There’s a classic saying that you should never discuss politics, religion, and sex at the dinner table. After nearly a year of investment blogging, I’m of the mindset that market timing should be added to that list as well.

When I began studying investing, two of the first books I read (on the recommendation of personal finance blogs) were A Random Walk Down Wall Street and The Little Book of Common Sense Investing. They were both well written books that did a very good job introducing investing to me. They both also shared a common philosophy: It’s a fool’s errand to try to beat the stock market. Give up now and try your best to mimic it.

Most conservative investors push two main concepts: First is to never buy individual stocks, and second is to never try to time the market. I have written about both here, but it’s the second I would like to focus on in this post, spurred on by an article in the Wall Street Journal today entitled Stocks Tarnished by Lost Decade. In brief, the article says that money invested in an index fund nine years would be in nearly the exact same place today, even less when taking into account inflation.

Supporters of the buy and hold philosophy like to say that market timing is risky. It’s funny, because I think the exact opposite: Staying in your investments no matter what is happening in the market seems ludicrous! I’m in the middle of a book called How I Made $2,000,000 in the Stock Market by Nicolas Darvas, and he has a great little paragraph on this:

I work at an investment advisory service that practices market timing. For nearly four decades they have beat all the market averages. In late 2007, they advised moving heavily in cash, and are now doing almost three times better than the S&P 500, and four times better than the Nasdaq.

Yesterday, I went down to the archives room and leafed through their monthly newsletters from 1987. As each month passed, they advised moving more and more money out of the market – right in the middle of a massive bull market. Three days before Black Monday, their headline was “REMAIN IN THE STORM CELLAR.” Buy and hold investors watched their profits from the past year completely wiped out three days later.

The most often quoted “fact” I hear about buy and hold is that if you missed the best X days in the market, your portfolio would be down X percent. This is an argument chock full of holes, such as:

• Missing the worst ten days would have profited you three times as much as missing the best days (source)
• Most of the best days are followed by the worst declines, wiping out those huge numbers (source)
• All but two of the “best” days occurred in the 2000-2002 bear market (source)

Next these arguments are followed up by a slew of quotes from famous investors. Of course, there are just as many famous buy and hold investors as there are market timing investors, so it’s a logical fallacy to cherry pick the quotes that agree with one side of the other. But let’s take a look at one of the most famous and successful investors of all time, Warren Buffett, on market timing:

Part of the “problem” with market timing is that there is an actual strategy to it. The buy and hold strategy is simple. Market timing can be incredibly complex, so it is important to follow a system that works – or follow an analyst who uses a good system.

Unfortunately, due to both credibility and privacy issues, I cannot say the name of the service I work for. But there are services such as Hulbert which monitor the performance of investment advisory services, many of which practice market timing.

I decided recently to get rid of some “stuff.” Now it’s odd that I should have stuff only a few months after moving, considering how much “stuff” I got rid off. However, in an attempt to un-clutter our lives a bit, I have loosed my definition a bit of what I would define as stuff. For example, I recently purchased an Xbox 360 (which I plan to return this weekend, but that’s another post). In doing so, I realized it would be very unlikely I would play many of my old Gamecube or Playstation 2 games. So I decided to sell them.

This also coincided nicely with my attempt to investigate eBay as a means for a side income. Nearly every eBay guide and book I skimmed recommended selling your own items first, so that’s what I did. I wasn’t completely new to eBay – I had sold and bought about 15 items over the past few years – but I had really approached it as a method of income before.

I started with collecting the ten games, and creating an auction for each. This was a bit more time intensive than I originally anticipated. Even though you can put in the game’s name (or ISBN) and have eBay add all the game details, you still have to put in all the various fields such as game condition, price, shipping, and of course the actual auction details. I wouldn’t be surprised if there was more of a way to automate this, but I couldn’t find it initially.

I also had to spend a bit of time researching the average price for the games, as some sold for $4 while others were $25. Anything that constantly sold other $5 didn’t seem worth the effort to me. Also, I wonder if I had started all the auctions at $4.99 if they would have eventually reached their market value naturally through bidding.

In any case, after three days my auctions ended and I had winning bids on eight out of the ten games. Now I had to package, label, and ship all of these! I had charged $5 for shipping, which was the average for games and also what I guessed the priority shipping would be.

