Stock Market Snapshot as of Jan 13, 2008

After a retracement in December that touched the trendline, the S&P 500 has restarted its downtrend, making a lower low on Jan 8th. The 50-ema has now moved below the 200-ema.


The Nasdaq 100 has been showing a lot of weakness in the beginning of 2008. The 50-ema is still above the 200-ema, but both have turned south.


The Russell 2000 has also made a lower low. It is still the weakest of the bunch.

My 401k Asset Allocation for 2008

As you can see, I am keeping it simple. I have rebalanced my portfolio and picked 4 new funds in the new platform that have performed well in the past 10 years (or since inception).

This asset allocation is 25% international, 25% large cap, 25% mid cap and 25% small cap.

This is a highly aggressive portfolio which will suffer significant drawdowns in a market downtrend, but also should easily outperform the S&P500 in a market uptrend. Since I am dollar-cost averaging into these funds and do not plan on touching any of this money for at least 20 years, a market downtrend only means I am buying more shares for the same amount of money. What matters is that 20 years from now, the market is higher than where it is now.

How Much House Can I Afford?

Fannie Mae provides future home buyers a calculator to help them estimates how much house they can afford to purchase. I took the calculator for a test drive. Here are my entries:



I then click on Calculate and voila!...



…and what the hell? Either this calculator is broken or I just found the reason for the current housing market crisis.

According to this calculator, and assuming a 6% interest rate, I can afford to purchase a $335,000 house which after down payment and closing costs would leave me nearly $4,000 in the red?? Why is this calculator telling me to bring $84,000 to the closing when I told the calculator I only have $80,000? Not to mention that my total debt-to-income ratio would rise to 50% (new monthly payment $2,450 + current debt payment $800 divided by monthly gross income $6,500).

According to this Yahoo How-to guide the standard requirements for conventional mortgages as established by Fannie Mae are the 28% and 36% debt-to-income ratios. Monthly mortgage payments, interests, property taxes and insurance cannot exceed 28% of the buyer’s monthly gross income. This is called the front-end ratio. Total monthly debt payments (housing, credit card payments, car payments, etc) cannot exceed 36% of the buyer’s monthly gross income. This is called the back-end ratio. I was not able to find any confirmation of those debt-to-income ratios on Fannie Mae’s website.

For a second opinion, I turned to the Yahoo calculator How Much Home can I Afford? I plugged in the same information and here are the results:



Now this makes a lot more sense. According to this calculator, the maximum house I can afford is around $281,000 (assuming a 6% interest rate). I am currently capped by the 36% debt-to-income ratio (my total monthly debt payments). I would have to either reduce my debt payment obligations or increase my gross income in order to afford more house.

I am contemplating buying a cosmetic fixer upper, preferably a real estate owned one, in a desirable neighborhood where home prices are typically in the $350k-$400k range. I am staking the market for the right opportunity to show up.

My Investment Portfolio Return for 2007

The brokerage account, rollover IRA and Roth IRA consist of stocks and ETFs. These accounts are actively traded. The 401k, the Janus account and the 529 plan consist of buy-and-hold mutual funds.

Returns include all dividends, capital gains and interests on cash balances (before taxes). The brokerage and Janus accounts are the only taxable accounts.

In 2007, the S&P500 was up 5.49% including dividends (3.53% before dividends).

The Janus account consists of just 2 mutual funds, the Contrarian and the Overseas. Needless to say I am very pleased with the 24% return.

On the other hand, I am disappointed by the performance of my 401k. My company decided in November to move the 401k to a new platform with a set of different mutual funds. Let’s hope for better results in 2008.

My Net Worth Update for 2007 and Goals for 2008

Back in December 2005, I gave myself the goal of increasing my net worth to $1M in 7 years. I figured I needed a 20.4% yearly increase of my net worth over the next 7 years to reach that goal. Now that 2 years have gone by, it is time for a little update.

In 2006, my net worth increased only 9.5%, leaving me short of my December 2006 goal by $29,700. That was not the best way to start.

In 2007, my net worth has increased a whopping 26% ($78,000). It means that I am catching up, but I am still short of my initial December 2007 goal by $18,700. Most of the increase came from a higher savings rate thanks to a substantial pay raise. I also managed a decent but not extraordinary 10.4% return (including dividends) on my investments.

My net worth in December 2005 was $273,200. My year-end net worth goals are:

	Goal	Actual
Dec-06	$328,800	$299,100	Missed by $29,700
Dec-07	$395,800	$377,100	Missed by $18,700
Dec-08	$476,400
Dec-09	$573,400
Dec-10	$690,200
Dec-11	$830,800
Dec-12	$1,000,000

I feel that tracking my progress towards my goal is helping me tremendously. I have become more focused, especially in regards to managing my stock market investments.

The goal for 2008 is a net worth of $476,400 by December 31^st. That is another 26% ($99,300) increase from where I am now. I find it difficult to be very optimistic about 2008 outlook. I will have to rely more on stock market returns and less on straight income to grow my net worth. There is currently a lot of fear and indecision regarding where the economy is heading. I guess it is one more reason to be cautious and stay focused.

To a fun and prosperous 2008 !