Category Archives: Rich

Blogging history made at last?

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Warning: Chances are I am the only person who sees any irony / humor in this story … therefore, I have italicized the only useful bit in this whole post … feel free to scroll down and ignore the rest. For the rest of you poor souls, here goes ….

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You’ve probably heard this old proverb about a small action snowballing into a larger effect (“for want of a nail … the war was lost”) … well, a similar effect has occurred in the blogosphere, all because I left a comment on BripBlap’s recent post about ‘spending’; here’s what I said:

Money clearly has one and only one purpose: to be spent.

Money Monk read the comment and said: “I have to blog about your comment, it really makes sense” … eventually writing about it here, saying:

Money clearly has one and only one purpose: to be spent. This was said from blogger AJC. And I could not agree with him more. Even if you save money eventually it will be spent on something later. Once you figure out a way to balance everything, that’s when you are truly Rich

Now, that’s pretty unusual in itself … usually one leaves a comment on a post; only rarely does one leave a post on a comment!

Then something really strange happened: Early Retirement Extreme picked up Money Monk’s post and followed it up with his own post, thus creating the very rare Triple-Nested Post … a post-about-a-post-about-a-comment 🙂

For those of you smart enough to skip over all of the above [AJC: I did warn you!]; the ‘meat’ of this post is this:

Whether you horde money now to spend later, or spend now and risk your ‘later’ is a matter that is overly analyzed, particularly on the web.

Instead, simply:

1. Embrace the Life that you want to live – focusing on what is / will be vitally important to you;
2. Calculate how much money you will need (usually a necessary evil for most, but not all, Life plans);
3. Put in place strategies and tactics to ensure that you have at least that much money available when you need it;
4. Happily spend the rest (or horde it, or give it away, or … whatever turns you on).

… and, by writing this post about my own comment, I have thus finally created the ‘holy grail’ (with apologies to the religious amongst us) of blogging: the previously only dreamed about Quadruple-Nested Post … a post-about-a-post-about-a-post-about-a-comment 😛

No doubt, bloggers will be talking about this momentous event for many, many years to come …

The mythical stock market guarantee …

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In a recent post I spoke about various products that purport to ‘guarantee’ your returns in the stock market … in the current environment, it’s totally understandable that investors would be looking for such guarantees. But, you pay for them …

… instead, I suggested:

You can provide yourself a similar – or better – result at far less cost: buy a low-cost Index Fund and wait 30 years to cash it out; I can virtually ‘guarantee‘ an 8.5% minimum return :)

Rufus, though, took me to task, citing the Japanese stock market:

Here’s a prediction for you….In about 5 years the NIKKEI index will show you to be completely full of it even at your 30 year timeframe. If you had picked up the NIKKEI 225 in 1990 you’d now be down 75% just on your principal. Fun! If you had picked it up in 1985, you’d be about even today, which is still an absolutely massive loss against inflation. Your entire premise has a market survivor bias built into it to which you are blind. There simply are no guarantees.

Firstly, Rufus is right … there are NO GUARANTEES in life .. especially when it comes to the stock market.

BUT, what I offered was a ‘virtual guarantee’:

It is simply based upon the fact that the past 75 years of the Dow Jones have seen NO 30 year periods (including buying in the day before the biggest stock market crash in history) of returns less than 8.5%.

I’m not sure whether Japan could claim anything remotely approaching the same track record, nor are/were its fundamentals the same as the USA.

From a practical standpoint, I can only tell you this:

1. I invest using history as a guide to setting my benchmarks, but I always buy on value: i.e. do the stocks, RE, businesses look cheap at the moment, and

2. I invest in markets where, if things turn drastically sour, then everybody else is likely to be in the same boat … and, by everybody, that means the whole world.

If I’m going to be peeling potatoes, then so is everybody else … hence my major stock market investments are always in the USA.

Rufus, of course, ONE DAY, there will be a 30 year period where this does not hold true for the USA either, but by then I’ll be learning to speak Mandarin Chinese ;)

Avoiding a one-way ticket to misery …

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broken-hammerSmart Money Daily says that winning the lottery is a “one-way ticket to misery” … and, I couldn’t agree more!

The problem, as he puts it is this:

There is something about our culture that gets people very excited about getting something for nothing. The thought of paying $1 for a lottery ticket and coming away with several million dollars is a fantasy many people can’t let go of — in fact, that’s why the lotto companies can afford to keep going in the first place.

The problem with winning so much money is that it’s a complete life change that very few people are ready for. Going from near poverty levels to wealth rarely ends well. People tend to either wind up lonely, broke, or in some other kind of trouble.

I couldn’t agree more …

I’ve read that 4 out of 5 lottery winners are worse off 5 years after winning the lottery than they were before. The problem is that you have to make your money slowly in order to learn  the rules of money that allow you to keep what you have.

