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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Buy, Save, Hold, and Buy

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

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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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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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.


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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Great Returns from Buy and Hold

On Trail

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I wrote a reply to an article that put down buy and hold investing the other day and the way I ended my response was to show that through buy and hold investing my net worth has increased almost every year – and not by a little.

First a definition. Buy and hold investing is where you invest with the intention of holding onto your investments for a long time period. What buy and hold investing is not is: buy and forget, buy and ignore, buy and hope, buy once and hold.

That last one is really the key. People who put down buy and hold investing seem to think that there is no way to take advantage of market opportunities unless you actively trade. That’s non-sense. When the market dips you can buy more, at a lower price, which is what you want to do, buy low and sell high.

The other mistake opponents of buy and hold investing make is to assume that stock and bond investing is all there is to a diversified portfolio. Well the more money you have the more you can branch out into other things such as commodities like gold and other metals, real estate, or a side business. Also don’t forget that you are your best means to diversification and should not discount your ability to increase your salary by getting promoted or changing jobs.

Since opponents of the buy and hold method often assume that stocks are your only investment they like to point out that these past twelve years have been flat. They’re right if they ignore two very important things that simply can’t be ignored: dividends and dollar cost averaging. Dividends are distributions of a company’s profits to their shareholders. Dollar cost averaging is the technique of buying stock (or mutual funds) on a regular schedule regardless of the share price. The idea is that you end up buying more shares when prices are low and fewer shares at the high price. As stock or mutual fund prices fluctuate you do better than simply buying once and forgetting.

S&P 500 over the past 10 years

I use a modified dollar cost average technique of my own. I invest at regular intervals through my 401k at work. In my personal investment accounts, I will accumulate cash and buy only on days the market is down. If the market has been rising steadily I’ll buy less often and accumulate more cash. If the market has been doing poorly and has one bad day after another, the accumulated cash allows me to buy more frequently. This technique takes discipline, there’s no doubt about that. The important thing is that I have been fully invested throughout so I haven’t missed any of the gains and because this is not money I need in the short term. 

As I mentioned at the start of this post I ended my comment to the other article by providing the percentage increase in my net worth over the last twelve years (there’s a benefit to being a financial nerd). So here it is in chart and graph form:

My net worth percentage change chartMy net worth graph

Please note that this does not depict my stock performance only but is an overall net worth. I feel this is a more accurate picture of all my investments, not just stocks. As you can see there were only two years that I had a negative return. The graph shows the dollar figure of my net worth (numbers removed for obvious reasons) in red and the green at the bottom is the amount by which my net worth increased or decreased (the chart in graph form).

None of this can be achieved without a plan and the discipline to stick with it. Do you have a plan for how to increase your net worth each year? Share your techniques in the comments section.


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ETFs – A Flawed Investment?

ETFs have been around long enough that I can analyze my initial thoughts about them and decide if they were correct or need to be modified. I know a lot of people, including many financial planners, love ETFs but I did not when they first were introduced and I still do not. As someone who believes in passive investing, ETFs may seem like a good idea but I just don’t see it.

Let me start by saying that there are good aspects of ETFs that work in theory better than they work in practice. For example, an ETF is priced throughout the day and can be bought and sold at any time. Unlike a mutual fund that is only priced once, at the close, an ETF seems to have a huge advantage. If the market is dropping quickly you could sell the ETF at midday rather than at the close, possibly limiting your losses. So what’s the downside of that? This feature encourages trading rather than investing. One down day (week, month, or year), even a precipitous drop, doesn’t mean you should sell if you have a long term outlook. Human nature being what it is I feel ETFs make it more likely to sell low and buy high. Of course if you are disciplined and have a plan that you stick with you can negate this potential trap.

ETFs follow an index giving you more diversification than individual stocks. Again that is true but the so called indexes that some ETFs follow are nothing more than sector funds in index clothing. There are technology ETFs and gold ETFs and health care ETFs to name a few and their only diversification is a broad swath of the same sector. To be fair there are some ETFs that follow the traditional indexes such as the S&P 500 but with the proliferation of the ETFs I think many people end up in the wrong ETF.

Then there is the cost of the transaction. Like any investment you can dollar cost average into ETFs but each purchase will carry a commission. Even using a discount broker that would be $9.99 (for example) per trade. If you bought one EFT a month for a year that’s about $120 and two ETFs a month would be $240. So what’s the alternative? I have an account with Vanguard and if you purchase their mutual funds there is no commission. I just saved $240 or more and was more diversified than an ETF that follows a pseudo index.

So does this mean I don’t own any ETFs? Well no it doesn’t, because there are some things for which I could not find a suitable mutual fund. The one ETF I own is an inverse US Treasury Bond ETF. Interest rates are incredibly, artificially low in my opinion. That doesn’t mean they will go up any time soon but when they do I will have an ETF that will do very well. Remember I have a long term outlook.

There are uses for ETFs and they could be a valuable addition to your portfolio but I don’t think they work for me. What do you think?

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Functional Financial Illiteracy


New York Stock ExchangeAsk anyone and they will tell you that it is very important to understand your finances, to be smart about your investments. Those same people, however, often are not knowledgeable about finance and investment, if surveys and polls are to be believed. One study published in December 2006 states: “Our review reveals that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions.” (emphasis added)

You simply can’t ask What Next without some level of financial literacy.

The media  seems to work hard to educate and inform us. Money Magazine, Smart Money Magazine,, and CNBC are read or watched by millions but can they be trusted? When the headlines on the covers of the magazines are things like “Top Mutual Funds for This Year” or “What the Market Will do Next,” they cannot be trusted because no one can predict these things accurately. When CNBC holds a “Million Dollar Portfolio Challenge” and rings the closing bell of the stock market to promote their casinoization of investing they lose any credibility they had.Roulette

The language of investing perpetuates the gambling myth. A stock that does well is called a “winner,” an investment recommendation is called a “hot tip” as if it were a horse running in the third race at the track. No wonder planning for the future is called the “retirement game.” The stock market, investing in general, is not a game where, if the “player” gets lucky, he can beat the house.

Asking What Next takes a much different approach to investing. It’s systematic, researched, and individual. Investing with a What Next outlook means weighing options, understanding that an investment in one area often precludes an investment in another area, recognizes that it’s folly to attempt to do better than “the market” when the market is made up of people all trying to do the same thing. For me, educating myself meant pursuing a career change into financial planning. That was a bit extreme. For most people, seeking the advice of a financial planner would suffice.

Asking What Next is only the first step. Understanding What Next requires work.

ConfusedMany people making financial decisions are functional yet financially illiterate. It’s time to change that. I’d stop treating investing like a game by avoiding the “Million Dollar Portfolio Challenge” and start educating myself on a reasoned, systematic approach to the future.

In my opinion your best resources to educate yourself and take a What Next approach to your finances, investments, and retirement planning are the following. Watch an episode of Til Debt Do Us Part on CNBC then check out Gail Vaz-Oxlade’s website. I’m a big fan of The Coffeehouse Investor both the book and the website – check them out. Of course there’s always my book What Next A Proactive Approach to Success – I’m kind of partial to that one (also available as an eBook).

A big part of What Next is taking action. Will you check out any of the above suggestions?

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