Tag Archives: money

Scam, bam … thankyou, Sam …

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I received a call today from a very legitimate sounding “XXX Futures” … I took the call wondering if they were associated with a prestigious Bank of the same name – who, through a very circuitous route actually owned a minority position in one of my businesses.

They weren’t … it turns out that they are just a well and conveniently named independent company selling ‘investments’ in Futures, options and the like.

I have no direct experience with the company, but trading Futures and Options just aren’t my style, so I respectfully declined and asked to be removed from their list … [click] was the response. Professional!

Now, I’m sorry that I didn’t invest 😉

But, my day was soon made brighter when I opened my in-box and found that I had ‘won’ a Spanish Lottery!

EURO MILLIONNATIONAL LOTTERY ONLINE PROMO

Batch Number: 074/05/ZYxxx
Ticket Number: 5877600545 xxx

We are pleased to inform you today  2008 of the result of the winners of the EURO MILLIONNATIONAL LOTTERY ONLINE PROMO PROGRAMME, held 2008.

($1,500,000.00) (One Million, Five Hundred Thousand Dollars)
Names, Contact Telephone Numbers (Home, Office and Mobile Number and
also Fax Number)and also with your winning informations via email.
CONTACT PERSON:MR ANDREW WOOLLEY
Bank Name:LA CAIXA BANK MADRID

Email:    mlacaixxxxx88@aol.com
           Tel:+34-693-518-xxx
           Fax:+34-91-181-xxxx
 Provide him with the information below:
1.Full Name:        2.Full Address:
3.Occupation:       4.Nationality:
Yours Truly,
Anna Maria(Mrs)

The days are not so long-gone since the mere sight of $1.5 Mill in writing gave me a blip of adrenalin; even so, it didn’t take me more than a micro-second to assess that it belongs in the Scam basket.

Not sure why I blanked out the last digits; which of my readers would actually call them? Still people get ‘stung’ by these and the so-called Nigerian Scams all the time.

I have a question: what would happen if you called, it was legitimate, and you actually won?!

Here’s what I think: if you don’t work hard to grow your wealth (through whatever legitimate means can get you there) and learn the rules of money on the way up … the statistics would say that you have an 80% chance of blowing it all – and, then some – within the next 5 years …

… and, believe me, it’s a lot more devastating to slip back down than it is to suffer some setbacks on the way up, in the first place.

Get Rich(er) Quick(er) … it’s much better than getting there too quickly … or, not at all 🙂

The way wealth is built …

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Damn, I had just finally trashed (and, I mean that in the nicest possible way) the Tycoon Report article that I had excerpted yesterday and the say before … after all, there is such a concept as “too much of a good thing” …

But, I wanted to cover the basics of making money today – hence, my digging the Tycoon Report Article out of my trash (a third time!) because the author, Jason Jovine, just happened to have summarized it really nicely in that same article:

Let’s start off today with a very short, simple lesson on the basics of money.  The way wealth is built is based on just a few things …

1.  How much you make (your income).

2.  What your expenses are.

3.  How you invest your money.

(I am of course not factoring in any inheritance or gifts that you may receive; they are just icing on the cake.)

The key here is to focus on the words “the way wealth is built” … here, we are talking about making money.

And, to make lots of money, if boils down to a ‘simple’ formula:

fn{a($Income – $Expenses)} x fn{b(%Returns – %Expenses)}

Now, I haven’t done maths in 20+ years, so the formula (mathematically speaking) is cr*p, but the principle is this:

Your wealth is some function of how much you earn (less what you spend each year living, etc.) together with some function of how and how much you invest (less any expenses involved in ‘investing’).

This means that there is more than one way to skin the ‘get rich’ cat; for example:

1. You can earn a sh*tload every year on your job (say, $250k p.a.), save a huge % of it (say 35% pre-tax), and invest in a bunch of off-the shelf products (e.g. mutual funds, ETF’s, etc.), taking into account that you will only get circa-market returns (stats say, usually less) and carry some costs (averages 1% – 2% of funds under management, hopefully all tax advantaged at least until withdrawal).

