The 5 Year Stock Market Rule

Don’t invest in the stock market unless you’re going in for 5 years. That’s the principle I operate under when it comes to investing in the stock market. Unless the funds I’m committing are free for the next five years, I’m not putting it into the stock market. It’s not a rule grounded in deep analysis or one created by an expert in the market (but experts have come up with similarly sounding rules with different time horizons), it’s simply one that I got in my head and one that has served me well thus far. The time isn’t the important part of the rule, the idea behind it is.

When it comes to the volatility of the stock market, it’s important that you think in the long term. In the short term, emotion often sways the performance of both the market and individual stocks. Apple has a bad quarter, everyone panics and sells the stock. The CEO of Under Armour announces he will be divesting some of his ownership shares, UA falls 50% in three months. Everyone thinks there is a recession, stock market is tanking, Fed steps in, and now it’s not nearly as bad as it used to be (as of this writing, international markets have begun rebounding incredibly off the Fed rate drop news). Either way, there are a lot of things that affect the stock market that have a lot to do with external factors (I don’t think the economy is an external factor, I was merely using it as an example of how emotion can play a large role). Those external factors are difficult to gauge and this they contribute to a volatility that is only bearable if you have time – hence the five year rule.

If you are limited by a concrete timeline, self-imposed or otherwise, that is less than five years, I recommend that you don’t put it into the stock market. A prime example for someone in my age group (I’m 27) is your house buying fund. If you intend to make a purchase in the next five years, I strongly urge you to leave those funds in something safe because the allure of historic 11% annual returns could pull you into a situation where you lose 11% in a month (such as the one we’re in right this very moment).

If this sounds eerily familiar to the advice you read for retirees, it’s because it’s exactly the same. If you are looking to retire on your investments, you should start divesting yourself of equities as you near retirement. You’ll want to keep some of it in stocks but given the immediate need of the funds, you’ll want to keep only that percentage you can live without for some period of time.

Do you use any sort of rule like this when you decide whether to commit funds to the stock market? It was a big jump for me to start investing non-retirement funds into the stock market and I started using this rule as a way of slowing down my eagerness and reducing my exposure to risk.

 The Home 

Should You Refinance?

When I purchased my home two, nearly three, years ago, I had a great interest rate of 5.75%. With the recent Fed rate cut of 0.75%, a question that has been swirling around the heads of my friends has been whether or not they should be refinancing. Some of them have loans at higher rates or HELOC’s and 2nd mortgages at higher rates – for them the analysis is worth performing. As for us, with the Bankrate quoted rates at around 5.40% for a thirty year mortgage (under 5% for a 15 year mortgage), the answer for us is unclear… this calls for an analysis!

(Click to continue reading…)

 Devil's Advocate 

Cancel Unused Credit Cards

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This is a Devil's Advocate post.

It’s a widely believed fact that your credit score can be improved if you keep your unused credit cards (rather than cancel them). By keeping these cards, you are increasing the average age of your lines of credit, increasing the total amount of credit, and decreasing your credit utilization – all good things when it comes to computing your score. So, why do I always advocate canceling unused cards? I advocate that because I believe it is the safest thing for you to do and is better than keeping unused cards for the credit score benefit.

Security Breaches

GE Money USA, a branch of GE that manages the in-store credit card programs of many retailers, recently reported that one of the nine back-up tapes put into storage at Iron Mountain had gone missing. After a search of the facility, they were unable to locate the missing tape. What was on it? It is supposed to contain the personal details of approximately 650,000 people. Think you are safe because you have nothing to do with GE Money USA? Unfortunately, you’re probably wrong because GE Money USA handles retailer credit cards for over 230 retailers, one of which is the ubiquitous JC Penney company. But look on the bright side, you might be getting free credit monitoring for a year! In all seriousness, while the actual probability you will be affected by data breaches such as this one will be relatively low, wouldn’t you be kicking yourself for keeping around an unused JC Penney card when you could’ve canceled it?

Promotional Offers

If you have a card and the credit card company starts offering hot new promotions for it, then you won’t be eligible for these new offers since you’ve already own the card. So, I’ve signed up for a lot of cards because they offered free promotions (I compiled a list of credit cards that offer $100 gift cards after you first purchase) and then didn’t use them much after the promotion (mostly because cards with better cashback came along), so why not cancel them so you can take advantage of newer promotions? There is generally a period after which the card no longer considers you a customer, usually six months, but after that you are like every other Joe (or Janet) on the street.

