Tag Archives: Investing

AJC’s Secret Strategy?

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Every financial ‘expert’ has a secret strategy …

… you know, the one that made them $1,000,000 simply by doing [insert: strategy of choice]; just try googling “how I made million” and you’ll come up with listings like:

How I Made $77 Million In Two Years & You Can Too by Vincent James

How This Kid Made $60 Million In 18 Months

How I made a million in 3 months.

How I made over $2 million with this blog

How I made my first million: Schoolboy entrepreneur…

7million7years- How to make 7 million in 7 years …

How I made a million dollars investing in real-estate

One link is about making millions in real-estate; another through marketing your business; another through online businesses; another through promoting yourself via your blog, and so on …

In fact, you’ll find one guy talking about how to make $7 million in 7 years through commercial real-estate and business 😉

At least that is the vibe that I am picking up, if Ryan at Planting Dollars (who kindly mentioned my blog in this post about personal finance outliers) is representative of my readers:

There are two blogs in the personal finance arena that are obviously outliers.

Adrian at 7 Million 7 Years… How many people do you know that are worth 7 million? Adrian did it in 7 years and writes about his strategies that are, of course, not common sense and not mainstream. He advocates starting businesses and investing in commercial real estate.

Jacob at Early Retirement Extreme… He retired in 5 years via traditional work, lots of traditional work, and cutting his living expenses to the bare minimum.

I may have used real-estate (both commercial and residential) – fueled by very modest (at the time) business-generated cashflow – to make my first $7 million, and then actually selling the businesses to make my next … but, I also used stocks, negotiating, options, gold, and relationships to make a few more million, as well.

Starting a business and/or investing in commercial real-estate may be the exact wrong – or right – strategy for you to make your $7 million in 7 years, too.

It all depends …

First, though, if there’s any ‘secret’ to making millions, it’s to truly understand the game of financial roshambo:

Stocks have no intrinsic advantage over Real-Estate; Real-Estate has no intrinsic advantage over Business; Business has no instrinsic advantage over Stocks.

This applies equally to how you choose to earn your money, as well as how you choose to invest it.

In fact …

It’s the combination of what you earn (income) and what you do with it (invest) that provides the compounding that you need in order to reach your Number.

For example, if you put a little extra salt-and-pepper into your income-producing strategy, you may be able to back-off the gas a little with your investing strategy (as long as you have cultivated excellent MM101 habits, so that you don’t just piss it all away).

On the other hand, if you are subsisting on a meagre office-job salary, you may need to ramp up your income with a little side business and you may need to seriously ramp up your investment strategy with some RE and/or stocks.

Three examples:

– I pursued a high risk / high reward business strategy to generate the cash that I then invested in real-estate and stocks to allow me to reach my Number; to ensure my success, I chose to push the risk throttle by expanding my businesses internationally.

–  Josh has chosen an  even higher risk / higher reward income-producing strategy by trading ‘penny’ pharma stocks with ever larger portions of his Networth going into one or two ‘trading positions’; I advised him to put a portion of his ‘winnings’ into lower risk / lower reward investments such as buy/hold RE, Value stocks, Index Funds, or (dare I say it), Bonds or CD’s to ensure that he reaches his Number.

– Mike has chosen  a high-income-employment path to producing the income required to fuel his investment strategy, but has chosen to ‘invest’ his Net Worth mainly in cash. I advised him to maintain his current earning capability, but ‘up’ his investment risk profile up the scale to, say, Index Funds so that he can then pretty much cruise to his Number.

It’s different for everybody …

In neither Josh’s nor Mike’s case does commercial real-estate or business need to figure greatly in their journey towards their Number.

And, it may not figure in yours 🙂

Hypothetical Mike … and, Beyond!

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The story so far:

Hypothetical Mike (the hero of our story) has super income-earning powers (ranging between $250k and $350k p.a.) … his powers also extend to corporate high flying, not to mention having a super-strong handshake 😛

His mission: to amass $10 million within 14 years.

But, like every superhero, he has a weakness: he keeps too much of his current $1.7 million networth in cash … $1.3 million of it to be precise.

Cash is kryptonite to financial superheroes like Hypothetical Mike!

