Credit crisis is not over

Warren Buffett warned yesterday that the credit crisis is far from over. I'll tend to believe him. American Express recently noted that late payments increased in April, while in past years it normally shrank. So more and more people are starting to rely on their credit cards. This isn't going to be an easy fall.

Yet, I'm still looking for bargain stocks that can weather the storm over the next 5-10 years. I'm holding, and I'm BUYING MORE in this market. American Express is now on my watchlist, since I missed the boat with Visa. I remember putting a limit order for $45 on Visa. It never got close.

We're going to try living on my paycheck, and my wife will simply sock her paychecks all into savings...or more investments. We'll see. With our rent going up, we're going to be stretched thin on my take-home money alone. I'm sure we'll be dipping into her paycheck once in a while, but I'll definitely try not to.

Gambling with market timing

There's definitely a thrill when cherry picking stocks near their lows and watching them climb back out of their holes. I got lucky on a number of stocks recently like CSE, NTGR, AMD, PAR, CCRT, AAPL.

Still, I definitely have some losers this year as well, such as VDSI, DBTK, OMTR, OXPS. These are Motley Fool stock picks, so I'm willing to hold at least another 12-18 months for signs that the companies will be able to turn around. I've continued to buy down on these so my price point is lower than what you see above, but have reached my limit and will not buy anymore.

Looks like May could be another downer month, so I'm adding cash into my Zecco account for more bottom fishing. StockTradingToGo and askStockGuru are recent technical analysis sites I've been reading. You'll be able to track my trades at ZeccoShare, Cake Financial, and Icarra.

Why ROTH doesn't make sense to me

Our AGI is above the Roth contribution phase-out limit, so we can't contribute to a Roth IRA anyway.

The Roth IRA allows you to contribute after-tax money into a retirement account, where future withdrawals after retirement age are income-tax free. The reasoning behind this is that one might expect to be in a higher tax-bracket come retirement age. That argument only holds water if you expect to SPEND as much as you do now.

Most people between the ages of 25-35 will have a rent/mortgage payment, a car loan payment, student loan payments, entertainment spending at bars/restaurants. Those really add up in terms of money being spent. By the time I retire, I don't expect to still be paying off any loans, which means the biggest reason for recurring income is nullified.

What if we move to a Value Added Tax like in Europe? A lot could happen in 30 years. Sure, your Roth withdrawals won't get taxed as income, but what are you going to do with that money? Spend it on goods/services. That pretty much means you've gotten taxed twice -- in 2008 when you put your money into the Roth, and in 2040 after you've retired and you bought a new set of golf clubs + 15% VAT. I don't play golf by the way. I hope I don't do that when I retire either.

So take advantage of the tax savings in a 401k for the NOW especially if your company offers 401k matching contributions, or a traditional IRA if you qualify. The Roth IRA is betting that your life situation will be more income-tax heavy after retirement. Who can see that far into the future? Instant gratification in this case is a good thing.

This post assumes you follow the generally accepted best practices of personal finance which are: Spend less money than you earn. Save the remainder. Grow that savings in dividends, investments, or interest.

Afterthoughts: Roth could make sense for the teenager getting a first-time job. If you have kids, and you've educated them in the merits of saving money, living frugally, etc, then encourage them to put their earnings into a Roth account. A teenager's first-time job is probably going to be taxed minimally anyway, so the Roth is ideal in that situation. Plus, that gives the Roth an investment horizon of at least 40 years.

Goals for May 2008

Since rent is expected to increase, I'm going to take my 401k contributions to 15% pre-tax instead of the 10% pre / 5% after tax contributions I was making before. I'll check my paycheck in two weeks to see how much more money I net. PayCheckCity has an excellent calculator for this.

Mint.com has some recommendations on how to save more money, such as moving to an E*Trade Checking account (which I've already done), and let us know that Starbucks and Peets Coffee are our most frequented merchants. I'll have to talk to the wife about that again.

Cleaning up clutter. I have lots of stuff lying around the house that I could probably put up on Craigslist. I'm too lazy to pack stuff up to sell on E-Bay. I figure I could gain another $200 or so selling all this crap I haven't been utilizing. Better yet, I might be able to donate and take an itemized tax deduction... except I don't expect our itemized deductions to top the standard married filing jointly deduction this year.

On Vacation until May

On vacation in Europe until the end of April. If I find cheap wifi hotspots during my travels, I'll log on to possibly write about my spending experiences. Otherwise, see you in May!