Please don’t read this to mean that I think someone should apply for the card for the promotional offer, cancel, then repeat. I’m not advocating that, in fact I think it’s stupid. The frequent applications for credit will destroy your credit score. I just mean to say you want to keep flexible, especially if you aren’t even using the card.

Out of Sight, Out of Mind

If you never use the credit card and never receive a bill, would you check your account for fraudulent activity? I’d say there’s a 99.9% chance you wouldn’t because you wouldn’t think to. You never used it so how could someone else have gotten access to it? However, it’s entirely possible that someone got access to your card and began using it without your knowledge. When thieves steal card information, it’s not uncommon for them to wait a few months before using it. Why do they wait? It’s harder to pinpoint when the loss occurred if it happened months prior to actual fraudulent activity.

Keeps Things Organized

You can’t lose a card if you cancel it! Let’s say you put all of your unused cards into your desk drawer. Six months later, someone breaks into your home and steals all of your cards (or just one, it’s actually worse if they only take one!), how can you possibly remember which cards to cancel? (you would know if you had a personal finance user’s guide!) Let’s say no one steals it but one of them expires and they send you a new one, only to have it intercepted at the mail box by an enterprising identity thief. Let’s say no one does anything bad and you have the card in your desk without incident, what’s the benefit? You have some extra clutter sitting around, extremely expensive clutter if it gets into the wrong hands.

May Not Actually Help Score

One of the main points behind keeping a card is that it improves your average credit line age but that may not be true. If you cancel a recently issued card, it could be possible that the new card is negatively affecting your credit line age metric. While it’s difficult to calculate and probably a waste of time, the credit score boost you are trying to get with the unused card may not be as good as you thought it was.

Ultimately, I think that keeping unused cards lying around is a recipe for disaster. I cancel cards that I don’t use, what do you do?


I’m Not An Early Adopter of Technology, Are You?

You’d probably be surprised to learn that I, someone with a degree in computer science and a career in the field of software development, am not an early adopter of technology. Prior to my current Treo 755p, I had an old Samsung phone for over two years. Before that old boring Samsung I had some other phone for two or three years. Each time, I didn’t get the cutting edge in technology, I got the cheapest and most functional version available. While my friends were taking photos and videos, I was asking them not to send me text messages because they cost me 7 cents a piece (there was no way I was sending a text message on a regular numeric keypad, I don’t have that much patience).

Want another indication of my anti-early adoption ways? Until a few months ago, I didn’t even have a television capable of high definition. High definition has been around since the 90s and I didn’t get a set capable of playing HD until 2007. This Thursday, if all goes well, Verizon will be coming over to install FiOS and my first taste of actual high definition in my own house.

So, why the aversion to technology? Cost. Anyone who has seen the product sales life cycle recognizes the small but important role early adopters play in the life cycle. They are the ones who wait in line early, boost the early sales numbers, and give you the fuel to continue innovation and thus better products. They are also the ones willing to pay high prices just for the opportunity to be one of the first in their circle of friends to have it. In many cases, that first premium is quite high! I was never one to be wow’d by technology, at least to the point where I had to have one. I was content to be one of the consumer masses to purchase the technology after it had matured a little and the prices had come down from the heavens. It’s a logic that has saved me from being one the early high definition DVD early adopters, many of which may find themselves screwed.

HD-DVD looks to be losing the format wars between itself and Blu-Ray, so all the HD-DVD early adopters looked nervous when Warner announced Blu-Ray exclusivity. To make matters worse, even the winners are smarting. The new Blu-Ray format, version 2.0, makes a lot of other Blu-Ray players obsolete! While the owners of existing Blu-Ray players won’t be as screwed as HD-DVD, it still represents a bit of a setback for those early adopters. As for me, maybe I get a PlayStation 3 now that it appears to be ‘future-proofed’ (at least to version 2.0)… or maybe I wait a few more months for everything shake out. 🙂

Are you an early adopter? If so, why? If not, why not?

 Personal Finance 

Personal Finance Lessons from George Washington

He was the man who led our fair nation to freedom, the first President of the United States, and his face stares at us from the ubiquitous one dollar bill – he’s none other than George Washington. As one of our first elder statemen, President Washington had a wealth of memorable quotes, many of which are applicable to both sides of personal finance. He speaks much about the importance of one’s integrity and character as well as the importance of discipline and service, all characteristics that are important in establishing a sound personal finance life. Let’s take a look at the following nine quotes.

“Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.”

Who you spend your time with will affect how you behave and that’s certainly true when it comes to spending habits. If you want to save, hang out with frugal people. If you want to be financially savvy, hang out with financially savvy people. How many stories have you heard of people looking to save money but always go out to expensive restaurants and trendy bars with their friends? There are a lot of ways to have fun (have a board game night!) and many of them cost very little. If you want to save up a few bucks, hang out with your friends who appreciate not going out to expensive places and you’ll reap the rewards. Don’t fight the current; just find a more favorable current.

“Be courteous to all, but intimate with few; and let those few be well tried before you give them your confidence.”

This particular quote, when applied to personal finance, speaks specifically to how you should select any sort of advisor. Finances are very personal and while you should give each advisor a chance, be very particular in who you trust with your treasure.

“Bad seed is a robbery of the worst kind: for your pocket-book not only suffers by it, but your preparations are lost and a season passes away unimproved.”

The foundations upon which your personal finances are built on have to be strong. In this particular case, the seed can be something like bad debt. If you have credit card debt that’s holding you back, priority one should be erasing that debt because it’s a bad seed that you can’t let grow to fruition. Trying to do something else with your excess funds, like investing in the stock market, while you have this bad debt, will usually end badly because that debt is guaranteed, investment returns are not. Keep your roots strong and your tree will grow tall and wide.

“Experience teaches us that it is much easier to prevent an enemy from posting themselves than it is to dislodge them after they have got possession.”

This is almost a part two to the quote above. It is far easier to prevent yourself from going into debt than it is to get yourself out of it, simply ask any of the many people who have overcome their credit card (or other) debts. The unfortunate thing is that those who fall into credit card debt often don’t recognize the hole they’ve begun digging for themselves. It isn’t until after they recognize it that they truly appreciate the difficult spot they’ve put themselves in. However, it bears noting that nothing is insurmountable if you show the courage and discipline to face it head on. While it’s easier to prevent an enemy from posting themselves, it’s not impossible to dislodge them.

“Few men have virtue to withstand the highest bidder.”

Take a look at Enron. Money corrupts. Need I say more?

“I hope I shall always possess firmness and virtue enough to maintain what I consider the most enviable of all titles, the character of an Honest Man.”

Honesty of character is paramount.

“Let your heart feel for the afflictions and distress of everyone, and let your hand give in proportion to your purse.”

The importance of philanthropy comes shining through in this particular quote, it’s important to lend a hand to those who are in need. First off, the world works in mysterious ways and we’re all in this fight together so why not help a fellow human being out when they need it? You never know when your kindness will be repaid in kind (perhaps never, but giving always gives back immediately with a nice warm fuzzy feeling!).

“My mother was the most beautiful woman I ever saw. All I am I owe to my mother. I attribute all my success in life to the moral, intellectual and physical education I received from her.”

Remember your roots and how you came into this world. You could be the richest man in the world but you got your start because of your mother and you were raised by your family, don’t ever forget that.

“Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.”

Considering it comes from our first President, I think we can take this last one at face value. 🙂

 Personal Finance 

Worst Inflation Rate In 17 Years

The sky is falling! Everyone panic! We are facing a recession! That’s the reaction Yahoo was probably going for when they plastered that on the front page of their Yahoo Finance page. The article itself repeated an announcement by the Bureau of Labor and Statistics that the CPI increased by 4.1% in 2007, compared to 2.5% in 2006. I bet you probably broke out into a cold sweat as your dollars were slowly losing their value (hint hint: the dollar is tanking internationally, so you should break out in a cold sweat, just not over inflation… yet) but let me try to put this all in perspective.

First off, let’s look at the core inflation figures, those are prices excluding fuel and energy. For 2007, that inflation figure is 2.4%, less than the 2.6% of 2006. Now, part of that is because some prices rose while housing numbers fell but ultimately non-food and non-fuel inflation was reasonable… not the “worst in 17 years.”

Also, consider that oil is at $100 a barrel, a figure that hearkens back to the days of yore when OPEC held us over the barrel. Even with higher prices for sweet light crude, our inflation is still 0.1% away from what experts generally use as a measure of average inflation. That’s right, the worst inflation rate in 17 years, 4.1%, is exactly 0.1% greater than the 4.0% number most experts use when calculating long run figures. How can 4.1% be horrible if 4.0% is the average?

