Slow Motion Lottery

 
powerballI didn’t win the Powerball (I also didn’t play but my wife did) and to make matters worse, my net worth has taken a big hit so far this year as the stock market has cratered. If I were close to retirement I’d  be worried.StockDecline

People, so called experts (you know my feelings on experts), are saying stupid things like sell everything, or sell into any rally. Don’t listen.

On the contrary, buy and keep buying. Don’t take every last penny and invest, that’s just as stupid, but if you buy regularly as the market falls, you’ll have a lot more shares when things turn around. It’s a proven concept called dollar cost averaging. These “experts” make it sound like dollar cost averaging is only a good idea when markets rise but it’s just the opposite. It works best the further the market falls.

The spring is tightening, coiling up for those of us smart and confident enough to stick with a plan, and bold enough to adjust the plan to take advantage of panic.

The lottery is real it’s just not a sudden and unexpected thing. It’s predictable (over long periods of time) and involves some faith but mostly discipline. The slow motion lottery of investing and working hard isn’t found in a convenience store, it’s found in your character.

So what should you do?

Make a plan. Investing blindly is no different than paying money for random numbers you hope will match some other random numbers.

It’s a new year and if you didn’t max out your 401k last year, this is the year to do it. I have calculated the amount I need to invest each paycheck so that I’ll hit the max on my last paycheck. Here’s how you can do the same: Take 18,000 (2016 max) and divide by your salary. This is the percentage you should invest. Take that percentage and multiply by your gross paycheck. For example: if your income is $80,000/year then the percentage you need to save is: 22.5%. Your weekly gross is $1,540 and you should put $347 each paycheck into your 401k.

That alone is good but it’s not lottery worthy. Save more now than you ever have and invest in accounts other than your 401k.

Discipline is hard. Saving when you really want to spend is hard but it’s a winning lottery ticket you just have to have the guts to buy it.

PS: if you read this far I’m impressed but I know you’re probably thinking there is no way you could save and invest that much. You’re wrong. Check out how much I save and stop making excuses.


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OPM = Opium

Do you know what OPM stands for?

Other People’s Money and it’s what get rich quick schemers tell you to use to do everything from buying real estate to…well really I’m just talking about buying real estate.

House for SaleI was on vacation at my house/rental property in California and I kept hearing ads on the radio about a real estate investment seminar where the star of a house flipping show will teach me, the listener, how to invest in real estate using other people’s money. “The Palm Springs area is an ideal place” to use these techniques, the voice said.

The funny thing is that when I got back home to my primary residence, I heard the exact same voice of the exact same television star saying that my town in NJ was an ideal place for these techniques.

What this person was really saying is that there are plenty of suckers in Palm Springs and plenty of suckers in NJ. This house flipping is easy and can be taught to anyone drug is the opium being pushed on innocent people who lack some common sense and want an easy way to success.

Real estate can be a great investment, I’ve invested in real estate and now own three properties, but it’s not easy, it’s not short term, and no one is giving you money without a proven track record.

Money can be made flipping houses, I don’t doubt that, as a matter of fact, my nephew has been quite successful doing it, but it’s his full time job and it was something he grew into building from a different but related business. Flipping houses is not something that can be done on weekends or in your spare time.

I know (if anyone actually reads this) that there will be some who say, “but I’ve done it, I flip houses on the weekends, in my spare time and it works.”

My response is if it works so well, why don’t you do it full time? If it’s so lucrative why not quit your 9-5 and get serious about it? The reason is that it probably doesn’t pay as much as you think and when you really do the numbers you’ll see that.

Don’t get sucked up in the it’s easy to make money (especially if you use other people’s money) game. It’s a losers game.


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Buy, Save, Hold, and Buy

 
I tweeted this Friday as the stock market was poised to fall:

BuyHoldTweet
While it’s true, it’s also a little too simple as tweets often are.
My real strategy is a buy continuously, but buy more when prices fall, and save (and hold) as prices rise.

Buy Continuously
This is your automatic savings and investing such as your 401k, Roth IRA, or 403b. Start young and do your best to max this out. Take full advantage of any matching funds and never, ever, take a loan out against these accounts. The money coming out of your paycheck on a regular basis is dollar cost averaging and captures both the ups and downs of the market and smooths out wild swings like the downside rout we’re having now.

Buy More as Prices Fall
When the market drops, that’s the time to buy. As Warren Buffet said, “be greedy when others are scared, be scared when others are greedy.” Don’t try to wait for the bottom, just dollar cost average more aggressively. Friday I invested less than 5% of the money I’ve been saving over the past year. As prices continue to fall I’ll buy more again.