Icarra.com down: Wednesday April 16 2008

Could not connect
Count not connect to db

These are the words I see when trying to connect to icarra.com, the portfolio/performance tracking site I recently moved over to. I had originally used Cake Financial but it didn't properly track my basis positions when I transferred stock between brokerages. I don't think there's any easy method to track brokerage transfers, so I've done it manually through Icarra.com.

Apparently Icarra.com has had outages before, just like Zecco.com. I guess I get what I pay for (nothing but my time).

E*Trade Max Checking: 3.25% APY

I opened up an E*Trade Max Checking account today. It has 3.25% APY if you maintain a balance of over $5000. They also reimburse ATM fees if the withdrawal doesn't put your balance below $5000 as well. The $15 monthly fee is waived if you maintain a balance above $5000 or set up direct deposit of $200 or more monthly.

We'll see how long this 3.25% rate lasts. My credit union has steadily decreased its savings account yields each time the Fed knocked down the interest rate. What's funny is that the E*Trade savings account yield is only 3.01%. I suppose if you don't have $5000 saved to put into the Max Checking account, the 3.01% Savings account is still a good deal.

So far, this is the highest APY checking account that Bankrate.com listed in a search today.

Zecco web site unavailable: 11am EST Monday

Right in the middle of trading day. Zecco.com isn't for the avid trader, folks. I doubt this is for a "scheduled upgrade" as they say it is. Why didn't they do this on Sunday when the markets were closed?

I initiated a funds transfer from my checking account at 8:00am EST this morning, and a check on some the market today looks like there are some good bargains. So I go to Zecco.com and it's down. How unfortunate. I'm sure I'll see other days for good bargains over the course of 2008.

Tax deadline draws near

We already got our refund back in March. Having gotten married in 2007, we'd procrastinated in adjusting our withholding forms, so when we filed in February, we were due a hefty refund of nearly $3000. However, we'll have to pay almost $600 to California.

But we finally readjusted our withholding, so we'll probably be owing money for 2008.

IRS Withholding Calculator
California Withholding Calculator

I actually find the California withholding form more complicated than the Federal, but at least the calculators help simplify things.

We filed using TaxCut Premium. I bought the retail box CD and plan on keeping it. I had a 2006 filing from Taxcut, but 2007 could only import small amounts of data, and not display my whole 2006 return which I hadn't printed. So I had to frantically scrounge around looking for TaxCut 2006 software in order to print my 2006 returns from the taxcut file. Lesson: always print your tax return and also save a .pdf or .mdi of it.

Perhaps I'll go to web-only tax returns in the future. That way it's platform-independent. The reason I went to TaxCut is because the CD software can install on either Mac or PC. Going Online makes it even more cross-platform. I can imagine doing my taxes on my iPhone, but that would be overkill eh?

Market timing and portfolio diversity

I gave some anecdotal evidence earlier about market timing. Well, here's some actual empirical evidence in a study by a Michigan University Professor Dr. H. Nejat Seyhun.

95% of the market gains between 1963 and 1993 stemmed from the best 1.2% of the trading days

The index gained at an average annual rate of 11.83%, for a cumulative return on $1.00 of $23.30 over 31 years. If the best 90 trading days, or 1.2% of the 7,802 trading days, are set aside, the annual return tumbles to 3.28% and the cumulative gain falls to $1.10

In the 1926-1993 period, missing the best 5.9% of the months (a total of 48 months) would have created exposure to 83% of the risk of continuous stock market investing, but the average annual return would have been 19% less than the return on Treasury bills.

In the 1963-1993 span, missing the best 0.8% of the days (a total of 60 days in all) created an exposure to 94% of the risk of continuous stock market investing. In this situation, the average annual return would have been 11% less than that of Treasury bills.

Of course, I'm curious to see a similar study include 1993 - 2008, and see whether it still makes sense to always stay in the market. The dot-com boom & bust is my main scrutiny here.

Yahoo Finance Chart of Dow, Nasdaq, S&P 500 from 1/4/1993 - 4/1/2008

That chart shows that had you put money in the market in January 1993, and forgot about it until now, you would still be sitting on a 200% - 300% gain. The tech-heavy NASDAQ hasn't yet climbed back to its 2000 peak, but both the DOW and S&P500 have already surpassed their dot-com highs while pulling back a little during the beginning of 2008. Makes sense to diversify after looking at that, unless you're trying to time the market and strike it rich/bankrupt really fast.

Being human, we probably can't forget about our money, and emotions can easily drive us to panic sell and get out of the market during declines. For the Nasdaq in hindsight it was a good thing to do at the peak. But again, that would have meant you could time the market. The overused phrase from Warren Buffett "Be fearful when others are greedy, and greedy when others are fearful" are words I've taken to heart. I've even put them into practice during the recent market declines.