Setting the Stage for a better 2009

Every year I set several goals that are typically related in some way to sports or athletic endeavors.  This year I have expanded that to include some other areas that need improvement.  Here are four of my goals:

#1 Goal 

More bonds in my portfolio!  I always have trouble adding bonds, it just seems to go against my grain.  For many years I have steered away from bonds and their boring returns with the argument that I was diversified in various equities, commodities and real estate.  That false sense of security worked for a long time.  It seemed that things balanced out because when one asset class was down another was booming.  That didn’t hold true for the bust of 2008 where equities across the board took steep losses with few exceptions.  The losses have gotten my attention and convinced me to reduce my overall risk.  I will not sell any assets, but will re-direct a large portion of new money into bonds. 

#2 Goal

Exceed my 2008 walking/hiking mileage.  Last year, I strolled along for just over 3 million steps or 1500 miles.  1.27 million of those steps were with my dog, Brownie Boy.  Dogs can be great motivators – how can anybody say no to a walk when the little guy is so excited about going?

#3 Goal

Read More.  I don’t care what the topic, just read.  I read twenty books last year ranging from personal finance to mysteries with romantic undercurrents.  I am giving myself free rein to read anything that interests me because reading something is better than not.

#4 Goal

Take off on an Adventure.  I want to live life with no regrets and one way to help make sure that happens is to do something every now and then that is frightening!  Okay, that may be a little over the top.  My aim is to do something that forces me to stretch in some way.  One of the possibilities for this year is a sea kayak trip, camping and fishing for 8 days along the coast.  

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Risks and the Road to Early Retirement

We may not realize it, but we all make risk assessments everyday in almost everything we do.  For example, some folks will drive nothing but the safest car on the road, typically a Volvo with airbags in every direction, while others ride motorcycles without helmets. 

It’s no different with personal finance.  Some of us are very risk averse - shying away from stocks, investing in bonds, wanting to secure our futures with reliable investments.  While others love taking risks – day-trading stocks, shorting stocks, chasing returns.   Ideally, a smart investor finds a middle ground that will allow for some growth while still maintaining a strong core.

When I first started investing, I would often say that I was willing to take on more risk because I wanted to build a portfolio that would allow me to retire early.  I knew I had to invest in stocks to achieve that.  And I reasoned that if I failed, then I would simply continue to work like every other poor slob until my normal retirement! 

In those terms, it seemed like a no-brainer. Why not take discretionary income and invest it instead of spending it?  While my friends and co-workers bought bigger homes, lavish vacations and more toys, I enjoyed having a "higher goal".  Whenever I mentioned retiring early to them, they looked at me like I was speaking a foreign language.  For many, the concept had never occurred to them. And as they gave it some thought, you could see the painful realization in their faces that they will never be able to do such a thing. 

Many of us have similar goals in life.  We aim to graduate from high school, then college, then we want to land a good job.  What comes next is not so well-defined.  Some wish to climb the corporate ladder, others want their own business, while others seek challenging assignments.  For me, I never desired to ascend into corporate bureaucracy, I never wanted my boss’ job ( even though I did eventually get it).  I wanted interesting work, but even more, I wanted security.  Typical woman, eh?  My goal to retire early was driven by that need and the fact that I prefer to work for myself.   I like my job, but to this day, I would much rather spend time working on one of my personal projects than going in to work.  I craved that freedom and early retirement was the answer.

The real bonus is that now that I have the means to retire early, I also have new-found powers.  I can pick and choose my work assignments, I call more shots, I take off when I want to, I don’t worry about where my career is going, what the boss might say, what co-workers might think, I can walk out any day, any time.  I am in charge!  My job is so much more fun. 

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Reaching the Peak money making years

Yesterday, I received my merit raise for this past years performance. The first thought that ran through my head when I saw the amount was – how am I ever going to be able to walk away from this money?

I have been planning, saving, investing most of my working life so that one day I could retire early, pursue whatever whim came my way and never look back. I have lustfully daydreamed of those stress-free days!

