New Financial Plan

The latest inflation readings came in higher than projected.  Many analysts and Fed watchers believe this makes it less likely that more rate cuts will come until inflation is back in check.  Stocks don’t like that idea and so they are down as I write this.

First, is this a surprise?  Food and energy prices have been racing up.  Health-care costs continue to climb.  Core prices have also moved up steadily.  As rate cuts were made to smooth the economy there were little side notes in the discussion questioning when it would all add up to higher inflation.  I believe the question was always when, not if, so should not be considered a surprise.

Second, is this a problem?  The popular opinion of the Fed’s comfort level suggests 1-2%.  What if they are willing to put up with inflation up to 3.5% for a while?  If inflation gets out of control it is a problem.  Until then, the bigger question is how realistic are inflation numbers.  If most people are experiencing personal inflation approaching 4% is it really a problem if the official reading says 3%?  I don’t believe it is a problem.  It is a real concern that needs to be included in your plans.

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Warren Buffet is trying to make a quick buck again.  He’s timing his investments again.  When will he learn?  Never-mind.  I know my place.  Buffet is someone I learn from, not lecture.  He believes in timing investments.  He believes in buying cheap.  He’s made billions doing just that.  Buffet knows how to do that and has the resources to do it well.

It’s funny, headlines yesterday pointed to Buffet’s move as great for the markets.  The first thing I thought was that it has to be great for Buffet, but that means it’s not so good for someone else.  Apparently he wants to re-insure municipal bonds for several companies who are possibly in trouble.  Due to financial policies and credit rating systems these companies need to have a certain amount of cash available according to the risk of their portfolio.  I guess Buffet believes that they are in a bad enough position that he can take the best big chunk of bonds from them.  They have to decide if giving up the fees he wants, and the bonds he wants, leaves them in a much stronger position.  One company came out very soon after I saw the news and rejected it.

What can we learn from this?  The biggest lesson is understand your position.  I believe timing investments is smart if you can handle it.  Buffet, Microsoft, and Blackstone Group are all trying to do it again.  But they are in great positions.  Billions in cash.  Finance, accounting, legal, and management teams working with them.  They will not only make investments, but take control.  It’s a lot easier to make money when you have a lot of money already.  Fees take a percentage off your investments.  That fee percentage will be a lot smaller on $1M than it will on $1k, so a larger investment can make a profit after fees quicker than a small investment.

If you had a billion dollars and real time access to Buffet’s financial moves what would you do?  Would you make the same moves as him, invest in Berkshire, stick with index investing, or be happy to preserve it and go more conservative?

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It looks like tax rebates will be coming by the summer time in hopes of juicing the economy.  Maybe lots of people will go out and spend on trips and treats.  Then we might see a hint of better news, especially if unemployment and the service sector look better with extra spending on top of seasonal job creation.  Any additional spending that does go on will factor in when results come out in the fall.  Hmm, I see stimulus aimed at kicking in heading into elections.

As to how they work the latest information I saw is here. The checks are an advance payment of tax breaks in effect for 2008. But they will be sent out based on your 2007 numbers. Those lucky enough to qualify before but not now will get to keep their checks.  People who are eligible for more money now than they were last year will get the extra money when they file next spring. The changes in eligibility highlighted are change in income and change in children.  If your income comes down or dependant children go up you can get the credit next year when you file.  If your income goes up too much, or children are no longer dependant this year, you can still keep any money sent based on 2007’s filing.

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The Giants surprised a lot of people in beating the Patriots.  Who would have thought that so many experts could be wrong?  As far as picking the winner I’d guess that more people picked the Patriots than picked the Giants.  Of course bets and odds are made based on perception.  Everyone thought the Patriots were very likely to win big, enough so that the spread was 13 points.  I don’t know how well that spread evened out the money bet against it, but the people who make that number are good at it, so I’d guess it balanced things out quite a bit.  So the spread is a handicap that brings more money to bet for the Giants when betting against it, but probably more money betting for the patriots straight up.  After all, if the experts are saying the game will go one way by 13 or more points it is a pretty strong prediction.

What about the markets?  Many experts have made their picks for the year and have predicted market returns.  There are all kinds of forecasts.  There are also predictions for inflation, current measures of inflation, and the opportunity to lock in yields through bonds.  That brings me to my question for you.  What spread are you looking for to invest more in stocks now?  Some people saw the recent declines as enough of a discount to jump in.

The reason for investing in stocks is believing that they will return more than other investments over the time frame you want to invest.  Investing in indexes is supposed to lower the risk involved.  So stock indexes will hopefully return more than bonds.  If your index has decent dividend yields it makes it feel even safer, since that yield makes the spread between stocks and bonds smaller.  In theory that means stocks only have to go up by that spread percentage to break even.  Any returns above that should mean stocks were the better investment.  Then Citigroup slashes it’s dividends.  What is the new yield on the index?  What is the new risk picture on the index?  How much weight does Citigroup have in either of those considerations?  This all goes back to what extra return you expect from stocks for the extra risk you are taking on.

Experts look back over the history they have recorded and pull out averages.  Those numbers influence expectations.  Stocks historically yield 10% over time.  Over longer periods stocks are several percentage points favorites over current bond offerings.  How will you bet on that spread?

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Wow.  Global stocks plunging.  More bad news in the financial sector.  And the Federal Reserve with a surprise 3/4 point cut to hold off some of the pain.  There is some other news mixed in too, with oil backing down a bit and a stimulus plan creeping closer to reality.  If only the stimulus plan was a reasonable one and truly quick, like now, instead of another political game that waits through more pain.

Assuming some tax rebate comes in soon I have different plans for it now.  We were waiting for the market to show it’s real direction before finishing off our 2007 Roth contributions.  It looks like it’s about time to buy on another big dip in the market.  The money we have for our 2008 contributions might be put to use too.  This is a decent size pullback, I believe 10% YTD.  We will still be dollar cost averaging our contributions by not dumping it all in now, but will also be timing them to invest on the dips in the market.  Even with the volatility of the past several years this month has been a harsh one.

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With all of the problems the economy has been struggling with there are many plans floating around for a quick fix.  Lately I have been hearing about proposals for new tax rebates.  This got me thinking about how people handle unexpected cash.  What do you do if you unexpectedly get $250?  Government officials and economists hope that the money is spent right back into the economy after it is sent.  That is why they plan to do it.  They have studied the issue, and used this tactic in the past, and many people will spend all of the extra money that they find.

For me the money goes right into the bank and that is that.  We don’t have a strict budget.  If we did, I guess the money would be divided up into a couple of categories.  We do plan our purchases.  We are lucky enough that an extra $250 isn’t a big impact on our situation, so it doesn’t have any effect on our purchases.  I think of it as an extra cushion in our emergency fund.

Companies also use rebates, but they do it to sell products.  They have studied the redemption rates and decide where rebates will drive up sales enough to make more money than the rebates will pay back.  Many times the rebates are not submitted, or not submitted correctly.  People do not follow through with them.  What if you do follow through?  When a rebate check comes in for $50 what do you do with it?  I dump mine in the savings account with my other money.  In my mind that money was already factored in when the purchase was made.

I do have a few places where I will spend that kind of money.  A few years back there were tons of rebates on office supplies and electronics.  At that time I would roll rebates over to buy new products with rebate offers.  It seemed like every few weeks I was cashing rebate checks, buying more stuff, and submitting new forms.  Those types of offers slowly disappeared and I stopped doing that.  The other rebate type money I do spend is credit card rewards.  That is mostly the case because I have cards that give me gift card rewards.  When we get those we start watching for things worth buying at those stores.

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