2. You can earn an average salary every year (say $50k p.a.), save a reasonable proportion of it (say 15%, preferably pre-tax) and amp up the returns on your investments (carrying some additional risk in order to do so) … I say ‘some function’ because you can (and should, IF getting rich on a small salary is your prime concern) borrow as much money as you believe that you can handle to increase the upside (of course, you again increase your risk).

3. You can increase your income (e.g. start a full or part-time business, with all the attendant risks) and then invest per 1. or you can amp it up (again) and invest per 2.

There are many combinations, hence strategies, available – obviously increasing your income and increasing investment returns greatly increases your chances of getting rich(er) quick(er)! As does lowering both your personal and investment expenses.

Now, the article’s finally toast!

But, Buffett doesn't use Stop Losses …

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On my first Live Chat Show, in response to a viewer question, I discussed the theory of Stop Losses (I just posted on this, so I won’t go into the details here).

Andrew saw the show and asked:

Your webcast today prompted me to look up some more of Warren Buffet’s letters to shareholders and general advice, I wanted to get your take on something I came across that seemed potentially contrary to what you mentioned about your use of stop losses in your webcast today.

Warren said he believes that when you invest in a company you should be able to see it go down in value by as much as 50% and not sell off because you know that you already bought it at a steep value. I know this is potentially different than what you mentioned because you were talking about protecting gains, but if you have the time let me know what you think.

I’m amazed that my web-casts can prompt anybody to do anything! Well done, Andrew!

The way that I see it …

… there are two ways to invest: (a) buy and hold through thick and thin, (b) trade in/out on market swings.
 
Warren does (a) and I do (b) hence, Warren is (much, much, much) richer than me 😉
Warren’s method takes excellent understanding of the market fundamentals, a stock that provides strong underlying cash-flow, and a business model that will stand the test of time. It also takes an awful lot of faith …
Trading in/out seeks to avoid staying in a falling stock … those choosing this path, generally are trying to move with the ‘Big Boys’ (the institutional ‘insiders’ who might have caught wind of some negative news that may put a short-term dent in the company stock) or are trying to avoid getting caught up in a dog that looked like a show-pony.
(b) is also trying to time the market, and we know where that can go …
But, Warren and I agree on the underlying principle: we are both buying a stock that we believe is currently well-underpriced by the market, and one that we would be prepared to hold on to for a very long time.
 
I just trade in/out of the inevitable (and, hopefully, relatively small) up/down swings in what I hope is a generally upward trend … once the stock gets back to market price, I’m out’a there, Baby!
Who’s method works better over the long-term: Warren’s, without a doubt!
Remember, always go with the money 🙂

The Mighty 401k Fights Back!

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A short while ago I wrote a post challenging the notion that you should automatically plonk your money in your 401k, because:

1. It’s ‘forced savings’

2. It’s pre-tax savings

3. You get free money from your employer!

Yesterday I wrote a follow-up saying acknowledging that these are all good things to have in an investment.

But, not the only things … in fact, there’s only ONE THING that I want from an investment: that it gives me a return that supports My Life.

Not, the life that the investment is capable of supporting … not the life that I have … not even the life that I want … but, nothing less than the life that I need.

But, I expected to cop some flak, and here is some of it …

Traciatim said:

Historically real estate tracks inflation, not 6% annually. You’re also forgetting maintenance and property tax, water/sewage, heat, etc. When you want to retire you’re also forgetting the cost of selling the properties.

In fact, this is a really common theme amongst the detractors (there were a lot of positive comments, too) … but, who ever said that you should invest in ordinary residential real-estate in ordinary locations?

Also, those who ‘remembered’ the costs of these direct investments (which I did allow for) , we tend to forget the hidden management costs and fees of the funds that your 401k invests in (which I did not allow for).

Curt said:

If you wait three years, real estate ‘good deals’ will be everywhere and you won’t have to invest the time to find them. That will likely be a better time to move money back into real estate.

This is the mistake of trying to time the market; this affects both the 401k ‘option’ and the alternatives, and probably requires a whole post in itself … if you are interested in the real-estate option (and, it is just one of many non-401k options that you could take) and you can find something that ‘works’ now, go for it!

Paul said:

One major flaw in your analysis…and I’m sure I could find others if I look hard enough:

You’re not accurately accounting for taxes here at all. The contributions to the 401(k) Plan are on a pre-tax basis. If you’re saving money in a bank account to buy real estate, that’s on an after-tax basis. To save $5k in a 401(k) Plan, you have to earn $5k. To save $5k in a bank account, you’ll need to earn $6,667 assuming a 25% tax rate.