One of the best benefits I found to shipping priority via USPS is that you can get the boxes for free. This may not sound all that special, but the cheapest envelopes I could find to ship games in that would adequately protect them were about $0.60 each. Using free shipping supplies therefore saved me $5 on my auctions.

When it came to actually mailing them, I first mailed one game “manually” by going to the post office and getting a receipt to find out the approximate weight of the game. Then I went home and used Paypal to print out multiple layouts. I have to say I was amazed with how quickly I was able to pay for and print eight labels. This whole process, including packaging the games, took about twenty minutes.

I was also able to go into the post office at 5:00 the next evening, stroll gleefully past the twenty person line, and drop my packages off at the front desk.

Was it worth it? Absolutely. I got rid of clutter and was paid about $100 to do so. I did realize how much effort goes into selling though. I also ended up paying a fair amount of fees in one form or another (Paypal, eBay listing, eBay final value), but I couldn’t see any way to make as much money as I did for the same amount of effort.

Inspired, I decided to pull out my plastic and sign up for a trial of Salehoo. Salehoo is a website which provides tools to research wholesale product providers. A large amount of auctions on eBay are from people who buy large quantities of items from a wholesaler and sell them marked up on eBay to make a profit. I did about an hour or two of research on ways to find these wholesalers, and found Salehoo to be one of the most often recommended sites. They had an 8 week money back guarantee trial, so I figured I would give it a shot.

So far, I have to admit I am a bit pessimistic about the whole thing. I spent, again, about two hours researching for products to sell. I tried maybe twenty, ranging from iPhone cases to tennis rackets to small porcelain dolls. I not often usually found the exact same item from the wholesaler, but it was selling for the same price as well! Meaning the seller either had a better wholesaler, or was making their profit through shipping.

I didn’t expect this to be an easy, get rich quick deal, but I hoped to find at least one product hopeful in a couple hours of searching around. I may try a bit more, but right now I am more inclined to cancel the trial and instead focus on other income alternatives.

During college, I usually drove home three to four times a year from Massachusetts to Cleveland, Ohio. Not only was it a long, ten hour drive but it also drained my Civic’s gas tank with ease.

So I would also be thankful to arrive in Cleveland and find gas prices that were often thirty to forty cents less than what I paid in Massachusetts. It never made much sense to me, but was always welcome - until I returned to Massachusetts and its higher gas prices.

Thankfully, an article in this morning’s Wall Street Journal helped to clear up some of the mystery of why gas prices vary by region.

• Gasoline taxes vary state to state, and are a constant factor. In other words, prices in certain states will often be higher than other states simply because of the tax on gasoline. For instance, New York has roughly two and a half times the tax on gas than Alaska.
• Transportation costs add to the price for regions further from refineries. The Midwest has to ship a large portion of the gas it consumes, which of course costs money.
• Local refinery issues have a large impact. For instance, Chicago currently has some of the highest gas prices in the nation due to the partial failure of a single oil refinery outside the city.
• Various other factors also contribute to the price. California has stringent specifications for the gas it uses, and also needs a separate supply as it isn’t connected to the majority of the nation’s gas supply. In the previous year this has actually lowered prices, as its own refineries have been producing a steady supply.

Two other interesting notes: First, if you want to find the absolute cheapest gas in your area, check out the site Gas Buddy. Second, do a google image search for “gas” and you’ll find some nostalgic images of gas priced at half of which we pay today - and yet still accompanied by stories about record high gas prices!

Index funds are all the rage today. There are a lot of very good reasons why, including the fact that they’re easy to “manage”, have low expense ratios, and are a good mix of risk and reward. They also were the alternative to turn to after the recent backlash against under performing mutual funds.

Unfortunately, simply putting your money in an index fund and calling it quits is not going to get you the best returns. By spending just a little more time researching the subject of portfolio allocation, you can increase your returns for the same amount of risk.

How? There is an excellent report by Hogan Financial Management that details this, which I’ll be using as a source for this information. It starts by comparing portfolio management to being a master chef. A chef doesn’t simply choose a packaged mix and throw it in the microwave. He instead creates a beautiful dish from a mix of carefully chosen individual ingredients.

