Sold My First Delinquent Lending Club Loan on FolioFn

On Friday, I announced that I was suspending my investments at Lending Club until either a delinquent loan caught up on payment; I accrued enough interest payments to offset my initial $25 investment or I was able to sell my investment at FolioFn.

Well, I was able to sell the $25 loan on Monday for $17. That's a 32% discount from the original loan investment. Initially, I listed the loan for sale at $19.09 and got no response. It didn't help that the FolioFn loan listing search feature wasn't working correctly on the weekend. My shift to a loan sale price of $17 was based on my gut feeling that I never should have made the loan, and FolioFn wasn't working well on the weekend. I initially figured FolioFn was a poor medium for searching for investment options and just wanted to unload my loan.

I initially thought FolioFn was a poor site because the option to sort notes by "yield to maturity" (YTM) was not working. Sorting loans by YTM is the best bottom line method of finding heavily discounted notes. How could people find my loan if this wasn't working well?

I tried the YTM sort feature today and it's working.

Another disturbing item is the fact that the equation used by Lending Club to calculate your Net Annualized Return does not factor in FolioFn fees and losses people may take selling discounted loans at FolioFn. About the only way the advertised "Net Annualized Return" works with any accuracy is if you hold all of your delinquent loans till default.

Sold My Bank of America (BAC) Stock

I have had a Bank of America (BAC) dividend reinvestment plan for several years now. I've lost a bit over $2k in it. Today, I sold all but 8 shares of the DRIP. I locked in a price of $13.23 per share.

I decided to sell since:
(1.) Worst case assumptions for bank stress tests have already been exceeded.
(2.) Money supply is fading
(3.) The stock is up 325% after hitting the bottom.

It's time for it give back some of its gains.

I am Suspending my Lending at Lending Club (Peer-2-Peer Lending)

Investing via peer-2-peer lending is a fun hobby that I have been doing at Lending Club for six months. Previously, I spent over two years investing at Prosper.

Over the last six months, I have made 37 loans at Lending Club. Lending Club states that my net annualized return has been 11.51%.

Two of my 37 loans have been paid off and now one is 16 days late in its FIRST payment. Here's my late loan.

I like how Lending Club provides a "collection history" on late loans. I found this collection history on my late loan:

Collection Log
6/11/09 (Thursday) Collections Agency contacted a borrowers relative
6/9/09 (Tuesday) Payment Failed
6/4/09 (Thursday) Attempted to collect payment
6/2/09 (Tuesday) Contacted a borrowers relative
6/2/09 (Tuesday) Contacted a borrowers relative
6/2/09 (Tuesday) Attempted to contact borrower (left voicemail)
6/2/09 (Tuesday) Contacted a borrowers coworker
6/1/09 (Monday) Attempted to contact borrower (left voicemail)
5/29/09 (Friday) Notified borrower of failed payment (e-mail)
5/29/09 (Friday) Attempted to contact borrower (left voicemail)
5/29/09 (Friday) Payment Failed

Was I just a victim of a Lending Club (Lendingclub) scam? The loan was for the maximum amount of $25k. If I was a Lending Club scammer, I would pursue a $25k loan.

I am now going on hiatus from investing in peer-2-peer loans at Lending Club. I will stay on hiatus until either:

(1.) The loan gets caught up on payments.
(2.) I accrue enough interest on my other loans to completely offset my initial $25 investment on the above delinquent loan.
(3.) I am able to sell the delinquent loan via the FolioFn Note Trading Platform. I have listed this loan for sale with an asking price of $19.09, a 25% discount to its face value of $25.45.

If the loan gets caught up on payments, I'm still going to attempt to sell the loan via the FolioFn Note Trading Platform. Pursuing the eventual sale allows me to clean up my Lending Club balance sheet of suspect loans and gain experience with using the FolioFn Note Trading Platform.

I'll keep you posted.

Is an Education Worth the Expense?

Outside the improvements in self esteem, communication and analytical skills, an education boils down to return on investment. I risk making this post as exciting as a "Wonder Years Ben Stein Lecture," but here goes...

Do you think it will make you more competitive for promotions? Do you think that a new career field or higher education would give you enough of a marginal increase in salary to merit the time spent?

I'm a proponent of education. However, you must understand that it's important to monetize the worth of an education. Here's some things to consider:

1. How much of a pay cut will you sustain over the period of pursuing an education? If you don't experience a salary decrease, do you think that your focus on an after hours education will impede your focus at work, thereby limiting promotion opportunities?

