Yes You Should Refinance. But How?

With mortgage rates dropping like a brick, it’s becoming a no-brainer for us to refinance our home loan. Even though we just got a 30-year loan 2 years ago at 5.875%, we can get 30-year loans now for around 4.5% or lower. You might be in a similar situation.

Rule of Thumb

The rule of thumb I hear thrown around a lot is that if you can drop 1% off your mortgage rate, you should refinance. To get a more precise idea if refinancing is good for you, you should really take into account how long you expect to stay in your home and see if you break even on your refinance costs before then. A good tool for this is the Mortgage Refinance Breakeven calculator found here (thanks MyMoneyBlog).

Breakeven Point on Our Mortgage

I plugged our numbers into the tool:

  • $180k original loan
  • $235k appraisal
  • 5.875%
  • 28 of 30 years
  • income tax rate of 25%
  • $175k loan balance
  • 4.5% new rate
  • 30 years
  • 0 origination and points
  • $3000 in closing costs

The tool tells me that I’d break even on this refinance in 18-22 months. We’d save $177* per month on our payments, and so as long as we’ll be here for 2 years we’ll make up the refinance cost and then some. Since we are planning on staying here for at least 2 years, we should refinance.

* The spreadsheet says $147… must have used slightly different numbers.

Yes But

The only real questions now are (1) should we wait for rates to go lower and (2) what kind of loan should we get.

I’ll avoid (1) for now. I think there is a real chance rates go lower, but I don’t want to be too greedy. I want to take advantage of a good thing while we have the chance. So I’ll assume we can refinance at the current rates.

RE (2): if your home loan situation is anything like mine, you have a lot of options to consider when refinancing. In our case, we have a second mortgage for $30k which is interest only at a rate of prime plus 1% (I think about 4.25% right now). We also have more cash flow than we did 2 years ago and can afford a bigger payment if it means we’ll be paying off the mortgage sooner and saving money on interest rates.

So we have questions like:

  • Should we roll the second mortgage (M2) into the new mortgage to lock in this low rate?
  • Should we get a 20 year loan (at 4.25%) instead of a 30 year loan (at 4.5%)?
  • Should we keep the M2 loan as is and make principle payments toward it?
  • Should we refinance the M2 separately?

A Spreadsheet!

Calculating all of this can make your head explode. I created a spreadsheet that calculates just some of the factors, while leaving others out, and focuses on the most promising options for us. You can see it here: Coleman Family Refinance Options.

The main scenarios I focused on are:

  1. The status quo, i.e. keeping our current loans.
  2. Refinancing just our first mortgage (M1)
  3. Rolling our second mortgage (M2) into M1 (we’d pay PMI for 3.5 years since we’d have less than 80% equity)
  4. Refinance M1 for 20 years
  5. Roll M2 into M1 for 20 years (PMI for 3.5 years again)
  6. Refinance M1 and pay difference into M2
  7. Refinance M1 for 20 years and pay extra $2k/year into M2

The columns of the spreadsheet show:

  1. The scenario #
  2. A description
  3. Rate on M1
  4. M1 monthly payments
  5. M2 monthly payments
  6. PMI payment if applicable
  7. Total monthly payments
  8. Term of M1
  9. Annual Payment
  10. Total M1+M2 debt in 2 years
  11. Total M1+M2 debt in 4 years
  12. Total M1+M2 debt in 10 years
  13. Lifetime cost of loan (rough rough estimate)
  14. Notes

Note on the columns. Some of them are updated when you tweak the numbers, but the 2, 4, 10, lifetime columns were entered by me after running numbers in that break even calculator linked above.

The second table has the same columns as the first, but shows the difference in payments/debt/etc compared to the status quo. So it can tell us how much we’d save (or spend extra) on payments and how much more (or less) debt we’d have after 2, 4, and 10 years.


There is also a table at the bottom of the spreadsheet showing expected returns if we made monthly investments at a 6% return. This is to help us calculate what we could be making with that extra $147/etc per month if we didn’t use it to pay off M2 or get a 20-year loan.

Some Pre-existing Notions I Had

Before I pull some numbers out and explain how we’re leaning, let me relay a few biases I had going into this.

