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  • I bought a (fraction of a) stock!

    A few weeks ago, I bought a very tiny share of Berkshire Hathaway B stock. This is the first time I have ever bought an individual stock. Until now, all of my equity investments were in mutual funds only, so this felt like a really big step for me – even though I only spent $50. $46 went toward the purchase and the other $4 went toward Sharebuilder‘s commission. The only reason I even took this plunge was because Jonathan posted about a $90 Costco bonus for Executive members (which we are) who open a new Sharebuilder account. We haven’t received our $90 Costco giftcard yet but I expect it to arrive in the next couple of weeks. The best part is that our tiny share of BRK.B is already worth $52. I don’t expect to make a fortune this way (obviously), but it was good to push beyond my comfort zone.

    Expanding Personal Boundaries

    I’ve discovered that I’m not the only one who finds expanding my personal boundaries to be a worthwhile goal. Over at Money Smart Life, Ben posted about what he calls extreme investing, “extreme” being a subjective term. As he puts it:

    The reason you might want to do a little extreme investing is that it can help broaden your financial horizons. As creatures of habit we tend to stick with what we know, whether what we’re currently doing is the best thing for our situation or not.

    He gives some guidelines for practicing extreme investing, the most important of which is that you should play with only a small amount of money – specifically, an amount that you can afford to completely lose. That’s exactly what I did in buying one-hundredth of one share of BRK.B – actually, we come out ahead on this one since our cost was only $50 but we’ll be getting $90 from Costco, which we would have spent anyway.

    My Next Venture: Prosper

    I seem to be getting all of my extreme investing ideas from Jonathan. I’m thinking that my next project will be to open a Prosper person-to-person lending account with $50. After I fund my first loan, Prosper will give me $25, which effectively reduces the amount I’ve risked to a mere $25. However, I need to learn a little bit more about Prosper, so I hope my peers who’ve blogged about lending on Prosper won’t mind answering a few questions that I haven’t been able to find answers to on the Prosper web site.

    Investing for the Future

    As I’ve mentioned previously, one of my major goals is to study personal finance and learn much more about money management than I currently know – basically, I want to give myself an unofficial education equivalent to that of a certified financial planner. But I’ve tried reading the CFP textbookI asked for and received last holiday season, and I just don’t have the brain power to study right now. Nevertheless, I think a little extreme investing is a fun alternative for the meantime to help me learn about investments outside my comfort zone.

    Great Debate over at AFM: To Sell or Not To Sell?

    I’m sorry I didn’t have a chance to post this before I went to work this morning, but there’s a great debate going on over at All Financial Matters in the comments to this post criticizing a post over at The Simple Dollar. To sum up, The Simple Dollar’s Trent wrote a post advising a reader who was uncomfortable with the stock market plunge to take her money out if it would make her feel better, and then reinvest when she felt more comfortable. AFM’s JLP has taken Trent to task for this advice, pointing out that the best way to maximize a stock market investment is to stay put for the long haul. The comments are full of people agreeing with JLP, Trent’s response to JLP’s post, JLP’s response to Trent’s comments, Trent’s response to JLP’s comments, and so forth.

    It’s interesting to see the strong emotions – especially Trent’s, as he stands by his original position despite all the arguments to the contrary. I have to admit that while I usually read The Simple Dollar every day, I glossed over his original post because I’m not interested in the advice he’s giving a reader about her investments. I have my investment strategy (index funds, dollar cost averaging, buy and hold) and I’m not looking to educate myself further right now (due to time constraints, as I’ve mentioned previously).