Does HypeMike – as he is known in superhero and rapper circles – need to fly higher and higher in order to fulfil his mission? Or, can he simply destroy that stash of kryptonite and let the natural laws of investing wisely take over?

In an unusual twist, we let the readers decide the outcome of this story …

For example, here is what Steve said:

What are Hypothetical Mike’s Talents and hobbies? Based on what he likes to do in his spare time. I might recommend starting a business, that could bring in an income and later be sold for a nice return. This could help him reach that goal quite well. It would be less like running a business cause it would be something he enjoys anyway.

If HypeMike were a mere mortal, I would agree with Steve: you and I should ramp up our Making Money 201 activities in an attempt to accelerate our income … 

… but, HypeMike already has his MM201 ‘money tree’ (i.e. his relatively high-paying job); coupled with his $1.7 million starting bank and his 14 year timeframe, he need leap no tall buildings to reach his Number.

A relatively mere 13.5% compound growth rate will do the job … PROVIDED that HypeMike doesn’t lose his main ‘super power’ i.e. his ability to keep earning superhero-like salaries.

Hypothetical Mike shouldn’t do ANYTHING to jeopardize his job, hence his income stream (e.g. moonlighting might be against company rules, or might distract him, tire him out, etc., etc.).

On the other hand, a number of readers commented that HypeMike’s money – merely sitting in cash – is his real problem. For example, Brad said:

If you are successful at running this business (you said you turned it profitable) then you should be in a position to negotiate larger and larger bonuses or equity ownership. Seems like THAT is what you are talented in. Don’t feel like you need to start investing in real estate or small biz because that is how OTHER people might have gotten rich.

I do agree that you should keep some cash positions if that makes you feel secure, but also to keep the bulk of your invest-able assets in at least an S&P500 index fund.

In my [AJC: emminently unqualified] opinion, Brad is 100% correct.

Hypothetical Mike should take a close look at Brad’s advice and follow it!

[Disclaimer: Brad is likely just as unqualified as I am to offer personal financial advice … always seek professional advice!].

Fitting a square peg into a round hole …

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The real problem with any of the so-called ‘safe withrawal rates’ that we explored yesterday – with 4% currently being perhaps the most popular amount advocated – is that they all assume a fixed annual spending amount, but are actually generated by a totally volatile (some would say random) portfolio.

We’re trying to fit a square peg (fixed annual spending) into a round hole ( a ‘random walk down Wall Street’) 😉

But 7m7y readers have an even more fundamental problem with planning our ‘retirement’ based on this type of common industry wisdom: we are planning on retiring early, hopefully, with a very large Number and a soon Date!

Most retirement models assume a 30 to 35 year retirement lifespan …

… I don’t know about you, but I retired at 49 and intend to live AT LEAST another 40 years 🙂

Many of my readers will be aiming to reach their Numbers even sooner .. and, may expect to live even longer!

The bottom-line: traditional retirement planning models don’t work, because we need money that will last as long as we do … we need a Perpetual Money Machine, because we don’t know how long we will live once we stop working.

A Perpetual Money Machine is anything that:

a) Protects your capital over the long-run, even allowing for the ravages of market changes and inflation, and

b) Produces a reasonably reliable stream of income, that also (at least) keeps pace with inflation.

Neither stocks nor bonds – the traditional tools of retirement investing – fit the bill for us:

1. Stocks are too volatile, and the income tends to be artificial (e.g. so-called dividend stocks attempt to fix the level of dividend provided even as the company’s profits fluctuate).

[AJC: Raiding marketing, R&D, and other seemingly non-essential budgets in lean years in order to protect the dividend stream is – to my mind – the mark of a poorly run company]

2. Bonds provide a very safe return, but the % returned each year is too low, meaning – at least, to me – an unnecessarily reduced lifestyle, especially after allowing for reinvestment to try and keep up with inflation.

That’s why my Rule of 20 is exactly that: a planning rule, NOT a 5% spending rule!

[AJC: Otherwise, I would have called it the 5% Rule, d’oh!].

In other words, my advice for PLANNING your Number, is to decide what initial income you want and multiply that by 20 in order to find your Number …

… but, my advice for LIVING your Number is to turn on your Perpetual Money Machine and live off whatever it happens to produce, after allowing for taxes and provisions against inflation and contingencies.