2. Once you graduate from a program, do you think you'll take a pay cut until you establish some form of seniority?

3. How long will you work in the new career field and benefit from the improved education? The best thing to do, strictly from a monetary sense, is to:

a) Monetize the net increase in salary that you expect over the remainder of your career: Present Value[ (new salary - prior salary)*(Number years remaining in work force)].

b) Monetize any impacts (decreases) to your annual salary while going to school

c) Monetize the cost of your psychic energy expended on school work. Could you have otherwise spent your psychic energy (brain power) teaching your children something useful or otherwise contribute to the household? This cost may be ignored, but you should be aware of it.

Now determine the net present value of a, b and c.

Example... If you make $90k/yr now and you pay $125k to go to med school and increase your salary to $200k/yr for a 15yr career as an M.D.

Benefit "A": ($200k - $90k) for 15 years @ 5% discount rate, Pay Raise Deferred Six Years From Now = $852,000.67

Cost "B": Lose $90k/yr salary for six years @ 5% discount rate = -$456,812.29 (present value of unearned income b/c in Med School/Residency)

Cost "C": Ignored, but could be considered

Net Present Value of "A, B, C" = $852,000.67 - $456,812.29 = $395,188.38

Now determine your return on education: Return on education: [(Net Present Value A,B,C) – Education Cost]/Education Cost * 100 = ($395,188.38 - $125,000)/($125,000) * 100 = 216% return.

In this case, furthering your education makes sense.

My Lending Club Portfolio Snap Shot

I've been lending at Lending Club since Nov. 4, 2008. Since then, I have been investing my website earnings and building a portfolio of 32 active loans, 1 paid off loan and 2 loans in funding.

My portfolio's Net Annualized Return on Investment has been 10.85%. After gaining two years lending experience at Prosper, I have learned to curtail my risk taking. At Prosper, I had an average loan rate between 21 and 22%. Needless to say, my high risk was rewarded with a high number of defaults. I'm still getting a small positive return at Prosper, but principally view it as a learning experience.

I'm taking a slow and steady approach at Lending Club. My average loan credit rating distribution is:

A: 27%

B: 26%

C: 32%

D: 15%

For the most part, I've been lending exclusively to those that work for the military, federal civil service, state civil service and health care. I have been bidding on loans that have debt to income ratios less than 20% and zero delinquencies in the last two years.

Email me if you're interested in becoming a lender. People I refer get a $25 bonus from Lending

Club and also gain access to me via email in the event you desire me to mentor you in learning to use Lending Club.

The Hazards of Double & Triple Inverse ETFs

I found a great Kiplinger Finance article via the blog Money Crashers. The article is about Inverse ETFs and how they may be "hazardous to your wealth." I have owned the double inverse Dow ETF and have enjoyed reasonable results. However, results vary and you don't get exactly what you expect. An excellent point is made in the article:

Real estate investment trusts have performed hideously over the past year. The Vanguard REIT Index fund tumbled 50% through April 7. Now, suppose you were smart enough to buy a fund that goes in the opposite direction of the Vanguard fund, namely ProFunds Short Real Estate fund. Its objective is to return the inverse of a REIT index. Your gain: Not 50%. Not even 25%. Instead, you lost 11%.

The article goes on to emphasize that these inverse funds don't target equal inverse returns over a month or year, but over a DAY! Additionally, the longer you hold onto these funds the worse your returns tend to be:

The longer you invest in a leveraged fund the more likely you are to lose money, warns Morningstar analyst Paul Justice. With these investments, time doesn't heal; it destroys. "It's an absolute fool's game," he says. "Unfortunately, there's a great swath of investors and even some financial advisers who think they can time the market with these funds. They're touted on CNBC all the time."

For the full article click here. Thank you Money Crashers for the good article find. I learned a bit today.

A Thrift Savings Plan (TSP) Investment Strategy For Today's Bear Market (Assuming You Want to Keep Skin in the Game.. Meaning Participate in Stocks)

If you have the urge to participate in the stock market, but want to minimize your risk, then consider reading the email below. It was sent to a friend of mine that I openly discuss the stock market with.

My email sent earlier today:

"Here's some guidance for you if you want to be a participant in the stock market.

(for Paul... The G-fund, referenced below, is the government 401k index that approximates the 30 year treasury).

This is my current guidance so long as the dow jones 200 day moving average is sloping downward. I intend to use the formula discussed below if the Dow jones drops below 6700 and there is no new significant "BAD" news in the market. This last stipulation is subjective. For the time being, I will keep my contributions restricted to the G-fund and will reallocate my TSP account twice per month after starting to use the below formula. I will cease using this model whenever the 200 day moving average on the dow jones industrial average slopes upward.

