In my recent post on dollar cost averaging I said that I think of this investment purchasing strategy as “mak[ing] a lot of small bets.” What I meant by that is that through dollar cost averaging you mitigate your timing risks by entering the market at many points in the hope that more of your entry points will generate good outcomes than bad ones.

We also learned last time that dollar cost averaging is a stock buying strategy designed to protect us against making the worst timing decision at the cost of being unable to make the best timing decision. The protection is achieved by making smaller but more prolific purchases to reduce the impact of poor timing on any particular purchase from affecting your overall return. When first reading about dollar cost averaging I got this feeling in my stomach that I had heard something like this before. I couldn’t quite put my finger on it until suddenly it burst into my head like an extremely over sized pitcher of childhood sugar water goodness . It brought to mind two words: Oh yeah! Vegas, baby!

Managing Risk Vegas Style

Dollar cost averaging is very similar to various betting strategies for many different casino games. Each round of stock purchasing is like a hand being dealt, dice being tossed, or a wheel being spun. Unlike Vegas, however, these rounds can last for as long as you are willing to hold onto your stock or mutual fund. To illustrate this, take a look at the chart I generated for the basics of dollar cost averaging post with the outcome of each particular bet (stock purchase):

By generating a larger number of good outcomes, Peggy Sue was able to turn a nice profit despite the overall decline of the value of the stock over the two year period of dollar cost averaging. At each stock purchase point, Peggy Sue is betting that over a long period of time that the value of the stock that she purchased will rise. In other words, she is wagering that she bought in at a favorable entry point for the stock. Betting in casino style games assumes the same general principle. At each particular deal, spin, or throw the bettor is wagering that they are entering the betting ‘market’ at a point when Fortuna will send them a nice little chunk of change from the hands of the poor through the hands of the criminal and über corrupt. If Fortuna is smiling a lot in the gambler’s general direction then they will win more then they lose and walk home a winner, just like Peggy Sue did in the farcical aquatic ceremony she participated in last night (and in the hypothetical dollar cost averaging example above). See, casino gambling and stock purchasing are the same thing.

The relation between gambling and the stock market doesn’t just involve spreading out risk and seeking favorable entry points. Being a successful gambler (and investor) requires knowledge, discipline, and commitment.

Knowledge - In the game of Black Jack the best way to increase your odds of good outcomes is to have knowledge in the game that you are playing. If you are a Black Jack player then you need to know the basic decision making chart. This becomes the basis for all every hand of Black Jack you play. In the same way, investing requires you to have the ability to analyze stocks based upon their financials and market conditions. Once you know how to do that, you do it with every stock that you purchase.
Discipline - Having the knowledge will only take you so far if you don’t have the discipline to implement it every time. The chance for success is so small in the game of Black Jack (the house has a about a 1% advantage over you) that if you stray from the methods that give you the best chance of success you are going to get burned way more often than not. Sticking with investing strategies that rely on companies sound financial outlooks, quality products, and good management as well as sticking to the correct strategy for the market conditions is the only way to pick more winners than losers on Wall Street.
Commitment - Both Black Jack and investing have their ups and downs. Having the steely resolve to hang through the tough spots or to lock in your profits in highly volatile stocks is the key to long term and repeated success. You cannot let the short term cloud your judgment.

As you can see, gambling and investing in the stock market are similar. Lest anyone conclude from this article that gambling and the investing are the same, here are some ways that these two enterprises differ dramatically:

• When you invest you are becoming the owner of a company whereas when you gamble you are buying entertainment and chance to win more money.
• When you invest you are fairly safe from losing your whole investment whereas with gambling you lose everything around 50% of the time.
• When you invest you are putting confidence in the products or services of others whereas when you gamble you are putting your confidence in probability and chance.
• When you invest you support a companies employees and provide products and services to the world whereas when you gamble (and lose) you enrich the rich and encourage them to get others to act just like you

Conclusion

Dollar cost averaging is a sound investment purchasing strategy that helps an individual minimize timing risks. The principles that make this strategy effective are also found in other fields where risk is plentiful (read gambling, surgery, dating, etc.). While this similarity allows for easy comparison between gambling and investing it is important that we don’t start thinking that gambling and investing are exactly the same. They are not. Don’t make that mistake.