The Myth of the Safe Withdrawal Rate …

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I have noticed an unusual phenonemom: I write a post on one theme and your (i.e. our readers’) comments explore another one entirely!

This is a GOOD thing … it means – I hope – that we are building an online community dedicated to the idea of linking our finances to our life, rather than simply attempting to fit within society financial ‘norms’.

Case in point: I wrote a post exploring various windfalls, and the comments lead us down the path of exploring so-called ‘safe withrawal rates’, which is the idea that there is a Magic Percentage of your Number that is ‘safe’ to withdraw to live off each year.

The problem is, what % do you choose?

For example, I have proposed the ‘Rule of 20’ for calculating your Number, which seems the same as proposing a 5% ‘safe withdrawal rate’, but Jake disagrees:

A 5% drawn-down rate on the pot of gold is a little on the risky side if you want the money to last.

After looking at a bunch of data, I feel that a draw-down rate of 2-3% is too conservative, but 5-6% to aggressive. 4% or so seems right. I know, only 1% off from your value but over time it makes a huge difference.

So, Jake has highlighted one problem with selecting a ‘safe’ withdrawal rate … if you are out by even 1% your spending can be over (or under) the ideal by 20%. I don’t know about you, but a 20% payrise (or paycut) is a pretty big deal … people quit their jobs over less!

So, what do the experts recommend?

Believe it or not, there is support out there for just about any annual % of your nest egg that you may choose to spend, for example:

7% – Not so long ago, the financial services industry proposed spending as much as 7% of your portfolio each year in retirement.

6% – More recently, Paul Graangard wrote two books proposing a bond-laddering and stocks strategy that supported a spending rate as high as 6.6% of your portfolio each year.

5% – Investment funds routinely allow spending of 5% of the portion of their investment portfolios dedicated to simply keeping up with inflation. Indeed, my Rule of 20 appears to support this withdrawal rate, too.

4% – A large number of studies – probably, the most famous of which is the so-called Trinity Study – advocate spending up to 4% of your initial portfolio (ideally, 50% stocks and 50% bonds, rebalanced each year), which provides somewhere between a 90% and 100% certainty that your money will last at least 35 years.

3% –  A whole slew of new retirement planning tools (generally using a Monte Carlo approach to modelling tens, hundreds, or even thousands of potential economic scenarios) have been released over the last 4 or 5 years by the financial services industry, purporting to analyse hundreds of alternative economic scenarios to try and model what would happen to your retirement portfolio (i.e. simulating changes in interest rates, market booms and busts, etc.) to find the ideal ‘safe’ withdrawal rate. The trouble is that a lot of these advocate very low withdrawal rates, typically in the 2.5% – 3.5% range. 

2% – Some even advocate a totally ‘risk-free’ approach to retirement savings by investing close to 100% of your retirement portfolio in inflation-protected bonds (i.e. TIPS); historically, these have provided a 2% return, after inflation and with total protection of your starting capital.

So, which is right?

None, as TraineeInvestor explains in his comment to my post:

I’m not fan of draw down models either. If you have to spend your capital to avoid eating cat food (or the cat) or are working with a very limited time period fair enough. But with a sufficiently long time horizon, my view is that any draw down rate is dangerous – in fact I would be uncomofortable if my nest egg was not growing at at least the rate of inflation (after taxes and spending).

Another way of looking at it is that if you are relying on draw down of capital for living expenses you are very vulnerable to adverse events. No thanks – I’d rather sleep soundly at night.

Me too! 🙂

Is he really a clever dude?

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[Disclaimer: Artist’s rendering of AJC … any resemblance to other bloggers living or dead is purely coincidental]

Have you noticed that I don’t have a category for debt on this blog?

[AJC: you can click on any of the keyword/categories in the orange header-banner above to see a list of blog posts focusing on that subject]

It’s not because we don’t talk about debt, as we clearly do …

…. it’s because, to me, creating or paying off debt is just the same as investing (after adjusting for tax: a dollar saved in interest, is the same as a dollar earned in interest or investment income, right?).

That’s why I was genuinely interested in finding out what was going through fellow-blogger Clever Dude’s mind when he loudly proclaimed:

We’re Free of Consumer Debt!!!!!!