I didn’t even talk about the risk inherent in real estate versus a diversified portfolio, or how your analysis of the return on the employer match is a bit off.

While it is good to think in unconventional ways at times, you better make sure you are accurately looking at these scenarios before you risk your entire future on them. While it could pan out, it could also blow up in your face.

Wise words, Paul. Of all the criticisms of my post that I read, Paul’s is most valid: I did not do an after-tax treatment (although, I did mention Capital Gains Tax); it’s just too damn complicated to run the numbers for a post like this … and, doesn’t change the relative outcome.

In fact, why do you think so many wealthy people invest in businesses and real-estate? It’s partly FOR the tax breaks! How much tax do you think that they legitimately pay per dollar earned compared to you, even WITH your 401k?

And, it appears that Pinyo of Moolanomey actually reran the numbers:

AJC – Interesting post, but I have to agree with the naysayers. Your analysis in scenario 1 didn’t include mortgage and other expenses. In part 2 of scenario one where you actually account for expenses and deposit everything into CD, the true advantage is only $63,000 over 30 years and this is before tax — after tax it’s virtually wiped out.

Sorry, Pinyo, on this one we’ll have to agree to disagree … unless you want to share your numbers? Then, I’m happy to do [yet another] followup.

BTW: real-estate is not the only viable alternative to saving in your 401k; my arguments apply to any investment that has the following four characteristics: leverage, depreciation, other tax deduction/s, and inflation protection.

Guys, the critical difference is this one – hardly mentioned in the comments at all: Real-estate has an apparent risk … but, the 401k option has a hidden risk.

I think we all understand the apparent risks of alternate investments v the nice, safe 401k (if you were set to retire at the end of 2007 and you ‘forgot’ to shift the bulk of your funds to the bond market, you may have a slightly different view on this) …

I’ll leave you with one thought: when was the last time that you read this headline:

‘Multimillionaire thanks the tax system for favoring his 401k … says” “without it, I would not be sitting in my beach house in Maui sipping Pina Coladas today” ;)

The Hidden Risk of your 401k …

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Recently I wrote a post that challenged the ‘Set It And Forget It 401k Brigade’ to at least rethink their strategy instead of just automatically maxing out their 401k …

… in doing so, I mentioned that there was a ‘hidden risk’ in your 401k.

Whilst the 401k proponents put forth all the wonderful, low risk arguments in favor of 401k’s (quoting long-term market averages of 12%+) they conveniently forget:

1. Fees: Figure around 0.5% – 1.5% in fees set by the funds that your 401k invests in and the fees associated with managing the 401k and the underlying funds (but, only the ones that your employer doesn’t pay). Most of these are conveniently hidden in your returns.

2. Market Dips: Did you know that while  the ‘market’ averages 12%+returns, you can only count on 8% as your 30 year return, 4% as your 20 year return, and 0% as your 10 year return from the market. My rule of thumb is: when planning your retirement, count on less … enjoy the possible upside when you are wrong!

3. Inflation: It takes time to get to the nest-egg that your 401k will give you … 20 – 40 years when you are starting out … so $1 Million just ain’t all that much money (now, let alone 20 – 40 years time!).

But, that’s not the hidden risk that I was talking about … it’s much, much more dangerous than those …

… the hidden risk of your 401k is that you may not get enough out of it to retire well.

Almost as bad, you may not care enough now to plan for what may happen then; after all, for you ‘retirement’ may be still 10 – 20 – 40 years away! Although, it need not be …

So, what do I mean?

As I said yesterday, the arguments that the 401k proponents put forth center around: it’s ‘forced savings’; it’s pre-tax savings; and, the possibility that you get free money from your employer!

All good things to have in an investment. But, not the only things …

… in fact, there’s only ONE THING that I want from an investment: that it gives me a return that supports My Life.

Not, the life that the investment is capable of supporting … not the life that I have … not even the life that I want … but, nothing less than the life that I need.

Just remember this: there’s nothing holy about a 401k.