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Posted in Investing, Money Management ~ No Comments

One of the tricks I use in my monthly budget spreadsheets is the SUMIF function. This is a powerful tool that helps me to easily summarize the financial information I record in the transaction section of my budget spreadsheet into clear categories for me to analyze and assess. I am able to track the monthly spending of all my budget categories with zero hassel - and it even helps me track how much my wife and I charge on our credit card each moth. The SUMIF function is very straightforward to use and it only takes a second or two to set up. For the effort you will remove lots of pain from your monthly tracking system.

The Tracking Sheet

As powerful as SUMIF is, it does require that you record some additional information when you input all your data into your system. My personal spending tracker looks like this:

This has become my bread and better format for tracking financial information. When I started tracking how much my family was spending on our pregnancy , I essentially copied the above into a new spreadsheet and started logging away. The real secret behind using this style of tracking is that it fits with the SUMIF function rather well. The columns to the right of the “Amount” are really key here. The “Account,” “Sub Account,” and “C?” allow me to:

• Categorize the transaction into one of my 11(12) major budgeting categories
• Make notes on the transactions or add additional information such as the confirmation number or a special note. You can even use these fields to mark a transaction as occurring by check, debit, cash, or credit.

Tracking sheets are the first step to using SUMIF properly. Your categories should be clear and relatively few in number (having 50 categories will just give you a headache, stick with just a handful). If you don’t have a clean and easy to use tracking sheet it might be a good idea to make what you are using better.

Using SUMIF

Now that you have your tracking sheet in tiptop shape it is time to flex your spreadsheet muscles (pronounced musk-lz). I usually like to use my SUMIF function on a different sheet (tab) than the one I make my list in. This helps reduce some of the clutter and lets me view information in a clean space. The sheet where I use SUMIF the most is my budget tab as seen below:

Behind the numbers in the “To Date Spending” column is the power of SUMIF. The function automatically and continually updates itself as I add new transactions or recategorize existing information. The workings of the equation are pretty straight forward, but its power is shrouded in a veil of mystery to the new user. To demystify SUMIF, let’s take a quick glance at the structure of the function as you will have to enter it into the cell to unleash its power. This example is taken directly from the cell that contains what we have spent on food to date:

=SUMIF( Expenses!E$6:E$80 ,B4 ,Expenses!D$6:D$80 )

Function - all functions begin with an “=” and are then followed by the name of the function. The parameters of the function are contained inside the parentheses. Every function has its own set of parameters that are required for it to function properly, so you need to be familiar with what they are so that you know what to put between the parentheses. Both Excel and Open Office have a button that will walk you through the parameter portion of writing functions. It is located on the toolbar and looks like the image found on the right. Other useful functions for financial tracking are SUM, AVERAGE, COUNT, VLOOKUP, and IF. Each have their own set of parameters.

Range - is the range of cells that you want to evaluate for you SUMIF function. Ranges in both Excel and Open Office list the starting cell and ending cell separated by a colon (starting_cell:ending_cell i.e E6:E80). Since this is on a different sheet than the one I am trying to use, the name of the sheet appears first. In Excel the name should appear as shown above, but in Open Office the name would show up as “$Expenses.” - both mean the same thing in their respective programs. In my example above you will also notice the dollar sign ($). Since Excel and Open Office Calculate are relational, this means that when I copy the cell into another cell that the numbers (rows) that the function looks at remains the same. This is important if you want to use the same equation multiple times without having to rewrite the equation every time. If I were to put a dollar sign in front of the column identifier (E) this means that no matter where I copied the equation it would always look at E6 through E80 for the SUMIF function.