1. I’m okay with our interest-only second mortgage. At 4.25%, that is a cheap price to borrow money right now. We’re making more than that on our money that we invest in our business and in our retirement accounts. Paying toward the principle on that loan would be like buying a 4.25% bond. Decent return, but not as good as we’re getting elsewhere. So I’m happy to loan at that amount indefinitely basically. However, I do think that rates will go up in the mid-long term. I don’t want to get caught with higher rates that are a strain to pay. Our idea has always been that we would use some kind of windfall (e.g. if we sell one of our website properties) to pay off that loan in one foul swoop. However, we should at least consider somehow locking in a rate for this.

2. I’m against paying PMI in theory. (That’s why we got a second mortgage before instead of one loan with PMI.) If you have the credit, other options are probably better for you. Some good info on PMI here.

Findings From the Spreadsheet

The key columns to focus on to compare options is the Annual Payments and the difference in debt in years 2, 4, and 10. The second table shows the difference in these numbers compared to the status quo. And so I can see that if I go with option #2 (refinance just the 1st mortgage), we’d save $1,764 per year and have $5,966 less debt/more equity after 10 years. If we held the loan the whole 30 years, we’d pay $21,985 less.

Now if I rolled M2 into M1 and payed PMI, we would still save $435 per year ($1,500 per year after 3.5 years) and have $12,538 more equity after 10 years since we’d in effect be paying principle on that M2 now. However, we would spend an extra $3725 or so on PMI those first 3 years, and sometimes it can be difficult to get PMI removed once you do have enough equity in the house. Overall though, it seems like using our savings from the refinancing to pay down M2 is a good use of our capital. It lowers our debt risk in the future.

You should be reminded here that not only do we have $5-12k more equity after 10 years, we could have invested the saved payments to have an extra $18-24k in our retirement accounts. Refinancing really is a good deal.

One option I really wanted to calculate was keeping our interest-only M2 and making principle payments to it instead of rolling it into the new mortgage or refinancing on its own. This would avoid PMI or additional refinance options. If we are disciplined, we can pay off M2 just as fast… but we’d also have some flexibility if we needed some monthly cash flow. Scenario #6 lays this out. We would end up paying as much per month/year as we do now. So no savings there, but we’re really okay with our current payments. We would however have an $31,336 less debt across both mortgages.

Scenarios #4, #5, and #7 basically come down to paying a little bit (or quite a bit) extra per month in exchange for less debt in the future and less interest payments over all. One nice thing about these plans is that 10 years out, we could have nearly $50k in equity built up in the loan. Combined with an appreciation in home value (I know, but we’re talking 10 years from now… let’s hope) we could have a nice size chunk to use as a down payment on a larger home.


I’ll let you know what we decide when we go through with things. I think I’m leaning toward refinancing just the first loan and making principle payments on our second mortgage/line of credit. Some things we need to think about:

  • Can we really get 6% on investments on money saved? 4.25-4.5% might be a good return for our extra cash in this market.
  • What is the risk that interest rates go much higher in the future, raising our minimum payment on M2?
  • What do we want our debt situation to be 2, 4, 10 years from now?
  • Can we really get the rates/fees I’m assuming here? 😮
  • Are deductions for interest payments, reductions in PMI or M2 payments, or other things I’m leaving out important?

I hope this helps people in a similar situation as me. And as always, I appreciate any feedback or advice you might have based on this. Cheers!

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Free “Avoiding Forclosure” DVD via NFCC

We received an email from Melissa Minkalis of the National Foundation for Credit Counseling (NFCC). They are offering a Free DVD about avoiding foreclosure.

I did not order the DVD or know much more about it. I did quickly verify that the NFCC is a legit organization and doesn’t seem to be simply harvesting contact info, etc.

From the email:

Did you know foreclosure rates rose 81% in 2008, making the housing crisis the #1 issue facing our economy today?

The main problem concerning this crisis is that most homeowners don’t seek help until it’s too late. The key is to get reliable advice as early as possible. Sadly, many people don’t realize that trustworthy help is available and what may seem like a dire financial situation can actually be organized, itemized, and prioritized by a NFCC certified credit counselor.

