Sunday, January 1, 2012

2011 Personal Finance Review

There used to be a graying tower alone on the sea
You became the light on the dark side of me

Some reflection on progress toward personal finance goals set early in 2011.

My number one goal in 2011 was to build current assets. I regard current assets as financial securities and physical assets that can readily be converted into cash. In my case, this rules out the house and various tax deferred (i.e., IRA, 401k) accounts. For me, current assets include immediate sources of cash (checking, money market accts) as well as 'close' sources of cash (securities held in taxable brokerage accounts, plus precious metals).

Fortunately, current assets increased substantially in 2011. The primary driver behind this was being debt free, a condition in place since paying my house off in late 2010. The influence of being debt free in standard of living and building wealth cannot be overstated. Cash that was previously siphoned off to pay down debt is instead allocated toward consumption, saving, and investment needs in the here and now. From where I sit, one of our Creator's greatest gifts to us was the capacity to be free. Extinguishing debt, for me, was like throwing off chains of bondage. I hope to God that I never carry debt again.

In building current assets in 2011, my original focus was on increasing cash. Cash is the most liquid of all financial assets and promotes maximum flexibility to cope with life's challenges and opportunities. About halfway thru the year, however, it became more obvious to me that central banks around the world are increasingly likely to debase currency in attempt to stave off systemic collapse (with the EU at ground zero). In such a situation, risk associated with holding cash goes up because the purchasing power of cash goes down.

This found me swapping cash for stocks and metal. My general foray into stocks didn't last long, however. After catching some nice moves in stalwarts like JNJ, INTC, MSFT, and CSCO, it became increasingly difficult for me to hold stocks given general valuations and the macro state of the world. By late in the year I had drained most of my brokerage holdings of stock in favor of a blend of precious metals and cash.

I also set a goal to 'trade opportunitistically' in 2011. This was also done with some measure of success. The first half of the year found me long various stocks and commodities to express what initially seemed heightened chances for significant inflation. I also thought that a number of blue chip stocks were showing decent value.

Minds can change with the winds, however, and they did in my case by mid year. My constructive view on valuations turned pessimistic, and I unloaded most of my equity risk over the course of the next few months. The bigger issue were macro ones. Summer found Congress unable to cut spending and debt (both were raised), and the EU coming apart at the seams.

By late July I had a pretty big short side book that worked well when prices started cascading lower. I built and pared this 'hedged' position several times over the next few months as markets heaved to and fro. What I learned is that I could be much more patient with significant long and short exposure when these positions were more or less equally paired. Lower prices were times to lighten up the shorts and take on some longs, while higher prices allowed for the opposite.

The effectiveness of this approach waned some late in the year as my long exposure in commodities underperformed the SPX substantially, causing performance to bleed a bit into the final bell. All in all, though, I liked how this approach performed in the volatile environment that we have been facing, and I plan to carry over this approach into 2012.

Finally, my other 2011 goal was to increase precious metal holdings. Most of my activity here came in the second half of the year in conjunction with my increasingly bearish outlook for fiat currency and financial system stability.

In a future missive, we'll sketch some objectives for 2012.

position in CSCO, SPX

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