Case in point: paying down your mortgage is a subject that always gets a rise out of my readers.

I see it very simply:

If mortgage rates are currently 5%, what investments can give you 5% + whatever margin you feel you need to compensate you for risk?

How ‘risky’ is that risk? And, what do you stand to lose?

Some people, like Executioner, look at the 100% risk/loss scenario:

Although I’ll concede that it is unlikely that a broad index fund would ever drop to zero, it’s not outside the realm of possibility.

Sure, it’s not outside the realms of possibility, but has it EVER happened?

What’s the worst 30 year return that the stock market (as represented by, say, the entire S&P500), a basket of ‘blue chips’ (say, Coke + Berkshire Hathaway + GE + IBM etc.) have returned, or any solid piece of real-estate (be it residential or commercial)?

I’m betting that it’s not zero … not, by a long-shot!

But, maybe the rules have suddenly changed?

Neil thinks so, at least when it comes to house values:

House appreciation used to be a sure bet, but it isn’t any more.

But, I can’t help wondering … we used to say: “the market is going UP, blue sky everywhere … the rules have changed, it’s going to keep going UP”.

And, that thinking, of course, lead to ridiculously high valuations of both stocks and RE … and, a correction had to come.

And, it did. Big time!

Now, we seem to be saying: “no 8% returns for next 30 years [Executioner]” or “House appreciation used to be a sure bet, but it isn’t any more [Neil]” … “the risk/reward balance is different now [I made this one up]“.

So, I can’t help wondering:

If this is really the case … if things really weren’t different BEFORE (i.e. the market couldn’t keep climbing) are they really different NOW (or, can the market really keep falling?) …

… or, are we just guilty of doing more ‘rear mirror’ personal financial management?

I can’t give you the answer … only 30 years of ‘future history’ can do that!

But, if things haven’t suddenly changed PERMANENTLY – if the fundamental principles really haven’t changed – then, isn’t a ‘down market’ a GOOD time to buy?

Or, is that just the way that Warren Buffett thinks?

And, I know one which side of this coin I’ll be betting on

Now, I have absolutely NO experience with that particular MLM, and very little personal MLM experience at all, other than reading a lot about MLM when I was younger and participating in Amway for a little while.

But, I take issue with SVB’s sub-heading (about half-way into his post; asking: “Does MLM go too far?” And, I wasn’t afraid to tell him/her so:

I don’t think that there’s anything inherently wrong with MLM; it’s like saying that franchising sucks: it all depends on the company.

It’s POTENTIALLY a great business model on 3 levels:

1. For the company: they get to take a product straight to market, cutting out layers of fixed marketing costs by replacing them with a multi-level commission structure.

2. For the (very?!) small % of ‘distributors’ who build large networks: they get to build a ‘passive’ income stream that lasts as long as the company does. I have a friend who makes $200k+ a month (for years now), and sips coffee and develops property when he gets bored. Not so bad.

3. For the majority of distributors: they get to buy product that they presumably love and use at discounted prices, and they may even earn some ’side income’. It’s what they do with this money (invest? start a ‘real business’?), and what they learn (people skills? sales skills?) that can provide the real value.

… this is all assuming that they do their homework and choose a reputable company. But, isn’t that the case with everything we do or invest in?

DISCLAIMER: The author of this comment has no relationship with any MLM, being a retired multi-millionaire who made his money in MUCH more mundane ways (‘real business’ and ‘real investing’)

6 million+ views, now that’s how to build a brand … here’s a lesson in viral-marketing for you: http://www.hoax-slayer.com/walking-on-water.shtml

Been reading your website for a while and your posts. What you share is nothing new.  Just the same recycled material that all the “guru” financial “experts” share with their flock. None it it will make you rich, nevermind 7in7. Becoming rich is more about being in the right place at the right time (luck) with the right product and enough capital. One could follow yours and similar advice for years and never get rich. Keep up the good work.  :)

Of course, since ‘hardtop’ has been reading my website for a while and my posts, he should know – as my regular readers already know – that I hold totally opposing views to many gurus such as Suze Orman, Dave Ramsey, and Ric Edelman.

