Category Archives: Finances

Detailed Financial Picture – October 2013

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September’s Numbers

As of October 7, 2013, we are $458,824.03 in debt (that includes the mortgage).  Without the mortgage, we’re at $38,274.36 in debt.  This includes a credit card, student loans, and an auto loan.  We currently have $970,197.77 in assets (including our house).  Our retirement accounts are at $320,117.12.  Our Net Worth is $511,373.74 (includes house and mortgage), up from $492,875.71 last month (3.75% increase).

Our net worth has broken the half million mark, meeting one of my goals for the year.  Hopefully, it will stay up for the rest of the year.

Our gutters and exterior painting haven’t been done yet, that’s expected next week, so that $7k is sitting in a savings account waiting to be paid to the contractor, reducing our net worth by 7k at least.  Some of the costs are variable (how much wood needs to be outright replaced), and anything left over from what we’ve saved will go towards the Chase card.

We overspent on our recent vacation by about $400, so our payment to Chase is less that I wanted, but the minimum was paid with no issues.  Next month should see at least $1500 go towards the Chase card.  It’s not likely to be paid off this year, but I can still dream.  I have a lot of reimbursements coming in at the end of October from my recent travel – I didn’t get my expense reports in before the deadline because I was still traveling.  I could ask my boss for a check, but it’s only about $200, so I’m not too concerned.  I haven’t budgeted any of that yet however.

My gym membership ends this month, and I don’t intend on renewing it.  That’ll give us 33.50 more every two weeks, which will help somewhat.  The weather has been sort of nice – or at least nice enough that we’re not running the AC/heater, so our electric bill is lower than normal, and given last year’s numbers, will remain that way for October as well, but will start creeping up in November as we start to use the heater.

Compared to last year’s report (October 2012), we’ve paid off $30,118.70, which gives a nice motivation boost.  Hopefully, by the end of next year, we’ll have paid off all our non-mortgage debt, or be pretty close to paying it off.

Debt (in the order we’re paying it down):

  • Line of credit (8.75%): $0.00
  • Chase (4.99% for life): $ 4,457.04 (-44.40)
  • Student loans (aggregated 6.55%):  $12,787.32 (-272.80)
  • Car loan (0%): $21,030 (-490.00)
  • Mortgage (4.125%): $ 420, 549.67 (-666.87)

Total paid off in September: $1,474.07

Measuring Investment Risk – Standard Deviation

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Now, we’re getting into some statistics, which is not my strong point.  I understand the basics, but not much more than that.

Standard deviation (σ) is a measure of how volatile something it.  It’s a measure of how far a value can be from the expected value (the mean μ).  The easiest method to calculate the average is to take a list of historical prices (adjusted close prices) and calculate the average return from that.

Daily Returns

First is to create a list of daily returns from the prices, and take the average of all the values in that array (N).  The first value in the array is 1, because there is no change.  You can download free adjusted close prices from Yahoo Finance (they’re adjusted for dividends and splits).

$latex \mu = \frac{\sum_{t =1}^{N}\left(\frac{P_{t}}{P_{t-1}}\right) -1}{N}$

Once the average is calculated, you can calculate the standard deviation.  The easiest method of calculating standard deviation is to use Excel or other programming language to do it, but you can do it manually as well.

$latex \sigma = \sqrt{\sum_{i=1}^{N}(x_{i} – \mu)^2}$

The standard deviation is currently one of the best measures of risk for an investment.  And you can calculate the standard deviation of a portfolio as well, just start with the daily returns of the portfolio instead of a specific investment.

Intuition about Values

The higher the standard deviation, the more the investment varies from the average return, and the more risk an investor would take on.

In general, the larger the average return, the larger the standard deviation should be, because no one wants to take larger risk for lower return.

Disclaimer: I’m writing these posts as a way to solidify my understanding of class materials, they may not be completely correct – and I welcome any corrections.

Measuring Investment Risk – Calculating Returns

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In addition to Computational Investing, I’ve also signed up for the Introduction to Computational Finance class through Coursera – it’s a similar topic, but a different point of view.  Instead of assuming you want to be a hedge fund manager, it goes into calculating returns, risk of an investment, and building a portfolio.  This is more “normal” stuff that any investor should know – but it has a very mathematical bent (several proofs, etc).  The class is self-paced through November, so it’s not too late to join if you’re interested.