I am always amazed at sports and rock stars who sign multi-million dollar contracts then are broke just a few years later (remember MC Hammer?) … according to Motley Fool, it boils down to two main issues:

i) The newly rich don’t look after their own money very well

I remember receiving my first multi-million dollar check; I flew to Melbourne from the US to personally bank it – after ‘watching’ it flow through the right channels. I remember worrying that the personal bankers might have just printed up fake bank business cards and rented a fake office just to rip me off!

By the time I received my next two checks (one of them just as big at the First Big One), I just let my accountant bank them for me … it’s amazing how your mindset can change so quickly. So, it’s no great surprise that some of these people simply trust others with their money.

ii) They spend more than they earn

This is an easy one: it’s ALWAYS easy to live beyond your means, no matter how large your means are 😉

Here’s a ‘system’ for those who receive a ‘one off’ amount … or, have a potentially limited life to their large earnings (e.g. a 5 years sports contract; a 10 year lottery payout; etc.):

1. When you sign the contract for $X per year, realize that you DON’T have 80% – 120% of $X per year to spend!

2. Instead calculate how much you will build up over the LIKELY life of the ‘contract’ and plan to save most of that (a secure/insured bank account is JUST fine for this purpose)

3. That total becomes your Number: adjust for inflation (i.e. take off 50% if it will take you 20 years to accumulate that amount … prorate for any shorter period)

4. Take 5% of that ‘accumulated’ Number and that’s the amount that you can afford to spend in any one year ‘living’ – starting now …. period!

5. To decide how much house, cars/possessions, etc. that you can afford simply apply the 20%, 5% and 25% Rules to your ‘Number’, accordingly:

– House: presume that you’re going to pay cash for this, and put no more than 20% of your expected ‘Number’ into the house; if you actually intend to buy so much house that you can’t pay cash (sucker!) then you MUST apply the 25% Income Rule,

– Cars and Other Possessions: always pay cash for these, and put no more than 5% of your expected ‘Number’ into them … since you will most likely enjoy spending, spread the 5% over the number of years that you expect to achieve your Number.

Of course there is still risk in this, but you are a [Insert Lucky S.O.B. Reason of  Choice: Lottery Winner; Rock/Movie/Sports Star; Slip’n’Fall Insurance Payout Recipient; etc.; etc.] so, you probably won’t be able to fully contain your spending until after you actually see how much money you are GUARANTEED to end up with, so this ‘system’ is at least designed to keep your spending as ‘realistic’ as we can without sacrificing your Rock Star Image (or, whatever ‘image’ you are trying to project) too much 😉

Still, to be safe yet keep up pretenses, simply rent the house (that’s where the 25% Rule comes in; i.e. don’t spend more than 25% of your after-tax yearly earnings on rent and other direct housing expenses) and cars until you’re pretty sure that you will actually achieve your Number … or, be prepared to downsize pretty quick if something happens (e.g. sport injury).

Oh, and forget the blood-sucking entourage!

I hope that this post becomes VERY helpful to you, one day soon 😛

How much house can you afford?

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We have spent a lot of time on this blog talking about your house and how much to spend etc. Why? For most people, it’s your biggest expense …

Interestingly, I have no rules for your first home, other than not breaking the 25% Income Rule (this video talks about 28% … my rule is post-tax, but this video doesn’t specify whether it’s pre- or post-tax), so it may be worth listening to what this guy has to say.

However, once you are in your first home, in my opinion, you have “entered the race” and that’s when my 20% Equity Rule and 5% ‘other junk’ Rule kick in to help you ‘win’ the race to your Number by not over-investing either in your home or in your ‘other stuff’ (incl. cars).

Let me know what you think?

7million7years in the 'news' again!

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picture-11Kimberly Palmer wrote an excellent piece for US News (and, reprinted by Yahoo News!) called 10 Secrets of Millionaires’ Money Management and the first cab off the rank is 7million7years!

I’ll let you click on the link to read the article in its entirety.

In the meantime, I thought that I should share with you my response to Kimberly’s contribution request which said:

I’m writing a story on “secrets of millionaires” and would love to include some of your thoughts — could you please share two to three of the strategies that worked for you, perhaps things you’ve written about on your blog before?

Hmmm …

Two or three strategies that could be counted as a ‘secret’ to becoming a millionaire?

The strategies are easy (Kimberly included one of mine in her finished piece), but there’s nothing ‘secret’ about making money and/or amassing serious wealth, as my eventual response to Kimberly showed:

Here we go:

1. The Number One secret of being a millionaire is not an obvious one, but it’s the absolute key: you need to know your Number i.e. how much is enough FOR YOU.