But, I do admit with great shame that I have ‘recycled’ material from Robert Kiyosaki, Michael Masterson, and Phil Town

Of course, it was very specific information, with the source, hopefully, credited

And, while I do agree that it helps to be “in the right place at the right time (luck) with the right product and enough capital”, I had to create the ‘right’ products for the businesses that helped to propel me to $7 million in 7 years,  as well as creating a market for them – without ANY outside capital – and, I had to commit to moving countries … and, putting EVERYTHING that I had on the line to get there!

[AJC: Insert favorite inspirational quote about making your own luck, here]

Oh, and before then, instead of spending my meager profits, I invested them in real-estate.

I guess we can put my success down to luck, after all

It was like going to a rock concert … without the music.

It was held at some football stadium, which was packed with 30,000 (maybe more?!) people and Warren Buffett and his long-time business partner, Charlie Munger sitting at a table with three large video screens behind them (just showing Warren and Charlie sitting at the table … only MUCH larger!).

They basically spent the day munching on Sees Candy (peanut brittle, I believe) and sipping on Coke …

Warren invites all the ‘international visitors’ [AJC: That's anybody who registers with a foreign passport as their ID ... I have a US driver's license, of course, but I heard that there were 'extra benefits" to registering using international ID] to a meet and greet.

This meant bringing anything that you bought from his trade show in the huge conference hall attached to the stadium (he has stands from a number of the 70+ businesses that he owns) and he and Charlie will shake your hand and sign it one item that you bought.

But, he stopped doing that – after 2008 – because there was a line of 1,000+ people waiting to shake his hand and get their signature. I know this, because when I got to him, the World’s Greatest Investor spoke to me!

He said (looking visibly paled): “Are there many more people in this line”. Sadly, I had to say there were …

Still, I got my $5 T-shirt signed, and had it framed with a couple of Warren Buffett and Charlie Munger playing cards (!), a couple of pictures that I printed from a web-site after googling “warren buffett”, and my round official entry badge.

Which has nothing to do with anything other than Bill McNabb – who replaced the famous founder of Vanguard (with their famous, low-cost Index Funds), John Bogle, who also seems to afford ‘rock star status’ with fans of his investing philosophy (which, naturally centers around buying and holding Index Funds) calling themselves Bogleheads and acting more like rockstar groupies than investing disciples – recently said that one “essential ingredient” in the investing and advice business, is:

Simplicity, which is exemplified by the “Five-Minute Rule” first coined by Richard Ennis of the pension consulting firm Ennis, Knupp: “If you don’t understand the thesis underlying an investment in five minutes or less, take a pass.”

This equally reminds me of a recent story of a company that a friend of mine was CEO of that existed solely to build, manage, and sell tax-advantaged agricultural ‘investments’:

Basically, this company did complex deals with rural land-owners, farmers, and so on to plant certain crops and sell shares to private investors; the advantage to the investors being (a) immediate and attractive tax-deductions, and (b) future (i.e. 10 to 30 year) capital returns … trees take a LONG time to grow!

Given that one friend was their CEO, another one of their key operations directors, and a third an enthusiastic ‘professional’ (counting, amongst others, my wife as his client) who positively represented the project to a number of my affluent friends who were also his clients, you may ask how much I invested in the company.

The answer is ZERO.

You see, I don’t invest in anything:

1. That eats or grows (because eventually it will stop eating, stop growing, and will die),

2. Uses tax-advantages as one of its key features (because I don’t mind paying my fair share of tax and governments have a sneaky habit of changing the tax rules),

3. Because of the 5-minute rule (if I don’t IMMEDIATELY understand it, I don’t buy it … and, truth be told, I don’t IMMEDIATELY understand much).

Postscript: because of the Australian drought, many of the trees did die, and the government did change the tax rules, and the company did go broke … and, many of my friends did lose 100% of their investment.

And, I still don’t understand the business 5,000,000 minutes later

It’s the one where an academic engineer beats the giant auto makers in the ’40s to inventing the intermittent wiper that you see on your car.

In case you are thinking of starting a patent-based business … don’t.

To understand why, please watch the movie; you’ll see a man’s solitary struggle over 20 years to (luckily, successfully) enforce his patent rights against a giant corporation (in this case, Ford).