Granted, Yahoo only said it was the worst rate in 17 years, which is accurate. However, I think by using that language and piling onto the mess that was created by the subprime market and all the financial companies taking huge writeoffs, they are playing into the hysteria. Worst in 17 years? Perhaps numerically but it’s not that bad, is it?

(You want to know what I’d like someone to discuss? The impact of the lost tax revenue as a result of these writedowns…)

 Personal Finance 

Roundup: MBN, Thanks For All The Fish

This week I left the Money Blog Network. It was an amicable separation and wish them all the best. As such, the weekly roundups will continue but will feature fewer links and more in-depth discussions of the articles that I link to. One of the values in roundups isn’t that you get a shotgun blast of a dozen posts but that you get a little more insight into my thoughts on what other people wrote (I hope!). The roundups will also include some non-personal finance articles that I found informative or entertaining, I hope you find them as entertaining as well.

After this week’s interview with Jeremy of GenXFinance, I’ve come to better appreciate the insight and knowledge he brings to the table when discussing investment matters. That’s not to say I didn’t appreciate his thoughts before my better understanding of his background really does help me appreciate it when he discusses news like how Fidelity reopened their Magellan funds. It’s crucial to understand that despite incredible historic returns, so incredible they closed it to new investors for a decade, and despite that those returns made Peter Lynch a household name, it’s really not the same fund and only time will tell if investing in this flagship product makes good sense.

I’m surprised no one discovered this earlier but it wasn’t until this week did I learn that you should set aside coupons for four weeks before you should use them. Trent at The Simple Dollar shares the idea that the Sunday coupons are the first promotional push by companies and that actual in-store sales will appear approximately four weeks after the coupons. Now, I’ve noticed that sometimes the coupons coincide with in-store sales, but for everything else I think this “lag” time makes for more effective use of coupons.

Nickel shares an idea from a reader that I’ve seen several times before and always thought was unrealistic. The idea is to move to a cheaper cost of living country in order to lengthen your retirement. The “downside is that it is so far from friends and family” is a pretty huge downside! I think that moving to a place in the US with a lower cost of living might be more reasonable than a developed country, there are a lot of reasons why other countries are less expensive to live in and those are undesirable reasons!

Herbal supplements aren’t FDA regulated, which is something I never thought really matter all that much, but that means you have no idea what the heck is inside of them. It also means that you have no idea that those pills were stuffed by a random person sitting in their living room with their unwashed hands as they smoked a cigarette (that’s if you don’t mind taking pills of ‘who knows what’). Thankfully I don’t take herbal supplements or I would’ve thrown up in my brain.

Okay, let’s say on the off chance you still have your appetite, how about a ranking of places that will give you free food if you eat a ridiculous amount? Stacy at Mental Floss put together a list of crazy places with this offer… one of them, Sunni Sky’s in Angier, North Carolina has Cold Sweat Ice Cream. That’s right, spicy ice cream! (and you have to sign a waiver to eat it!)

I hope you all have a great weekend, don’t eat anything bigger than your head (unless you can get it for free), and don’t buy any herbal supplements from shady online vendors that email you. If you do want herbal supplements, I can some that can help you lose weight, gain confidence, improve intelligence, and costs only $59.99 for a bottle of 20.

 Your Take 

Your Take: Would You Spend A Stimulus Package?

There’s talk of an economic stimulus package that may involve some funds going back to low and middle income Americans in the hopes that they’ll spend it, boost the economy, and make everyone who watches stock tickers sleep a little easier at night. Matt Lauer interviewed Henry Paulson, the US Treasury Secretary, on the Today show and discussed the potential stimulus package and brought up a very good point. He brought up a quote in the Wall Street Journal about how the last time this tactic was tried, back in 2001, many low and middle income Americans saved their check from the government and didn’t spend it. (wsj blog article discussing this idea)

That’s what people do, they spend in times of prosperity and save in times of crisis. With the stock market taking a pounding, with the billions in bank write offs, with the sub-prime news, and all the talk of a recession – whether we’re actually in a time of economic crisis or not, people think we’re in a time of economic crisis so I’m inclined to believe they’ll save any money the government decides to dole out.

(As an aside, I love how we’re always going back to Reaganomics and supply-side economics, which was really the last time we truly battle a long period of economic slowdowns, in that case it was stagflation caused in part by oil prices. Tax cuts plus deficit spending… how much longer can we be ripping the golden eggs out of the golden goose before the poor thing dies and China stops buying T-bills?)

So my question to you is, if you got money as a result of the stimulus package, would you spend it or save it?

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