So instead of having Hamburger Helper for dinner, the food version of an index fund, let’s instead look at a way to more carefully construct your portfolio. This assumes you have a somewhat standard portfolio of 60% stocks, invested in the S&P 500, and 40% intermediate term bonds (many readers here have a higher percentage of stocks, but the same theory still applies). This portfolio had an average return of 13.66% from 1975 to 2000, with a standard deviation of 10.5%.

Standard deviation is a simple way to measure the risk of an investment like this. A higher deviation means a larger departure from the average; in this case that means spikes in the gains or losses of an investment. Listed below are changes that can be made to increase the returns of such a portfolio:

1: Shorten the maturity of bonds
While it is true that longer term bonds often have higher interest rates than shorter term bonds, the risk of being locked into a long bond that may decline in value is not worth the small gain of higher interest.

This step actually reduces the overall potential gain of the portfolio down about 0.5% to 13.27%, however it greatly reduces risk by 1.5% (in terms of standard deviation). This allows you to take risk in places that offer higher rewards.

2: Add small capital stocks
There are two reasons for this. First, this is a step towards diversification. The S&P 500, while a solid index fund, is mostly focused on larger-cap stocks. Secondly, while small-cap stocks are higher risk, they can also offer much higher rewards than the risks of a longer-term bond mentioned above. In fact, small-cap stocks often go up when the S&P stocks go down, which provides a nice balancing element that can lower portfolio volatility.

This step increase the portfolio’s return to 14.43% and standard deviation to 11.68%

3. Add value stocks
Value stocks are stocks which are current a bargain for what they should actually be worth. This often happens, for instance, when the magical number that investors (or companies) place for a quarterly profit is not met. Value stocks are usually held for a period of a few years, which give them time to recover from the low price you bought them at, and in turn give a solid return. In fact, value stocks outperformed the S&P500 index 92% of each rolling 20-year period since 1963. They also further diversify your portfolio in that value stocks have returns that differ from the average S&P 500 stocks.

Adding value stocks increases the portfolio’s return to 14.95% and decreases standard deviation to 11.36%

4. Add international stocks

With globalization having a bigger and bigger impact on somewhat equalizing international markets, adding international stocks still is an excellent way to diversify your portfolio to reduce risks. It may not impact your gains much, but common sense tells you that investing all of your money in one nation is riskier than spreading some of the money abroad.

Adding international stocks decreases the portfolio’s return to 14.93% and standard deviation to 10.08%.

By taking these steps listed above, we have increased the return of $1 invested in 1975 in the original portfolio from $27.93 to $37.26 – and have decreased risk at the same time!

Do not be a slave to a single index fund, or feel as though because you are not trained in the stock market that you can’t take steps to improve the returns on your portfolio!

Recently, I have noticed a good number of postings on the 6% interest rate offered by FNBO, an online bank similar to ING or Emigrant Direct. Scores of people are moving money over there, as this rate is guaranteed until September 1st, at which point it will most likely drop down to a number more in line with its competitors.

I looked at opening an account there today, to use as our soon-to-begin savings towards a house down-payment. I could have easily added another account at Emigrant Direct, but I figured with the amount of money we would be contributing it would be worth taking advantage of a higher interest rate, even if only for six months.

Unfortunately, I was unpleasantly surprised to find that it made very little difference at all. Even assuming I earned 6% for an entire year (even though the rate is just guaranteed for another six months), with a deposit of $1000 a month I would only earn an extra $50 at the end of the year compared to how much I would have earned at 5%. Sure, $50 is nothing to sneeze at, but it’s a paltry 0.4% gain when you look at the total sum I would have saved over the year.

It made me realize that while compound interest is a wonderful thing, it does take several years to really build up steam. It’s important to note that over the course of five years, that 1% would account for an additional $1400. Would I take a risk and invest that money in the stock market, hoping for a 10% return over five years, that additional increase in interest would add up to $7300!

Of course, I know that investing money in the stock market that I will absolutely need in five years is risky business. Instead, I will be on the lookout for taking advantage of that extra 1% over the course of five years in a stable, reliable online bank account.

This was a good question I saw posted at a forum I read, so I thought I’d copy it here and post my response as well:

When I mentioned to a friend that I was leaning towards Vanguard he told me that I shouldn’t put my eggs in one basket. In other words, I shouldn’t open up the Roth directly with Vanguard, but rather use a brokerage such as Schwab. Now, firms like Schwab offer no fees on their own funds, but wouldn’t I get charged a lot of money every time I made my monthly/quarterly/etc. deposit on a fund that’s not in-house such as Vanguard?

