Many people only look at the cash for emergency usage. In reality, any liquid assets that you have can be counted towards emergency usage. Real estate assets are obviously not as liquid as cash, bank CD, bond, and then stocks, listed in the order of liquidity consideration.

What kind of emergency you may need more cash than usual? I believe that one should cover accidents, medical and death situations by car, medical, and life insurances. If you have disability insurance, that is even better. Please do remember that the social security tax that you pay covers part of your disability and life insurance needs. But one is still left with one of the most dire and common cause for the need of emergency cash fund: unemployment.

Obviously, when you plan for your emergency need for unemployment, you don’t need include any of the cash drain from income tax bites, since you won’t have any income. I think it’s OKAY to keep cash + bank CD to be just 1 to 2 months of your living expenses excluding income taxes. But you should probably have about 9 months to even 2 years of total liquid asset to prepare your emergency needs. You can count some 100% of your bond, and 50% value of any stocks/mutual funds that are NOT directly related to the sector your job is in. I’m using 100% of the bond value, because I assume that in the situation where you lose your job due to economic reasons, economy should be in a deflationary recession, which is usually good for bond investment. I’m using 50% for your stocks, because I because counting all potential losses and capital gain taxes, 50% is probably a good conservative number. You can substitute with any other percentage number for your stocks, but you should only include stocks that you are willing to sell at all cost. Preferably, you should not include any stocks in your absolute core holdings.

In summary, I will set a goal to have a liquidity of 9 months to 2 years (depending on your comfort level), instead of some 3 to 6 months of emergency “cash” fund. Having lots of spare cash is a convenience that you pay for in terms of loss in the potential investment return and/or paying down towards your mortgage. One should be more flexible in managing the money by NOT sticking to absolute cash.

Here is the advice from the traditional way of looking at emergency cash. There are a couple of good advice, but it further shows that one should consider total liquidity instead of just cash.

First of all, make sure you understand the title correctly. Investing against $US is in no way investing against US, nor is it unpatriotic. As I have talked many times in my blog, I expect a higher than normal inflation rate going forward compared to recent history and compared to other countries, most likely this will translate into a higher depreciation rate versus other currency, and rising prices of commodities. Warren Buffett has betted billions of dollars against $US in the foreign exchange market in his company Bershire Hathaway because he also believed that $US is vulnerable to depreciation due to heavy government debt overhang. Same for George Soros, and Bill Gates (Actually, some of their timing was not that ideal. I think they got screwed by all the central banks).

You could put some of your money in foreign currency, especially in a foreign country that you either travel to more frequently for personal or business reason. I don’t advise anyone to put too much cash in foreign currency in general. The reasons are that the amount of cash that you put in foreign currency will add to the amount of your idle non-investing cash. This amount of cash is also quite less usable to you since it is in foreign currency until you travel to the same foreign country. And unless you divert a significant amount of your asset to foreign cash, your overall portfolio cannot be protected against $US depreciation.

Despite all these, if you want to invest in foreign cash, you can do so very easily at www.everbank.com. This is one of the best international banking site that I’ve seen. Not only they offer certificate of deposit in foreign currency, but they also offer CD tied to a basket of commodity currencies (such as Australian/Canadian/South African dollars). The foreign exchange charge by them is a little expensive for my taste at 1.5%. It means that the moment you exchange your $US to foreign currency, you are already out of 1.5%. So unless you intend to leave those money in that currency for a very long term, and/or use them when you travel, it serves you no good to exchange your money just for a couple of years.

If you have an allocation for bond investment, I advise highly to allocate some money to foreign intermediate term bonds within your bond allocation. There is no easy way to tell how much you should allocate for each currency. Some of the currency that I like better for the long term are Euro, Japanese Yen, Chinese Renminbi, Canadian, Australian, and New Zealand dollars. My criteria for choosing a particular currency are a strong, expanding economy, and/or economy more based on production of commodity. European countries don’t grow that fast, but I would put some dollars in that economy since it (and maybe Yen) would probably be the first primary choice when $US falters.