As of today, we have paid off all $113,000 of our student loans, auto loans and credit card debt.

We are debt free!!!

My fellow blogger is right to be proud of his achievement … but, does that make it the right investment choice?

Check it out:

He paid off $113k … now, this is no small achievement, some people don’t even save that in their entire lifetime! Still I couldn’t resist asking Clever Dude for some details:

The rate on the student loans was 6.25%. The 2nd mortgage is 7.875%. First was 5.25%.

I chose to pay off the student loan because it was more manageable and I could get it off the books faster than the 2nd mortgage. Mathematically, the 2nd mortgage makes more sense until you factor in the tax deduction which brings them down to about equal.

I also wanted to know a little about his current net worth (after the mammoth debt-payoff feat) – nosey, aren’t I?! Anyhow, Clever Dude was happy to share:

Don’t mind the math as I rounded:

Cash: 17%
Investments: 37%
Home Equity: 6%
Autos: 17%
Personal Property: 12% (if I could sell it all right now)
Whole Life Insurance: 5% (yep, I got it, it’s expensive, but I’m not giving it up!)

So, Clever Dude has ‘invested’:

-> $113k in loans returning (by avoiding having to pay) around 6.25% after tax

-> 17% of his net worth in cash returning (I’m guessing here) 2%?

-> 6% of his net worth in his home returning some unknowable amount in future (potential) capital gains

-> 5% of his net worth in insurance ‘investments’ of dubious value after (often) exorbitant fees

-> 29% in (presumably) depreciating ‘assets’ such as autos and personal property

Now that he is debt-free, what  will drive Clever Dude’s investment strategy from here on in? He says:

Investing and savings are next up in our planning. Honestly, we’ve spent so much time just thinking about debt, we haven’t spent much time on the future. Now is the time.

Now, I’m not here to pick holes in Clever Dude’s investment strategy as he had a strategy and moved mountains to achieve it – not to mention, that we know so little about Cleve Dude’s true financial situation that we are in no position to advise / criticize …

…. but, I do want to use this example to show why following a blind – and, in my mind totally arbitrary – investment goal such as “reducing debt” is not always the best idea:

Clever Dude has only 37% of his net worth in investments right now (OK, he is working on his Master’s Degree, so he has had other things on his mind) and has limited the bulk of his net worth’s returns to only 2% to 6% (or so) by almost-totally focusing on paying debt.

Why?

So, that he can start “investing and saving”!

Now, does that make sense to you?

Even more on the debt-free fallacy …

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I’m not a Ramsey fan, and I am equally not a fan of pithy statements that are supposed to make us financially secure, both for the simple reason that they are unlikely to help me – or, you – achieve a Number (i.e. retirement nestegg) amount that is large enough to live my – or, your – Life’s Purpose.

Now, if you don’t have a lot of travel and free time associated with your own Life’s Purpose, then you may be able to live nicely off $50k a year indexed (assuming that you have a $1 mill. nest-egg, in today’s dollars)  … but not me!

I aimed for – and, achieved – a $7 million in 7 year target (starting $30k in debt) because that’s what I decided that I needed (actually, calculated) … and, this blog is written primarily for those who want to achieve the same.

So, it shouldn’t come as a great surprise that I both agree and disagree with Jesse – the Debt Go To Guy– who says:

Risking $1,000 a month on a possible 8% return instead of a guaranteed after-tax ROI of 5% by paying down mortgage debt is NOT such a “Duh” decision. If you do get 8% you must pay taxes, and if you live in a state like CA, then after taxes you’re about even. Plus you have slippage… transactional fees etc for the investment / trade. So risking your $1,000 a month on 8% instead of a guaranteed after tax return of 5% is not always so smart, and a bad example.

People with double-digit interest rates on credit card debt, especially the many folks paying 20-30%+ interest, are not likely to find a better investment opportunity in their entire life than inside their own liability column. Every dollar in debt paid off is a guaranteed after tax ROI of 20-30%. Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time. What makes you think someone in debt could pull off such a stunt?

OK, that’s sound commonsense advice and hard to argue with:

– Sort your debts into high interest and low interest, and have a good crack at the high interest ones first, because the money that you save on interest is probably way higher than you could earn elsewhere. A dollar saved is a dollar earned, right?