The purpose of your 401k investment is NOT to get a tax break, not to put aside 15% of your gross salary a month, and not to get any employer match … they are just (important) features …

Just like any other investment, your 401k’s purpose is to help you get you to Your Number so that you can live Your Dream!

Anything less is just settling for less. So, let’s consider the binary options here:

1. Your 401k will get you to your Number

You know your Number, right? And, you know when you need it?

If not, either read this and do this … or, you’ve just wasted a valuable 3.5 minutes beer drinking, relaxing time that would have had a far more beneficial effect on your life than what you have just read … or, will ever read … on this blog!

And, you know what your 401k can deliver by then, right? Not when your employer says that you retire, but by when you need The Number!

If you haven’t done the calculation yet, ask a Financial Adviser to help you (or follow along with our 7 Millionaires … In Training! at http://7m7y.com starting with this article) …

… you think knowing this might be just a tad important?

Now compare what your 401k is likely to be able to produce (now, I would not be using ‘average returns from the stock market’ for this life-critical calculation … I’d want a buffer … but, that’s really up to you and your bean-counter) with Your Number …

… if they are much the same, stick with your 401k (after all, it is ‘set it and forget it simple’). Then concentrate on keeping your job and, getting bigger and bigger pay-rises, because you’ll need ’em!

2. Your 401k will NOT get you to your Number

If your 401k will not get you to your Number, what choice do you have but to at least consider alternates, be they instead of –  or in addition to – your 401k savings plan …

… be they real-estate, stocks, 2nd/3rd/4th jobs, marrying into money, winning the lottery, businesses … 

…. be they whatever …?

Of course, you could just give up and settle for your lot in life; who am to tell you not to give up on your dreams?

I’ll leave that little job up to Frankie 😉

Should the rich invest in Index Funds?

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When I glanced at the incoming stats to this blog this morning, I happened to see that a number of people had come to this site because they had typed the following search into Google: “should the rich invest in Index Funds”?

It’s a great question to which the answer is: it depends! 🙂

If you want to BECOME rich: No

If you have a high salary and can save a lot of it (see yesterday’s post) … and are happy to keep doing this for 30 years (to ‘guarantee’ the return), then plonking your money into an Index Fund (preferably via a series of 401k’s, ROTH’s, etc. etc. to get the tax benefits) may be all that you need to do.

But, even with some employer matching and tax benefits, for many salary earners the low returns (and, the costs built in) to such funds might not be enough to get you to where you need to go …

If you are ALREADY rich: Yes

Here the rules change … you are more concerned about wealth-preservation than wealth-building. Therefore, ‘saving’ in a way that ‘guarantees’ your principle and living standards can be a suitable alternative to ‘investing’ for high returns in retirement (or close to it .. i.e. within 10 years).

The typical choices here are:

1. CD’s: Just keep your money in the bank – but, inflation will kill you.

2. Bonds: Preferably inflation-protected – and, low returns will probably put a damper on your long-term spending habits.

3. Real-Estate: Using low-or-no borrowings (opposite to our wealth-building real-estate strategies!)  – reasonable (and, reasonably safe returns) provided that you invest wisely, manage the property well (using an expert and reputable property manager, of course!), have a suitable cash buffer for expenses and loss of tenants, etc. You live off the rents and you may have the added benefit of a larger estate to leave to the rug-rats and/or donate.

4. Index Funds – you may need to be prepared to sell down 2.5% to 4% of your holding every year (that becomes your ‘replacement salary’), but – over a 30 year period – that should be enough to self-sustain (i.e. keep up with inflation and your annual salary). The lower the % that you withraw, the greater the chance that your money won’t run out before you do (and, if the market goes well, you COULD even have the added benefit of a larger estate to leave to the rug-rats and/or donate).

But, when planning for retirement, don’t make this mistake: the market has returned an average of 12% – 14% p.a. for the last 100 years …

… but, if the market crashes just before – or in the early stages of – retirement, it can have a major impact on the longevity of your portfolio … in other words, you are screwed!

So, do what I do and plan for the worst: plan to have the bulk of your money in the Index Fund for 30 years, because that’s how far out you need to go to ensure an 8% return … then take off another 1% for fees … another 3% or 4% (5%?) for inflation …

If you only plan for 20 years, the ‘guaranteed’ return drops to a measly 4% and inflation will just say “thanks for the snack” and leave you with nothing!