Save as Prices Rise
Over the past year or so I haven’t been buying stocks (I buy stocks only in low cost index funds) and instead have been saving more aggressively. This doesn’t mean that I haven’t been buying any stocks, just not any above my set investment plan. Now I have more capital to invest and since prices are lower I hope to get better returns. Too many people don’t have the discipline to save like this but if you can then you’ll be prepared like I am.

It Paid Off Before

Do you remember how far the market fell in 2008? In 18 months the Dow Jones Industrial Average lost more than 50%. Many people sold, panicked really, but not me. I continued buying throughout 2008 but still I lost a huge amount of money, with my net worth diving 16.44% (check the chart below). In 2009, however, my plan and my discipline paid off. My net worth rebounded by 24.93%, more than recouping the losses of the previous year.

My net worth percentage change chart

 

 

 

 

 

 

 

So what’s your plan in this tumultuous time for the market? Panic and sell at the worst time or stick with your plan and take advantage of low prices?


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Your Life is a Business

 
CEOWe are all self employed and our business is ourselves. If you run your life like a business, understanding things like cash flow and investments, you will be very successful and not worry about your future.

I watch shows like The Profit on CNBC and Restaurant Impossible on Food Network and the common thing between these shows is how most of the business owners don’t know basic information about their finances.

As a business owner I’ll admit that I may not be able to answer all their questions off the top of my head, but I have meticulous records and I could have an answer within minutes. Can you do the same for your personal finances?

Salary versus income

This is the first thing that people often get wrong. In business it’s the difference between revenue and cash flow. Say your salary is $100,000 a year, that’s $1,923 a week. But that is not what you take home. After taxes, health insurance and other deductions, like your retirement savings, you are saving for retirement right, you could easily be taking home only about $1,000 a week or less which is just $52,000 a year. Live like you have 100k and you’ll be broke all the time.

Here are my questions for you: what is your net worth? What percent of your gross income did you save in 2014? If you can’t answer them immediately can you get the answer in less than a few minutes?

Mislabeling investments

Forget the debate on whether a house is an investment or not, what some people do with their homes in the name of investment can be downright silly. For example, renovating the kitchen, bathroom, or basement might add some value to your home when it’s time to sell but it’s not an investment, it won’t appreciate beyond the value of the house as a whole. You can’t sell your kitchen renovation when you’re short on cash.

In business every investment has an ROI, return on investment, meaning that if you spend $100 on a new piece of equipment it better increase your income by $200 or more (because you don’t invest to break even). Then there are capital expenses and that’s more like the kitchen upgrade, it may not make you money but it’s necessary to function.

A hobby is not an investment even if you consider it a business. Unless there is potential for this hobby to be your sole source of income it’s just not an investment. I’m not against hobbies or even having a little side income but inflating what it is doesn’t help.

Stretching is for exercise

Too often I see people reach beyond what they can afford for what they want (even so called experts). They want a new car but the payments are too high so they lease it instead, a couple with one child in a two bedroom home say they’re outgrowing it and buy a bigger house they can’t afford, they want a vacation home and overestimate the rental income they will get.

All these examples are people who stretched to afford something but they all run the risk of pulling a muscle to keep the analogy going. Instead, buy the car one model lower, stay in the house longer, only buy the vacation home if you can afford it without renting it out, and still rent it.

Successful business people look at every expense carefully, they don’t spend unless it’s necessary or will lead to more income.

What are some things you feel people could do better if they ran their lives more like a business?

 


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Timing is Everything

 
Originally written Jan. 31, 2014 I’ve updated this post to reflect the reality of how time affects perspective. I’ve added new comments in blue italics surrounded by parentheses.

Well it’s back to a topic that is very important to me, finances.

Going DownAs I write these words the stock market is a bit more than an hour from opening though you’ll read these words (because I’ll finish this post) after it opens. Based on the pre-market indicators today is going to be a down day (possibly very down). So far 2014 has been a down year with the Dow dropping 4.39% or 748 points and that doesn’t include whatever is in store for today. I for one hope it continues down. (Well it didn’t continue and as you read these words the Dow is up 3.82% for the year)

Wouldn’t it have been nice to sell everything on Dec. 31, 2013, the peak, and then buy it all back whenever we hit the bottom? (That would have been Feb. 03) It would have but it’s also impossible to know when those two events will occur, eveyone knows that. They say timing is everything in life but perfect timing is impossible when it comes to stocks. Since perfect timing is impossible then what about not so perfect, or just average timing? We’ll get to that in a second.