What is stopping me? Is it greed? A love of money? I don’t need all of the income. I can live comfortably on much less. I am sure there is some element of greed in the mix, but I think it goes beyond that.

First and foremost, I have worked hard to get here. How can I throw it all away? It’s my base, my foundation that I started building over 20 years ago. I graduated from an engineering school – some say that electrical engineering is one of the most difficult degrees to obtain. I worked to achieve it in four years, many take five or more. I also worked to land my first job, it was not handed to me.

And I have suffered. I have traveled extensively on business when all I wanted was to stay in one spot for awhile. I have given presentations when I was not comfortable with the data/info. I have participated in numerous stressful as well as excruciatingly boring meetings. I have received my share of awards, but I have also experienced backstabbing and co-workers claiming credit for my work. I have worked several 100+ hour weeks and received pay for only 60 of the 100 hours. I have made the leap from engineering to management, successfully. And from that experience, I have learned that while most engineering problems can be solved by applying logic, that is rarely the case with personnel issues. But that's another story.

I have lived through all of this and succeeded. It took a long time to get here, to climb to a high point. After more than 20 years in the workforce, I am firmly rooted in the most profitable, money making years of my career. I have arrived, so how can I leave now, when I have given (suffered) so much and worked so hard to reach this peak?

To answer my own question - I believe that there needs to be another peak. Another goal to pursue. You have got to be willing to come down from the mountain to move on to the next big challenge. The key is to develop an outside interest, hobby or second career that stirs up enough passion that you can’t wait to leave and move on to the next phase of life. That all sounds just wonderful, rah, rah, sis, boom, bah!

But, it falls short when you realize that you have been focusing all of your energy and effort into your present career. I have other interests and hobbies, but are they enough? Do I have enough of a foundation to build something that I can become passionate about?

Many of you may think that's crazy. And you may be telling yourself that you would have no problem retiring. But, keep in mind many people fail retirement for various reasons and return to work within six months. After today, I know it’s going to take a lot to overcome the draw of that money. The force field that surrounds it has taken over 20 years to create.

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Overturning Maslow’s Hierarchy of Needs?

I have seen a few comments lately that chastise PF bloggers for obsessing about retirement and not living for today. It’s true that sometimes when you have a goal you tend to focus too closely on that goal at the expense of everything else in life. Its important to keep things in perspective and helpful to remember Maslow’s hierarchy of needs.

Maslow’s Hierarchy of Needs

A strong foundation is needed to reach the higher levels. But that foundation must also be maintained, if it is allowed to erode or break down, everything could topple.
Maslow recognized this inherent human flaw.

According to Maslow from his book entitled "On Dominance, Self-Esteem, and Self-Actualization, by A.H Maslow":
"If they are dominated by a higher need, this higher need will seem to be the most important of all. It then becomes possible, and indeed does actually happen, that they may, for the sake of this higher need, put themselves into the position of being deprived in a more basic need."

He recognized that we often obsess about our goals and leave behind other matters which are vitally important. It’s possible to see this flaw, where we have effectively turned the hierarchy upside down, in many different areas of our lives.

For instance, some of us have become too focused on our careers. We work so much that we don’t have time or energy to create a healthy meal at home. Consequently, we grab something fast and eat junk food. This upsets part of the good foundation that healthy food provides. Others spend so much time surfing/blogging and playing video games that they neglect their families, parenting duties, home maintenance, etc. While others enjoy the moment by making excessive purchases and neglecting to plan and fund their retirements. These actions erode the foundation, impact relationships and jeopardize our futures.

Its great to have goals and the drive to achieve them, but it’s also essential to apply moderation to achieve a happy and fulfilled life.

Blogging can be a path to achieving your Goals

Everyday I look forward to reading my favorite Personal Finance blogs. What is so neat about blogs is that once you find a writer that you like, you can read his/her articles nearly everyday. You don’t have to wait for their next book or weekly newspaper column to come out. And Bloggers are a conduit for information. It’s like having dozens of eyes scanning the internet, financial magazines and TV shows for interesting PF information.