So, are Index Funds for you?

The true cost of 'helpers' …

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The best way to give up your ‘day job’ is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at http://ajcfeed.com ….

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Last month, I wrote a post that was a little scathing about what I call ‘middle-men’ and Warren Buffett calls ‘helpers’ … all of those people inserted between us and those fantastic “little pieces of American Business” [another Buffett quote … he means ‘stocks’] that we want to buy.

The problem is they cost us …

and, for every 1% in fees that they cost us, and our returns on $100,000 invested for 20 years goes down as follows:

1% 2% 3% 4%
 $17,383.14  $31,876.74  $43,938.73  $53,958.08

That’s how much you LOSE from what you COULD have earned on that $100,000; scroll to the bottom [better yet, keep reading] to see what Warren Buffett actually estimates all of these middlemen (agents, brokers, advisers) to cost American Business – hence us!

In the meantime, let me cast my views on these two important topics:

Financial Advisers

I will lay it right out on the table for you: I don’t like ’em, don’t trust ’em … but, sometimes you can’t live without ’em. In fact, I usually advise people to see a financial adviser and, I have NEVER told people not to.

I’m just telling you my opinion 😉

I see four problems:

1. Commissions – in the USA, most advisers are tied in some way or another to selected funds and/or providers … they will not or can not, provide you with truly independent advice. Sure, they may be honorable and educated and ethical (of course, they all are) but would you go to an honorable and educated and ethical Lexus salesman and expect her to advise you to buy a Maserati?

2. Fees – I love them! Truly … if I pay a fee I know I should be getting what I need, not what some ‘freebie’ guy is selling me. Unfortunately, in the financial planning industry even fee-only advisers can have affiliations to selected providers via agency, equity, or simply because they only have experience with a limited product set.

3. Results – How rich is your financial adviser? How rich do you want to become? They should be as rich as you want to become x 10 [AJC: OK, as rich as you want to become x 1 or 2 for right now is OK … but, when you get half-way whomever you ask for financial/commercial advice should be as rich as you want to become x 5]. And, if they are stinking rich already, did they get there because they invested in the same way as they are advising you or because they run a damn good financial planning business (which requires more selling talent than investing skill)?

4. Product – When was the last time that a financial adviser – particularly a financial planner – said, “Look Bud, I’d love to sell you this really great financial product, but [takes you aside, puts his arm around you and whispers conspiratorially] what you really need to do is [insert sensible alternate investment of choice: invest in real-estate; buy your own home; put the money towards starting a new business; look for 4 or 5 undervalued businesses and buy their stocks]” ?

Personally, I’ve never been to a financial planner [AJC: actually once, nice guy – I went because I kind’a know him socially – but, as soon as he started talking ‘business’ I felt my skin crawl and couldn’t wait to get out of there!], I would rather look for a business/investment savvy accountant to run the numbers for me.

Invisible Middle-Men

These are the guys researching, packaging, distributing, and managing investments for you. The most ‘typical’ product that we are talking about here are Managed Funds, which all carry fees – most hefty, some miniscule – to cover the costs associated with all of these ‘invisible’ middle-men, as well as the financial planner’s commission (if you decided to go with Option 1., above after all).

The problem is that, even if you wanted to diversify [you shouldn’t!] you wouldn’t buy one of these funds through an adviser/salesman … you would go direct to, say, Vanguard’s web-site and sign up for their lowest-cost broadest-based Index Fund and start contributing … and, you wouldn’t need to come up for air for another 30 years!

Warren Buffett talks a lot about other middle-men; what he laughingly calls the “Helpers” (as in “I’m from the Government and I’m here to help you”) e.g. the stockbrokers, the hedge fund managers) and if you want to read his beautifully laid out reasoning from his 2005 Letter to Shareholders, check out this article.

In the meantime, I lead you to Warren’s stunning conclusion:

The burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.

Try compounding a 20% ‘loss’ over 10 years and see what you end up with!

ETF's as a hedging tool?

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A while a go I wrote a post that discussed the difference between ETF’s and and Index Funds for diversification purposes … and, you know what I think about diversification.