– Now, when comparing the lower interest debts and investments, you really need to look at all the factors, such as risk, taxes, costs, etc. Often, it will be paying down the debt that wins, although I would be surprised if paying down a 5% mortgage ‘wins’ over any sensible RE, value stock, or business strategy in terms of serious wealth building.

But, I don’t really think that “Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time”. I know that Warren Buffett has produced 20%+ compound returns, and George Soros didn’t become a billionaire on less than 20% – 30% compounded returns.

That doesn’t detract from Jesse’s statement that “every dollar in [credit card] debt paid off is a guaranteed after tax ROI of 20-30%” and I do agree that it would be almost impossible for anybody except [insert: Forbes Rich 1,000] 😉

But, here’s where I disagree with Jesse:

I think Dave Ramsey provides sound advice for most people, and while I think it’s better to expand your means and increase your income instead of living like a popper, his advice has proven to help many hundreds of thousands of people to stop paying interest and start earning interest, and that’s the key.

– readers attracted to this blog are not in the same position (at least, no longer wish to be in the same position) as the ” hundreds of thousands of people” that Dave Ramsey has helped, and

– “stop paying interest and start earning interest” is not the key to reaching a large Number by a soon Date.

Look, there is nothing intrinsically right or wrong about paying interest, it’s merely a by-product of a loan that you have taken out. Just make sure that the loan produces more income than the interest expense that you paying, by a wide enough margin to account for the risk, taxes, and costs that may be involved.

This is a ‘no brainer’ when you realize that a rental property can produce income (assuming that your calc’s prove that it is all worth while … by no means the case on all – or even many – properties), and it is equally a ‘no brainer’ when you realize that borrowing money on your credit card to buy an LCD TV produces NO income, so why would you do it?

But, it takes a giant leap to suddenly realize that – for any existing debt that you may already have – paying down debt on a mortgage that costs you 5%, or a student loan at 2% may not be such a brilliant idea when an investment that can produce 15% compounded comes along and you now need to decide where to put your cash: into paying off those loans (to blindly achieve a ‘no interest’ outcome) or into the investment (hopefully, to produce an income-producing asset with excellent cashflows).

Of course, we’re making an assumption that reasonable people can achieve reasonable investment returns … but, if you think those kinds of investments are almost impossible to come by, take another look at:

– Value stocks (read Rule # 1 Investing by Phil Town),

– Real-estate (read Multifamily Millions by Dave Lindahl),

– Business (read The E-Myth Revisited by Michael Gerber).

[AJC: and, if these all sound too scary for you, just remember that over a 20 to 30 year period a low-cost index fund that tracks, say, the S&P500 will return circa 11% to 12% (yes, before taxes and ultra-low fees), and – if you are worried about risk – has NEVER produced less than an 8% return over 30 years]

I didn’t become a multi-millionaire by blindly entering into debt, but neither could I have become a multi-millionaire by blindly avoiding it … debt, for me, was a tool that I used sparingly, yet wisely.

I recommend that you do the same 🙂

Is your first home a good investment?

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This is a loaded question, obviously, because I just revisited the subject of buying your first home (of which I am now an avid fan) a week or so ago; Rick suggested:

Since equities also have a good long term investment record, why not scale back on the primary residence somewhat and invest in both real estate and equities?

At the time, I responded by saying: “The effect of the 20% Equity Rule and 25% Income Rule is to ensure that you are always investing AT LEAST 75% of your networth elsewhere (could be business, RE, equities, etc., etc.).”

Of course, that doesn’t address the question, as I have also said that these rules are up for grabs – meaning, you can just ignore them – when considering buying your first home.

Now, I am clearly a fan of buying your first home – you just need to go back to one of my very first posts to see that – but, it wasn’t always that way …

… I started by believing that there were other investments out there that performed better than your first home.

And, that still holds true; after all, as my Grandfather once told my Grannie when they had the same decision to make soon after immigrating to Australia:

You can’t always buy a business from your home … but, you can always buy a home from [the profits produced by] your business.

This still holds true … as does the 20% Equity Rule. In other words, if you are absolutely committed to using the funds to start a business, or are ABSOLUTELY committed to ALWAYS investing at least 75% of your Net Worth, then by all means keep renting.