Criteria - is the condition or criteria (it can even be another function if you want it to be!) that you want to have added together. It can be in the form of a number (50), expression (<4), or text (Food). Since I am trying to categorize my purchases this is going to be the specific category that I want to view my spending for. Since I have all the categories already listed in the cell to the right of the SUMIF function, I simply call that cell by inserting the B4 into the cell. You don’t have to do it that way, but if you don’t you have to type “category_name” (with the quotes) in every single equation you are using. If you do the cell name way, and you use the $ tip, you can easily copy and paste the function into a new cell and not have to do any more work. Easy as cheesy.

Range Sum - This is the range of values that you want to sum if the value in the range equals what you are looking for (hence the name SUMIF). If a matching value is found in E6:E80 then it will return the corresponding value in D6:D80. If you leave this part of the equation blank then it will sum the Range .

If you are anything like me, the best thing to do now is play around with the equation like crazy. By fiddling you will gain some much needed experience and learn how to build your very own equations. Once you have it down, you can incorporate the SUMIF function into your monthly tracking sheets and easily keep track of your monthly budget without having to do any additional work. It is a clean and effective way to summarize and categorize your raw financial information into meaningful statements of spending. SUMIF helps you make a financial forest of all your little transaction trees.

Questions? Comments? Leave a comment below or shoot me an email using our contact form .

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Posted in Budgets ~ No Comments

I am a very new investor and I am historically very risk adverse. I have always like the idea of earning money from other people’s labor, but until recently I have always been pretty scared to invest. Right now I am working hard on acquiring $2,500 to open an account with an internet brokerage firm and reading what I can to understand stocks, bonds, and mutual funds.

There is a lot of information out there about not only how to choose stocks, but also how to purchase them. I still don’t know very much about how to choose stocks, but I think I am starting to get a handle on different stock buying strategies. There are a couple main ideas about how to purchase stocks, but there is one that seems to get a lot of attention from personal finance gurus and amateurs alike. They call it “dollar cost averaging” (but it may be more appropriate to call it “make a lot of small bets-ing”).

The main idea behind dollar cost averaging is to purchase stocks or mutual funds at a fixed time interval with a predetermined amount of cash. It really does not matter what your interval is or much you invest as long as you are consistent and use it for long periods of time (7-10 years by some estimates). By keeping your time horizon long you are attempting to capitalize on the historic upward trend of the market.

Here is an example of how dollar cost averaging works: Peggy Sue might invest $100 a month as part of her wealth building strategy. She invests in a low expense ratio mutual fund that attempts to mirror the market since the vast majority of mutual funds under perform the major indexes and individual stocks represent more of a challenge than she is ready for. Each month Peggy buys $100 worth of this fund no matter what the market price is. When the fund is cheaper her $100 buys more shares, and when it is more expensive her $100 buys fewer shares. Because of this dynamic, Peggy Sue will always be paying less per share than the average price at which she made all of the transactions. To see this, below is real data from a stock that consistently declined over a 12 month period:

The average cost at which the shares were purchases was $10.18 (the sum of the buy prices divided the total number of buy prices) while the average cost per share was $10.02 (total amount invested divided by the total number of shares). If this were Peggy Sue’s situation, she is now is poised to take advantage of a rise in the funds value since she stuck with it through the decline. The fund would have to rise to a value of $10.02 from its current price for Peggy Sue to break even with her investment if she were to stop dollar cost averaging now. Here is the hypothetical rebound of the fund over the course of the next year on the market (the previous year is shaded in grey):

At the end of the next year Peggy’s position is worth $2,663.87 (shares she own multiplied by the price of the stock - 255.16 x $10.44) when she paid $2,400 to acquire it, representing an 11% return (or you could view it as a $1.03 profit per share). For a moment lets imagine two different scenarios to help us understand the advantages and disadvantages of dollar cost averaging: the perfect timing scenario and the worst timing scenario:

• Perfect Timing - this scenario will help us see the opportunity cost of dollar cost averaging. If Peggy had invested the entire sum ($2,400) at the markets bottom ($7.11 per share) she would have a position worth $3,881.85 at the next highest point ($11.50), representing a 61.74% return ($4.39 per share). The perfect timing scenario is 326% better than dollar cost averaging!
• Worst Timing - here Peggy makes the worst blunder of all in buying the stock at its highest point ($12.61) and selling at its lowest ($7.11). This is the scenario where you get “injured, injured bad ” in a proverbial kick to your investment gonads. If this were to happen you would see a loss of 43.62% (-$5.50 per share). The worst timing scenario is 634% worse than dollar cost averaging. Yikes.

Dollar cost averaging will in all cases but one be better than the worst timing scenario but never better than perfect timing. This stock purchasing strategy effectually reduces your risk of catastrophic failure (worst timing) by sacrificing your ability to maximize the gains possible in a position (perfect timing). How much protection dollar cost averaging offers against these two extremes depends largely on the market conditions and on when you decide to pull out of your chosen fund or stock. Overall, dollar cost averaging is a relatively safe investment purchasing strategy for long term goals, enabling you to autopilot your investing while minimizing timing risks. You still need to pick a good stock or mutual fund that has a level or upward trend over the long term to fully reap the benefits of dollar cost averaging.

This article was included in the Carnival of Personal Finance #154 at Canadian Dream: Free at 45

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Posted in Investing ~ 2 Comments

I am convinced that the cost of raising children in nowhere near what most people say it is. Browsing the internet I stumbled upon a table depicting the cost of raising a child from birth to the time he reaches adulthood in the eyes of the law. The table’s data is a little out dated, it was initially compiled between 1990-1992 and was adjusted to 2001 dollars using the Consumer Price Index, but even using a 2001 purchasing power it still claims that raising kids brings with it a hefty price tag for my family’s income range - $124,800. According to this table, my expenses will grow by an additional $7,000 per year because of the addition to my family that currently grows in the dark, comfy goodness of my wife’s uterus. According to conventional wisdom and modern standards of living I will need to generate an additional income of $580 a month in order to clothe, feed, and provide shelter for the fruit of my loins. People want to tell me that instead of getting a teaming, screaming mass of life and flesh I will be getting a financial sink hole. Pshaw right, and monkey’s might fly out of my butt.

Being pregnant has forced me to come face to face with these numbers that I have always thought were over inflated and a bunch of consumerist nonsense. I have decided it is time to prove the numbers wrong and buck the system of consumption that has our culture viewing parenthood and children as a financial liability. In my effort to make a conquest of parenthood and redeem childhood from the clutches of network advertisers and public television’s gender neutral child programing empire I am going to do what I do best: track every penny that we spend. Take that purple dinosaur man!

From the very beginning of our pregnancy I have counted every single thing that we have made, bought, or has been given to us new in an effort to get a real picture of just what a baby might cost. So far we have spent a total of $29.06. My wife made some pretty cool balls for our baby, the materials were used fabric and pillow stuffing so the cost of these toys is negligible. We bought two packages of baby wipes from Walmart while on sale, the total there was $2.13. The last and final item we bought was a pair of maternity pants that my wife desperately needed as her normal jeans were quickly becoming uncomfortable as the baby expanded its lebensraum. The trip to Target landed us a bill of $26.93.

So over the next six months or so I will be getting the skinny on just how much it will cost to bring a little baby into the world. I will be tracking everything I can possibly think of - from insurance copays to gifted items - to get a true picture of what it costs two kids from middle class families to birth a child in the expensive San Diego. If you are an experienced parent, feel free to mention some of the more interesting things that you have had to spend money on due to raising a child in the comment section below. Even if your not a parent but have a good idea leave a comment too. If you mention it, I will be much more likely to remember to record it when I run across it and that way everyone can benefit from this free and publicly available information.

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Posted in Family Life ~ 8 Comments