The other day I shared the somewhat gloomy view of our earned income in 2008, which will likely to decline by a small percentage due to a variety of factors. To continue this series of 2008 financial planning, let me discuss how I view our investment portfolio will evolve in 2008. I will continue to do this on an assumption-by-assumption basis that resembles the top-down annual planning model I shared earlier.

3. We will be able to achieve 7-8% annual return on our portfolio, although with more volatility throughout the year.

It is very apparent in the second half of 2007 that market volatility is significantly increased compared to the last couple of years of eventless growth. Domestically, although the U.S. economy is potentially facing a recession, it does not mean stock investment will be untimely. Externally, U.S. dollar will continue its devaluation against other major currencies, and the economy of BRIC will continue their boom without the growing consumption by the developed countries. All in all, I do believe a modest single-digit gain is possible by a portfolio that has a deep-value/contrarian flavor, sizable exposure to foreign markets, and active cash position management through USD/Yuan carry-trade.

Now that our portfolio is worth over $800k, the growth of portfolio size is not only produced by more savings from our earned income, but also materially contributed by investment returns. We are confident that our day job and sideline business will continue to produce sizable cash flow, so we only need a little help from investment gains to deliver a million-dollar portfolio (excluding value of our stock option account) by the 3rd quarter of 2008.

4. Further Employee Stock Option Account appreciation is unlikely.

Our employee stock option account appreciated by over $60,000 since the start of the year -- that is, excluding the value of newly vested options, which is deemed as earned income. After exercising some stock options at the market top in early November, I still have about 7,000 exercisable stock options that will gradually expire between 2011 and 2013. However, given MSFT is already trade at above $35, a figure that is only supported by continuous mid-teen growth of the soon-to-be-$60-billion-dollar company, I doubt I can see much upside of further appreciation in 2008.

Next, we will be discussing our spending budget and tax picture of 2008, followed by a holistic view of our 2008 financial prospects.