It’s just that 99% of people will – sooner or later – fall off the investing wagon. It’s human nature.

Then they’ll end up with no investments, little net worth, and no home. Buying your first home, and using that as a springboard into other investments, is a great way to go; just remember what I said, way back in the beginning of 2008:

 If you are ready, willing and able to buy your first house, or you are thinking of trading up (or, down) …. here’s my advice:

Put aside the emotional decisions and just consider the financial impact, and that is: your house is the ONLY way that most people will ever get off the launching pad to financial success …

Why? Because, you are building up equity over time (even a flat or falling real estate market eventually climbs back up again) …

… but – and here is the key – ONLY if you are prepared to put the equity in your house to work for you … that means, borrowing against the equity in your house to INVEST.

Is Mike aiming high enough?

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Mike is a divisional CEO for JP Morgan (runs a whole country for them!), and he earns $250,000 in a bad year and $350,000 in a good year. He’s running fast and aiming high.

But, is Mike aiming high enough?

If you weren’t following the comments on this post, then you were missing out on more than 50% of the benefit of that post … I think that also holds true for most of my posts; our readers rock!

Anyhow, Mike said:

I’m 36 and have already got up to the savings level of someone who is 50 or 55… question is when do I want to take it easy and stop working for a while- or at least working make myself rich instead of JP Morgan, who owns the company I’m running!

Aspiring to the savings level of someone who is 50 or 55 is no great shakes; it’s where Mike goes from here that will dictate his future, so I asked Mike a few questions:

Disclaimer: We know next to NOTHING about Mike’s true situation, so nothing here constitutes financial advice* … it’s best if you – and, Mike – treat this as a hypothetical, merely illustrating how to apply 7m7y ‘rules’ to somebody on an income rather than working their own business/investments. On with the questions …

1. What’s your Number?

2. What’s your Date?

3. Why?

4. What’s your Current Net Worth?

It may be that Mike’s presumably super-high salary (after all, he is running JP Morgan in his neck of the woods!) combined with an aggressive savings / investment strategy will do the trick …

Mike’s response:

Salary isn’t super high – only $260K USD a year (base salary & guaranteed bonus) – max variable bonus on top of this is another $100K so it’s comfortable but not huge.

My number is abour 10 million – would like to hit it in the next 14 years or sooner.

Current net worth is 1.7M USD with $1.3 M in very liquid assets (cash…) Residence is fully owned and monthly burn rate is pretty low.

Given that Mike’s Prime Financial Objective should be to reach his Number by his Date, his financial strategy should be the one that he is most comfortable with that seems most likely to achieve that target …

… IMHO, he (or anybody) should only choose a more ‘active’ (read: risky) strategy if it’s a by-product of the strategy that he truly resonates with …. for example, I would start a business even if plonking my money in CD’s would have been enough – that’s just me [AJC: but, it wouldn’t have been all of my money – or even a lot – going into starting that business].

What does this mean for Mike … I mean, Hypothetical Mike? 😉

Well, let’s go through the steps:

STEP 1 – What is Your Number / Date?

Mike’s Number is $10 Million and his date is circa 2023.

STEP 2 – What is your Required Annual compound Growth Rate?

Starting with his $1.7 million Net Worth [AJC: reading between the lines, Mike’s paid off house may not even ‘break’ the 20% Rule – and if it does, not by much, so I don’t see a problem here] our faithful online calculator shows me that Mike ‘only’ needs a 13.5% Required Annual Compound Growth Rate on his Net Worth.

[Tip: If you haven’t used this calculator before, it’s simple: Mike’s ‘ending value’ is his $10 million Number; his ‘starting value’ is his current $1.7 million Net Worth – although, I would be tempted to subtract cars/furniture and any other personal ‘stuff’ that can’t be easily turned into cash and/or loses value … house is probably OK to include here – and, ‘the number of periods’ is just his 14 year Date] 

STEP 3 – Select your Growth Engine

This is where it gets fun … Mike simply needs to take a look at Michael Masterson’s table of ‘money making strategies’ – handily reproduced for you in this post – to see that any number of strategies will be enough to propel him from $1.7 million to $10 million in 14 years: anything from stocks to real-estate to small business.