The first two weeks are on calculating simple, annual effective rate, and continuously compounded returns and the probability background needed to complete the class.  One of the closing topics of week two was measuring investment risk.  It’s generally accepted that standard deviation (σ) is an easy to calculate measure of risk.  This tells you how far values deviate from the expected result – the mean (μ) – or the simple/continuous rate of return, so you know how “wild” the investment can be.  A larger standard deviation implies a larger risk to the investment.  In investing, a larger mean (or expected return value) also tends to imply a larger standard deviation because people expect to take more risk for a larger return. We haven’t gotten to actually calculating the standard deviation yet – although I think I know how.

Calculating Returns

The first value to calculate is a return over a time period.
$latex R$: Return
$latex P_{t}$: Price at time $latex t$
$latex P_{t-1}$: Price at time $latex t-1$
$latex R = \frac{P_{t}-P_{t-1}}{P_{t-1}}$
$latex R $ can be any time period, but we’ve been using monthly for the most part in class.

Calculating Portfolio Returns

Not only do we need to worry about the returns for a single investment, but we also need to calculate the return for our entire portfolio for it to be useful. The return for a portfolio is pretty easy, it’s a weighted average based on the initial total investment. If asset A has a return of 5%, and asset B has a return of 3%, and we spend $3000 on asset A, and $7000 on asset B, the portfolio rate of return is:
$latex R_{p,t} = .30*R_{A} + .70*R_{B} = .30*0.05 + .70*0.03 = 0.036$
or 3.6%

Disclaimer: I’m writing these posts as a way to solidify my understanding of class materials, they may not be completely correct – and I welcome any corrections.

Detailed Financial Picture – September 2013

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August’s Numbers

As of September 6, 2013, we are $460,154.26 in debt (that includes the mortgage).  Without the mortgage, we’re at $38,937.72 in debt.  This includes a credit card, student loans, and an auto loan.  We currently have $953,037.41 in assets (including our house).  Our retirement accounts are at $308,600.37.  Our Net Worth is $492,883.15 (includes house and mortgage), down from $496,985.00 last month (0.83% decrease).

I updated our car values this month, so we lost some value there (about $3500), and our investments went down 0.88% this month as well, so I still think we’re doing well.  Our Net Worth is still up 17.5% since January 1, 2013, and investments are up 20.06%.

We *finally* have HOA approval for fixing the wood trim and gutters on the house – it only took them 3 months (apparently, the management company and the HOA board weren’t speaking to each other…).  But, now we’re waiting until the 2nd week in October to have the work done – first available slot on the contractor’s schedule.  As a bonus, the money’s all saved up, we don’t have to dip into the emergency fund or borrow from the line of credit either!  And, we now have the “extra” to throw at the credit cards again.  I’m hoping to get the Chase card paid off before the end of the year.

Debt (in the order we’re paying it down):

  • Line of credit (8.75%): $0.00
  • Chase (4.99% for life): $ 4,501.44 (-752.55)
  • Student loans (aggregated 6.55%):  $12,916.28 (-143.84)
  • Car loan (0%): $21,520 (-490.00)
  • Mortgage (4.125%): $ 421,216.54 (-664.59)

Total paid off in August: $2,050.98

Your Broker as a Middle Man

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Not all trades execute on the actual stock market.  Let me repeat that – not all trades execute on the actual stock market.  So where do they execute?  At your broker, or your broker’s broker (a market maker).

As I discussed previously, a market has an order book which lists the prices folks are willing to buy and sell at.  Your broker also has an order book, and since it costs them money to execute an order on the actual exchanges, they may try to fill it from their order book, not the market’s.  This is the part that blew my mind – I didn’t know that this was possible – I figured that all trades went through the exchanges. After all, how do you know what market price is if everything’s not traded in a centralized place?  The professor wasn’t completely clear on this, but I think that when a broker fills an order locally, they have to notify the exchange.  Investopedia confirms that the broker has to notify the exchange (principal trading).

