HELOC + ESPP (or 0% Credit Cards) = FREE MONEY (15% to 60%+ returns)!

For anyone that has available Equity in their home and an unused potential in their employers ESPP program should really pay attention! For those that are playing the shell game with 0% credit card interest rate arbitrage and ask, "Hmmm, where could I get a guaranteed 10% or 15% return?", well read on, how about a 40% or even 60% annual return! I've been giving away some free money and I'm not happy about that. I'm correcting that, toot-sweet! I hope all of you will review your circumstances and consider doing likewise, if it makes sense and you have availability to your ESPP that you aren't currently funding to it's max potential.

I have available equity, like most people, that I just realized I could be putting to work. Recently I've pulled back on my ESPP contributions, for at least the last year now, in favor of maxing out my 401k. Of course that's a good option, but I've been thinking and came up with a novel idea. So, no more wasting the potential of my ESPP. Here's a simple example. My employer offers an ESPP that plan with 15% discount on stocks every quarter. So, that's a 60% annualized return. Take a look and see how that works out:

• Jan-Mar: Contribute 0-15% of your income and purchase your companies stock at 10% discount. At which time you can sell immed for 10% gain or hold and sell at a later date. Let's look at an example of $50K (take home pay) after taxes. This would break down to about 4200/month after taxes. Example: 15% of $4200 = $630. contributed montly x 3 months = $1890. Sell immed to lock in 15% gain of 283.00.
• Apr-Jun: same thing as above. Total contributions of $1890.00. 2nd 15% gain of 283.00.
• Jul-Sep: same thing as above. Total contributions of $1890.00. 3rd 15% gain of $283.00.
• Oct-Dec: same thing as above. Total contributions of $1890.00. 4th 15% gain of $283.00.
• Total contributions for year: $1890 from Heloc x 4 (i.e. recycled 4 times)
• Total of 15% quarterly returns: $1132.00
• Total return on initial $1890 HELOC contribution: 60% annual return!!! Now that rocks!

Now, please correct me if you think I missed a point, as I'm just thinking about all of this and planning to implement shortly. I plan on starting this Jan 08, so I'll see how it actually works out. Here's how the quarterly draw and money management would work:

• Jan 08: Draw $1890.00 from your HELOC Account that you'll be contributing from your payroll for Jan-Mar contribution period. Deposit that amount in your checking account that you normally use for bills, etc. Make min payments to HELOC every month.
• Jan 08: Max out your payroll contributions so that $1890 is drawn from payroll during Jan-Mar 08 contribution period
• Apr 08: Stock is purchased with your contribution. Sell this stock immed, or put stop loss to increase potential returns even more!
• Apr 08: Deposit the $1890.00 from your stock sale proceeds into your checking account that you normally use for bills, etc.
  remaining $283.00 is your 1st 15% return (use in your checking if you want to help bridge between subsequent stock purchase and sell periods or apply payment to HELOC to reduce principal).
• Apr 08: Max out your payroll contributions so that $1890 is drawn from payroll during Apr-Jun 08 contribution period
• Jul 08: Stock is purchased with your contribution. Sell this stock immediately, or put a stop loss on it to increase your potential returns even more.
• Jul 08: Deposit the $1890 from your stock sale proceeds into your checking account that you normally use for bills, etc. The remaining $283.00 is your 2nd 15% return (use it in your checking if you want to help bridge between the subsequent stock purchase and sell periods or apply payment to HELOC)
• Jul 08: Max out your payroll contributions so that $1890 is drawn from payroll during Jul-Sep 08 contribution period
• Oct 08: Stock is purchased with your contribution. Sell this stock immediately or use a stop loss to increase potential returns.
• Oct 08: Deposit the $1890 from your stock sale proceeds into your checking account that you normally use for bills, etc. The remaining $283.00 is your 3rd 15% return (use it in your checking if desired or apply payment to HELOC).
• Oct 08: Max out your payroll contributions so that $1890 is drawn from payroll during Oct-Dec 08 contribution period
• Dec 08: Stock is purchased with your contribution. Sell this stock immediately or use a stop loss to increase potential returns.
• Dec 08: Deposit the proceeds into checking. Wash ... rinse ... repeat for next year if desired
• Dec 08: pay off remainder of HELOC balance on original $1890 plus interest.
• Dec 08: Count your returns of $283 x 4 = $1132 (i.e. 60% profit, less any interest paid on HELOC probably no more than 8% or 9%).