If your portfolio is small, and cannot invest in individual bonds, I would suggest buying some un-hedged international bond fund, preferably having no US component in it. I found and invested in a low-fee bond like that BEGBX, but its returns are (and were) not great. The primary reasons are obviously that $US has been going quite strong against foreign currency these past 1 to 2 years, and that bonds in foreign currency usually pay less interest than US, especially Japanese bonds which has its interest rate at almost 0%. For that reason alone, I probably would not put too much money into Yen if at all. So please do set your expectation lower when you invest in foreign bonds, and understand your reasons for investing in them. You’re taking a position, not for a quick short term gain.

You can either buy diversified global stock funds or country-specific mutual funds or ETFs (such as EWJ for Japan, EWY for Korea, EWT for Taiwan, IFN for India, EWC for Canada, EWA for Australia, etc.) Diversifying in foreign countries may also help reducing your portfolio volatility, according to Modern Portfolio Theory (MPT). Personally, I would recommend buying ETF/mutual fund from Vanguard, and possibly fine-tune your allocation by adding EWJ, EWY, IFN, and maybe EWA/EWC (both of which are more tied to commodity markets if you are interested). How much you should allocate for each depends on your personal preference? In the long term however, this percentage may be the determining factor of how well your portfolio performs.

By commodity, I don’t mean physical commodity, but rather any investments that are related to commodity price. More specifically, they are natural resources and/or precious metals. I have two focused posts on how to invest in those two sectors. Please simply click on the hyperlinks. Assuming $US depreciates, investing in these two sectors will help retaining the purchasing power of your US dollars. The biggest advantage of investing in commodity-related investments is that it is the more direct way of maintaining your purchasing power (if deflation sets in, your money in this sector will shrink since the current price of commodity is less compared to the time you invested). However, commodity sector is the most volatile sectors of all. If you cannot take an annual swing of some 40+ %, you should control the volatility by sizing this portion to a small percentage until you can accept its overall volatility effect on your portfolio.

Since most of the people (if living in the US) will have the majority of assets in the US and/or dominated in $US, it simply makes good investing sense to have your asset diversified in different countries if not in different currency. Most financial advisors will advise you to at least have 10% to 20% stock/mutual fund holding in foreign stocks. Historically, such diversification reduces your overall portfolio volatility. For the following classes of assets: foreign cash, foreign bond, foreign stocks, and commodity-related investment, I recommend foreign stocks as the safer and better long term way to invest against $US for smaller investors. If your portfolio size is sufficiently large > $500K, I suggest to consider foreign bonds as part of your existing bond portfolio.

If one’s portfolio is big enough (>$300K), and has the tolerance for extreme volatility, one can put some 5% to 20% into commodity-related investments in natural resources and precious metal investments. At times, this may be the only saving grace for your portfolio when both domestic and foreign stocks are down. More and more, due to globalization of world economy, this is increasingly true. Stock markets around the world are quite synchronized. Investing just in foreign stocks most likely will not save you a heart attack in the short term (when all stocks fall) but only giving you a long term advantage.

Welcome to the 46th Carnival of Investing, hosted at My 1st Million At 33! Thanks to all the contributors to the carnival to make this another great carnival for more learning on investing your money, and thanks to Jonathan for making hosting arrangements.

Using my own judgment, I have highlighted the posts that I like better by RED color. There were a couple of posts that I have struggled with my binary RED/not RED decision. Please don’t take my color codes too seriously. Also, the listed order is however RANDOM. All the comments/color codes are only of my own opinion. Readers are encouraged to investigate on their own for each post.