Today, I would like to offer you and your readers a chance to order a new DVD from the NFCC, Avoiding Foreclosure, which can be ordered, FREE of charge by visiting [our Avoiding Foreclosure order form]

Showing inspiring stories from folks who decided to really take charge of their unfortunate situations, this free, informative DVD will provide viewers with motivation for change. Even the toughest of circumstances can result in positive solutions with the help of NFCC certified professionals. It is the hope that seeing these stories first hand will give others the courage to take action.

Gavin’s Calling All Canadians: RSP Advice

Got this email from a fan. And since none of the current writers are Canadian, I thought I’d throw this out there.

BTW, RSP stands for “Registered Retirement Savings Plan” and seems to be a Canadian 401k. I’m sure a lot of the standard retirement plan advice would apply, but we’re looking for a Canadian perspective.

Hey InvestorGeeks

My name’s Gavin Adamson. I write occasionally for the Globe and Mail
and this time I’m writing a piece about what part online – DIY
investing plays in RSP building.
Not sure if any of you guys have an online RSP account, but if you do,
I’d be interested to speak with you. Here I’m looking for a chat about
what sorts of tools/data research you use to make RSP decisions. Do you
use your online brokerage site research and tools? Are they good?

If you don’t have an online, RSP account, or you’re not interested, I’d
appreciate an announcement on your site that I’m looking to speak to
someone. They can get in touch with me at my website

Thanks a lot


The Bernanke Put

Fingers crossed.

He should moderate his language, open the possibility of a rate cut, and send the markets higher.

I hope he keeps his mouth closed, talks about inflation and the US dollar, and keeps rates right where they are.

Wishful thinking? Perhaps. However, I just have a vibe that he isn’t the soft touch that people think he is. My impression is that he just might suprise a few people.

Time’s up Bernanke! – are you made of steel or of butter?

Good luck,


PS In what is becoming a theme, here is another idiot piece by Ben Stein, and here is another piece about bankruptcy and an instant 7000 people out of a job. Of course, you need to make up your own minds.

This post is for entertainment purposes only. No part of this post should be construed to constitute investment advice. The author is not an investment professional and assumes no responsibility for any investment activities you undertake. Prior to undertaking any financial decisions, you should contact an investment professional.

The Fall of the All Consuming Yankee

The consumer is tapped out. After consistent 25 basis point increases to the Federal Funds Rate, we are finally starting to see the effects on the stock market.

Yesterday morning we saw three headlines that caught my attention. The first detailed Sears’ guidance for this quarter – a reduction from $2.12 to from $1.06 to $1.32 per share. These revisions are, at best, a 30% reduction and, at worst, a 50% reduction from their previous optimistic estimates.

Notably, declines were across all categories. If you follow the theory that the consumer is on thin ice, then it is hardly surprising to find big ticket items are not being purchased. Sears is having trouble selling new stainless steel fridges and widescreen TVs because consumers do not feel confident about their financial situation. The only sector that wasn’t hit as hard was women’s apparel and footwear – suggesting stressed housewives may be engaging in retail therapy.

The second headline noted that Home Depot is now expecting a 15% to 18% drop in earnings per share for fiscal 2007, as opposed to their previous guidance of 9%. This is a further example of a, supposedly wise, management team who were unable to predict the severity of the downturn.

All should take note – when pundits tell you the housing crash will be over by Q4 of this year, they are making a foolish guess. Furthermore, even if they are right, do not expect the market to rebound. Burnt fingers will not be so quickly back into the fire.

Home Depot’s response to this downturn was particularly ironic:

Home Depot, which has more than 2,000 stores in the United States, Canada, Mexico and China, said Tuesday it will open approximately 108 new stores in fiscal 2007.”

Lastly, this tidbit was to be found in Yahoo’s summary of the Best of Today’s Business:

More than 2 million subprime, adjustable-rate mortgages will be reset to much higher interest rates over the next several months, raising monthly payments for people with weak credit. In October alone, a record $50 billion in ARMs will reset, said Mark Zandi, chief economist of Moody’s Consumer groups fear this could spark a new wave of foreclosures.” (emphasis added)

Many commentators speak about the small impact of subprime foreclosures (e.g. here) as if somehow the problems stop with subprime. However, the problem is a continuum, beginning in subprime and extending all the way into Alt A.