Considerations and things to think about:

• The one drawback with this strategy is that you can't get an endless stream of high percentage returns (i.e. your limited to your 15%, etc. max payroll deduction amount). But, that doesn't mean you can't offer to loan money to any of your coworkers and teach them how to do it (especially if they don't have HELOC money avail). That's still leaves a great return on investment if you split it with your coworkers. Anyone know if there's any problem with going this route? Obviously the drawback is that your coworker might not be that on top of money, like you :-)...
• If you're not currently maxing out your 401k, then you should definitely do your best to try and max out your 401k contributions
• By concentrating your efforts on maxing out your 401k, then you will likely not have funds to max out your ESPP potential, in that case you should look at using your HELOC to fund your ESPP to it's max potential as above
• Many ESPPs have even more advantages for you to make gains beyond their 10% or 15% (or whatever their discount stock purchase % is). Some companies allow you to purchase at an even lower price, based on lowest price of 1st date or contribution period or last date. So, if the stock price at the beginning was 50% lower than the end, you get to purchase at 50% + your discount percentage 10% or 15%, etc. from the current stock price. This makes even more gains!!! The Wonderful World of Employee Stocks, Part 3: Don't Poo-Poo Your ESPP
• As mentioned above, profiting from 0% credit card offers makes a lot more sense now. Traditional methods discuss putting the money in savings accounts and using that gain, well ... how about the percentage gains above!More on How to Make Money with 0% Credit Card Transfers (And Five Reasons Not to Try). The only thing I'd caution against with 0% Credit Card offers, is that they are real tricky to manage, and I'd still advise going with the more sane cheap money avail to you through HELOC, if you have it.

You'll find this post on the following carnivals:

Money, Finance and Fancy: The Carnival of Personal Finance #132, Whimsical Christmas Edition

118th Carnival of Debt Reduction - Winter Solstice Edition

Your Personal Stock Market Army - The Stop Loss!

Stop losses can bring you peace of mind, profit, and minimize your losses.  If you own stocks right now and don't know what a stop loss is, then I encourage you to sit a spell, grab some coffee or tea, and sip of this important information. If you own stocks right now and know what a stop loss is, I sure hope you're using them.  If not, then please stick around for a spell.

I had a friend many years ago that was complaining about his troubles investing in stocks.  He never seemed to make a decent profit on winners and he always seemed to collect a bunch of losers and never knew when to get rid of them.  I told him I'd listen to his troubles and offer advice where I could.  He had close to a million dollar portfolio invested in individual stocks.  Man was I envious of his assets!  But, not of his investing skills.  I asked him a simple question: "Do you have sell prices or sell ranges for all the stocks you own?".  His answer: "Not on a single one."  He allowed the market and his financial needs and emotions dictate when he would sell something.  After our couple hour discussion, of basically what you'll be hearing below, he vowed to have stop losses set on all of his stocks within the next week.  Note: at that time, there wasn't such a thing as trailing stop losses available on most online broker sites, so now days it's even easier!

I've heard his thanks many times since for introducing him to the power of the stop loss.  You definitely want to get educated on the stop loss as your most important weapon in the war of personal finance with respect to stock investing. Keep in mind this is stocks, not mutual funds. With mutual funds, you are diversified. With stocks you are putting all your eggs in one basket, as they say. This can be a very risky proposition and you need some protection. Sometimes you need protection from yourself, and your ability to rationalize and accept deeper and deeper losses. Here's where the stop loss comes to the rescue!

What is a stop loss? Here's a quick definition from wikipedia:

With a stop order, the customer does not have to actively monitor how a stock is performing. ...Once the stop price is reached, the stop order becomes a market order. ...A sell stop order (also stop loss order) is an instruction to sell at the best available price after the price goes below the stop price. ...This can limit the investor's losses (if the stop price is at or below the purchase price) or lock in some of the investor's profits.

There are 2 types of stop losses at many brokers and online brokers now:

1. Traditional Stop Loss
   Traditionally with the stop loss, you would select a price point at which you wanted to sell if the market price went below that price. If this is the only kind available at your broker or online broker, then please do use it. The use of the traditional stop loss might require a little extra maintenance on your part, as you monitor and decide to ratchet it up to lock in profits or limit losses.
   