I gave up trying to time the market very early in my investing career but there is some wiggle room. Almost as soon as this new year began, I started selling stock. Not because I’m a clairvoyent investor but because I had to rebalance my portfolio anyway and rebalancing to me doesn’t mean selling and buying at the same time. Since the year began I have sold 3.2% of all my stock holdings and moved it to cash or bonds. (I’ve continued selling as the year went on and the markets have risen) That’s not a lot in the grand scheme of things and fits with my philosophy of buy and hold. I held onto 100% of my stocks during the 2008 collapse and subsequent recession and even added to my positions which paid off very well with 2008 seeing a 16% decline but 2009 seeing a 25% increase and 2010 seeing a 17% increase all while buying on the way up.

If you have a plan you can and should stick with it and that’s exactly what I’ve done and am doing. (My plan is to buy low and sell high – duh – but I rarely sell – the little selling I’ve done is very small compared to my holdings. More importantly I’ve been saving and it’s those savings that will allow me to buy when I beleive the time is right) Also very importantly, do not make big moves. 3.2% is not a big move but, if I’m successful, it will have a big impact many years from now, and that is what planning is all about.

Will I begin buying stocks at the exact right moment, when the market hits the bottom and things begin going up again? Absolutely not! But will I buy at a lower price then I sold? Yes. Will that growth compound over many years if I continue to hold? Yes. The timing is not when to sell but when to scale back buying and when to amp up buying.

My next post will be on my technique for rebalancing my portfolio.


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Manage Your Money Don’t Let it Manage You

 
So I haven’t written anything in a very long time and I’ll get around to some reasons in future posts but yesterday I saw a sudden rush (which for me means three or four people) reading some posts I wrote a while back, they even tweeted links to their followers (thanks!). That inspired me to make an effort to write some more so I’ll start again with a favorite topic of mine, finances.

Percentage_IncreaseI keep very detailed stats on my money, what’s coming in and what’s going out, my investments, how they’re performing, and my plans for the future. One thing I do every year is a cash flow analysis (because I’m that exciting). Because I track everything I spend I can make informed decisions rather than just guessing. Of course I’m not going to share actual numbers – you know my name after all, but I will share percentages.

All of my income is 100% but what is the total from? Well my salary represents 35.92% and my wife’s salary represents 41.91%. Yes she makes more than me and I’m not only ok with it, I love it because it shows that smarter people are rewarded more. So our salaries represent 77.20% of our income where does the rest come from? The next largest chunk comes from investments in the form of dividends and interest at 14.75%. This might sound high and it is (and will be the subject of a future post) but is key to building wealth. I wrote about our two rental properties in What Next and they represent 6.11% of our income. After that comes our 401k match which represents 1.87% of our income and that is free money, money that we’re not taxed on but that grows and grows until we retire (and beyond). The importance of the match can’t be overstated.

Now comes the importance of tracking your spending because I can list, in broad categories, where every penny of my money went.

Mortgage: 12.67%  Loans: 2.22%  Insurance: 1.78%  Taxes: 19.59%  Commuting: 1.59%  Household: 1.57%  Vehicles: 4.19%  Eating Out: 2.67%  Groceries: 0.80%  Entertainment: 2.01%  Utilities: 1.79%  Travel: 0.72%  Medical: 0.38%  Pets: 0.49%  Rental Properties: 9.09%  New Business: 17.57%  Misc: 2.64%.

Since the numbers above don’t equal 100% where did the rest go? Savings! Last year we saved 18.23% and that’s from gross income while in the midst of opening a new business.

Some observations:

While my rental properties contribute 6.11% of my income it takes 9.09% in expenses. In other words “passive” income like this isn’t easy money and often the return isn’t evident until the property is sold.

Even though a large amount of money is generated by dividends and interest (this year, 2013, was unique because of how much stocks were up) most of that money is inaccessable because it’s in retirement accounts such as a 401k.

We spend very little on groceries for two reasons: we eat out a lot and we buy in bulk at Costco which if done carefully can save us a lot.

 


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The Best Investment You Can Make is in Yourself

 
I’m taking a break today from the Gary Vaynerchuk interview to…to what? I don’t want to complain but I’m afraid that is how it will sound. I don’t want to sound like an old man who thinks this generation is lacking what previous generations had but after reading this, you might think that’s what I’m doing. I don’t want to put my leadership skills (or lack of skills) out there for everyone to see but I have to be honest with myself and I’m choosing to do so publicly.

leader-mdI choose kindness over harshness. I choose conversation over orders. I choose second and third chances over rash decisions. I give the benefit of doubt rather than expecting the worst. All of these seem to be backfiring.