So, the brokerage pockets the savings from not executing the trade on the actual exchange, and may have pocketed the difference in the buy-ask spread as well.  Although, since they have to report the trade, the markets stay sort of in-sync – another place computerized trading can take advantage.

I have no illusions that I would ever be able to take advantage of these small inefficiencies and timings, but I find it fascinating to read and learn about them.

Disclaimer: I’m writing these posts as a way to solidify my understanding of class materials, they may not be completely correct – and I welcome any corrections.

Saving Money with Baby – Breastfeeding

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Before I launch into my post, I don’t want to seem as if I’m pushing one feeding method over another.  I voluntarily chose to not breastfeed (after trying for 6 weeks) for multiple reasons – the primary one being my sanity.  I support any woman in whichever choice she makes to feed her child, whether voluntarily or involuntarily.  This is simply a post about how you would save money if you breastfeed.

Daughter Person was fed breast milk (notice I didn’t say breastfed) for almost 6 weeks.  She spent a week in the NICU and I had to pump, which created a *huge* supply/demand issue when she got out, and she would never actually latch.  After watching Dad or my mom feed my daughter because I was pumping instead, I said to hell with it, and we went out and bought formula – and I personally feel that it was one of the best decisions of my life. It also makes me a little more qualified to compare the cost of the two 🙂

Bottles are required for formula feeding, but not for breastfeeding (but you’ll probably still buy some anyway so you can take a break), so I’m not including the prices of bottles in this calculation.

Costs of Breastfeeding

(Optional) pump: $200
(Optional) milk storage bags: $12 for 50ct
(Optional) nursing clothing: $50-$100
(Optional) nursing pillow: $45-$65
(Optional) reusable breast pads: $15
Total optional items: $322 – $392

Notice that all of these things are listed as “optional”? They weren’t for me, but they’re not really *required* to nurse a child.

Costs of Formula Feeding

We were *very* lucky in that Daughter Person did not have any special needs or allergies where we needed special formula. If your child does have such needs, triple or quadruple the numbers below.

We used Kirkland (Costco) brand formula for Daughter Person, $17/canister, and each canister made 262 oz of formula – $0.15/oz.  When you formula feed, you *will* make too much formula at once and have to throw some out, so I’m using the amounts we actually made, not just what Daughter Person actually drank.  Daughter Person also drank very little compared to some of my friends’ children, so these would just be estimates for any other child, and probably on the low side.

From 6 weeks when we ran out of frozen breast milk to about 2 months, Daughter Person drank 2-3oz per bottle, and 8 bottles per day (and night).  That’s 24oz per day for 2 weeks: $50.40

From 2 months to 4 months, she drank about 4oz per bottle, and still drank 8 per day.  That’s 2 months (60 days), at 32oz per day: $288

From 4 months to 6 months, she drank 6 oz per feeding and had about 6 feedings per day: $324

Then from 6 months to a year, she drank about 4 feedings of 6oz each per day: $648  At that point, we switched to whole milk.  We started feeding her solid food at 6 months, and she slowed down on formula consumption at that point.

Some kids drink as much as 8oz or more at a feeding when they get close to 6months, but not Daughter Person, so your mileage may vary.

Total costs: $1,310.40

Savings

You could save anywhere from $1,000 to $1,500 (or more if you need to use a special formula) by exclusively breastfeeding, so it’s a good economical choice if you have that option.

How Stocks are Priced

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As part of the Computational Investing class, I’m learning all kinds of things about the market in general.  The first is how exactly trades are executed and how a market price is set.

While your online broker can accept multiple types of orders, the “real” stock market can only accept two kinds: a limit order, and a market order.  Limit orders are where you set a price you’re willing to pay for a set number of that stock, or a price that you’re willing to sell at for a set number of stocks.  These orders create an order book at the market.  As limit orders come into the market, they are fulfilled if and only if there’s a matching “price”.  For example, if you are willing to buy 100 shares of a stock at $99 per share, and the lowest anyone is willing to sell it for is $100, your order is not going to get filled at that time.  Your order will go in to the order book until someone is willing to sell at $99/share.  The same happens when you want to sell a set of shares.  This order book exists for each stock listed on the market (and completely computerized of course).  So what happens if no one’s willing to buy at the prices people are willing to sell at?  Nothing – no orders are executed.  This is the “buy-ask spread”.