Additional details to understand about TSP:
- you are authorized to move funds between the G-Fund and other equity/bond funds up to two other times per month
- also, TSP account holders are able to do unlimited moves from equity funds to the G-fund (this is important if the stock indices rocket up like they did these past two weeks. If that occurs, you can start taking some profits off and move them to the G-fund if you like).
- naturally, your monthly contribution allocation will determine what percentage goes to each of the investment options.

The below formula is developed (a big SWAG by me) using the short term lows for the Dow Jones industrial average over the 1990s and plotting them against what I construe as reasonably safe percentage amounts to invest in equities. How did I determine what are "safe" percentages to invest in the stock market? I assumed that the lowest the dow jones could go is 4100. If it did, I would want any losses experienced by my position in equities to be completely offset by gains I make in the G-fund to give me a net return of approximately ZERO.. then fitting an exponential curve to the plot you get:

Net percentage invested in TSP equities = 12.667 * e ^ - 0.0007 * dow jones average

where e is the exponential function on your calculator roughly equal to 2.72

Using today's closing price for the dow you get:

Percent in TSP equities = 12.667 * 2.72 ^ -.0007 * 7522
Percent in TSP equities = 12.667 * 2.72 ^ - 5.2654
Percent in TSP equities = 6.52
Percent in TSP equities ~ 7%

If Dow hits 6500
y = 12.667 * 2.72 ^ -.0007 * 6500
y = 12.667 * 2.72 ^ -4.55
y = 13.35
Percent in TSP equities ~ 13%

If Dow hits 6000
y = 12.667 * 2.72 ^ -.0007 * 6000
y = 12.667 * 2.72 ^ -4.2
y = 18.94
Percent in TSP equities ~ 19%

If Dow hits 5600
y = 12.667 * 2.72 ^ -.0007 * 5600
y = 12.667 * 2.72 ^ -3.92
y = 25.07%
Percent in TSP equities ~ 25%

If Dow hits 5000
y = 12.667 * 2.72 ^ -.0007*5000
y = 12.667 * 2.72 ^ -3.5
y = 38.2%
Percent in TSP equities ~ 38%

If Dow hits 4600, percent in TSP equities ~ 51%

If Dow hits 4100, percent in TSP equities ~ 72%


I hope this puts things into perspective for you. Hopefully you'll find this useful in the event you want to participate in the stock market while minimizing potential losses.

Do you know how to get the 200 day moving average on the dow jones? If you click here you'll see a one year chart of the dow with the 200 day moving average highlighted in red.

Today's Stock Market Slide is Even Worse Than That Seen During the Great Depression (Day for Day Comparison Included)

Donald Luskin at Smart Money wrote an article titled "Even Worse Than the Great Depression." The article is critical of the Obama administration's handling of our economy's woes. I'm not interested in the article for this aspect. I'm interested in it because of the chart overlay comparison of the S&P 500 during the Great Depression and today's stock market.

The article states:

As of March 5, "the S&P 500 has lost 56.4% from its all-time highs 513 days ago. At the same point in the bear market associated with the Great Depression, that is at the 513 day mark, the S&P 500 had only lost -- only! -- 49%. In other words, to be no worse than the catastrophe that happened to stocks in the Great Depression, the S&P 500 today would have to rally 17%."

This is troubling information given the fact that during the Great Depression the administration did little to stem the free fall. Yet during this depression our administration is pulling out all the stops trying to stem our economy's free fall.

Continuing with the Mr Luskin's comments: "Looking forward, if stocks are going to continue along the same bleak path they followed during the Great Depression, then I have good news and bad news. The good news is that we're halfway through it. In the Great Depression, the bear market lasted 997 days. We passed that halfway mark two weeks ago... Which brings me to the bad news. By the time the bear market was over in the Great Depression, on that 997th day, the S&P 500 had lost 86.2% from the top. To match that, we'd have to fall another 68.3% from here."

In my 401K i'm bracing for up to a 40% free fall from current stock market levels. I'm thinking hopefully that our government's efforts to throw good money after bad will eventually halt the economy's slide. To brace for a 40% stock market slide, i'll invest no more than 9% of my 401k in the stock market (at its current levels). That way, a 40% loss absorbed by 9% of my 401k equals a loss of 3.6%. Given the fact that the rest of my 401k is invested in government bonds, my net return would be near zero. Meanwhile, a position in the stock market exposes me to some upside if the stock market has a short term rally. If that occurs, I would quickly unwind (sell) any 401k equity (stock) position. I have not yet bought equities in my 401k, but I am now considering switching from 100% govt. bonds to 3% equities when the Dow Jones hits something between 6300 and 6500.

