financial advisor, avoiding the issue of "buying high and selling low." Finally, while I still have not identified any candidates, I will continue to look for opportunities to short stocks during the next rally.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

Photo Credit: Wikimedia Commons

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

3/17/08 Stock Purchase Update - More Sell Signals

With the market decline of early 2008, the stock purchase updates have not been as fun to write. However, I am going to remain disciplined and do a weekly update until I sell the positions from the portfolios. Currently, the portfolio is based on a 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) and a January, 2008 stock pick update of Apple (AAPL), Research in Motion (RIMM), Intuitive Surgical (ISRG), Priceline (PCLN), Core Labs (CLB), and Google (GOOG). The total portfolio is now has a slight gain of 2.3%. All the positions were up last week. On 3/7/08, the system gave a sell signal for Apple and Google. Here's the current status of the stocks in the portfolio:

	My Wealth Builder 10/15/07 Buy List
Stock [purchase date]	Shares	Purchase Price	Current Price 3/14/08
Potash (POT) [6/7/07]	50	$71.59	$160.49
Southern Copper* (PCU) [11/13/07]	40	$108.24	sold 2/19/08 @ 109.05
CNH Global NV** (CNH) [11/13/07]	50	$55.22	$51.57
BHP Billiton*** (BHP) [11/27/07]	50	$71.54	sold 2/19/08 @ $73.98

*On 1/18/2008, the system gave a sell signal for PCU.
**On 2/1/2008, the system gave a sell signal for CNH.
***On 2/15/2008, the system gave a sell signal for BHP.
I will try to sell CNH during an upcoming market rally, hopefully above the purchase price.

	My Wealth Builder January, 2008 Buy List
Stock [purchase date	Shares	Purchase Price	Current Price 3/14/08
Apple** (AAPL) [1/17/08]	25	$160.93	$126.25
Research in Motion (RIMM) [1/17/08]	25	$88.71	sold 2/22/08 @ 103.23
Intuitive Surgical (ISRG) [1/18/08]	20	$261.81	$283.07
Priceline (PCLN) [1/18/08]	25	$92.33	$117.63
Core Labs* (CLB) [1/25/08]	25	$116.25	sold 2/19/08 @ $121.67
Google** (GOOG) [1/25/08]	20	$582.66	$437.92
Google** (GOOG) [2/1/08]	10	$521.27	$437.92
Google** (GOOG) [2/26/08]	10	$457.44	$437.92

*On 2/8/2008, the system gave a sell signal for CLB.
** On 3/7/2008, the system gave a sell signal for AAPL and GOOG.
I will try to sell AAPL in an upcoming rally. I plan to hold GOOG since it is part of my core holdings.

The market has gone below the January, 2008 bottom. As of the close on 3/14/08, the Dow, Nasdaq and S&P 500 indices were respectively down 9.37%, 16.58%, and 11.86% year to date, below January end of week lows of 8%, 12.3% and 9.4% in my 1/25/08 Stock Purchase Update.

I continue to believe that the probability of a recession in 2008 is relatively high, if we are not already in one. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in early 2008 has already caused the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008. At this time, I plan to sell CNH, AAPL and continue to hold the balance of the portfolio. I do not plan to add any more to the amounts that I have already invested in the above tables.

Full disclosure: I own all the stocks mentioned in this post that are not indicated as sold.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Personal Finance Simplification - Bank Account Consolidation

During March, 2008, I will be working towards consolidating our bank, credit card and brokerage accounts. This past week I have been working primarily on reducing our bank accounts. Here is a summary of the accounts, my analysis, and the decisions:

Regional bank 1. I have been using this bank or its predecessors for over 20 years. We have our joint checking and joint savings account at this bank. In the past year, I had added two checking accounts for some business ventures I was investigating.

We have a good relationship with this bank. In addition, our joint checking account entitles us to a lot of services at no charge - e.g. traveler's checks, domestic and international ATM withdrawals, and notary services.

We will keep the joint checking and savings account and close out the other accounts, when the minimum time has passed to avoid closing fees.

Regional bank 2. I opened this bank account when I started my part time seasonal work. I thought is would be a good idea to have a separate account for direct deposit. Also, this bank handled the internal banking for the company from which I retired and they provided a $75 bonus to open a new account.

As it turns out, having another account for my part time job wasn't a good idea. It created additional paperwork, with no additional benefits over my current bank. In a couple months, when there is no longer a penalty, I will close out this account.