1. Victor Fam presents Millionaire Factors posted at Victor Fam. Victor shares the tips from the book of The Millionaire Next Door.
2. TJP presents Can Gap Inc. (GPS) turns things around? posted at Investor Trip. TJP gives 3 reasons GPS may not be doing well.
3. Finance Buff presents 401(k), Roth IRA, then Back at 401(k) posted at The Finance Buff. Comments on a few rules in the list of 25 Rules to Grow Rich By from Money magazine.
4. indexfundfan presents Cash balance interest and margin account posted at Indextown. A good detailed strategy on how to maximize your cash balance interest earnings while waiting for an opportunity to invest the money.
5. F. D. Bryant III presents Newsvine - Social Security is a Ponzi Scheme: Why we must switch to Personal Accounts posted at FDBryant3’s Newsvine. Yes, I agree with the author to some extent.
6. Andrea presents Starting in Real Eatate posted at To Become Wealthy.
7. Steve Faber presents This Can Make You Money - But You Must Dig Deeper posted at DebtBlog.
8. MillionDollarCountDown presents Some Strategies For Down Market posted at MillionDollarCountDown. Strategies for managing your portfoilio when market goes south.
9. Ralph Morgan presents Asset Class - Fine Art posted at Enough Wealth.
10. Ricemutt presents Diversifying into real estate through REIT ETFs. posted at Experiments in Finance. An introductory post about four REIT ETFs.
11. Michael K. Dawson presents The Commodities Bull Market is Back posted at The Time and Money Group.
12. Andy presents Spend and Save at the same time! posted at Andy.
13. Trent presents Counter Intuit-ive posted at Stock Market Beat.
14. Christine Kane presents Don’t GET Rich Quick. BE Rich Quick. posted at Christine Kane.
15. Gina presents Include Net Capital Gains in Investment Income posted at Gina’s Tax Blog.
16. The Dividend Guy presents 7 Stocks for the Really Long Term posted at The Dividend Guy Blog. A collection of stocks for the long term.
17. Super Saver presents Investing 101 - Managing Risk Successfully posted at My Wealth Builder.
18. goldguru presents A Closer Look at Tagish Lake Gold Corp posted at goldguru. Detailed look at Tagish Lake for massive gold and silver deposits. Get in while the getting is good.
19. Tom Hanna presents The Week Ahead: Your Financial Roadmap for October 30 to November 3, 2006 posted at Financial
    Options. Economic calendar.
20. Mike presents Investing In Stocks and Personal Morals posted at The Road 2 Riches.
21. A Samuel presents Sama Dubai Snap Poll shows Dubai Property Outshines China and India posted at Nubricks.com.
22. Scott presents New Prosper Features posted at Scott.
23. Jonathan presents Trade Execution: Why It Matters, and Broker Comparison posted at MyMoneyBlog.
24. Paul Paulson presents Gold For Thought posted at MoneyKeg Blog.
25. Michelle presents How to Invest For High Returns & Avoid Losing Your Original Investment posted at EconoEdge.
26. Jim presents Don’t Invest Borrowed Money posted at Blueprint for Financial Prosperity. Investing borrowed money makes you more emotional.
27. Andy presents Desire to Retire: “3 things to consider when think… posted at Andy.
28. Mister Juggles presents Save These Hot Boobs from Cancer posted at Long or Short Capital.
29. Bryan C. Fleming presents Million Dollar Savings club Update: Day 65 posted at Bryan C. Fleming .com. I wouldn’t invest $100 IMHO.
30. MyMoneyForest presents eBay - The Maturing Dot Com posted at MyMoneyForest.
31. FMF presents The Best Investing Book of All Time posted at FreeMoneyFinance.

That concludes this edition. Submit your blog article to the next edition of carnival of investing using carnival submission form. Past posts and future hosts can be found at blog carnival index page.

Technorati tags: carnival of investing, blog carnival.

As a guest writer, 2million blogs his personal finance from 2millionblog.com, and is recording his journey to financial freedom. Please check him out at his site for more goodies. The following is the part I of his energy hedging series (part II & part III), showing how to hedge energy prices. End of Frugal’s message.
——————————————–

A review of my current hedging strategy on energy prices.

When I started my job in 2001 one of the strategies I planned with my savings was a hedge on rising energy prices. I ended up investing a modest amount in Exxon and Chevron thinking that if energy prices went up significantly both of these companies would benefit. With my recent attention on gas prices, I thought it would be a good time to review this strategy.

First lets take a look at the price change of Exxon’s stock compared to the change in the price of gas. I’ll use my estimated historical gas prices from the charts at raleighgasprices.com to track gas performance. I also took historical stock prices from Yahoo!Finance to pull the closing price of Exxon stock on the 1st trading day of each month.

Interesting side note: A quick look at some statistics with this data - I calculate the Pearson Product Moment Correlation Coefficient for this data set as 0.89 (a strong positive correlation). This also suggests that 79% of the stock price change is correlated with the price of gas. Keep in mind the gas prices are estimated and this was done for illustrative purposes only.