I understand the feeling that a job is just a job. I understand having a job you don’t love, I have one now that I don’t even like. I get wanting to do the bare minimum when there is no motivation or incentive to do more. I get all that, but I’m at the end of my career (yes I’m young but I’m at the end of one career, not my working life).

When I was at the beginning of my career the concept of work hours was foreign to me. I stayed and worked and improved my skills because I wanted to, because I was curious, because I knew that some day I’d advance and grow to higher levels. I did this without overtime pay and when overtime was available, I often wouldn’t put in for it because I wasn’t working, I was learning.

What I see of my staff is that, so early in their working lives, they’ve already checked out. I don’t see the curiosity and interest in honing their skills, learning new things, going beyond (or even living up to) their job description. The sales associates want to be managers, and the manager wants to be the general manager but none are excelling (or are even adequate) at their current position.

My pep talks haven’t worked. My pep talks with a dose of reality haven’t worked. My honest assessments with consequences behind them haven’t worked. I know business people have to fire staff and I’ve had to as well, but when you see potential in a person in spite of their lack of effort it makes the process that much harder.

I can’t help but think that a young Gary Vaynerchuk did well because he is someone who is invested in himself. I am someone who invests in myself. I don’t see my staff investing in themselves – they’re just picking up a paycheck.

Do you see the same of your staff, of the employees you deal with at a store or on the phone? What do you do to get them to see that investing in themselves pays the best dividends?


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Savings Matter

 
In my last post, I talked about so called financial experts and how often they seem wrong. I’ve also written about these “experts” here and here. At the end of the post I said that I’d show you how my savings and investing strategy has allowed me to be aggressive when I wanted to and cautious when I needed.

piggybankThe key to finances is having options. If you buy a new car every couple of years, go on really expensive vacations, and otherwise live at or above your means, you’re not leaving yourself many options. If, on the other hand, you save aggressively you will have many options when opportunity arises.

Deciding to change

In 2006 I decided to change my career from television to financial planning. I had the option, the ability, to spend the $5,000 for tuition and an additional $2,000 for networking by traveling to financial planning conferences. I saved aggressively in anticipation of the transition knowing that I’d be leaving behind a good salary to start over.

But what does it mean to save aggressively. Well in 2006, the year I decided to go back to school, Julie and I saved 31.71% of our gross, not net, income. In 2007 the middle year of this transition we saved 42.18% of our gross income. And in 2008, the year I passed the CFP® exam, we saved 34.2% of our gross income. Another important aspect of finances is tracking your money. Without tracking my finances I couldn’t tell you with such specifics how much I saved each year.

A New New Course

In 2009, having no luck finding the right fit in financial planning (another option I had was to be picky with my choice of employer), I decided not to pursue this plan any further. What then was I going to do with the money I had saved?

Two things happened that year. First I wanted to renovate a rental property I own on the Jersey Shore. That plan was also abandoned when the local zoning laws were too much to deal with. Once again I had a large amount of savings with no plan for it.

Option 2

That’s when a friend mentioned that her sister owned a rental property in our favorite part of California, The Coachella Valley. That’s when we decided, just after the real estate market had crashed and was continuing its slide, to buy an investment property. The years of saving meant we could explore other options and this one has turned out pretty good. Our savings in 2009 were just 0.47%! That’s less than 1% but it was because we had saved that we had the option for an investment with the possibility of a big return. This investment is part of a long term plan that we are able to add to every few years because we save when we need to and spend when it’s wise.

Maybe we could have had a little more fun and a little more things but It comes down to sacrificing in the short term for long term gains.


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Foolish Cycle Continues

 
WhitneyThe experts are at it again. Not that they ever stop spouting off but when they change direction I think that’s a sure sign to ignore them. One such expert perpetuating this foolish cycle is Meredith Whitney.

The Difference

I’ve said it before, that if you use the gauge of who is richer, who garners more respect, and who can get on TV any time she wants then Ms. Whitney is far more qualified than I am to offer her financial advice. The difference is that I’ve been correct in my predictions and she’s been wrong though she’ll never admit it (especially to me).

What Now?

Stocks have gone up very quickly and there are various reasons for that but Ms. Whitney has been cautious about stocks – until now. CNBC states “Known more for her pessimistic take on the markets, and banks in particular, Whitney has turned in the opposite direction.” Run the other way!