Here's the chart overlay comparison between the S&P 500 in the Great Depression and today. The blue corresponds to the S&P 500 during the Great Depression and the red corresponds to present day.

Over the next 15 months I plan on earmarking roughly $20k in a regular brokerage account for investing in the stock market. This $20k will only be used if the stock market hits a low similar to that of the Great Depression. If that happens, I'll likely set up a simple portfolio of 2, 2.5 and/or 3x bull ETFs, using Direxion and Proshare ETFs. There are no 3x bull ETFs noted on the preceding Direxion and Proshare links. Examples of 3x bull ETFs include: Direxion Dev Mk Bull 3x (DZK), Direxion Sm Cap Bull 3x (TNA) and Direxion Lg Cap Bull 3x (BGU). Conversely, if the market rallied 10-20% from its current levels I would establish positions in 2-3x bear market ETFs. A decent article about Direxion 3x ETFs and their characteristics can be found here at the site "seekingalpha."

A larger chart comparison of the S&P 500 can be found at Luskin's article here.

A Letter I Originally Wrote to Two of My Friends Today About Investing in Today's Market

Here's a letter that I wrote for two of my friends who sometimes ask me for advice/ideas on investing. I got 2/3rds of the way through it and decided that i'd beef it up a little bit with hyperlinks and additional details with the final goal of later posting it to my website. Here's my letter:

I think that these are the following resistance points for the Dow Jones:
6448
6304
6021 (I think that the market will drop to this point)
5616
5061
4741
4601
4341
3708 (I don't think the market will drop below 4100)

If the Dow drops past and closes below any of these points, then it's my opinion that the stock market is saying "lookout below" and the Dow has a chance to proceed to the next lower level. I am not a stock market technician. All I did was look at a chart of the Dow for points where there were significant depressions in the chart indicating selling was high and the chart had a bounce off of a clearly established short term bottom.

By the end of this month, the Treasury's "Stress Test" of major banks will be done. I'm interested in seeing how things pan out. I'm also interested in what the Treasury discloses on or about 23 March in accordance with Fox Business's FOIA info request about emergency loans provided (article link). Also, you might want to pay attention to economic statistics reported on national news. So far, economists are over optimistic and missing the mark on estimates. The easiest stats for you to follow are those related to the unemployment rate. The "nationally reported" unemployment rate for February was originally estimated at 7.9% but actually came in at 8.1%. If you're interested in the real unemployment rate you can click here for a recent article I wrote about the Bureau of Labor Statistics U-6 unemployment rate. Follow my November article's embedded link to the BLS page with unemployment statistics. Also, here's a link to the economic calender, if interested.

My take is that as long as the average economist/statistician is underestimating business stats, then the stock market doesn't yet have the full pain of this depression priced in.

All the best

U.S. Federal Reserve Sends a Signal to Wall Street: If Private Equity Doesn't Want to Buy Your Subsidiary, We'll Buy It From You

AIG is set to announce the largest ever corporate loss by a U.S. company this Monday which some estimate to be approximately 60 billion dollars. According to a 28 Feb CNNFN report:

"AIG will also give the U.S. Federal Reserve ownership interests in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, the source said."

This purchase of these two companies comes on the heels of a massive debt restructuring for AIG where the Fed gives more favorable terms on the credit line extended to AIG saving the company one billion a year in interest expenses.

The Fed is only keeping AIG on life support. Meanwhile, nobody wants to do business with AIG, further compounding AIG's problems. The Fed needs to decided to either let AIG go bankrupt or without equivocation signal that "The Fed will not allow AIG to fail" by finalizing a take over of the company. In my opinion, if the economy continues on its current track, the Fed will be forced into a FINAL decision within the next 13 months.

Here's the full CNNFN article.

A Household Divided: Annual 401K Results of Both My Wife and I

My wife and I are Thrift Savings Plan (TSP) participants. TSP is the Department of Defense's (DoD) version of a 401k. This week both of us received our annual TSP statements.

My wife gets very agitated whenever she knows that i'm buying and selling investment products. She is a staunch advocate for buy and hold. I believe in buy and hold only in its application to our household Dividend Reinvestment Plans (DRIPs).

Unfortunately for my wife, her buy and hold philosophy didn't result in stellar TSP account performance. For 2008, my wife lost 12.06% in her TSP. During 2008, her portfolio investments were:

- 68% in government bonds (TSP G-Fund)
- 10% in the S&P 500 (TSP C-Fund)
- 9% in small cap stocks (TSP S-Fund)
- 13% in international stocks (TSP I-Fund)

During 2008 my TSP account lost 1.47%. This pales in comparison to those that decided to keep their TSP purely in the G-Fund. Had I decided to do this, I would have had a positive return of 3.77%. During 2008, I bounced back and forth between government bonds and equities. At one point, I had as much as 12% of my TSP invested in equities. I finished the year with 100% of my TSP in government bonds.

My TSP investment plans for 2009 are as follows:

(1.) If the DOW hits 6500: 97% government bonds (G-Fund), 1% international (I-Fund), 1% S&P 500 (C-Fund) and 1% small cap stocks (S-Fund)

(2.) If DOW hits 5000: 34% G-Fund, 22% I-Fund, 22% C-Fund, 22% S-Fund

(3.) If the Dow hits 3500-4100: 1% G-Fund, 33% I-Fund, 33% C-Fund, 33% S-Fund

In reality, I will slowly transition to the above investment allocations as/if the DOW falls vice waiting for it to exactly hit the points in detailed in 1, 2 and 3 above. Additionally, i'll slowly increase my TSP contribution rate from 1% of base pay (what it is now) to 15-40% of pay as/if the DOW falls. I typically elect for 100% contribution to the G-Fund (government bonds) and reallocate between investment options depending on where the stock market indicies are, value wise.

My wife will continue with her 5% of pay contribution with 4% employer matching. Her contribution allocations will remain 25% G-Fund and 25% in each of the I, C and S Funds. This contribution allocation should steadily increase her position in equities over the long haul.

Some of my readers may staunchly disagree with my household's small contribution rates of 1 and 5 percent of our pay to TSP. We are contributing this small amount because we have made the decision to pay off one of our three investment properties within the next 12 months. Today, we owe $43k on the property. We will continually need to plow most of our free cash into this house to meet our goal.

Dividend Reinvestment Plan (DRIP) Stock Screen

I'm a fan of Morningstar investment services. I frequently use it to justify when I invest in my current DRIPs. Here's my latest DRIP screen...

(1.) Dividend Reinvestment Plan (DRIP) Offered = Yes
(2.) Dividend Yield >= 2.2
(3.) Morningstar Economic Moat = Wide
(4.) Free Cash Flow - 1 Year > 0
(5.) Fair Value Uncertainty <= Low
(6.) Price / Fair Value <= 0.84
(7.) PEG Ratio <= 1.64
(8.) Return on Assets % - Trailing 12 Months >= 9.63
(9.) Net Profit Margin % - Year 1 >= 9.63

This screen gives me:
(1.) 3M Company (MMM)
(2.) Coca-Cola Company (KO)
(3.) Colgate-Palmolive Company (CL)
(4.) ExxonMobil Corporation (XOM)
(5.) Johnson & Johnson (JNJ)
(6.) Microsoft (MSFT)
(7.) Novartis AG (NVS)
(8.) PepsiCo, Inc (PEP)

I then went to TheMoneyPaper's website to screen stocks to determine if each DRIP offers direct investing or reoccurring investing for $1 or less per purchasing transaction. Here's the ones left over:

(1.) 3M Company (MMM)
(2.) ExxonMobil Corporation (XOM)
(3.) Johnson & Johnson (JNJ)
(4.) Novartis (NVS)
(5.) PepsicCo (PEP)

The ticker symbols link to The MoneyPaper's prospectus for each corresponding DRIP. TheMoneyPaper is generally my favorite starting point for purchasing DRIPS. I typically look at the prospectus for the "Agent Name." I then go to the Agent's website to see if it allows for the DRIP setup at a cost lower than TheMoneyPaper. If so, good. If not, then I determine how many DRIPS I want to buy. If it's a significant number, then I typically subscribe to a one year plan with TheMoneyPaper. This costs money up front but saves money on each DRIP setup.

At this point, I have what I consider too many DRIPS. I have 24 different DRIPS. The only reason that I have grown not to like having so many DRIPS is because I always move every three or so years with the military. It's a bit annoying doing so many address changes.

Of the final list, I already have DRIPS in ExxonMobil, Johnson & Johnson and 3M. I would personally avoid Novartis only because I already have a diversified Drug/Medical related company. I am considering starting a DRIP in PepsiCo.

My Last Lending Club Bid - Borrowers Loan Request is Still Open for Bidding By Others

Lending Club is a peer to peer lending network. It's a good place to dabble in small lending to make an interest rate well above certificates of deposit. My biggest tip is to not get greedy and go for the biggest interest rate loans.

Here's the last loan request I bid on at Lending Club. It's a retired Army E-8 (Master Sergent) who now works civil service as a GS-12 in the civil service. His military pension is safe and his civil service job is safe. Also, the borrower makes a reference about going to Iraq each year. Civil service contractors in Iraq have what is typically the safest jobs available.

Bid at own risk.

If you don't have a Lending Club account, you can set one up via this below button.

Modifications to my Dividend Reinvestment Plans

I just stopped my automatic monthly investments in Exxon Mobil (XOM) and increased my position in Johnson & Johnson (JNJ) by 15%.

JNJ's trading price is significantly lower than my entry points over the last year or two and it is continuing to grow. It has a 3.2% dividend yield. Finally, many of its products are household staples that are continually being purchased as consumers downsize their discretionary spending.

I stopped my monthly investments in XOM in part because believe to some extent the Morningstar analysis. Morningstar does not show it to be a compelling buy at its current price point.

I started to buy Walmart shares (WMT) in my corresponding DRIP but noticed that there was a $1 auto-invest fee. Screw that. I don't want to pay fees for my DRIPs. I regret setting up my DRIP in Walmart.

Finally, I have active automatic investment plans in 3M (MMM) and Dow Chemical (DOW).

Credit Card Losses at Citibank Expected to Peak in Mid 2010 (Plus Other Personally Related Commentary)

Economics is one of my favorite subjects. This morning on CNBC a host conveyed that Citibank is projecting that its credit card losses will peak in mid 2010. The key determinant for credit card losses is the unemployment rate. I suspect that there is some lag between peak unemployment and credit card losses since:

a.) Credit card billing cycles have a natural one month lag between accrual of debt and debt repayment.
b.) Accumulation of debt on credit card requires a 4% of balance due repayment. Unemployed personnel should be able to make minimum payments for 3-6 months while they collect state unemployment payments.
c.) If unemployment payments are not enough to sustain a household, some unemployed personnel have "emergency" funds that may sustain them until the end of unemployment payments.
d.) I wouldn't consider 30 days delinquent as a loss for credit cards. I suspect credit card payments would need to be at least 90 days delinquent, perhaps 120 days delinquent before factored in with peak credit card losses at Citibank. Let's stick with 90 day delinquent assumption.

Doing some back of the envelope math:

June 2010 minus "a" = May 2010
May 2010 minus "b" = Dec 2009 to Feb 2010
Dec 2009 to Feb 2010 minus "c" = Dec 2009 (firm, vice date range)
Dec 2009 minus "d" = Sep 2009

Using Citibank's statement for peak credit card losses, one may extrapolate a peak unemployment rate around Sep 2009. Now factoring in the U.S. agricultural growing season marked by last freeze in May and first freeze in October, one may infer that agricultural jobs will provide some employment strength up till October. Readjusting for this seasonal sector of our economy, I believe that U.S. peak unemployment could be around Oct 2009, assuming Citibank's projections are valid. The extent of Citibank's credibility in forecasting profits / losses is debatable, especially with their deplorable projections related to mortgage backed securities leading up to the real estate bubble.

The whole travel industry may get some of the traditional summer travel but should bank on significantly lower consumer travel in Thanksgiving and Christmas periods. Retailers will feel the biggest pinch during the next Black Friday and Cyber Monday in Nov 2009. Thus, I would stay away from investments in sectors involving discretionary income until at least 2010.

Yes, the Obama administration will likely provide significant economic stimulus. Even with this, American citizens will have grown to understand the impact of tough economic times. They will also realize that today's negative three percent household savings rate (an approximation) needs to be readjusted to the ten percent plus savings rates of the early eighties. This readjusted savings rate will offset much of the gains some people expect out of the upcoming Obama stimulus package. Even with the stimulus package, the financial sector has a number of emergency / TARP loans from the U.S. government. It will take these companies about 5 years (this is a SWAG) to either payoff these debts, or make significant progress allowing them to long-term refinance the debt. This 5 year period of time represents a period where there is less money available for lending. Those who qualify will naturally be those cases that have high FICO scores and present minimal risk to banks.

My best investments for 2009:
- Stocks: Bear Market mutual fund (BEARX). If you insist on going long on stocks, consider utilities, consumer staples and health care.
- Cash: Paying off mortgage early or saving to buy a house

Sticking to Basics Eases Financial Stress

Gregory Karp of the Chicago Times writes an easy to follow article titled "Sticking to Basics Eases Financial Stress." The article makes sense and integrates well with my own developing financial philosophy.

Karp cites a Synovate survey and emphasizes that people who follow three basic rules of money management are less stressed. The rules are:

* Have an emergency cash fund. Of those surveyed who did not have a six-month emergency fund, 90 percent felt stressed. This compares with 78 percent of all people surveyed feeling stressed. Finally, of those with a six-month emergency fund, only 56 percent felt stressed.

* Pay off credit cards in full

* Use a household budget. Similar results were found linking credit cards and household budgets to stress levels.

Karp's article can be found here. The remaining is my opinion...

Many people waste time focusing on exciting money making ventures and focus less on the simple things. Take for instance credit cards, people who carry a non o% APY credit card balance have no business investing in the stock market. Pay off your credit card.

The importance of a household budget varies depending on whether or not you are naturally frugal. I don't use a household budget at all. But, I'm an inherently frugal person. If you're prone to overspending, work on developing a manageable budget that focuses on saving for lifetime goals.

As for investing, focus on securing your future. Is your house or car paid off? If not, a majority of your free cash flow should go towards paying off these items. Are you or your spouse in an upwardly mobile career? If not, some of your free cash flow should be spent on career related education and training to make you competitive for higher wages and / or more satisfying work. Finally, speculative investments should take up no more than 20% of your free cash flow.

I will likely have people disagree with my 2009 household financial goals. In 2009 my household does not plan on contributing to a ROTH IRA. Instead, we are focusing our extra cash flow to pay off one of our three investment properties within the next two years. We feel it is important to pay off our houses during a down economy. Our 6-8 year payoff plan is as follows:

* House 1 (1400 sq ft @ 5.875% 30 yr fixed): $50.6k in mortgage debt with an estimated payoff date in Dec 2010.

* House 2 (1900 sq ft @ 5.5% 15 yr fixed): $91k in mortgage debt with an estimated payoff date no later than Dec 2013.

* House 3 (3100 sq ft @ 5% 15 yr fixed): $151.5k in mortgage debt with an estimated payoff date no later than Dec 2016.

The primary reason for focusing on our mortgage debt is the fact that it's a sure thing and in this economy, good renters are not. The one thing that may complicate our house pay off goals is unforseen maintenance expenses. We remain open to selling any or all of our houses if we get the price we want. Otherwise, we'll continue to carry them and the remaining $293k in mortgage debt associated with them.

Despite my emphasis on paying off our houses, i'm still speculative in other areas. I'm investing all of my blog earnings in peer-to-peer lending site LendingClub.com. So far, i've invested $125 in blog earnings in a 11.43% net interest bearing loan portfolio diversified across five loans. One can establish a LendingClub account through the below ad.




I'm also investing $150 a month across three dividend reinvestment plans (DRIPS): Dow Chemical (DOW), 3M (MMM) and Exxon Mobil (XOM). I started all three of my DRIPS through Directinvesting.com and corresponding agent companies Bank of New York Mellon, Wells Fargo Bank and computershare.com, respectively.

Just Started Small Automatic Investment Plans in Three DRIPS (Exxon Mobil, Dow Chemical and 3M)

I just started small, $50 per month, automatic investment plans in Exxon Mobil, Dow Chemical and 3M. I'm also doing periodic manual investments in my Johnson & Johnson dividend reinvestment plan (DRIP). I've owned an XOM DRIP since the 1990s. I've owned 3M and JNJ for 2-3 years. I've owned Dow for about one year.

I like Dow Chemical (DOW) because it has a huge dividend, 6.9% and it's raw input costs has to be coming down substantially with the huge drop in oil costs. It's payout ratio is a little high at 62%, but I think that might come down with the lower input costs.

I'm buying 3M (MMM) because it has a nice dividend, 3.5% and is still growing, albeit slowly in this economy. Since 2007 much of it's earnings gains have come through currency exchange rates. Nonetheless it's a nice blue chip. Also, it has a high return on equity (ROE) of 32.83%... among other things.

I'm buying Exxon Mobil (XOM) sort of as a hedge against Dow Chemical. But, I still love the company. It has a measly Debt to Equity of 0.077. It has a decent dividend of 2.3% and has more than 10% of its stock value in cash on hand. It is has been buying stock back vice plowing its cash on hand into more oilfield rights. Smart move, at least recently while oil prices have been in bubble territory.

Finally, i'm not starting an automatic investment plan in Johnson & Johnson (JNJ) because their agent, Computershare, charges $1 per month for the JNJ automatic investment plan. Instead, i'm manually doing purchases via my online account. Doing purchases like this in JNJ allows you to bypass the $1 fee.

My other periodic investments going forward will likely be the international (EFA) exchanged traded fund, government bonds and precious metals.

(Guest Post): Missing Out on The Tax Benefits of Retirement Savings

This is a guest post from LAL at "Living Almost Large." LAL is a twenty-something woman in a dual income no kid (DINK) household. As a scientist, she enjoys blogging about finances after hours and looks forward to one day having enough money to do what she really yearns, be her own boss. I wish her luck and hope she gets to own that book store she referenced in her original post or find enjoyment elsewhere.