The housing sector is in far worse shape than the experts on Wall Street realize – yesterday we saw a pull back in the market, and the futures this morning point to a similar flat or down day. However, over the past months, Wall Street has failed to price in the poor economic outlook. Yet, here is an example of the situation consumers face:

Arizona’s only publicly traded home builder must write off $100 million on land and operations after a second quarter in which home orders fell 28 percent and new-home cancellations climbed to 37 percent, according to preliminary numbers released Friday.

New-home cancellations have left the Valley’s housing market with at least 20,000 homes built but unsold. Builders have offered hefty incentives of $50,000 and more to sell the houses, but many potential buyers can’t sell their existing homes.

The result is a glut of homes for sale…”

Granted, Arizona is one of the worst locations, but it isn’t the only region to suffer this problem. While subprime mortgagees have low credit ratings, they don’t necessarily purchase in low socio-economic areas. Subprime foreclosure properties can not be neatly segregated into a single suburb.

We are just starting to see the fall out.

With Wall Street starting to show signs of reduced consumer spending, both due to fear and also due to rising costs (see “M3 money supply”), businesses will be reducing inventory and preparing for leaner times. This will sap at business confidence and reduce capital expenditure. As more home loans reset from teaser rates to rates approaching double digits, consumer disposable income will further decrease. If foreclosures continue to rise, we may witness further financial strain, as seen with Bear Sterns two weeks ago.

In short, the situation is unlikely to improve from here. The next 6 months do not look good.

If you haven’t already, take a look at the S&P500 over the last 6 months – notice the recent double top and the market’s inability to rise to new highs. My thoughts? Consider moving at least a portion of your holdings to cash if you can.

Philip John

This post is for entertainment purposes only. No part of this post should be construed to constitute investment advice. The author is not an investment professional and assumes no responsibility for any investment activities you undertake. Prior to undertaking any financial decisions, you should contact an investment professional.

Are You Financially Smarter Than A 5th Grader?

Yes, I’m still an InvestorGeek! It might seem like only Jason and Christian are blogging lately, but I don’t mind being the guest that drops in once in a while. I’m sure many of you have watched or heard of the new Mark Burnett-produced game show called “Are You Smarter Than A 5th Grader“. If not, you can read a quick description here.

I was inspired after reading Canadian blogger, Tony Hung’s short diatribe on who’s really smarter – the kids or the adults? Tony, if you don’t know, is an editor at the prominent new media site, BlogHerald. I’ve had the privilege to meet him, and trust me, he’s one smart dude! But I digressed since the question remains, who ARE the smart ones? What does it mean to be smart? Is it just about random trivia or knowledge? After all, adults were able to create a show like that to make money! Aha…. now that money comes into play, that’s my lame segway to discussing financial smarts!

So, What Makes You Smart?
Sure, trivial knowledge can sometimes make you a millionaire… rarely. Ken Jennings was $2.52 million richer after inspiring the millions of the easy money / instant gratification generation with 74 consecutive wins on the ‘Jeopardy!’ game show. But is that what being smart is all about? Is the proficiency at regurgitating facts and information enough to call someone smart? I’ve previously written on Investorial that being successful in financial matters is not predicated on whether or not you have the knowledge. But it absolutely matters to be financially smart! What do I mean?

I humbly define “Smarts” to be a keen sense of awareness; and not just an awareness of facts. Alongside knowledge must come awareness of self, and a highly developed thought processes influenced by many factors – your life experience, your parents (a gimmick that Robert Kiyosaki exploited very well), your cultural influences and even your moral belief system.

Perhaps because of my Chinese ethnicity and the stereotypes attributed to me, I often rebel at the thought that you go to school for knowledge. It’s not that I don’t like those compliments of being a genius or math wiz, but going to school is not about learning 1 + 1 = 2! True awareness is achieved when you have a process in place that tells you how to find the answer should you not know what 1 + 1 equals. Whether it’s leveraging someone else’s know-how, or knowing how to look up the answer. Knowing the answer qualifies as knowledgeable, knowing how to achieve the same result without knowing the answer is displaying smarts and ingenuity! Truthfully, there are some “slackers” I admire more than geniuses. They are not working hard, but they are working smart!