It wasn’t long before I started thinking about blogging. I had already written down a few goals that I wanted to reach, but I wasn’t sure what the next step would be to get there. I needed an action to get me on the road and I thought that starting a blog might help me work towards those goals. The first thing I did was to list the reasons that I wanted to Blog.

Why Blog?

• Evaluate financial choices – researching the info and then writing a coherent analysis is a great way to evaluate something.
• Improve writing skills. I have a goal to write a post every day. Practicing any skill with that kind of commitment will generally lead to improved performance.
• Extra shot of Motivation. Making public statements about goals, plans, metrics adds a little more motivation and commitment to actually see it through.
• Improve creativity. Finding something interesting to write about with enthusiasm everyday requires imagination and creativity.
• Get Feedback. Most blogs have a comment section and those comments can be very helpful for making adjustments and fine tuning your style.
• Share ideas and give something back to the community
• Meet people with similar goals and interests

These reasons convinced me to give it a try. Now, after a month, I have listed some thoughts about my blogging experience.

Blog Reflections

Getting started
I did not expect some things to be so difficult. I went round and round over picking the blog name. And I never imagined that pressing the publish button would be so cool. The first time was a rush - I had my own space on-line and I could write just about anything that came into my head

Second thoughts
At first, I had a lot of reservations. Will I run out of things to write about? Am I wasting my time? Then I would think who cares if no one reads it, I am writing about stuff that I want to learn more about. That was my primary driver, so I told myself to keep researching topics and cranking it out. I did not tell anyone about the site, not even family or friends. That wasn’t easy. Anytime you are working on a new project, its just natural to want to talk about it.

Setting a writing goal
I set a goal to write each day for a couple of months to build up content. I would do this before even trying to lure readers or place ads on my site. I wanted to keep it simple, neat and clean as long as possible and focus on writing good content with consistency. I noticed that it got easier and easier to write and I got faster at writing – precisely my goal. Not only did my writing improve, but I noticed that it became easier to think of just the right word when speaking. Words and thoughts just seem to flow more easily, now.

Don’t Break the chain
I followed the mantra of Jerry Seinfeld, the comedian. As a comedian, he needs to write new material quite often. He would pull long, stressful hours to meet a deadline. To alleviate this pressure he decided to dedicate himself to writing everyday. He motivated himself by keeping track of how many days in a row he had written. He wanted to keep the chain going. His mantra was – don’t break the chain.

Site meter
My curiosity got the best of me, I added a site meter. I will admit that it was a thrill to see that people were coming to the site and reading more than one page! Because I had not received many comments, the traffic count was a lot more than I had suspected. Maybe they were lost???

No Ad Blogging
After a month, I wondered if I would ever open my site up to ads. Money has never been a driver and the ads are a nuisance. Then one of the blogs that I read regularly, came out and cancelled most of his ads! What a surprise. I decided to hold off even longer – no ads.

Understanding Total Returns for Bonds

As part of my 2008 Finanical Goal, I plan to evaluate various types of bond investments, post about them and then select one for purchase. First, I want to examine how individual bonds provide returns.

Understanding stock returns is pretty straight forward - market price plus dividend, but Bond returns are a little more complex. In talking with friends and co-workers I realized that very few people are comfortable with how bonds work. In the book, Bogle on Mutual Funds, there is a very good explanation that I bookmarked for future reference. I have summarized Bogle’s description and added a few of my own comments, of course.

Bond returns are comprised of three items:

• Initial yield
• Reinvestment rate
• Impact of Rate change on market price

The primary factor by far is the initial yield – it is the major determinate of the future return on a bond.

One might assume that a bond with an 8% coupon would achieve a return of 8%, if held to maturity. This is not always correct, because of the reinvestment factor. US Govt bonds pay a semiannual interest coupon that is reinvested at the current rate (not the initial rate). If the new rate is less than 8% the return will also be lower and conversely if the reinvestment rate is higher the corresponding total return will also be higher. The following table illustrates the importance of the reinvestment factor for a 20 year Govt bond (8% coupon, $10,000 investment).