But, not CD’s … this calculator shows that Mike’s biggest risk is actually the low-risk ‘investment’ option that he has so far chosen: cash …

… if he keeps ‘investing’ in cash, Mike’s Number will be struggling to reach $3 million in 14 years, rather than the $10 million that he needs 🙁

Rather than being the ‘safe haven’ that it appears, keeping his assets overly-liquid is actually stopping Mike from reaching his financial objectives … worse still, it’s forcing Mike to think about chasing more income, when it’s the exact opposite strategy that Mike should be following!

That’s why, I recommend that Hypothetical Mike choose stocks and/or real-estate in whatever mixture of either / both that suits his temperment.

Now, we are talking Value Stocks when we suggest a 15% compound growth rate, and reasonably well-geared (i.e. no more than 25% – 30% starting equity) commercial real-estate – mixed with stocks – when we suggest a 30% compound growth rate.

But, here is the key …

… for Mike, and anybody else whose primary Making Money 201 ‘accelerate your income’ tool has been climbing the corporate totem pole to a position where (a) income is [relatively] high, (b) expenses are reasonably low, so (c) saving rates are high, their net worth will most likely grow even if they merely plonk their money in their 401k and/or Low Cost Index Funds…

You see, Mike will continue feeding his Net Worth with both Investment Returns AND additional salary contributions.

This means that Mike will most likely reach his Number simply sticking his money into low cost index funds:

Mike should follow the advice that Warren Buffett gives to all the Hypothetical Mikes of this world … in fact, it was virtually tailor made for his situation:

If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.

Given that Mike’s current salary / job makes reaching his Number a virtual gimme – with such a variety of relatively low impact [AJC: certainly in the context of amassing a $10 million fortune!] Index Fund, Value Stock, and/or Real-Estate investment strategies available to him, what would you advise him when he says:

Right now my best option is to continue to get a successful track record (already turned around the business and changed it from major losses to modest profits) and maybe I can find a better gig.

What advice would you give to Mike?

I know what I would say 😉

* [Insert: ‘Not qualified financial advisor; not financial advice; seek qualified advice before investing; take two Tylenol and call me in the morning; yadayadayada’ disclaimer message of choice]

What would you do if you won the 2010 World Series of Poker – Part III?

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Congratulations!

You’ve fought through a field of thousands, and now you’re sitting across the table from Phil Ivey – heads up for the most coveted bracelet in sport.

Of course, you’re just thinking that you already have the $5 million runner-up prize ‘in the bag’ (allowing you to have a very nice – and, ‘guilt free’ – $250k spending spree, and then live this quite pleasant $250k/year lifestyle) …

… but, you’re hoping-against-hope that you beat Phil senseless and pocket the $8.5 million first prize!

Firstly, let me burst your balloon: you’re still a ways off the $11 million (plus a bit extra for up-front ‘splurging money’) that you’ll need if you want to live this rather lavish $550k per year lifestyle … but, you’ve still made your own $7 million in 7 years, and then some! 🙂

I’m now assuming that you’ve made your Number …

… so, the key is to protect your wealth (to ensure that you have that $250k – give or take – to live off, inflation-adjusted, for the rest of your life); you do this in any number of ways:

– Invest in Index Funds and live off 5% (dividends + selling off some shares each year), enduring the ups and downs of the market,

– Invest in Inflation-Protected Federal Government Treasury bonds, suffering the low returns currently available, with the option to ‘spice things up a little’ by using up to 5% of your capital each year to buy 12 month call options over the market,

– Invest in real-estate; since you’re not trying to create new money, you can afford to pay cash and simply live off 75% of the rents (setting aside, perhaps, another 5% of your starting capital and 25% of all net rents against vacancies, repairs/maintenance, and other contingencies).

Of these, the last holds the most attraction for me, because:

– I don’t require much liquidity (I’m looking for steady income), but can always keep aside another couple of year’s of living expenses (say, $500k) in cash … just in case,

– My income (i.e. the rents) is generally inflation-adjusted (and, rents usually go up – over the long’ish run – in line with inflation),

– I never need to worry about eating into my capital: it’s sitting there in bricks and mortar – also growing at least in line with inflation!

Of course, you could always just blow it all on a mansion and a garage full of Ferraris 🙂