Nobody is going to learn everything they need from textbooks. In fact, most people have not been thought how to manage their finances through any form of formal training. But even if you obtain knowledge, will it truly help? Knowledge that smoking causes cancer doesn’t deter smokers from taking a puff, so why would knowledge help a spendrift become frugal? How is it that someone is labeled “cheap”? Why do people have gambling problems? Why are some people so afraid of the stock market when people keeping telling them how to manage risk? These are personality traits deep rooted in your financial biography. There are certainly ways to overcome tendencies, but its usually through an epiphany, an awareness, a self-realization, rather than the consequence of gaining knowledge.

How Financially Smart Is A 5th Grader?
Does a 5th grader need to bother with finances? Even if they are taught the knowledge, they will lose it during their growth into adulthood. They might remember for one or two years, but it will be a vague memory when they truly need those information. The cramming /memorizing of knowledge is not learning! There is nothing at stake for the kids. They won’t be able to apply those strategies in their life. Those strategies are not being self-actualized into their being because there’s no application or relevancy to do so. Most kids cannot relate when you scold them about wasting money. Again, knowledge does not equate to smarts because the awareness was never achieved.

If that’s the excuse of a 5th grader, what’s the excuse for an adult who keeps falling into debt and having to declare bankruptcies throughout their life? If you’ve got a friend that falls into that category, I’m sure he/she has been told many times the different ways to get out of debt. Maybe he/she even called Suze Orman and got a tongue lashing from her about the subject too. So much knowledge is imparted but it doesn’t mean a thing if it doesn’t integrate with your thought processes. Contrast that to someone who is not knowledgeable, never got advice from any sources but simply has the will to stop splurging on meaningless items. Does being financially smart resonate with being critical to your financial life yet?

The next time you watch the game show. Give the contestants a break! Kids and adults can both be knowledgeable and/or smart in their own way. The truly smart thing to do is not to compare and work on yourself!

Next Time: Business / Career Smarts
If we are discussing your financial smarts, invariably we will need to touch on business / career smarts. Your finance is derivative of your income, which is sourced from your business / career, right? At least if you weren’t born with a silver spoon, there will be a phase in your life where this is relevant. I will actually leave this topic for a future blog post, so watch for it!

What Gives With Interest Only Being Better Version 2?

My original version of this blog entry has been deleted because I did find some errors in my spreadsheet. I saw them when I was explaining what I thought I had found while doing my calculations. The new calculations are not as I thought they were, but still some interesting things can be extracted from it.

I was reading a blog entry where one couple in Seattle had a hard time trying to find a place where they could take out a mortgage for 15 years. One woman in another blog commented that 15 years is a bad idea, and better would be a 30 year mortgage because it lets you buy more house.

Comments like, “ooh better get a 30 year mortgage than 15 year mortgage” raise my hackles! I don’t believe such comments and decided once and for all to figure out what the numbers are.

There are two variations to this scheme:

1) Get the same mortgage, but invest the monies

2) Get a bigger monies for the same amount that you would pay monthly.

Ok, so I created an Excel spreadsheet that anybody can download to verify if I am right or wrong. Folks, please verify my spreadsheet because I want to know if I accounted for everything, because I found out something very very interesting.

I made the following assumptions for variation 1:

  • 300,000 mortgage
  • 30 year mortgage at current rates (5.75%)
  • 15 year mortgage at current rates (5.52%)
  • Interest only mortgage at current rates (5.53%)
  • Renting at 2,000 per month
  • Income of 90,000 with tax rate of 25% with interest paid deducted from yearly income.
  • 1.5% of 300,000 charge per year for maintenance, etc
  • 9% return on alternative investments 
  • 5% return on the price of housing
  • The difference in monthly payments are invested into alternative funds

For variation 2 I made the following assumptions:

  • 300,000 mortgage for the 15 years
  • 530,000 mortgage for the interest only
  • 420,000 mortgage for the 30 years
  • 30 year mortgage at current rates (5.75%)
  • 15 year mortgage at current rates (5.52%)
  • Interest only mortgage at current rates (5.53%)
  • Renting at 2,000 per month
  • Income of 90,000 with tax rate of 25% with interest paid deducted from yearly income.
  • 1.5% for yearly fees of the original price of the property.
  • 9% return on alternative investments
  • 5% return on the price of housing
  • The difference in monthly payments are invested into alternative funds

Running the numbers I decided to sell after 10 years. At that time I decided that I would buy another house using the same prices.