The third item, rate change, impacts the bonds market price and is only a factor if the bond is not held to maturity. An increase in rates will reduce the market value of a bond. Many have trouble with this concept. Here’s my explanation. If rates are increasing and you are holding a bond at a lower rate it is no longer as desirable (valuable) because better rates can now be had. You are locked in to your initial rate, but of course the semiannual coupon is being reinvested at this new higher rate. So not all is bad with raising rates – just don’t sell into that environment.

The table is somewhat misleading because rates rarely stay the same for 1 year let alone 20. For a 20 yr bond there will be 40 semiannual reinvestment dates. That will result in a lot of averaging of the overall reinvestment rate. The effect of averaging over a long time period explains why the impact of reinvestment rates is not the primary force in bond returns.

Define a value, a goal and the steps to get there

Yesterday, I posted about the importance of having long term goals. Today, I describe one of my goals and how I plan to achieve it.

One of the things that I value is my environment. Its very important that I am content where I am living, working and playing. I was raised in the country and took much of it for granted at the time. However, after living in a large metroplex, I know exactly how important my environment is to my happiness. For instance I place a high value on clean air, low traffic, easy lifestyle pace, elbow room, privacy and natural surroundings (no concrete for me). My long term goal is to live on a small acreage in the country.

Now, how do I plan on getting there? First, I define a short term goal. My short term goal (2-3 years) is to sell my current home in the city.

Breaking that down even more to a 1 year goal, I have listed things that I need to do before I can sell my home. For instance, I want to replace a couple of windows, paint the exterior fascia, replace a shower stall and learn about selling a home by owner. I list these specific tasks and the timeframe that I plan to accomplish them. Because I know that these tasks are directly related to my long term goal, I am more motivated to get them done. And it feels great to check them off one by one knowing that I am making progress towards my ultimate goal.

Life is a Journey

Anytime an incident like the recent one in Omaha occurs, it reminds me just how fragile our lives are. Tomorrow seems inevitable, but there is no guarantee that any of us will be here for it. We must plan for our future and have goals in mind, but do not forget to live today. Life is truly a journey.

One of my favorite quotes is from Martina Navratilova. She has experienced much success in her life as a result of hard work and perseverance. She once said that “The moment of victory is much too short to live for that and nothing else.”

It is important to balance living for today with planning for your future. Everyone should have a set of goals that encompasses all aspects of their life. What do you value? Where do you want to be in 20 years? What do you want to be doing?

My list of values includes:

• My environment – where do I want to call home?
• Financial Security – what do I need to feel secure?
• Education – what am I interested in learning? What areas do I want to improve upon?
• Health – what activities do I expect to be able to do 20 years from now? How do I want to feel?
• Career – what kind of work do I want to be doing?
• Family and friends – what will these relationships be like in 20 years?
  
  After you define your values, you should be able to link specific goals to a value and then identify the steps required today, next week and next year to reach these goals. Like any big project, some goals can seem overwhelming, but remember your life occurs one day at a time. So take a step each day towards that goal and eventually you will arrive. In my next post, I will break down one goal as an example.

My 2008 Financial Resolution

It's never too early to get a jump start on your new years resolutions. Especially when Cash money life is offering a chance to win a 4GB iPod nano for writing out a financial goal for 2008.

My 2008 financial resolution is to learn and evaluate several bond options and make an investment.
Using the S.M.A.R.T goal format:
Specific - I want to increase my knowledge about investing in bonds to include mutual bond funds, US govt bonds, TIPS and municipal bonds.
Measurable -. I will evaluate each of these, make blog postings on each and make an investment in the bond instrument that best suits my financial plan.
Actionable - This is 100% possible. I have books that cover the subject, internet resources to mine and I can draw upon the experiences of individual friends and family that have invested in various types of bonds.
Realistic – I want to learn enough to feel confident in my bond investment. I do not expect to become an expert or become a bond trader.
Timely – I plan to start this month, evaluating a different bond instrument each month and then making an investment in April of 2008.

What is your financial resolution? The giveaway ends December 4th at 11:59 PM, Eastern Daylight Saving Time and the winners will be announced Thursday, December 6th.