For most Gen-X and Gen-Y’ers, retiring with a couple of million when they are 65 won’t be anywhere near enough to maintain even an average lifestyle because that little pup called inflation is constantly nipping at your heels as you try to run towards building your own retirement nest-egg. You need to be aiming for a MINIMUM of $3 million+ in 5 to 10 years to even be considered a ‘bare bones millionaire’ these days.

2. The second secret is also counter-intuitive but equally powerful: when you get to your Number STOP and live your Life, you deserve it.

For example, if you have a business and somebody offers you enough money to meet your needs for the rest of your life, then – as long as the offer values the business reasonably – TAKE IT. Don’t get greedier 😉 by rejecting the offer looking for more. And, don’t be tempted to start again – lighting doesn’t often strike twice and who knows when the next recession (or other disaster affecting your business e.g. fire, departure of a number of key employees, etc.) will hit?

3. The final secret is to learn the lessons of money early and stick to them.

For example, know how much capital to have invested in your own home, in your cars and in your other possessions, learn how much you can safely borrow, learn how to live within your means, and learn how to delay gratification; these are the habits that you need to maintain on the way up, so that you can keep your millions when you get there. If lotto winners can spend their winnings in just 5 years and end up broke and athletes and celebrities such as MC Hammer, Elton John, and Evander Holyfield can spend their huge fortunes, your paltry few millions can easily disappear much faster than it arrived.

See? This is pretty much it … the rest is just “filler” 😉

To buy and hold?

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I’m not posting this video just because of the historical interest (to that end, Phil Town – of Rule #1 Investing fame, and supporting actor in a recent post – does advise to “get the heck out of the market”) as it aired on August 17, 2007 … but because of the explanation that Phil Town gives about how Rule # 1 is NOT about buying and holding … equally, it’s NOT about trying to time the market, but it IS about:

1. Finding a quality stock that is ‘on sale’ (as MANY stocks are right now), and

2. Moving in / out when the ‘Big Guys’ do (i.e. when the major mutual funds buy or sell huge quantities of your favorite stock/s).

The major mutual funds control the short term price of stocks as they decide to move in/out of positions; the Rule # 1 investor takes advantage of this by buying into – or selling out of – a stock that they would otherwise be willing to buy/hold …

… but, the Rule # 1 investor has one advantage: they can buy into / sell out of a stock in the time it takes them to log into their online trading system (eg E*Trade, Scottrade, etc.) and press the BUY/SELL button.

The mutual funds, on the other hand, can take weeks to buy into / sell out of a major position for fear of causing a major price correction if they move their huge volume of stocks too quickly.

Warren Buffett has commented on this advantage of the small investor:

During a shareholders meeting in 1999, Warren Buffett lamented that he could generate 50% returns if only he had less money to invest.

I’d even accept a paltry 25% return … how about you? 😉

PS If you’re interested in learning more about Rule #1 – but, are not yet ready to buy the book – then listen to these podcasts: http://www.philtown.com/podcast/

A little rain must fall …

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triffids1We left Chicago just before Christmas … it was one of the coldest winters that most could remember, certainly the coldest that I have experienced. The last day of school was canceled due to the cold, so my children didn’t even get a chance to say a final goodbye to their friends.

When we packed the house, we moved into a hotel down the road for a week – for the life of me, I don’t understand why suburban-Chicago hotels don’t have underground parking lots:

In the morning, ice built up on the inside of the windshield …

… I remember, when the temperature ‘warmed up’ for a day or so back to mere freezing (circa 32 degrees) that it felt quite comfortable: no heavy coats, hats or gloves required.

When living inside a refrigerator feels ‘comfortable’ you just know that something’s screwy with the weather!

So, we arrived in Melbourne on Christmas Day to one of the hottest summers on record. Our children’s first day of school was also canceled just a few weeks later, as the hot spell continued, due to the extremely hot weather … that’s the definition of ‘irony’.

And, I got around to contemplating the various ways to water the garden in our rental house, as Melbourne has been plagued by a drought with strict water restrictions:

The house has a rainwater tank – it fills up from rainwater that lands on the roof and is funneled via the gutters – with a fancy automatic pump that starts up as soon as you squeeze the spray-fixture attached to the hose … I used up the whole tank in just one watering of the garden and it hasn’t refilled itself since (well, it is finally full again now). Needless to say, I wasted my time … without another watering, the garden looked as bad as before.

Then, I noticed that I didn’t really need to water the back garden and most of the grass, because there is a very efficient ‘water dripping system’ in the back (but, not in the front of the house … that part of the garden that now looks, well, dead) that just drips the smallest amounts of water under a timer that is only allowed to run 2 hours twice a week … that seems just enough to keep the plants and much of the grass alive.

Finally – and, this is what filled the water tanks – it rained!

In fact, we had a whole series of rainy days (surprising, since it’s summer) that finally put out all of those horrible bush-fires that you may have heard about …

… not only did it douse the fires, but the whole garden has sprung up, and in the space of just a week or so even the weeds look like something from The Day Of The Triffids … seriously!