You’ll also get a bit of a wake-up call about the legal profession (they will aim to settle a case early, so that they get their 30% quickly).

But, what piqued my interest was the characterization of the man at the center of the story:

He (according to a screen play that probably had very little to do with reality) suddenly got the notion that fixed speed wipers were stupid, so he immediately – and, I mean that night (!) – set about solving the problem.

Now, I suddenly realized that man is me!

Case in point:

I created a little e-book some time ago for an online experiment that I was running for you guys; I actually gave the e-book away on this site but – for the purposes of the experiment – sold it for a few bucks a copy on a site that I set up for that purpose.

Well, I’d been selling a few copies along the way … but, the experiment served it’s purpose, and I almost forgot about the book.

But, it’s good! A simple, concise overview of everything that we talk about on this blog.

So, on Thursday night, I suddenly get the idea for a site called “little free book”; I thought: “why not give this little book away to everybody … heck, I don’t need the money”.

By Monday morning (that’s now), I have all of the pieces in place: book; graphics; web-site; twitter account; and, Facebook ‘fan ‘page‘.

I have two points that I would like to make:

1. It’s really easy to set yourself up on the Internet, especially if you have a blog: you have plenty of knowledge collected in your own blog (on whatever that subject may be) to create your own for-free and/or for-fee information products.

If I can get all of this up and running BY MYSELF over one weekend, surely you can do the same over a week or two? You may not make much money (or, you may make a lot!) but, you will gain a huge amount of experience with ‘new media’ and ‘social media’ … as well as business.

You might even make enough money to kick-start some other business and/or investment program.

2. What I don’t have is any clear strategy of what to do, other than give these books away to as many people as possible.

But, that’s OK … you read the book by  Ready, Fire, Aim by Michael Masterson didn’t you? If you haven’t, the message is clear: any ACTION is better than no action.

Now, that the site is out of my head and onto the virtual ‘paper’ of the Internet, I have PLENTY of time to cogitate on all the potential strategies and counter-strategies of what I might/should/won’t/shouldn’t do with the Little Free Book.

But, until I got SOMETHING going, I really didn’t have much to think about, did I?

Oh, if you don’t already have my e-book, I would love for you to download a copy for yourself, and even send this link: wwww.littlefreebook.com to your friends.

I would also LOVE for you to click ‘like’ on my new Facebook ‘fan page’ that I set up specially for this book: http://www.facebook.com/pages/Little-Free-Book/119974768055224 and, encourage your Facebook friends to do the same.

And, if you are a fellow blogger, you already know what to do …

But – and, this is a big BUT – only if you like the book … and, me

If you don’t know what Vegemite is, let me give you a few brief ‘highlights’:

- Vegemite is a salty black spread that is best used VERY sparingly on toast or dry crackers;

- Aussie children are almost weaned on it … it’s the only way to learn how to like it!

- It’s predecessor is Marmite, an English product derived from animal fats;

- Vegemite, on the other hand, is made from the sludge left over from pouring beer out of its vats (really!)

- It used to be fed to pigs, because of its very high Vitamin B content, until an Australian Food Scientist discovered how to refine it slightly and feed it to children [kids = pigs?]

Even though I actually LIKE Vegemite, I can understand that to most people it is totally inedible:

I met a food scientist who was working on a project to create Vegemite cookies to help feed the less-fortunate in Africa (again, because of its super-high Vitamin B content); this came on the back of the very successful Milk Cookie project which helped to bring Calcium to places (like Africa) where the shipping and transport of dairy products would be just too difficult.

Unfortunately, they had to cancel the project … there was just no way to make the Vegemite cookies taste good!

Now, I can actually relate to how bad this stuff must taste to others (yet tastes so good to me … in moderation!) because I was traveling to Amsterdam and in the clothing store (that I stopped by to buy a hat and scarf for the bitterly cold winter weather) there was a jar of candy on the counter …

… actually, it was liquorish – so, I took one and almost spat it straight out … it was THAT horribly salty! Apparently, it’s a delicacy in Holland on par with Vegemite (and, as bad tasting to the uninitiated).

One man’s food it definitely another man’s poison.