This data shows even a better correlation than I expected between Exxon stock and average gas prices in Raleigh. This information could be useful for future planning.

Now lets take a look at my Exxon stock holdings in my DRIP:

Notes: Please go to my original site for a better formatting of this table. ROR=Rate of Return; ROR is calculated annually; *Averaged ROR; dividends reinvested are aggregated into yearly “Invested” column; actual ROR is higher because dividends paid are not calculated in ROR.

On the surface I have been averaging a ~22% rate of return (on stock price only) for money invested in Exxon stock, a fantastic return for a blue chip stock. I have obviously benefited well from the Exxon stock price, but how has this helped me to hedge against rising gas price?

First lets see what has happened to my average monthly gas spend since 2001. Since November 2001, my 3 month rolling average has increased $88.75/month, or if things level off, an estimated $1065/year.

My net profit from the Exxon investment (excluding selling costs and taxes) is currently $1,163.12. While my estimated annual gas spend has increased $1065, my net worth has increase more than enough to offset this while still earning a 1.9% dividend. However, this hasn’t really helped me hedge against the long term impact of rising gas prices, I have only been able to offset a year’s worth of additional gas spend. If gas prices remain the same, I have essentially hedged against paying a year’s worth of the gas increases, but nothing more.

This is a reminder for the Carnival of Investing next week. It appears that blogcarnival.com has some problem. If you cannot submit through them, please email me directly the same information with trackback preferably (so that I can easily notify you) at 1stMillionAt33$gmail.com, replacing $ by @.

Thanks.

Frugal

Why did budgeting fail me?

1. It was too hard to manage. I tried using MS Money and other complex methods to get my finances in order. I kept a budget for 2 days before quitting. It took too long to manage everything. When I bought a can of beans from the store, I would have to input the following information:

• Did you pay with credit, debit, cash, or check? Credit.
• Which card? Amex.
• What date did you buy it? Um. Yesterday.
• What catagory did this purchase fall under? Food.
• What sub-catagory did this purchase fall under? Eating out? Groceries? Yeah. The last one.
• What was the sales tax? ARG. Food doesn’t have any.
• Where did you buy it from? Who cares?
• How many did you buy? A MILLION. LEAVE ME ALONE!

2. It was too inaccurate. There was always some emergency and I would end up going over what I expected. Way over. This was discouraging enough for me to throw most of my budgets away. What’s the point of having a budget if I’m just going to spend more than I thought anyway?

I needed to find something easier. I wanted to do the least work possible. Here are some of my main guidelines that have allowed me to keep a budget for the past 3 months.

Binary Dollar’s Budgeting Guidelines:

Do NOT budget more than you earn. This includes your income, rent from tenants, a conservative estimate of earned interest, etc. The ideal pool you should start with is 90% of your take-home pay for a little bit of added cushion.

Subtract your fixed expenses first. Pretend that you pay your utilties, rent, and savings at the beginning of the month. Even though the food bill changes each month, I subtract a rough estimate as a fixed expense. I don’t want to run out of money and go hungry. Your savings should be a fixed expense too. Don’t fall into the trap of saving what’s “left over” at the end of the month. There won’t be anything.

Things that I usually subtract from a month’s pay:

• rent - $500
• utilities (rough estimate) - $100
• food (rough estimate) - $130 (Are you calling me fat?)
• savings (this could be emergency funds, ira, etc) - $500
• car (rough estimate) - $40.00

Strip the catagories. Figure out what’s important for you to keep track of. You don’t need 75789347598374 catagories in your budget.

I’m not worried on a day to day basis about how much of my savings goes into an IRA, money market, or some mutual fund. I lump it into a catagory called “savings” on my budget sheet.
Use the bare essentials according to your tolerance of complexity and your priorities. I have fairly broad catagories. Here’s my list:

• rent
• student loans
• gym
• utilities
• car
• groceries
• savings
• spending

Evolve your budget. I used to write my budget and then try to spend according to it. I had it backwards. I had to spend and THEN write my budget. My budget did not become accurate until I started tracking my spending. My budget changed quite a bit in the beginning. It took me 3 months of tracking my spending to evolve my budget. What I thought I spent and what I actually spent were different. Don’t keep your budget the same month after month if it isn’t working. Tracking strategies will be covered in the next article.