So, what I learned it that there are two ways to water your garden that work and one that doesn’t:

– You can drip, drip, drip feed your lawn water in the most efficient way, or

– You can water more deeply, less often, but it must be done a number of times, but

– BUT, you cannot simply dump your entire water supply on the garden once and expect miracles.

And, this story actually has something to do with money …

… you see, I think that there’s only two ways to make keep your ‘financial garden’ healthy, and at least one way to guarantee failure:

1. You can follow the Making Money 101 steps of drip, drip, dripping money into your savings account – being very careful not to soak up too much with excess spending – and gradually find your veggie patch bearing small fruit; enough to live on, if you have spartan needs,

or

2. You can regularly ‘deep soak’ your financial future by large – but, not too large (such that you are left with nothing in reserve) – and regular applications of finances into various Making Money 201 ‘income acceleration techniques – such as small businesses and/or ‘buy/hold, income-producing’ investments – some of which may actually take root and bear an abundance of fruit on their own,

but

3. You must not be foolish enough dump all of your financial resources into the One Big Thing [Insert Speculation of Choice: Lottery; Business Deal; Sports Contract; Stock Market Holding; etc.; etc.] and hope that it solves all of your financial problems in one fell swoop …

… it rarely does, and it’s no fun going back to ‘drip, drip, drip’ once you have tried and failed 🙁

7million7year's April Fools Day Joke!

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april-foolOK, I promised myself that after my March Fools Day joke-with-a-message (you know, the horse racing system one) that I would NOT do an April Fools day post …

… apparently, promises are made to be broken 😛

So, yesterday’s April Fools Day Post was another joke-with-a-message: no matter how much you have, you can always spend more.

Yesterday’s post is actually (slightly) rooted in fact; I have made some errors recently, and the market has turned, so let me come clean:

– We bought our current home for about $1.6 Mill.; naturally, we paid cash.

But, after we cashed out on the second part of our 7m7y journey (the part that I have NOT yet written about on this blog, because it’s a business success story, not a personal finance success story like my 7 million 7 year journey), things took a turn for the ‘worse’:

– We upgraded to a $4.5 mill. home (plus $1 Mill. renovations to come: house/swimming pool/tennis court), and again paid cash … unfortunately, the market correction has probably wiped $500k – $1 mill. of value … but, this is ‘value’ that will only be realized when we sell (hopefully, we’ll be there for at least 10 to 15 years).

– We bought $300k of cars (for cash) but also managed to sell the Maserati

– I did indeed lose $600k in the stock market; this is the ‘cost’ of my experiment in letting somebody else manage a small part of my portfolio for me, and trying to time the market (bad AJC … bad boy!)

– And, I was due to receive a $3 Mill. ‘bonus’ from my ex-employer, that was to be delivered in cash, but ended up being delivered in now-reasonably-worthless stock (that 30 pence to 7 pence slide is real).

The two mistakes that we made were:

– We tried to time the market … however, $1 Mill. represents a small’ish % of our total portfolio

– We spent money on a house that we assumed that we would have, but didn’t get (i.e. the UK cash-to-stock thing).

So, right now, we have broken the 20% Rule … but, I counted cash, and after all of this (including completing the renovations) we still have a LOT of cash in the bank, plus the houses, plus equity in a number of apartments / commercial property, not to mention a ‘passive’ business or two floating around … I won’t have to ‘downgrade’ my $7 million 7 year mantle anytime soon [AJC: because, say, $3 million in 11 years just wouldn’t have the same ring to it, would it?] 🙂

Still, how are we going to ‘correct’? After all, we have broken so many Rules, it hurts me to think …

Well, exactly the same way that you would:

Some of it will come from simply waiting for the market to correct (that $600k stock loss will partially reverse, as will the 30-pence-to-7-pence UK stock slide) … some of it will come from making long-term buy/hold investments in this soft-to-recovering market over the next year or three … some of it will come from applying a large portion of the equity in the home (and selling the old one, when the market recovers) to investments (thus bringing us back within the 20% Rule).

But, the lessons are clear: always obey the Rules … do NOT speculate … and, heed Rick Francis’ Making Money 301 advice:

You really should [not] have to worry about affording needs anymore- you just have to control your wants. Also, you can afford to be more conservative in your investments. Making Money 301 should be a lot less risky as you only need to maintain your principle against your spending and inflation.

Where were you when I needed you, Rick? 😛

PS: In case you didn’t get to see the masthead that went with yesterday’s post, here it is … I’m particularly ‘proud’ of the by-line (something to do with noses, white powder, fast cars/girls) … unfortunately, all-too-true for too many people (but, definitely NOT me! Well, the fast car – singular – maybe). I don’t even know who the photo is of? Do you?

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