Internet bank. Last year, I opened an account with ING Direct for the higher interest and a $25 bonus. My experience with ING Direct was very good. However, while the interest rate was good, I found it was not worth the effort of making periodic transfers and managing another account. In addition, it didn't have some of the services that Regional Bank 1 provided.

I closed the ING Direct account last week.

Overseas bank. I still have our Japanese bank account from our overseas assignment. I kept it because I believed that the dollar would depreciate against the yen, and was waiting for that event before transferring the money back to the US. In the past week, the dollar just hit a 12 -1/2 year low versus the yen.

I will be closing out this account in the next month.

After the next couple months, I expect to have just two bank accounts, one checking and one saving, with Regional Bank 1. This should significantly reduce the amount of paperwork from our banks.

For more on New Beginnings, check back every Sunday for the next segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Information - Acquisition Versus Analysis

Why We're Powerless To Resist Grazing On Endless Web Data by Lee Gomes of The Wall Street Journal shares the findings of Dr. Irving Biederman. In his research, Dr. Biederman found that "new and richly interpretable information triggers a chemical reaction that makes us feel good, which in turn causes us to seek out even more of it." Dr. Biederman's findings could explain why the Internet has such appeal. Our brains are hardwired to want new information and the Internet is an abundant source that is easy to access.

This story resonated with me since I see myself falling into the trap of information acquisition over information analysis. Information acquisition makes my brain feel good. Watching the stock market via the Internet is fun, entertaining and makes for good stories. I love checking the stock market status constantly throughout day. On the other hand, information analysis can make my brain feel tired. Sorting through data, converting information to knowledge and then taking action for complex projects is hard work.

A personal challenge is to get the right balance of acquisition versus analysis. Right now I am skewed towards information acquisition in a couple of my focus areas. For my dream job, I think I need to invest more time in information analysis. For my stock investments, I think I need to reduce the time spent on information acquisition. Intuitively, I knew I needed to make these changes. Why We're Powerless To Resist Grazing On Endless Web Data helped me to better understand why I may be resisting the change:-)

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Renaming Early Retirement

Smart Money recently held a contest to rename "retirement." In my experience, the term retirement generally connotes an ending rather than a beginning. Although, the Smart Money chose "Life 2.0" as the replacement for "retirement," their term doesn't quite work for me.

At this point, I think of life in three parts defined by the primary activity of the segment- Learning, Earning and Enjoying. Of course, no phase is exclusively one activity and each phase contains a bit of all three activities. Here's how I would define the phases:

Learning - Birth to 27. This is the phase that includes formal education and socialization. During this phase, one acquires knowledge and develops skill needed for the earning phase. Of course, there is time and effort invested in recreational activities and may be some time spent working.

Earning - 16 to 65. This is the phase where people spend the most their time working to earn money to support themselves and their family. During this phase people also save for future retirement.

Enjoying - 50 to death. This is the phase where people leave regular employment, typically living on a pension, Social Security or other retirement savings. During this phase, people can enjoy doing their preferred activities, provided they have good health and sufficient retirement income.

For me, early retirement could appropriately be called an Earning phase sabbatical, with a high likelihood of transitioning to the Enjoying phase. During the sabbatical, I will attempt to find or create my dream job, since I do have a passion for making a difference in these jobs. If the dream job ideas should fail, I will be happy to move into the Enjoying phase full time.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Front Page Of The Newspaper Test

"Don't do anything you wouldn't want to have on the front page of the New York Times." ~ New York Times Rule

The headlines of this week reminded me of the famous New York Times rule I had heard a long time ago. To me, the rule always seemed like a reasonable test on the appropriateness of an action or activity. If I would be embarassed to have the public read about what I did, then I probably shouldn't do it.

I wonder what may be the defining tests for future generations. I don't expect the New York Times to be as big a factor when my daughter becomes an adult. Social networking sites may be a much bigger force in the future, resulting in the rule becoming, "don't do anything you wouldn't want an employer to see on My Space or Facebook."

In either case, it's probably best to remember a quote from Benjamin Franklin, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial, political or ethics advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Fed Actions Will Only Delay The Inevitable

When we are no longer able to change a situation, we are challenged to change ourselves. ~Victor Frankl

I must admit that I am impressed with Dr. Ben Bernanke's and the Fed's creativity in addressing the current economic issues. They are using a larger set of tools than the changing the Fed funds rate. First, in August, 2007, the Fed lowered the Fed discount rate, a largely symbolic move to give investors confidence. Yesterday, the Fed announced the would lend up to $200 billion of treasuries in exchange for mortgage backed debt to increase liquidity and help credit markets. In each case, the Fed appears to be addressing a specific economic challenge, instead of using just fed fund interest rate cuts to address all economic issues. However, I believe the Fed actions are only delaying the inevitable.

