Frank the Financially Savvy Atheist - The F.S.A.

Oh no, I've been demoted (not at work) but something much more important. I no longer have the coveted double asterick at Madame X's blogroll! Oh woe is me. I don't blame her though, it's hard to have something as a frequent read when it's only updated once a month or so, so no hard feelings :). To that extent I wanted to provide an update for those who care about the various things going on me and my family's life.

In my most recent Net Worth Update I mentioned that I was going to be concentrating on my career in order to maximize my earnings. I've been stepping things up at work. So far this has been very positive. In addition, I've been able to get home at a decent time to make sure I can spend ample time with my wife and kids. All in all, it's been very positive around here recently, but all this means that something has to give.

As is readily apparent, the blog hasn't been updated until now, and at the same time, I have not been studying as much as I should for my CFA exam. Moreover, the house is a mess. So things aren't perfect, but they have been going well for us. Right now we are in the midst of planning our eldest son birthday party. This will be the first big party we've thrown since he's in preschool now. And on top of that, my wife has just recently gotten braces, which adds a whole new aspect of crazy busyness to our life.

So basically, our family is busy and things are going well. But there are only so many hours in the day. I will update when I can, and expect to see at the very least continued net worth updates.

I decided to take a look and see what the potential difference could be between perfect market timing and just straight investing. Here's what I did.

Let's say that there are two potential investments: a stock market index, and a cash vehicle (i.e. a money market account). Now, let's posit a portfolio manager (PM) who will attempt to time the markets on a monthly basis. In other words, the PM will determine whether or not the the stock market index or the cash vehicle will outperform in the coming month. The PM will then switch back and forth between the two to try and capitalize on his/her expectations. Our cash vehicle will yield a little over 1% on an annualized basis and our stock market will be modelled by a normal distribution with an average of 0.80%. To cap it off, we will invest only $100 in each portfolio and then let it sit there.

Ok, got that? We can now take a look at 5 distinct portfolios. 1.) A portfolio solely invested in cash, 2.) a portfolio solely invested in the stock market, 3.) a PM that is a perfect market timer that will always correctly determine which investment will outperform in a given month, 4.) a PM that is only 80% accurate with his/her predictions, and 5.) a PM that is only 20% accurate with his/her predictions.

Throw together some excel magic to see what the portfolios look like after 10 years and here are the results of one scenario.

The difference here is astonishing. The perfect market timer PM has turned your $100 into almost $1240. Your 80% accurate market timing PM would have increased your investment to $583. Your stock market investment is now $356 while your cash porfolio is only $110. Your 20% accurate PM did not do so hotly, and your portfolio is now only worth $141.30.

There are a bunch of caveats and what not to the above analysis (taxes, costs, feasibility) but it shows you the magnitude of the difference between portfolios in this simple scenario/world. No wonder so many people try to time the market, it could be insanely profitable. Just a thought experiment, this is by no means an argument to go out there and try to market time yourself (or alternatively to hire an active manager to do so).

The most recent MITM from CNN profiles a young couple, Ryan and Hope (25 and 23 respectively), and it piqued my interest because I wanted to see how my wife and I (also a young couple) stack up against them. Here is a quick table summarizing our differences.

	Ryan and Hope	Frank and Mrs. FSA
Ages	25 and 23	24 and 25
Occupations	Car salesman and Medical billing	Finance guy and Student (soon to be teacher)
Salary	$56K	>$100K
Home and Land	$125K	$200K
IRA, 401(k)	$22.5K	$50K
Mutal Funds	$3k	N/A*
529 Plan	N/A	$3.7K
CC Debt	$4.5K	$20K
Car Loans	$17.5K	$50K
Student Loans	$5.5K	$30K
Mortgage	$100K?	$185K
Leverage ratio	~ 2x	~ 2x
Net Worth	23	12K

*We don't own any mutual funds in a taxable brokerage account like this family

The main differences are clear:
1. We have a significantly larger debt load than this couple. While our leverage ratio is slightly lower than this couple (total debt / total income), their net worth is higher at 23K vs. our 12K. The article didn't mention how much their mortgage was, but did mention a mortgage payment of $500-ish a month.
2. We have three kids and spend less on entertainment.
3. We make more than they do right now.

Overall I think my wife and I are doing fine. We do have a substantial amount of debt no matter how I try to spin it. We could do a better job of sticking to our budget, and improve in other areas as well. Moreover, as the article states, kids are expensive and our three little ones a certainly a drag on time and money (but we love them!). Still, it was an insightful exercise for me at least.

Another ho hum month. Nothing all that exciting to report. Assets ticked down 2 bps (darn stock market) but liabilities were also down 63 bps. We've almost completely funded our Roth IRAs for 2007, still have a few months to get the remaining $2,000 or so. All told that brings our net worth to $12,466 a 16% increase month-over-month. If only the stock market would cooperate with me then that number would be higher.

Now for an update on our goals:

• Pass Level III of the CFA: I need to study more for this, I am so far behind already. Work has been crushing me in terms of time. Hopefully I can go three for three with this exam.


• Lose 10 lbs by June 1st: I have made some small changes here and there, doing a semi-daily walk, parking further away so I walk more, etc. So far I am keeping my current weight, but not really losing all that much. I haven't been doing as much on the diet side to ensure my success.


• Spend more time with family: this has been going decently well. I have been practicing piano with my eldest son more and my hours haven't been terrible. Weekends have generally been terrific family time and I really look forward to weekends now.


• Implement GTD by end of Jan: failed! But, I did borrow GTD on CD (read by the author) and I do listen to it in the car. Moreover, I do have the book so I can use that for reference. New deadline, end of March.


• Publish weekly report for work: this has been going well and it's getting my name out there. I have received positive feedback from people above me and above my boss so that makes me feel good about what I'm doing.


• Other goals are going so-so to ok.

One thing I would like to add is that I am getting rid of my goal to generate $20/month of income from this blog. Why? Well, I've realized that my time could be much better spent working on my career and maximizing my income in that way first. Should have been obvious to me, but at least now I realize it. Overall this year has brought some new challenges especially on the work front and I am not sure when things will subside to a calmer level.