But, to get an idea as to how popular Vegemite really is – despite the taste (!) – here are three anecdotes for you:

1. Kraft bought the rights to Vegemite at some point, and if you visit their offices in Northbrook, Illinois (as I have) you will see its logo displayed very prominently on the wall above the receptionist’s desk. Not bad for a product only sold in a country of 20 million people (and, stocked in the USA almost purely for visiting Aussies).

2. Vegemite is inherently kosher (apparently pig food isn’t as unkosher as pigs-as-food) , but when Kraft decided to cut costs and take it off the kosher list (meaning that religious Jews in Australia could no longer buy it … a very small minority, in a very sparsely populated country), there was such an outcry that Kraft had to certify Vegemite as kosher again.

3. When we came to America, we brought 6 huge jars with us (and, brought more back on every trip home); this is not just us: my wife accidentally met a girl who was also relocating to Chicago … they were both at the supermarket checkout with a few of these large jars and (naturally) got talking.

So, what?

Well, there is a personal finance message and it’s this: one size doesn’t necessarily fit all … what one person likes may not suit the other at all.

That’s why when Steve asked me why I recommend that you put aside 2 year’s living expenses in retirement (as opposed to zero dollars before retirement) in your ‘emergency fund’, I can’t really disagree when he says:

Adrian, what you said makes sense in most cases I suppose, but ,each case /person will have different circumstances ,even after retirement.Some sort of funds set aside seems a wise move.You cannot fore see very situation that might arise,especially at an advanced age.

So, yes I agree that there is no magic in the 2 years’ number: put aside 1 year, 18 months, 2 years, or more …. I don’t really care!

And, does it really matter whether you meet the 20% Rule or make it, say, 15% or 25%?

Probably not …

BUT, the principles behind these rules – indeed, the whole methodology that I am slowly unfolding in these posts (in the random, shambly way that bloggers like to follow) – is One Size Fits All.

Why?

Because the principle is simple: Find out how much you need to make (and why and by when), then work out how hard you need to work (financially) and how much risk you need to take to get there, then go for it!

But, if you stray too far from the the guidelines that I provide, the chances are that you will not be investing enough to make any sort of meaningfully large Number by any reasonably soon Date.

Second guess the Been-There-Done-That Multi-Millionaire who has a passion for sharing his hard-won personal/financial experience at your peril

-

This guy makes a big deal of this ‘new approach’ to investing.

Recognizing that people are scared of the market right now [AJC: before they become irrationally exuberant, again, in the next upswing] instead of giving this guy 100% of your money to invest in crappy mutual funds …

… you only give him 80%

You put ‘the other 20%’ into The Bank, so that you have 2 years of cash to live off, and essentially ride the downswings.

I think that they’re hoping that by focusing on that yummy cash, you’ll forget to check what the market is doing, until you next go to top up your 2 year bucket.

OK, pre-retirement, 2 years living expenses is way too much to have aside. $0 is a better number.

Post retirement, I agree on the 2 year number (in fact, I recommend it); but, I don’t agree with his recommendations for the 80% bucket

… only two of my closest friends even know that I do blog – about personal finance – but, I won’t even tell them the name of my blog or my ‘pen name’!

[AJC: By now, you probably know that Adrian John Cartwood isn't my real name - only the Adrian part is. For no reason that I can understand, my daughter started calling me 'Adrian John Cartwood" when she was 7 ... well, when the idea to write this blog sprang to mind in 2008, AJC was the natural choice!]

It’s not comfortable to talk about money: but, I resolved from Day 1 that this blog would need to be authentic and I would have to share the most gruesome details of my financial life.

So, when Bob asked:

From your “I’m a money hacker” post:

What is some financial advice you could give our readers?

Most people don’t really know how much house they can afford, so let me give your readers some very specific advice that will help them through every stage of their own financial journey: never have more than 20% of your Net Worth invested in your own house…

Do I understand from this post that $5M of your $7M net worth is in your own house?

… I can, from a position ‘protected’ by semi-anonymity, remind our readers that my $7 million journey represents a 7 year ‘slice’ of my financial life from when I started $30k in debt in 1998 and ended up with $7 million in the bank in 2004.