As a result, I expect the stock market will continue to be in a downward trend for most of 2008. Of course, I wish the stock market would quickly resume its upward trend of the past five years:-) While the Fed moves have provided some confidence, the stock market rebounds have been relatively short lived. Thus, it seems to me that a recession is inevitable, if we aren't already in one. Despite the gallant Fed interventions, I believe revising our financial plans to protect our savings against a recession has been the right approach. The last plan element that I am still working is identifying individual stocks to short. I hope to have to have several possible candidates chosen in the next couple weeks to short during the next rally.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Avoid Tax Rebate Scams

If you're in a rush to get a tax rebate, beware of con artists posing as IRS or Social Security officials. Scam artists target tax rebate checks shares how these impostors contact people via phone or e-mail requesting personal financial information (e.g. bank accounts, Social Security numbers) in order to expedite direct deposit of a tax rebate payment. The article notes, "For the record, the IRS will never ask for bank account or similar information over the phone or Internet."

For further, information see the IRS webpage on e-mail and telephone scams. The article reinforces that the "IRS does not contact taxpayers by phone to verify bank account information" and the "IRS does not send unsolicited, tax-account related e-mails to taxpayers." One can report suspicious e-mails and phone calls to IRS at phishing@irs.gov, using instructions from How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

3/10/08 Stock Purchase Update - Google Continues To Fall

With the market decline of early 2008, the stock purchase updates have not been as fun to write. However, I am going to remain disciplined and do a weekly update until I sell the positions from the portfolios. Currently, the portfolio is based on a 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) and a January, 2008 stock pick update of Apple (AAPL), Research in Motion (RIMM), Intuitive Surgical (ISRG), Priceline (PCLN), Core Labs (CLB), and Google (GOOG). The total portfolio is now flat. GOOG continued to decline significantly this week and is down 42% from its high of $747.25 I will continue to try to sell CNH. Here's the current status of the stocks in the portfolio:

	My Wealth Builder 10/15/07 Buy List
Stock [purchase date]	Shares	Purchase Price	Current Price 3/7/08
Potash (POT) [6/7/07]	50	$71.59	$155.34
Southern Copper* (PCU) [11/13/07]	40	$108.24	sold 2/19/08 @ 109.05
CNH Global NV** (CNH) [11/13/07]	50	$55.22	$49.18
BHP Billiton*** (BHP) [11/27/07]	50	$71.54	sold 2/19/08 @ $73.98

*On 1/18/2008, the system gave a sell signal for PCU.
**On 2/1/2008, the system gave a sell signal for CNH.
***On 2/15/2008, the system gave a sell signal for BHP.
I will try to sell CNH during an upcoming market rally, hopefully above the purchase price.

	My Wealth Builder January, 2008 Buy List
Stock [purchase date]	Shares	Purchase Price	Current Price 3/7/08
Apple (AAPL) [1/17/08]	25	$160.93	$122.25
Research in Motion (RIMM) [1/17/08]	25	$88.71	sold 2/22/08 @ 103.23
Intuitive Surgical (ISRG) [1/18/08]	20	$261.81	$264.75
Priceline (PCLN) [1/18/08]	25	$92.33	$116.92
Core Labs* (CLB) [1/25/08]	25	$116.25	sold 2/19/08 @ $121.67
Google (GOOG) [1/25/08]	20	$582.66	$433.35
Google (GOOG) [2/1/08]	10	$521.27	$433.35
Google (GOOG) [2/26/08]	10	$457.44	$433.35

*On 2/8/2008, the system gave a sell signal for CLB.

The market activity is testing the short term bottom. As of the close on 3/7/08, the Dow, Nasdaq and S&P 500 indices were respectively down 9.86%, 16.58%, and 11.54% year to date, below previous end of week lows of 8%, 12.3% and 9.4% in my 1/25/08 Stock Purchase Update.

I continue to believe that the probability of a recession in 2008 is relatively high. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in early 2008 has already caused the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008. At this time, I plan to sell CNH and continue to hold the balance of the portfolio. I do not plan to add any more to the amounts that I have already invested in the above tables.

Full disclosure: I own all the stocks mentioned in this post that are not indicated as sold.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC