Money Progress

The recent downturn in the economy has caused many people to question their investments, including myself.  Here is a short summary of my background.  I graduated from university with a bachelor’s degree just over a year ago.  Since then, I have been in the “working world” getting paid a salary for my work week, just like many others.  Thanks to graduating with no debt and keeping my living expenses low, I was able to start investing some money within just a few months of working full-time.  In hindsight I wouldn’t have started investing so early, but that is what I did.

I started a 401k and also fully funded a Roth IRA for 2007 since I had enough income as an intern for that year.  By September I also fully funded my Roth IRA for 2008.  All in all, I had invested $12,000+ in a fairly short amount of time.  Most of this money was in stocks, as is suggested for someone my age who is investing for retirement.  I also “diversified” by investing $3,000 in Vanguard’s Total International Stock Index in a non-retirement account.

We all know what happened next, the stock market dropped severely.  Here are a few pictures to illustrate.  The first is from Yodlee MoneyCenter and the second from Vanguard.

The large jump in the Roth IRA just before the crash is a 401k rollover from changing jobs and a transfer from my non-retirement account.

On October 10th I decided I didn’t want to risk losing more than I already had and I transferred 90% of my Roth IRA from the Vanguard Target Retirement 2050 fund to their money market fund.  Since then I have added to the risk by adding some bonds to the mix.

This type of investment change is exactly what most experts and advisers would say not to do.  I just bought high and sold low!  Well, it was at this point that I decided my cash savings was not sufficient enough to have this much money invested in stocks.  One of the reasons I was so aggressive in contributing to the Roth IRA is because I knew I could always withdraw the contributions tax-free if I had an emergency and really needed the money.

Since the crash, the only money I’ve invested in stocks has been in my 401k.  You might notice that the curve on the purple line that represents this above is getting a bit flatter.  That is because I’ve been steadily lowering my contribution percentage to the 401k.  I have decided that I would much rather have cash in savings rather than money invested in anything with a large downside risk at the moment.

The reason for my new found desire for a large cash savings is two fold.  First, I think that an emergency fund with 12 months of living expenses is probably not a bad idea.  With unemployment climbing it seems fairly reasonable to have a fund of this size rather than the more commonly suggested 3 months or 6 months.  My other justification for hoarding cash is actually representative of my new investment strategy.

This new investment strategy is the thought that perhaps I should be investing in myself instead of others. I’ll expand on this more in future posts, but it is a thought that has been guiding many of my recent decisions.  The traditional thinking might be that putting away money early for my retirement in stocks and bonds is investing in myself and my future.  However, that doesn’t ring entirely true.  I am investing for my future in this way, but I am actually investing my money in hopes that others will make financial progress and increase their value.  In that sense, I am not investing in myself.

I have not decided to do anything radical, but this thought will shape my investments in the future.  I plan on continuing traditional investments in stocks and bonds once I decide I have enough of an emergency fund, but probably in a reduced capacity.  Therefore on this site I will write some about these traditional investment methods, but I am also very interested in exploring alternatives.  Right now the main alternative I am considering is saving money to invest in a business of my own, rather than investing in other people’s businesses.

Feel free to post any thoughts in a comment below!