Beating Broke

Personal Finance from the Broke Perspective

Your Primary Home is NOT an Investment

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Home or Investment?Your primary home is not an investment in the normal sense of the word.  Dictionary.com defines Investment thusly*: “the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.”  Some of you will argue that you buy your house because it will appreciate in value.  But, to fit the definition, you must have bought it specifically for that purpose.  And in the case of a primary residence, that isn’t true.

When you bought (or buy) your primary residence, you’re looking for a home.  You’re looking for a place to call your own where the money that you spend on it goes towards your ownership of the home.  Sure, it may show some returns by way of appreciation of value, but those are locked into the house until you sell.  And, truthfully, you probably don’t care about that unless you sell, so if you plan on living in the house (the definition of primary residence) it makes little difference what the house is worth as long as it provides a home for your family.

So, don’t be fooled into looking for a good “investment” when you buy a house.  Look for an affordable home that will provide for your shelter needs.  When (if) you sell the house, it gets converted into an investment and you will have hopefully made some money, but when you’re looking for a home, pick the one that will fit your needs. Not the one that shows the most potential for return.  That’s what second homes and rental properties are for.

*I know that thusly isn’t really a word.  I blame it all on Alton Brown.

Photo Credit: svilen001 @ sxc.hu

Lending Club Returns Update

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As I mentioned before, I’ve been taking the normal 10% contribution amount that most would be putting into their retirement accounts and splitting it between my lending club account, and a sharebuilder account.  It’s been a bit of an experiment.  I happen to think that lending club is a relatively safe investment option for a portion of your portfolio.  I’ve still got my 401(k) from my old job, so the investments that I’ve made at lending club and in the sharebuilder account don’t even really make up 5% of my total investments.  In short, I can afford to get a bit risky with the money.  So far, it’s been anything but risky, however.  I’ll update on the sharebuilder account in another post.  Let’s take a look at what my lending club account has done.

To date, my investments look a little like this:

  • Total loans invested in: 24
  • Total loans paid off:5
  • Total loans defaulted: 0

Lending Club Net Annualized ReturnWith only 24 loans, it could be that I’ve just been lucky thus far.  I’ve had a couple of the loans go past due by 10-15 days, but nothing that hasn’t been caught up and made current.  And no defaults.  As I continue, I expect that I’ll see one or two.  With all the doom and gloom about the economy recently, I fully expected to see one already.

To date, I’ve deposited $257.20 into the account.  That includes money from before this experiment started, so it’s not all recent.  With that 257.20, I’ve invested in $511.36 in loans.  The math savvy of you will notice that the invested amount is quite a bit more than the deposited amount.  That just means that the money has turned over almost 100% since being invested.  The more recent money, which accounts for about 50% of the account hasn’t had a chance to turn over yet, or that number might be higher.  My total income, minus fees, is $36.26.

My portfolio breaks down like this:

  • 39% of the loans are D grade
  • 25% of the loans are B grade
  • 15% of the loans are C grade
  • 9% of the loans are F grade
  • 7% of the loans are E grade
  • 4% of the loans are A grade

As you can see, I’ve gone a bit riskier and weighted the portfolio towards the higher grades, but is still heavily centered around the C/C+ grade.  (Read this to see how I select loans)That keeps my return a bit higher, while also keeping the risk a bit lower.  Speaking of return, what is mine?

According to lending club, my net annualized return is 12.82%.

I like that.  It’s far better than any bank or credit union is going to pay me for my money.  To get that, I give up the liquidity of the money (I’d have to sell my notes to get the cash), and I give up some of the stability of the money (it’s riskier than a savings account or CD).  Because this isn’t my emergency fund, or normal savings, I’m ok with giving up both of those things, in exchange for an above average return.

Do you invest with peer-to-peer lending?  Do you use Prosper? Lending Club? Both?  How’s your return?

Why are We so Clueless about the Stock Market

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Why are we so clueless about the stock market

By: Mariusz Skonieczny

Mariusz could have just as aptly named this book something like “The Beginners guide to the stock market” because that is what the book is; essentially.  He takes a very low level approach to the stock market in an attempt (I believe) to bring the chaos that is the everyday market to a much slower and easier to understand pace.

Even having read the book, and seen some of the examples he used, my mind is still having a hard time with it.  I’ve been so conditioned to see the stock market as this super-duper complex machine that only the smartest and best educated can even begin to understand.  And some of the elements of the stock market are that.  But, at it’s very core, the stock market is nothing more than an exchange for shares of companies.  The beginning of the book makes that abundantly clear.  It goes on from there, to explain some very simple concepts about earnings, e/p ratios, dividends, and stock price.

The book has a couple of failings, in my opinion.  One, it’s terribly short.  At 164 pages, it’s reminiscent of a “how-to” manual or very in depth brochure.  I also think that he took the concepts down to a too simple level.  I would like to believe that a company like Microsoft is similar to a lemonade stand, but I just can’t accept it.  Also, with as much explanation as he gives about the structure of business and the simpler indicators of a business’ health, it would have been nice to see him give a more in depth look at a few of the methods he uses for researching a company, as well as the use of various trading platforms or some of the best share dealing account UK trade brokers can offer.  He very briefly mentions a few, like annual reports, but it would be nice to maybe have examples of where in an annual report to find the information we need and also what form it might take.

The book gives a beginner the tools to understanding the basics of the stock market and to begin investing on the markets simplest level.  And I think that was the goal of the book.  Mission accomplished.  I would have liked to see it have a bit more information on the back end of the stock research and selection process.

Disclaimer: I was given a copy of this book by the author for review purposes.  If you’d like a copy for yourself, you can pick it up at Amazon.  Or, there may be a giveaway here in the coming months, so you could wait for that as well.