Here is what I found for variation 1:

It does pay to get an interest only mortgage and invest the monies. At year 10 you pocket with the interest only 374,000, and the 15 year mortgage 323,000. This means you get 50,000 more by investing. However, this implies that you will invest the monies and get 9%. Granted both returns I searched and found on the Internet so they are averages over a time span of about 35 years.

If you only invested half the monies that the interest only gives you then you will be at a disadvantage. If you invest none of the monies then you will be at a massive disadvantage. In other words you will see the same amount less per month whether you use interest only or 15 year mortgage.

The tax advantage of the interest only vs the 15 year mortgage in year 10 is barely 200 USD, which in my opinion is nothing to write home about.

Here is what I found for variation 2:

Variation 1 was not what the original blogger was talking about. Variation 2 where you buy more house for your money was what the original blogger talked about. This means you would be investing nothing, and doing the numbers for this variation the results are not good.

Yes you can afford more house eg 530,000 vs 300,000, but after ten years it means you pocket less money 292,000 vs the 15 year mortgage 322,000. What I found particularly interesting about this variation is the associated risk. Your tax advantage in year 10 is greater (400 USD), but you have more costs since a more expensive house has higher taxes, etc. Additionally if you purchase a higher priced house there is a greater liklihood that you will not be able to sell your house.


In my original blog entry, which I deleted, I said that the money you pocket is greater by paying off the mortgage. When I fixed my calculations for Variation 1 it was not the case, but it was the case for Variation 2. Though, what is extremely important to realize is that interest only or long term mortgages only apply if in the long term the markets and housing prices go up. If during the 10 year period you don’t get the required returns you are buggered. For example I did the calculations when both the investments and housing prices only increased by a mere 2% per year over a 10 year period. At that point the money that you pocket goes way up for the 15 year mortgage, and for the others you are left straddling quite a bit of debt.

So in the end it might cost more per month, but it is better to get a 15 year mortgage…

Money Money Money. Money.The following is a paid review. See the notes at the bottom for more information.

Looking for a place to store your hard earned (or not so hard earned) money? is site that shows the interest rates available at the most popular US banks.

According to the list, HSBC is the best bet with a 6% rate on “new money”. But hurry, you only have until April 30th to get the “promotional rate”. Bank of America and E*Trade are also decent with 5.1% and 5.05% repspectively. Your corner banks like Wachovia and Wells Fargo are offering just 0.25% and 0.50% respectively. The worst offer on the list is Key Bank, with a pitiful 0.15%.

The table at also has a notes column, which relays any minimal balance requirements extra fees or (as in HSBC’s case) if the rate is promotional or the standard rate.

Other than that, the site doesn’t offer any more. If the data stays up-to-date, it will still be useful to people who want to compare all those numbers in the same place. And if’s SEO strategy pays off, they might get enough search engine traffic to make a few bucks on the Google ads they show. (They didn’t seem to have affiliate links for the bank links though, which could be a better source of income.)

I’d like to be able to sort the list by any of the columns (primarily the rate column), and an RSS feed or email update feature would be nice. Also user-submitted comments and reviews would help round out the info in their notes column (which looks like it was just copied from a website) and possibly out any “hidden fees” or issues with the banks. The site is in “alpha” though, so features like this and more than I can’t even imagine could be in the works.

I think a site that with this information that is uncluttered and easy to use would be great. I did a quick search for similar sites and coulnd’t find anything else in this space I really liked. There is a savings account search application at that seems to have much more data. However, the site is a bit cluttered.

Note: A couple months ago, I signed up as a blogger at “pay-per-post” site The post above is my first paid posting through this service. I plan on writing an article soon about my experience using ReviewMe. Stay tuned.

In Defense of Bush’s Tax Cuts

I was listening to Bernake, and then Mr Sanders started the typical leftist propaganda. The Democrats are idiots who are going to self-destruct in about four years. My political leanings are center right liberal libertarian.

The tax cuts that Bush made have raised the hackles of Democrats. Democrats want to nullify the tax cuts. Yet I will argue that Bush was right to make the tax cuts.

I bet you are ready to pounce on me and say, “Only the rich benefit from the tax cuts and they pay so little.” Well, let me tell you a story about morality and being pragmatic.