2. Trailing Stop Loss
   The traditional stop loss requires regular maintenance if your stock price is on the move and you would like to efficiently lock in profits or further limit your losses. It's great that brokers have added the trailing stop loss as an option with brokers and online brokers. This allows you to set a stop loss margin that will follow an increasing price. You typically have the option of choosing a trailing stop loss by $Dollar Amount or by %Percentage. I love this, because you can choose to follow a rising stock price with a trailing stop loss of for example: 5%. That way, as a stock price continues to rise, you'll be locking in a profit that is 5% below it's high price. The 5% gives the stock enough room for volatility as well as ensure that your locked in profit continues to rise.
   

I propose that you should never own shares of stock without having a stop loss placed on them. Quite simply, it is human nature to keep accepting a lowering stock price without selling. You begin to rationalize at every new red flag in the lowering stock price: the news just isn't good, I know they'll be announcing a new product soon, people just don't know enough about them yet, stock prices generally go back up, I'll just wait till I get back to even and then sell, etc.

We should be quite the opposite with stock investing, we should not be emotional. We should think of stocks as a vehicle for our investments, and one stock is just like the next. There is nothing magical about the current stocks you own. If they are losers, then get rid of them, learn and improve your stock picking rationale and pick again. If you have winners, learn aspects for picking winners. Lock in profit for winners. Don't allow winners to become losers, because you got attached emotionally because it used to be a winner.

I encourage you to learn a method of picking and evaluating stocks that works for you. For me, it's CANSLIM. CANSLIM defines a method of evaluating and picking stocks and was created by William J. O'neil. I recommend you to look at these books in the library, bookstore, etc: How to Make Money In Stocks and The Successful Investor: What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses.

Again, i propose that you should never own a share of stock without protecting it with stop loss. I'll break that down to 3 three powerful reasons for having a stop loss:

1. Limiting Loss
   When you own a stock, you should do some regular self assessment as to what is a reasonable loss you would accept for the stock. Whether you do this weekly, monthly, quarterly, just do it regularly. Once you set your stop loss, you have now protected your investment from a pre-determined loss. This is key, because human nature would have us complacent and rationalize a declining price at every turn with the hope that the price would soon recover. But, by thinking ahead of time, you take this emotional and fear based thinking out of the equation and treat an investment in a proper way, as a vehicle of investment. You take the time to think rationally about what amount of loss you are willing to accept if a stock moves against you. You limit the loss, because you take out the changing emotions that will occur as that stock becomes a loser and you would inherently start rationalizing the losses. I don't care if you're a long term investor or short term. If you're long term, then you'd just increase the margin of your trailing stop loss to not be triggered by normal volatility.
   
2. Locking in Profit
   When you are lucky enough to own a stock that is appreciating in value, you should be protecting that growing profit. I used to ratchet-up my stop loss on a weekly or monthly basis as stocks kept growing in value. Now days, they have an awesome new kind of stop loss, they call the trailing stop loss. This means you can set the stop loss to trail the rising price by a dollar amount or a % amount. This is an absolutely powerful feature!
   
3. Peace of Mind
   Probably the most important benefit of the stop loss is the peace of mind you'll enjoy. You'll sleep peacefully every night. You'll feel at ease throughout the week, without submitting to the need to check your stock prices hourly to see if you are ahead or moving behind. This is all because you put in place your hard working army of individual stop loss soldiers on each of your stocks.

I love free money with ESPP's. If you have an ESPP available at your employer, this is like free money and the stop loss can maximize your profits and limit your loss of profit. What I do, is every time my employer buys my ESPP stocks, I immediately (the day it becomes avail in my broker account), go in and set up a trailing stop loss of 3%. I encourage you to adjust your %percentage based on your stocks volatility. 3% for my employers stock works perfectly. If the stock keeps rising, then I keep locking in more and more profit. As soon as it turns around, it's sold for me automatically.

I also do this when I have lost confidence in a stocks upward momentum (can be due to market news, stock news, etc.) and it begins to move sideways. I'll reduce the % of trailing stop loss, to still gain from upward momentum and at the same time press the sell sooner than later.

If you didn't hear me before, I'll close with the same thought: I propose that you should never own a share of stock without protecting it with a stop loss. You'll benefit greatly from the peace of mind in your daily life, knowing that you put in the up front thought and made decisions on what loss you are willing to handle for each of your stocks. You'll feel at peace that you're profits are automatically being locked in as your trailing stops chase after a rising price.

Is There a Silver Lining in the Mortgage Meltdown?

If you're investing for your retirement and you have a decade or more to prepare, then you shouldn't sweat the meltdown. If you have good credit and an adjustable rate mortgage coming due soon, then you shouldn't sweat the meltdown. If you've been taking steps to get your financial house in order, then you shouldn't sweat the meltdown.