Market orders are orders to buy a specific number of shares – at the “market price”.  These orders are what “moves stock” in the order book.  If someone wants to buy 100 shares at market price, the order is first filled by the lowest offered price, then the next lowest offered price, etc until the order is filled – and the “price” is the aggregate of all those prices.  The same happens when you sell at market price.

When your broker accepts other kinds of trades, their computers watch the market for specific conditions and places your order on the market as a market order or limit order appropriately.

It is possible to take advantage of this across multiple stock exchanges – called arbitrage.  If stock A is selling for $99 on one exchange (say NASDAQ), and someone on the NYSE is willing to buy for $100 – if you are quick enough (which a “normal” human trader is not), you can buy 100 shares on NASDAQ and sell them at the NYSE for a $100 profit.  The reason that a “normal” trader is not fast enough is that all other hedge funds (with computers physically located in the same data center the NYSE and NASDAQ are) have also seen this opportunity and try to take advantage of it.  This is part of the Efficient Markets Hypothesis – and why a stock has pretty much the same price on all exchanges.

Next Time: Your broker as a “middle man”.

Disclaimer: I’m writing these posts as a way to solidify my understanding of class materials, they may not be completely correct – and I welcome any corrections.

Computational Investing through Coursera

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I take a lot of free “continuing education” classes through Coursera – to be broadly interpreted as “oh, that looks interesting”.  I’ve taken VLSI classes (a minor of mine in undergrad), thermodynamics, Greek and Roman mythology, Greek history, EU law, etc.  It lets me learn new things in a “structured” environment without paying anything.  I’d be a perpetual student if funds would allow, but Coursera comes pretty close.

I wanted to let you all know about the Computational Investing class that just started yesterday (August 26, 2013).  I’ve listened to the first set of lectures, and I’ve already learned more about the markets than I ever knew – like how a market price is set.  The viewpoint that the class is taught from is that you want to be a hedge fund manager, and now you’ve got to figure out how to do that.  The prerequisites are pretty low if you’ve got any programming skills: interest in the stock market, and programming skills.  I haven’t run into the programming requirements yet.  I know they’re in Python, which isn’t one of my stronger languages (C all the way!), but I haven’t delved into any of the assignments yet.  Dad is an expert Python programmer, so I expect to need to ask for help at some point.

The professor covers how the stock market works, what incentives managers have, and how to measure performance (so far).  I know how to figure out standard deviation of a fund now, so I can apply Modern Portfolio Theory more rigorously and figure out the right risk/reward for us.  I don’t intend on changing too much of our portfolio at this point, but I’m taking in all of this knowledge like a firehose.  I think it’s fun (others may disagree with me).  The “end project” seems to be a market simulator with which you can play with various strategies.

Are you taking Computational Investing?  Are you enjoying it as much as I am?

Figuring Out Asset Allocation Across Accounts

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Figuring out our desired asset allocation was only the first step – the next was figuring out what trades I needed to make to get that allocation.  Enter Google Spreadsheet – which can pull financial information from Google Finance.  I’ve made it available with somewhat dummy data (The funds we have are accurate, but the number of shares is not), so you too can play with it.  It’s not likely to be immediately useful to you, but you can see it as an example of how we allocated across accounts, and create one for yourself.  The important page is the first one – you just want to categorize your holdings according to the asset classes you’ve defined (which may not be all that easy), then fill in your current amounts.

I used the second sheet for data – I keep track of the number of shares I have, and Google Finance pulls in the current prices and then updates the first sheet.   I have conditional formatting enabled on the second row to show me when my allocation is out of whack by +/- 1%.  If you change your desired allocations, you’ll need to change the conditional formatting – Google won’t let me use a cell as a starting point.

There is no magic linking the first sheet and the data sheet – it’s all manual linking in the formulas.

If you do happen to have more Google Spreadsheet-fu than I do and update it, please let me know so that I can link folks to an updated version.