The moral of socialism and anybody who leans towards the left says it is immoral to give tax breaks to the richest of the rich. The rich should pay more tax than the poor because the rich can afford it.

So a poor person would pay 10% income tax and rich person pays 50%. Many will argue it is ok to tax the rich because they can afford.

Oh really? Tax rates are percentages and thus the rich will always pay more than the poor. So I ask what moral argument do you have to force the rich to pay a higher percentage than the poor? After all the poor are the ones that take advantage of the government services, and the rich don’t. My argument is for a flat tax rate for all (say 14% to 20%).

The reason why the rich are taxed to the hilt is because it is an easy populist thing to do. Let’s face it there are more poor than rich and the politicians can do the math. Yet pragmatically it is the wrong thing to do, and when Bush created the cuts he was being pragmatic.

I live in Switzerland and the taxation levels are extremely low. For example Michael Schumacher who lives in Switzerland earned last year about a 75 million per year and paid about 5 million per year (I am guessing based on a TV report).

Michael is happy and so is the Swiss government. Michael will never take advantage of the Swiss benefits (unemployment, pension, etc). Yet Michael pays unemployment, pension and taxes in Switzerland. Michael’s taxes are being used to pay for services that poor people use.

Now imagine if Michael moved to his native Germany. There the German government would demand 50% of his income. Here is where I ask what right does Germany have to 50% of Michael’s income? Answer, none! Michael is willing to pay taxes as most rich are (Really rich people generally speaking are willing to pay taxes so long as the taxes are moderate.) 

Think about this situation. Germany and their socialists believe they are morally correct to charge 50% income tax. If rich people paid 10% socialists would cry foul and demand rich people pay their fair share (which they do since taxes are percentages.)

Yet Germany with its 50% does not get any monies whatsoever from Michael because he pays his taxes in Switzerland. Switzerland is pragmatic and says, “hey 5 million is better than nothing.”

Now enter Bush and his tax cuts. Until the tax cuts many rich and American corporations put their headquarters in Switzerland. Switzerland benefitted quite a bit and the money kept on jingling in the Swiss coffers. When the Bush tax cut became active the rich and American corporations went back to the US to pay their taxes.

The Treasury said the government actually ran a surplus of $44.5 billion for December, the largest ever for that month. The gain reflected a big jump in quarterly corporate tax payments.

And here in Switzerland they have noticed that they have less revenues! Why? Swiss papers have said because tax revenues went back to the US.

So while you might not agree to the tax cuts from a moral perspective, pragmatically it is the right approach. Gotta give Bush credit where credit is due.

2006 Year in Review

Pictures can speak louder than words. So here is a shot of the performance of my E*Trade account.

Jason's 2006 Investing Performance

Yikes. First one question. Is is possible to apply technical analysis to a chart of your performance? If so, I would be short Jason Coleman right now. I got hammered in December (giving back all the gains of a nice November) and my portfolio value has fallen out of the channel it was in. I should probably sell out of all my stocks even though the individual stocks themselves don’t look so bad. Or do they?

My trading strategy for that first half of the year can be summed up as “find great company stocks, buy them when they are overpriced, then sell like a pussy when the stock loses money” cause that’s exactly how I lost all that money. Other problems I was facing was investing with money that I needed for other stuff. So I would enter a decent investment (like buying MSFT at $24) and have to pull the money out at a bad time (when the stock was down $1 at $23) and then I wouldn’t have money to buy the stock at a better time (when it was close to $20, now closer to $30).

Lesson learned:

If you don’t have the liberty or patience to stay in an investment for the long term, don’t make a long term investment.

A theme that I noticed a lot this year was that I would make good calls. I just never seemed to put my money where my mouth was. Usually, my money was too busy wrapped up in a worse trade. I credit a lot of this to selective memory though.

Now something incredible happened around July. Actually three somethings. (1) I learned more about technical analysis and started trading a swing-trading strategy, (2) I left my job and started working at home, thus had more time to devote to stock research, and (3) the market turned around and soared. Which of these was more important, I’ll never know. This I know, I did a lot better than I did earlier in the year. Although I was only keeping pace with the S&P and boarder market, I at least wasn’t losing so much.

What happened in December? A lot of my loses came from a botched trade in SIRI.