Whitney says she’s “not been this…bullish…on equities in my career.” Yeah I know, but I have, and I’ve been right and she’s been wrong. I’m a lot more cautious, now, just as she seems to be jumping in with both feet.

This reminds me of another person I’ve called out for being a fool who jumps on whatever bandwagon is rolling through town, James Glassman, who wrote the book DOW 36,000 just as stocks were about to crash from their internet binge. Glassman later wrote, Safety Net, a book about how stocks were not a good investment and which favored bonds just before this amazing stock market run we’ve experienced these past few years.

Pickers

My feeling on investing has evolved over the years and at one time I thought I could time the market, predict with reasonable certainty what individual stocks would do. I was wrong. Since then I have become a passive investor (passive is such a misnomer).

It’s been said that you can pick your friends, you can pick your nose, but you can’t pick your family; I’d change that to you can’t pick the direction of the market. And yet people try. They tried with internet stocks, they tried with housing, and they’re trying again with bonds.

My Advice

You choose whether you want to listen to these so called experts but my advice is to ignore these fools and invest with a long term view. Tomorrow I’ll have a post about how my saving and investing has enabled me to be aggressive when I wanted and cautious when I needed.


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Right but not Perfect

 

How do I do this? How do I write a post called “Right but not Perfect” without sounding like a jerk, like an egotistical self-centered idiot? Well, I don’t know that I can. You have to have a certain amount of all of that in order to put yourself out there and say “I have answers.” If I’m going to criticize others I better be able to back that up, otherwise I am a jerk.

Anyone offering advice, be it financial, personal, business, or otherwise, is saying “I know better than you.” That’s ok because sometimes they do, other times it’s just a second opinion, a different perspective than you have.

Financially speaking I’ve done well. I’ve made mistakes but they weren’t catastrophic, they didn’t do irreparable harm, or really any noticeable harm. I’ve been right about a lot of things such as the housing bubble but I was also wrong about the housing bubble too.

What? I was right and wrong? Yup, and lucky too.

I’ll start with a big mistake that could have had serious ramifications. When I got my first job out of college I immediately went out and bought a Jetski. Jetski 750SXThis could have been the start of a reckless spending spree, a lifestyle I couldn’t afford but it wasn’t, because I made a deal with myself. I told myself I would buy the Jetski but save aggressively after that. I stuck with my plan!

In 1995, at the age of 25, I bought my first home, a townhouse. My aggressive savings paid off and so did my parent’s help, letting me live in their house rent free. It happened to be pretty much the bottom of the market. That was just luck. I had a roommate to help defray the costs, that was smart. In 1997 my girlfriend, Julie (yeah she’s my wife now), moved into my townhouse because the home she owned (purchased when she was just 23) had burned down, that was really bad luck.

House FireWe invested part of the insurance money as the house was being rebuilt and doubled it. Partly luck, partly good judgment, it was a highly risky move but it paid off. We didn’t go overboard when the house was completed, buying furniture and expensive electronics, we were frugal, we lived well below our means, something that continues to this day.

In 2000 we bought our first rental property at the Jersey Shore. I thought it was the height of the market, that home prices couldn’t go up any more, that was dumb. As prices continued to rise I could have cashed in but I didn’t. I was right in 2005 when I wanted to sell and wait until prices crashed to buy again but I didn’t. Was it a mistake? Maybe but I’m not going to complain about a successful investment because it could have been more successful.

When it comes to stock investing I’ve done well, too, but made serious mistakes. Not one, not two, but three stocks I owned have gone completely under. I lost everything I invested in them but I knew the risks and didn’t lose my shirt. I had a comparatively small percentage in each stock. As the saying goes, I didn’t put all my eggs in one stock basket. Again, I had a plan and I stuck with it. Those losses caused me to completely rethink my investing strategy and now I subscribe to what is known as passive buy and hold investing (though I think passive is a misnomer).

My second rental property has lost value, a substantial amount of value. Here again this could be considered a mistake but once again I knew the risks. I wasn’t trying to time the market, to buy at the bottom. I assessed whether I could afford it, whether I would make money in the long term, not the short term. If that meant I had to hold it for 5, 10, 15 years or more I was ok with that. I had a plan and I stuck to it. I’m three years into the investment and it looks like it will be closer to 10 years that I’ll need to hold onto it. That’s fine.

I haven’t been perfect but no one is. I’m satisfied with how things have turned out so far and I’m looking forward to the future. All I can do is give you some insight into my success and my failures and let you be the judge of whether I’m someone who can offer you anything worthwhile. 


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