Harry Chen Thinks Aloud

It’s almost the time to say “Good Bye” to the year 2007. I learned much about investing in 2007, and I’m looking forward to refine my strategies and apply them in 2008 and the years beyond.

Looking back 2007

In 2007 the development of three events have affected my family directly: (1) a slowdown in the US housing market, (2) a sharp decrease in the US Dollar value and (3) a significant increase in commodity prices, in particular, in food and energy prices.

The crash of the US sub-prime market caused a US housing slowdown. A minor drop in the home value in our neighborhood, though only damaged our net worth on paper, changed the way to we spend money. Because we felt that we have less money now, we have avoided purchasing many big ticket items.

A cheap US Dollar discouraged us from traveling to countries whose currencies are trading against the US Dollar in a record high. Similar to the effect of decreasing home value, a weak US Dollar hits my consumer confidence.

Expensive food and energy directly affected our household spending. Eggs, milk, wheat and corn products are now more expensive than what they used to cost. However, in some aspect, this has a positive consequence. We are more conscious about energy conservation and reduced the purchase of non-essential junk food.

Investing 2008

Two investment vehicles that I come to appropriate are (1) mutual funds that invest in gold and (2) high-yield CD. I believe that these two investment vehicles are useful for any personal investment portfolios.

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The US Dollar is trading historically low against many major currencies. Few questions come to my mind: (1) How did we come to this situation? (2) Who can and can’t benefit from a cheap US Dollar? (3) Should small investors be worried about a cheap US Dollar?

How did we come to this situation?

According to The Economist article, the US Dollar is trading historically low for three key reasons: high oil prices, a weak US economy and a troubled US credit market.

Who can and can’t benefit from a cheap US Dollar?

Individuals and companies benefit differently from a cheap US Dollar. For individuals, tourists travel in the US from countries with a strong currency can benefit. Travelers from Canada and EU find everything to be cheaper in the US. On the other hand, US tourists who travel abroad face a complete oppose situation — everything is more expensive abroad than at home.

A cheap US Dollar can help US companies and depress the economy of foreign countries. US businesses with an international market can benefit greatly from a cheap greenback. This is because the price of their exports are now more competitive than those from countries with a strong currency. Developing countries whose economy depend on exports to the US may be hurt by a cheap US Dollar — a weak US economy will demand less imports.

Should small investors be worried about a cheap US Dollar?

In general, small investors in the US shouldn’t be worried about a cheap US Dollar, assuming that their investment portfolios are diversified and are aimed for long-term investment. Currency exchange rates are cyclical — the US Dollar was the king in the late 90’s. It’s only a matter of time for the US Dollar to come out of its low (the question is when). Meanwhile, I think investors should continue to invest in the US stock market, in particular in S&P 500 companies. The profits of US national business may be hurt by a weak US economy, but multinationals should do relative well because of their diversified international markets.

Experts believe that now it’s a good time to diversify some of your investment in cash. This is because the yield of cash is very attractive given today’s market condition.

1. Cash yield as much as long-term bond. As of July 9th, 2007, 10-year US Treasury yield is 5.16%, and 6-month CD offered by INGDirect is 5.15%.
2. The yield of cash investment is ahead of the current annual inflation rate, which is around 2%. If your cash investment yield 5%, then you enjoy real cash yields of 3%.
3. The Fed probably will keep the short-term interest rate at 5.25% for the rest of 2007.

For those who are interested in cash investment, I recommend CD laddering.

Source:

• Daily Treasury Yield Curve Rates
• INGDirect Orange CD
• Diversify into Cash?

After seeing shares of Google stock price hitting all time high, a friend asked me if I own shares of GOOG. I reply “yes. And do you?” “No, unfortunately. I own shares of some index fund,” he said. “So you probably own GOOG”, I laughed.

Like my friend, I don’t directly own share of GOOG in my investment portfolio. I own shares of an S&P 500 index fund and which makes certain amount of investment in GOOG. I’m happy when GOOG share price goes up, and I’m not too upset when it drops hard. This is why I think investing in index funds makes sense for most people.

Also, I think many mutual fund owners don’t aware how their mutual fund works. This can be dangerous because they may end up overweighting shares of certain high-profile stocks like GOOG.

After reading my blog post that advocates cost does matter in long-term mutual fund investments, Gabriel asks how he can apply this low expense principle in managing his 401K account. Let me try to answer his question with the ideas that guide my 401K account management.

The general idea: to keep you 401K investment cost low, your first need to identify the types of expenses that you’re paying to mutual fund managers or your 401K management company. Because different companies offer employees with different 401K plan, the strategy that I’m about to describe may or may not be applicable to everyone.

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If you are not convinced that keeping investment costs low is important, check out a real-life example. In 2005, the investments of Judge Alito were revealed to the public. Based on this MarketWatch article, I did a research on the expense ratio of different funds that he owns. Surprisingly, all funds that he owns have really low expense ratios. Alito has a net worth of about $1.72 million.

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Why should we invest? For example, why is it such a good idea to buy a house, or put away money for retirement savings? The simple answer is that in order to secure our financial future, we must learn how to make money from money. For example, use the money that we’ve saved from paychecks to make more money. This is the basic of investment.
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MarketWatch reports that Google is to be added to S&P 500 Index, replacing Burlington Resource Inc. This is a good news to those who want to invest in Google but doesn’t want to buy Google stocks directly.

Since GOOG will be part of S&P 500 Index, investors can own shares of GOOG by investing in index funds that tracks S&P 500 index (e.g., Vanguard 500 Index Fund).

I think in the near future, investors should see a minor increase in the stock price of GOOG since all mutual funds that track S&P 500 index are forced to re-balance their portfolios to include GOOG.