New rule:

I can never trade SIRI stock again. I am always wrong.

I made a mistake that I’ve made before (WITH THE SAME STOCK); I turned a trade into an investment. In November I came up with a thesis, based on technical analysis, that SIRI would bounce from $3.60 to about $4.30 or so. I didn’t have any conviction, so I stayed out of the trade. Then the stock started taking off. At $3.90, I thought there was enough confirmation that my original thesis would hold and SIRI would see at least $4.30. That was my trade, $3.90 to $4.30. When the stock hit $4.30, I didn’t sell. I changed my mind and decided to hold on to the stock for a longer trade. Bad idea. Now the stock is down around $3.50 and probably going lower.

I was greedy. I could have sold the sucker and been happy with a nice little $150 profit. The kinds of profits that were making me so much money throughout the fall. What’s worse is that as my money was held up in SIRI I missed some opportunities to take advantage of some swings that were happening in my other holdings. I stink.

(UPDATE: I wrote this article before trading started in 2007. I am currently planning my sale of my SIRI stock. A lot of people were selling at the end of year, as people tend to sell big losers for the tax advantage at the end of the year. Now at the beginning of the year, there are a lot of stupid people who lost money, sold losers, and now have a lot of cash. These people are going to be buying on the first trading day of the year. That’s what’s happening with SIRI and a lot of stocks now. The plan to not be greedy and recoup as much of my losses as I can.)

More than E*Trade
I’ve been especially risky with my E*Trade account. There are a few reasons for this. (1) I’m young and my account size is small. Thus, I’m more able to recover from a big loss. (2) I’m using this account to learn about trading and investing. Some people advocate paper trading, but I find that trading with real money makes it that much more real. Part of learning to trade is learning how to make money. Paper trading is fine for this. A bigger part of learning to trade is learning to control your emotions and tendencies. This can only be done when something real is at stake. And (3) my E*Trade account is only 1/3rd of my total savings. I have another third saved in mutual funds through a 401k and another third invested in my old employee share purchase plan. Let’s take a look at these other investments.

My 401k
The year-to-date returns on my 401k account is 15.9%. This was a good year for everyone. I don’t know how my numbers stack up against others. I was invested pretty evenly in 4 funds.

– Fidelity Contrafund (FCNTX) (+15%)
– Harbor Capital Appreciate Fund (HACAX) (+1.7%)
– Royce Opportunity Fund (RYPNX) (+20.4%)
– Templeton Emerging Markets Fund (TEEMX) (+25.8%)

All of the funds are “stock – growth” funds, except TEEMX which is an international fund. The fund that sticks out like a sore thumb there is HACAX. This was a fund I purchased into on a tip. That should have been a warning there.

I thought that I needed to diversify a bit more and didn’t know which fund to choose; a colleague suggested HACAX and I thought, “Why not?”. In the middle of the year, I saw that HACAX had handled the pull back from May-July much worse than my other funds. While other funds were floating a bit above 2% returns (or much higher in some cases), HACAX was down almost 10%. The stock was overweight in technology, which had been hit the hardest in May. But I new that tech (and the stocks HACAX owned) were going to lead the turn around in July. So I stayed with the stock. They managed to crawl back to positive but didn’t improve much once they got there. I thought that they had made some bad moves. So I moved the money I had in HACAX into another international fund: Fidelity Diversified International (FDIVX). I’m now about 50-50 international vs. US funds. This is a bit higher than recommended, but I think good for an aggressive portfolio.

My ESPP: Accenture (ACN)
Here is a chart of ACN for the year.

ACN 2006 Chart

Not too shabby. In July, I sold about half of my stake. I was quitting my job and needed the money as a cushion until my independent work starting producing more cash. Some of the money profits found their way into the E*Trade account. The stock I sold in July had been bought at much lower than $28. The options came with a 15% discount too. Nice. The remaining shares continued to do very nice throughout the rest of the year. Exact numbers are hard to come by, but the gains in ACN made up for all of my loses in the E*Trade account and then some. Overall, both accounts are up about 10-15%. Plus the 15.9% gains in my 401k, and I have about 13-15% gains overall. Very acceptable, but I know I can do better.

That’s all for now. It’s been educational and entertaining to look back on my year of trading in 2006. Thanks for being there with me.