—
Henry, who contributes to the blog Binary Dollar, is a developing writer interested in technology and fundamental personal finance. He also drank a gallon of milk in 1 hour when he was in college.

I just bought a 2GB Secure Digital (SD) memory for about $19, made by Kingston. The 1GB SD memory is about $9, also made by Kingston.

The original price for 2GB SD is $37.95 before tax, with $9 mail-in rebate, using $10 Google checkout reduction, and $0 for shipping. The rebate will expire on Oct 28.

The deal for 1GB SD is $30.95 before tax, with $13 mail-in rebate, using $10 Google checkout reduction, and $0 for shipping.

Hurry before the rebate expires. Kingston is a pretty good manufacturer.

Here is the link to 2GB SD:
http://www.buy.com/retail/product.asp?loc=101&sku=202743332

Here is the link to 1GB SD:
http://www.buy.com/retail/product.asp?loc=101&sku=202743519

If you have missed the deal, don’t worry. Go to the Google Checkout site list and just start shopping for any combined order more than $30. As far as I can tell, you can use Google Checkout for $10 REPEATEDLY. If you can manage to buy things just for $30, you can get 33% off in every order. Not everyday you can get such discount. Plus that if you scroll down on that page all the way to bottom, you can register any of your Citicard and get $5 additional off on your first order. And I am guessing that you can register multiple of your Citicards, and get multiple $5 off, . Am I too sleazy?

Can’t believe this is happening again to me. My site was down intermittently for the last 5 hours. I made some complaint to my site hosting company, and they seemed to have addressed and alleviated my concerns.

Let’s hope that it won’t go down like this anymore.

I was heartened by gold’s price action over the last three days seen in the price chart from Kitco below. From a high near $592 on the 23rd, it dropped nearly $19 to a low near $574 on the 24th. It then almost recovered all the way back to $592 today (25th). Gold stocks, as represented by the HUI, managed gains during this turmoil in the physical market, culminating in today’s 3% move to 316.13. This speaks loudly of some persistent buying in PM stocks.

Click to enlarge

The PM correction from the May highs has been quite painful. The “throw-over” move at HUI=369 got many people, myself included, I’m apprehensive about calling a bottom. Indeed, I’ve been fully invested in PMs and determined to ride out the rest of this correction. There is a cluster of fibonacci retracement levels and moving averages in the 320’s. Since the HUI is nowhere near oversold, it needs to get over those levels to show this rally has legs.

This is not investment advice, all usual disclaimers apply.

California is one of the biggest state in the USA. The dynamics in CA can been seens as a microcosm of the entire US (actually CA is almost 1/6 or more by GDP). Since I’m most familiar with the state of California, my discussion will be mostly drawn from events in California, even though similar dynamics is playing out in other regions.

Currently, there are two obvious trends, all hitting the headline of the newspaper:

1. Sale volume in housing market is down dramatically. Housing market is no longer rising on the average.
2. Residential rental market is picking up steam. Rents are rising at a much faster clip, many at 6% to 7% annual increases.

All these come as no surprise to me, since I have specifically stated different strategies for different people in my Unconventional Strategies in This Housing Market back in June, fully expecting this unfolding scenario.

If one can understand how things are the way they are today, one can better anticipate what could come next.

The sale volume is down big because there is certainly a change in the sentiment of the participants, especially in the overall real estate investing segment. A very significant part of the sale volume is due to second home buying, and purely investor buying. The exact number is hard to tell, but my guess is probably 20% to 35%. Some of the CA real estate investors have gone out-of-state for better values. Some of the investors are stopped by rising short-term interest rates. The late investors are bleeding cash probably on the monthly basis, which is forbidding them to flip their last home trade for a profit. It’s one “trade” gone bad, and the game is slowly over for them. Some certainly pocketed good profits previously, and can get out less scathed, or have a better holding power. But many of them may have spent significant portion of the profits that were earned in previous trades, and a trade gone back means no more home-flipping income.