Many people talk about saving for retirement. Yet I have found very few people actually maximize their retirement contributions. What does that mean? It means very few people actually contribute $15,500 to a 401k annually or $20,500 to a Roth 401k, as well as $5000 to a Roth, Traditional, or Non-deductible IRA.

Instead I hear from a lot of people, I am saving for retirement 10% or 15% and now I want to pay off my mortgage. I think it’s a huge shame! I mean it’s great, but do you realize that once you pay off your mortgage you cannot go back and stuff money into your IRA or 401k for previous years contributions? This is an opportunity that can never be regained. You only have one year to make your contributions to a retirement plan and you cannot contribute after the deadline passes. But they forget about the tax benefits of investing in a retirement plan.

If you invest in a Roth IRA, you can draw out the earnings tax free when you retire. No other plan gives you that benefit. But what if you don’t qualify? Then you should contribute to a non-deductible IRA still. Why? For a couple of reasons, the earnings are tax deferred until you withdraw them similar to a 401k. And while not tax deductible it is tax sheltered.

As for investing the maximum into a 401k, why should you do it? Well you have a 6% mortgage, but you are saving off the top 15% at a minimum on taxes, more likely 25% +! How can you compare paying 6% interest to saving 15% in taxes? That’s a 9% immediate gain, not to mention your mortgage is tax deductible! Personally my DH contributes the maximum annually to a 401k because it saves us 25% federal taxes and 6% in state income taxes. That’s 31%! Yes when we retire, who knows what the tax rates will be, but what if we live in a state without income tax? Or rules changes? Or we draw from our 401k only up until the 15% federal tax bracket and then we use our Roth IRAs? There are many scenarios, but given a chance I’d rather avoid taxes that I know I will occur. So, for these reasons, try to maximize your retirement savings annually. It’s the best return on your money.

Here's a link to the fabulous site "Living Almost Large."

Potential Dividend Reinvestment Plan (DRIP) Investment Screening by Morningstar.com

This weekend I ran a stock screen on Morningstar.com. I looked for companies that:

- Scored an "A" in stewardship (highest score for fiscal responsibility)
- Wide economic moat (tough for competitors to enter same market)
- Were rated at 5 stars (Morningstar's highest rating)
- Were available via dividend reinvestment plans (DRIPS)
- Low level of uncertainty about companies fair value (best level based on quality of earnings visibility, predictability of future income).

Here's what my search turned up:

Microsoft Corporation (MSFT), Business Appl, Consider Buying $29.80
Paychex Inc (PAYX), Data Processing, Consider Buying $43.40


MSFT closed Friday at $25.16, 18.4% below the consider buying price
PAYX closed Friday at $32.89, 32% below the consider buying price

From a DRIP investing perspective, PAYX is the only good choice. MSFT charges a whopping $2.5 per transaction plus 10 cents per share. It's smarter to simply use limit orders on a discount brokerage account for MSFT and name your own price. As for PAYX, there are zero fees for cash investments, auto-investments or dividend investments. You can start a PAYX DRIP by going directly to American Stock Transfer and shelling out $250 for an initial investment. $250 to much? Then go to Directinvesting and buy just one share. If you do this, you'll pay a one time commission that is pretty large... You decide.

PAYX has been on my interest list in the past. I don't plan on starting a PAYX DRIP now. I've got over 20 as is. I was merely doing the Morningstar search to see if any of my DRIPS would pass the criteria. My largest DRIP holdings are Exxon Mobil (XOM), Bank of America (BAC), Aflac (AFL), 3M (MMM), Southern Company (SO), Johnson & Johnson (JNJ) and Home Depot (HD).

If you're interested in setting up a DRIP in any of the above companies or a non listed company, you should start at Directinvesting. Use the Directinvesting search tool and find the "agent name" in the company prospectus supplied by Directinvesting. Next, google the named agent and see if you can buy the stock at their site for little to no initial cost. If not, go back to Directinvesting and use them for the initial purchase and transfer to the named agent. Using Directinvesting typically costs $25 - $50 in initial commission. I've used Directinvesting to establish about half of all my DRIPS. I established all the other ones by going directly to the agent used for each company's DRIP administration. Some of the most common Agents used are Computershare, Wells Fargo and New York Mellon.

Aside: I use Morningstar.com for much of my research. I get a free subscription through my employer (U.S. Navy). If you don't want to subscribe to Morningstar, a good alternative is Yahoo Finance.

YouTube Video: Father Investing in Daughter's Development

I've been a fan of this fatherhood.gov video for some time now. It's a perfect example of investing in your child and puts a smile on your face when you watch it.