My recent ‘bad beat‘ post talks about what happened between 2008 and now

But, the years in-between (i.e. 2004 to 2008) were very kind to me: dominated by a series of sales of my Australian, New Zealand, and US businesses to a UK public company … it was almost literally raining money for those years.

But, this is a personal finance blog, not a business blog, so I concentrate on the $7m7y because I believe that is repeatable by almost any of my readers.

Even so, my $5 million (cash) house certainly breaks the 20% Rule (my net worth would need to be $25m+) but, it doesn’t matter!

You see, the 20% Rule only applies when you are still chasing your Number!

When you have reached your Number (Making Money 301), THE RULES CHANGE:

Remember when you calculated your Number?

You:

1. Took your required annual living expenses (of course, adjusted for future inflation until your chose ‘retirement’ Date) and multiplied that by 20, and

2. ADDED in the value of your house (plus any additional cash required to pay off the mortgage), initial cars, and any other one-time purchases.

Once you reach your Number, you no longer require 75% of your Net Worth to be in investments: you ‘only’ require the amount that you came up with in Step 1.

So, you can buy as much ‘stuff’ (houses, vacation homes, cars, etc.) as you like with any extra cash that you happen to have!

For me, it doesn’t really matter how much house I bought, as long as I still have >$5m in investments, generating my annual living requirements.

So, Bob, you don’t have to worry about me … yet … I just like to complain

Question: I’m 28 and would like to have $1 million by the time I retire at 65. What are some of the investing options I should consider? –Joshua Sin, Fresno, Calif.

Answer: I’m all for savvy investing, and I’ll get to what I think you should do on that front in a minute. But let’s not forget that when it comes to building wealth, investing alone won’t do it. –Walter Updegrave, Senior Editor, Money Magazine.

Walter Updegrave, the author, then goes on to provide a very interesting analysis of how to come up with the $1 mill by 65 – basically saying that it can’t be done:

If you begin putting away $100 a month starting now and continue doing so until 2047, the year you’ll turn 65, you would need an annual return of roughly 13.5% a year to turn that monthly hundred dollars into a million bucks.

What investment options can deliver a 13.5% annual return for almost 40 years? None that I know of.

True. Correct. Perhaps, Insightful.

But, I’ve said it before and I’ll say it again: who in their right mind cares?

Hasn’t Walt forgotten to ask the key question … why???!!!

Joshua is to be commended for thinking so far ahead, at the age of 28, towards retirement. But, shouldn’t our financial expert’s first step be to examine if the objective is reasonable?

Let’s give it a shot:

Choosing a much more reasonable go-forward inflation rate of 3.5% …

[AJC: The author assumed "a modest 2.5% inflation rate"; that's just UNDER the current outlook for the next 5 years, pulling out of a major global recession ... but, I wouldn't bet FOR a 40 year recession, if I were planning my own retirement!]

… by the time Joshua turns 65 that $1 million will only be worth $268k.

What does that mean?

It depends on what Joshua does with the money; however, given that his 37 year financial strategy has been simply to ‘save’ (presumably via CD’s, Bonds, Mutual Funds, and the like), I guess we need to assume that he will continue that strategy in retirement.

Therefore, Joshua will have little choice but to abide by the ‘advice’ of the financial planning community, which will be centered around finding a ‘safe withdrawal rate’; a great way to find out what that might be for Joshua, is to plug his $268,000 nest-egg into the T. Rowe Price Retirement Calculator:

Now, what annual income would be reasonable for somebody like Josh to aim for in retirement? $150k a year? $75k a year?

Let’s just say that he aims for $30,000 a year or $2,500 (before tax!) per month in today’s dollars; how well does he do with his $1,000,000?

Not very:

[AJC: PLUS whatever social security there may happen to be in 37 years time ... how optimistic are you?!]

Do you think that Josh would have been more surprised to learn that:

a) he would need to average 13% p.a. on his savings to reach $1 mill, or

b) even if he made it all the way to his $1 mill. target, he would only have $871 per month to spend?!

Our readers represent a small but keen-to-learn cross-section of people interested in the subject of personal finance;  let’s tell the financial services, advice, and publishing industries:

What sort of financial advice are you looking for?

Go ahead, leave a comment – especially if you’ve never done so before – and, we’ll challenge them to respond!