In any case, whether it is because of voluntary or forced retreat, investors no longer participate in the same fervish way as before. This is the most obvious from all the national home builders reporting dramatic rise in the cancellation rates (cancelled by home-flipping investors, and/or cautious would-be home owners). What’s left in the housing market is the remnant of new stupid investors and normal home buyers. However, with volume going down, it pretty much means that price cannot be pushed up through a more fervent buying process anymore. Prices will be determined by other factors.

That is the current price environment. However, price alone does NOT tell the whole story. If you buy any stocks, you know that there are really three prices: transaction price, and bid/ask. In the real estate market, the asking price is the most visible. Transaction price come out with maybe two months lag. However, only sellers can see the bidding price. In the stock market, market makers will balance the bid/ask, and try to facilitate the marketplace by putting out a transaction price closer to the dollar-weighted price of all bid and ask prices. In the real estate market, the real estate agents and brokers perform the same function. They won’t get paid if there is no transaction, and therefore, first and foremost, they want to bring the buyers and sellers to come to the same term in price. Why is NAR telling sellers to tone down sellers’ expectation in price? Because the bidding price is actually WAY LOWER on the average than the asking price, and these agents can only make transactions happen by bringing down the price (and not the other way around). Even the new homes are having all sorts of incentives and discounts which in effect lower the actual asking price.

So what is happening is that ask price is probably slightly down to 10% higher than last year, while very few transactions go thru to the advantages of sellers because of greater fools and never-ending lies from real estate agents, and increasingly more transactions go thru in the advantage of buyers. There are not more transactions because there is a BIG spread in the bid/ask price. If you have such things happening in the stock market, you will call that as “illiquid” or less liquid market, which also translates into lower transaction volume.

Once you take the average of all completed transactions, the price is about flat, since the sellers were expecting 10% to 25% higher in price than last year.

Rents were depressed partially because of more new homeowners who “shouldn’t” be homeowners due to zero down payment or extremely low mortgage payment from the negative ARM or interest-only ARM. Now the same factor is working in reverse to the advantage of the rental market. For the first-time home buyers, it is becoming tougher for them to either come up with a hefty down payment or qualify for a higher mortgage amount.

Besides, the bulls in the real estate market is right all along in that both job market remains strong, while population (+ all new immigrants) growth is steady. By default, it means housing demand. And if the housing demand is not going into the housing market, then it must go into elsewhere, in this case, rental market. Many places, like Southern California, have rental vacancy rate of less than 4% (or 96% filled). It practically means that it’s all full since you are always bound to do some cleaning up inbetween move-ins. And what that means is Pricing Power for the residential rental market.

Yes, rents are going up more. And unfortunately, they will keep going up at a faster rate than general inflation rate or CPI. It will go up until two things happen (forget about factors due to housing market for now):

1. People start to move out of California.
2. Business cannot find their employees at the salary wage that they want to pay, and start to move out of California.

I’m not saying that both of the above will happen. What I mean to say is that the growth of both population and job opportunities will probably go down to match what is happening in the rental market. Essentially, all markets will find their equilibrium point. It is hard to say what is the final equilibrium which is a dynamic balance anyway. However, things will only happen slowly. Average people’s ability to forecast the future is limited. When there is some change, they simply ignore them, and expect things to stay the same, until the change becomes a consistent trend. I don’t expect most people to move out of state, but rather coming in less, or through attrition due to various reasons.

At the same time, for the expanding business and the new business coming into California, they may be in for a surprise (if not already). It will become harder and harder to find skilled workers (or even unskilled workers for that matter) willing to accept the same salary level as before. Workers will demand a higher pay because of a higher rent, either because of necessity or because of expectation. Turnover rates will be higher. Competition for workers will be tougher. So for the businesses, they only have two solutions: pay more, or move out. Some of them will definitely pay higher, while the ones that cannot afford to pay more will move out. It is like Darwinism, survival of the fittest.

In the meantime however, workers will trench down first and take up the rental rate increases on their face, while businesses will simply expand slower with lots of unfilled job slots (until they raise the wages). The bulls in real estate market are right about the growth. But the markets ADJUST. And the adjustment is certainly that growth will be forced to slow.