That doesn’t make any sense to me. If you’re investing in a Vanguard index fund, open an account with Vanguard. Like you said, most discount brokers only have a limited selection of funds you can deposit in without paying a charge. Vanguard recently changed their fees so you can invest with whatever amount you want and never get charged a dime as long as you elect to use their electronic paper system.

If you ever decide you want to invest in individual stocks, or other non-Vanguard funds, just open up another IRA account at a different brokerage (you are allowed to have more than one IRA account).

After realizing I couldn’t build a portfolio of individual stocks for $500, I began to lose interest in the market as a whole. It seemed as though I would be decades away from having the kind of money needed to invest in the market.

Of course, this wasn’t true at all. Instead of being drawn in by huge gains and ways to double my money in a month (my own company’s advertisements seemed to be having an effect on me!), I instead made the decision to actually learn about personal finances and investing.

The last time I made this decision was with poker, and I’ve found there to be some striking similarities between the learning process of these two subjects. When I first started poker, all I wanted was a cheat sheet of which cards to play, as I figured this was the quickest way to beating the vast majority of players. For the most part, I was right. Yet I had barely skimmed the surface of learning about poker, and I soon realized that by purchasing recommended books and learning more about the foundations of the game, I could not only become much more knowledgeable about the subject, but increase my profits even further.

My first step in this process was visiting the Morningstar Investing Classroom and reading all of their information provided. It was an informative, albeit slightly overwhelming, introduction to the world of investing. I continued my online research with sites such as Motley Fool, CNN Money, and MSN Money.

To satisfy my desire to know what it would be like to actually invest in individual stocks, I opened up a portfolio at Yahoo! Finance and invested a mock $3000 into 7 or 8 stocks recommended by my company. At the same time, I invested $3000 into the Vanguard 500 Index Fund (VFINX). I thought it would be interesting to compare these two as time went on, buying and selling in my company’s portfolio per their recommendations, while just letting the index fund work its magic.

At the same time, I continued my research, posing questions I had both to internet forums and to one of the analysts at my company, who was kind enough to put up with a neophyte. I soon realized though that I was nearing the end of information I could find for free.

In late April, I ordered three books from Amazon:

• The Random Walk Guide to Investing by Burton G. Malkiel
• The Little Book of Common Sense Investing by John C. Bogle
• Rich Dad, Poor Dad by Robert T. Kiyosaki

One of my goals is to write up my personal impressions of these books, as I read them as well as once I’ve finished and let the information sink in a bit.

While waiting for my books to arrive, I made a trip out to Barnes & Noble with two purposes: First, I wanted to buy a Moleskin notebook to keep all my notes in. I found myself continually returning to the same bookmarked pages, as I simply couldn’t remember the massive amount of information I was trying to learn about finances. I had been looking for an excuse to buy a Moleskin for a few months, and thought this to be the perfect reason to buy one.

Secondly, I had just gotten a copy of my wife’s IRA investments, and found that she was invested in four different load based mutual funds. I immediately told her to transfer those as soon as she could, but couldn’t really back up my statement. So I went searching for a book I had read a few times over by Suze Orman called The Money Book for the Young, Fabulous, and Broke, which I knew had a few pages on load versus no-load mutual funds. It’s something I plan on going into soon in one of my posts.

Anyway, while looking through the investing section I happened upon Jim Cramer’s books. I wasn’t really interested in his actual investing advice yet, as I knew he focused mostly on fairly regular buying and selling of stocks, but I did see he had a biography of sorts called Confessions of a Street Addict. I spent a few minutes reading this at the store and decided to pick it up, as I figured while learning about the market would be good, increasing my desire to learn would get me even better returns.

I’m more than halfway through the book so far, and have really enjoyed it. For one, my respect of Jim Cramer has greatly increased – it’s pretty amazing to see what he has accomplished, and how he got there. The book has also served as a great history of the past few decades of the stock market, an in-depth look into how hedge funds work, and an interesting touch on what it was like to be involved with the dot-com bang and bust of the 90’s.

