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With the roll of the calender into 1 Jan 2007, I picked up a 2.2% cost of living raise and a 2.7% housing allowance raise.  I am not giving away any secrets here…..as military are paid by rank and years of service and the pay tables (as well as Congressionally approved annual cost of living raises) are all in the public domain.  As was the case last year, I will roll most of this raise into our investment strategy.  It is an easy and painless way to increase our monthly savings.  Of course, this prompted me to figure out how I would invest the additional money.  It was a pretty simple decision.  I will roll all of my "base pay" raise into the Government Thrift Savings Program that the military became eligible for a few years ago.  This money is deducted from my salary pre-tax, so I get the benefit of letting it grow tax deferred.  The housing allowance raise (which is a non-taxed allowance)  will likely be used to increase the kids’ monthly investments. 

As the New Year approached, I spent a little time re-evaluating my investment strategy.  Let me start by saying that I am not a master investor by any stretch of the imagination.  There are probably smarter things I could be doing, but I don’t have the time to manage my investments hourly/daily.  My strategy has been investment in a combination of individual stocks, bonds, Government Securities and stock funds.  I use the Government Thrift Savings Program (TSP), US Savings Bonds allotments, USAA Investment Services and an online stock trading company called Sharebuilder to conduct my investment transactions.  I will continue this overall strategy in 2007.  The following provides a bit more detail on my strategy:

US Savings Bonds – US Savings Bonds are a convenient, low-risk way to save money.  However, since they are low risk, they are typically lower-yield when compared to other investment vehicles.  Since I have a fairly long savings horizon, I have divested most of my investment dollars out of the Savings Bond markets in favor of stocks and stock funds.  I do still keep a small monthly allotment in savings bonds for each of the kids, accounting for about 5% of my investment dollars.

Thrift Savings Program – I plan to invest 43% of my investment dollars in the tax-deferred Thrift Savings Program (TSP).  Within this program, I hold shares in 4 different funds, but will actively invest new dollars in just 3 of them (the higher risk/yield funds).  I have balanced my investments across these funds to establish a risk profile consistent with my longer savings horizon.  As such, 35% of my new TSP investment dollars are going into each of the Common Stock Index (C Fund) and Small Cap Stock Index (S Fund), and the remaining 30% are going into the more volatile International Stock Index (I Fund).  I also hold shares (but am not investing new dollars) in the Government Securities Investment Index (G Fund), which offers lower yield and no risk of loss of principal. These funds have performed well for me over the past year (Jan – Nov 06), as follows, and I will continue to utilize these funds as a major component of my investment strategy:

• I-Fund Gained + 28.2%
• S-Fund Gained + 15.6%
• C- Fund Gained + 14.25%
• G-Fund Return + 5.04%

Individual Stocks – I plan to invest about 42% of my investment dollars in individual stocks within the stock market.  Last year, I utilized the small Dogs of the Dow strategy for picking/investing in stocks.  By this method, you choose the ten stocks with the highest dividend yield, and then make a one-time lump sum investment equally in the 5 that are the lowest price.  The idea is to buy once and hold these stocks for a year, and then re-evaluate/re-invest at the end of the year.  I ended up divesting two of them mid-year (GM and Pfeizer), but held onto Merck, AT&T and Verizon with the following exceptional results (12 month gain BEFORE dividends):

• AT&T Gained + 43%
• Merck  Gained + 33.8%
• Verizon Gained + 19.6%

I have also held my interests in Sirius and have continued to acquire Microsoft stock weekly.  The following represents my last 12-month gains/losses (on paper) in those stocks (BEFORE dividends):

• Microsoft Gained +14.5%
• Sirius Lost -47.2%

I am still evaluating my strategy for 2007.  The current Small Dogs of the Dow are Verizon and AT&T (which I already own),  and Pfeizer, GM and GE.  I haven’t yet decided whether I will divest of Microsoft and Merck (which is still a "big" dog of the dow) and reinvest in GE, GM and Pfeizer.  I will more likely stay pat and see where things go.  I am hoping Microsoft will see gains with the upcoming release of its next OS, Vista.  I can’t see Merck climbing much more.  I am still leary of GM’s financial posture and Pfeizer is falling out of favor with its recent FDA snubbing of its only big research project.  As far as GE, I used to own it and wouldn’t mind owning it again.  I will continue to hold on to Sirius and see if it regains consciousness.  I still believe it is a good speculative stock to hold for the long-run, given the price I paid for it.  Perhaps the biggest question I have to answer is where will I invest my new stock investment funds in 2007?  I invested my new stock investing funds almost solely in Microsoft during 2006, but I think I need to find a new horse to ride in 2007.  Time for more research I guess!  Maybe GE?

Stock Funds – Late in the year, I started a new investment for each of the kids using the USAA First Growth Fund.  This is where I invest the last 10% of my investing dollars each month.  This fund has been fun for the kids to watch, although they haven’t been following it as closely as their current spending account.  They have been following their spending  accounts into which their $20 monthly allowances are deposited.  Regardless, Ben was ecstatic to see that we have already invested a decent amount in his new investment account since August and it has earned a 6% return. 

I wish I had started investing at an earlier age, as time is the key to all investing.  Nonetheless, I got on board early enough to be able to significantly supplement my military retirment pay and any other retirement pays that we may accumulate in my future second career.  I hope to impress upon Ben and Delaney the importance of starting early with good investing habits. 

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