    However, I think the biggest problem is that Trent never mentioned asset allocation. Based on her question, it sounds like the reader’s 401(k) is entirely invested in growth funds. She asked if she should move some of that into a money market to wait out the stock market’s losses, then reinvest when the market turned around. Trent told her that she shouldn’t have an investment that’s causing her to lose sleep – so maybe the biggest problem is really that he didn’t answer her question. She didn’t say that she was losing sleep, she was really asking if she should time the market to mitigate her losses in the growth stocks. In any event, investing entirely in growth funds is a bad idea – hasn’t she ever heard of diversification? I think what Trent should have told her is that it would be a great idea to move some of her 401(k) money out of the growth funds – not into a money market, but rather into bonds. Her peace of mind needs to come from diversification – otherwise, she’ll just end up stressed from not having any investments that are growing to meet her retirement needs.

    This is also a great time to bring up Mapgirl’s post on why you shouldn’t trust personal finance bloggers. Very few bloggers are experts, and I’m pretty sure no bloggers owe a fiduciary duty to their readers except in extremely rare circumstances. We all just offer our own opinion, based upon on our personal beliefs and experience. But it’s up to each reader to make the most of his or her own money.

    The debate continues on The Simple Dollar in the comments here.

    College Savings Series Part II: Coverdell Education Savings Accounts – Financial Tip of the Week (Feb. 27)

    This is the second part in a series on saving for college. Part I: Options is here.

    I’m a huge fan of Coverdell Education Savings Accounts. Except for the contribution limits, they are the ideal vehicle for college savings. The money grows tax-free, there is a wide range of investment choices, and the money can be used for expenses incurred prior to college.

    Coverdells used to be called Education IRAs because they work a lot like Roth IRAs. You contribute post-tax money, up to $2,000 per year, and it grows tax-free. You invest it like you would in an IRA. Therefore, unlike with 529 plans, you have a lot of choice about how to invest your money. If you already have an IRA that you’re happy with, you probably won’t have to do a lot of research since you’ll already be familiar with the investment options of the company your IRA is with. In selecting your investments, however, keep in mind that the time frame for when you will need the money might be different from your time frame for retirement and that you might want to allocate your money differently than you would for retirement.

    The money in Coverdell accounts can be used as soon as your child enters kindergarten. That means you can use it to pay for private school tuition. Even if you plan to send your child to public school, a Coverdell can be an attractive option because you can use it for expenses like books and computers.

    The biggest drawback with Coverdells is the relatively low contribution limit of $2,000 (the limit is lower if your income is over a certain amount, but the income threshold is quite high). There is a penalty for over-contributing, so you want to make sure that no more than $2,000 is contributed each year per child, especially if several people are contributing. There is no limit on the number of Coverdell accounts a child can have, so long as the contribution limit isn’t exceeded. That means you can easily diversify your investments, for example by opening one Coverdell with a mutual fund company and another Coverdell with a bank so you can invest in a CD.

    College Savings Series Part I: Options – Financial Tip of the Week (Feb. 20)

    This is the first post in what will be a series on saving for college. I won’t post on a schedule, but rather I’ll share what I learn as I research my own options for saving for Alex’s education.

    To the best of my knowledge, there are three major options for tax-advantaged college savings. I’ll summarize them below and discuss them in greater detail in the future:

    1. Coverdell Education Savings Accounts: These were formerly known as Education IRAs and they work a lot like Roth IRAs. You contribute up to $2,000 per year (of your post-tax money) and it grows tax-free. You can choose investments as you would with an IRA so it’s up to you to manage the asset allocation. Money in Coverdell accounts can be used to pay for education-related expenses beginning in kindergarten.
    2. 529 Savings Plans: These are the most popular college savings plans these days. Every state has its own plan, but you’re not limited to the plan offered by the state you live in. Your contributions grow tax-free and contribution limits are high. You can choose from various prepaid tuition plans or investment-based plans. Investment options tend to be more limited than with Coverdells – for example, in California, your choices are a “Guaranteed Option,” which is basically like investing in a CD, two age-based asset-allocation plans, and two 100% equity plans.
    3. U.S. Savings Bonds: Parents can redeem bonds without tax consequences if the bonds were purchased in their name after they turned 24 to pay for tuition and fees if they meet certain income limitations.
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