The company I work at is mostly growth oriented. As I found out early own, stocks and mutual funds could be separated into three main categories: growth, value, and blend. Four of our publications focused on growth stocks, and one focused on value stocks. Not surprisingly, the growth stocks are what drew my attention. Some of the profit margins advertised by the value newsletter were very impressive, but I didn’t want to see what would happen if I invested in a stock and sold it two or three years later.

It was also at this time that I accidentally tuned into a show that I had once found incredibly annoying: Jim Cramer’s Mad Money. I had first seen this show a few months earlier, when channel surfing, and stopped momentarily just because I couldn’t figure out why they were doing a sound effect demonstration on CNBC. Once I realized what this show actually was, I couldn’t figure out how people watched it without getting a headache.

Of course, with my newfound interest in growth stocks, I began to turn on the show nearly every night. Hearing about various stocks (including a lot that we included in our company newsletters), and the reasons behind whether it was strong or not, was very interesting.

My savings was still recovering from the past few years of graduate school, but I was extremely anxious to start investing. At the various financial websites I visited, I was constantly barraged by ads for discount brokerages. I looked into these, and soon discovered that you really could trade stocks for only $5-$10 a trade.

The next day I signed up at Scottrade. The signup process was a tad intimidating, as they needed a lot of my personal information, and I had to click off a lot of checkboxes saying, among other things, that I wouldn’t do insider trading. Eventually, my account was setup and ready to go, just waiting my initial $500 deposit.

So I took a look at our company’s model portfolio … and saw that the portfolio consisted of 10-15 stocks spread over $100,000 dollars. Surely I could invest with less than that though, no? I looked up some of their favorite stocks and saw I could buy maybe 10 shares of a stock and use up the $500 I set aside.

But I soon realized that by paying $14 to buy, and eventually sell, $500 worth of stock, I would be paying 3% in transaction fees. My measly $500 didn’t look like it was going to cut it, and the frustration of opening my account and being a step away from trading stocks before realizing it wasn’t remotely realistic snubbed my interest in stocks. At least, for a week.

In early 2007, I began work at an investment advisory firm. They publish several newsletters which give commentary on stock market conditions and recommend certain stocks. I had never been too interested in finances or investing, though I did always enjoy activities like paying my bills or updating my most recent credit card transactions in Quicken (oddly enough). I graduated with a degree in computer science, so I actually wasn’t hired to do anything financial at the company. Yet my daily tasks had me repeatedly interacting with these newsletters, and my interest began to grow.

My interest piqued, I began to look up information on the basics of personal finance and investing. The internet helped immensely, but it also complicated things, as there was a seemingly endless list of pages dedicated to this subject. I soon found that not only did people disagree about nearly every aspect of it, but that there were seemingly thousands of different aspects to disagree about!

Having just finished my formal education a month earlier, I considered myself officially starting my financial life, as paying thousands of dollars a month for tuition made it difficult to have any finances at all. Before this point, the term “savings” referred to a few hundred dollars that would grow in a 1.5% interest savings account at the local bank, before being ransacked in order to pay for a broken windshield or dentist’s appointment. Since I had barely had a few hundred dollars to put into this savings account, let alone hundreds of thousands of dollars to invest in the stock market, I wasn’t very interested in the subject.

I did make one interesting discovery during this time that helped spur my interest (no pun intended). I read a story about how online bank accounts were growing in popularity, specifically in regards to accounts that were offering as high as 5% interest. I was a bit hesitant at first; as much as I used the internet for various transactions, the thought of putting my savings away in a bank which didn’t even have a physical location was a bit frightening. So I did some research, and saw these banks mentioned places like CNN.com and the New York Times, and began to feel a bit more confident about transferring my money to an online bank.

This is how I made my first step towards saving money, by opening an account at Emigrant Direct and transferring $500 I had made playing the online poker casinos. I let the money hang there in the account for a few months before presenting the idea to my wife of moving nearly all of our money market account, earning a paltry 2.2% interest rate at PNC Bank, to Emigrant Direct. Not only was I making more than twice as much interest, but I didn’t have to worry about minimum balance fees or a limited number of transactions per month!

Seeing how easy it was for me to double the interest I made from my cash savings made me wonder what kind of results I would see if I really started researching personal finance and investing.