At Blogging Stocks Tom Taulli recently interviewed Ken Little, author of The Pocket Idiots Guide to Investing in Bonds. Ken shared his perspective on the recent market meltdown and had this to say:

If you read some of the reports about the recent swings in the Dow, you would think this had never happened before, when in fact it happens all the time. The stock market goes up and it goes down. The smart strategy for most individual investors is to begin an investment plan of dollar cost averaging and stick with it regardless of what the market does.

If you're already doing some smart retirement planning by investing on a regular basis, then you're taking advantage of the power of dollar cost averaging. This is a powerful tool to smooth out the hairpin turns of the investing road. MSN Money has a great little article to illustrate the power of dollar cost averaging to sock away a million bucks for your retirement. The author walks through this example and all the powerful ingredients that allow it to happen:

Here's how it works: Say you start with nothing, invest $500 (of your income) a month (a healthy discipline), and let your money ride (over time) in diversified investments. Long term, the stock market returns at least 10% annually. Assuming a 10% return, you'd have $102,000 after 10 years, $380,000 after 20 years, and $1.1 million in 30 years.

Take a look at these 5 steps to preparing for an early retirement. If you're already on the right track, that's great, keep it up and rest assured that regularly scheduled investing is going to payoff in this turbulent market that's brewing.

If you haven't gotten your retirement savings started yet, then start now! You'll have a couple of powerful advantages by starting now. The biggest advantage is: those who make a commitment to start saving become wealthy (Doesn't matter what your circumstances are), that's powerful! The other big advantage is dollar cost averaging and the buying power you'll have as the market makes corrections.

If you're having some difficulties with credit, you might find yourselves in the subprime arena, and affected by this situation. A great source of information on credit issues, mortgages, and money management is creditboards.com. Just be prepared to spend the weekend reading through the credit forum discussion boards and you'll be on your way to cleaning up and boosting your credit picture.

Automatic Investing is Hot!

Automatic Investing ... Set it and Forget it Savings!  Sounds like an infomercial, right?  It's definitely an attractive concept.  You've probably been seeing more and more of this concept popping up all around you.  The latest hot book is David Bach's Automatic Millionaire.  The new trend in 401Ks and mutual funds is Lifestyle Funds.

It's hypnotic and alluring to think that you can build an automatic personal investment system to achieve your goals.  It seems like a silver bullet and in many aspects it is.  Once you've made the commitment to save, then actually follow through to save regularly, you just need the final ingredient to determine what to invest in.  It's simply not enough to build your retirement nest egg in a savings account.  But, it gets complicated when you have to think about all the investment options out there and which to use. 

I've mentioned before a great study by 2 professors from Harvard and Dartmouth that points out the single most important ingredient to building wealth is to follow through with your personal commitment to save.  You can follow Automatic Millionaire, The Richest Man in Babylon, or any other investment advice.  The Richest Man in Babylon has been around for decades and has got to be the original automatic investment advocate.  You can kick off your automatic investing by automatic draws from your paycheck to savings, 401K, whatever vehicle you have available.

The next step is selecting options of investing the savings you're building.  Here's where things like Lifestyle Funds are a great new trend entering 401K funds and mutual fund arena.  The goal of these funds is to handle all the asset allocations for you in one fund.  You select the fund closest to your retirement date like Lifestyle 2020, Lifestyle 2040, etc.  The fund automatically handles the asset allocation as you get closer to your retirement date.  Being more aggressive when the date is further away and more conservative as your retirement date approaches.  Liz Pulliam Weston, in her MSN Money article, explains it this way:

This is Retirement Investing 101: You want a bigger chunk of your money in bonds and cash as you approach your last day of work, since you'll have less opportunity to make up any losses.

I'm a big believer and follower of the entire automatic investing approach.  I'll be looking more into these lifestyle funds as my retirement date approaches.  For now I'm following an aggressive stocks only approach and I do follow an automatic approach.

I hope to blog more about it in the future.  It follows an automatic strategy from the Armchair Millionaire.  I have my 401k investments go to 1/3 S&P 500, 1/3 Russell 2000, and 1/3 to International (EAFE) fund.  You can read more about this allocation mix and why it works so well here: Armchair Investing Strategy, from the book by Lewis Schiff Armchair Millionaire.  The key to it working so well is is the principle of non-correlating markets, which simply means that while large caps might do well, small caps might not.  Also, while US Markets may do well (S&P 500 & Russell 2000), international markets (EAFE Fund) may not.