But, for those who are just passing by the blog and thought you’d like to drop in [AJC: my regular readers will skip over this post because they wouldn’t be interested in diversification either 😉 ] here is an interesting article from the Tycoon Report:

If you haven’t already, you should start moving your money out of mutual funds and into ETFs (Exchange Traded Funds).  In my opinion, they are tailor made for the “Average Joe” investor to get the benefits of a mutual fund without their crazy fees.

For a detailed listing of all of the fees, etc. that come with mutual funds, you can visit http://www.sec.gov/investor/pubs/inwsmf.htm#how.

In my opinion, the only downside (for some people) with respect to ETFs may be that you can buy and sell them as easily as you can.  The reason that I say that this may be a downside for some people is because, if you are impatient or have an addictive personality,etc., then you may know yourself well enough to stay away from investments that you can easily get in and out of.

In other words, if your personality is such that you are tempted to trade without a logical reason to do so, then perhaps the difficulties (such as fees) that come with a mutual fund will prevent you from trading needlessly.  An ETF, on the other hand, may (because of their ease) encourage certain types of people to trade.  If you do not have this type of issue, then you should certainly choose ETFs over mutual funds.

I like ETFs personally because they are less risky than individual stocks.  As you may know, you can never totally eliminate risk, but you can reduce it.  You can reduce risk by hedging, diversification, and insurance.  ETFs reduce risk through diversification, as you’re not assuming the risk that your investment will go to zero based on the demise of one single company.

Nice summary. Here’s where I sit … if you’re using the ETF for:

1. Speculation– Using an ETF (or any other ‘broad-based’ investment) as a hedge against short-term risk is fraught with danger … you are speculating. Yes, you are ‘hedging’ against the risk of any particular stock tanking (conversely, spiking) but you are really just betting with/against the whole market – if people knew where the market was going, they would be richer than Buffett. On the rare occasions that I do speculate (anything less than a 5 – 10 year outlook going in is speculating to me), I prefer to speculate with options and/or just a select handfull of the underlying stocks.

2. Investment– Now, if I am going to invest with a 5 – 10+ year outlook going in, then I am less likely to be speculating and more likely to be ‘saving’ or ‘investing’. It’s important to realize that I may not actually hold the investment for that long ( who knows what the future will bring?), but I certainly have the expectation of holding, going in. I don’t like to ‘invest’ in a broad-based ETF/Index because then I am truly ‘investing’ in paper, and market sentiment/emotions. I would not be investing with the understanding of the fundamentals of the underlying business, which is the only way that I expect to ‘beat the market’ in the long-term: buy under-valued businesses that I would be prepared to hold forever, and wait for the market to ‘catch up’ to my way of thinking … this is pretty much what Buffett does (actually, did … when he was a little smaller and could make smaller investments) with the stock investment part of his portfolio. If I get it wrong, but I llike the business and it makes good profits (else, I wouldn’t have bought it … then, I don’t mind holding. If I get it right, and the price spikes up to ‘fair market value’, I may end up selling early.

3. Saving– I don’t have ‘saving’ strategies – my speculation (20%) and investment (80%) strategies seem to cover me pretty well. But, if you just want to plonk your money away … either as a one-off (Uncle Harry left you some money) or on a more regular basis (you have a 401k or just want to regularly save) … AND you have a 20+ year outlook, then this is where ETF’s or Index Funds finally come into play! Plonking your money into a Spider ETF or broad-based Index Fund can be better options than CD’s or Bonds. Just don’t get fancy here … the good news is that Warren Buffett also recommends this strategy for the “know nothing investor” as he calls them … he also calls it “dumb money“, but he means that in a nice way 🙂

Now, as to selecting an ETF v a broad-based Index Fund, it’s a close call.

Finally, I was a little amused this little ‘teaser’ on the very same page as this very nice Tycoon Report article exhorting you to ‘invest’ in ETF’s; it said:

Most ETF Traders Will Lose … And Lose BIG

ETFs are the hottest new investment around, and for good reason. But many everyday investors who jump into ETFs without a proven system to guide them will lose their shirts.

Then [of course] it went on to the ‘solution’: On Thursday, June 12th, Teeka Tiwari will reveal the secrets of using ETFs to generate enormous wealth. But, there’s nothing wrong with a little good marketing …

My advice? Keep your shirt buttoned!

Millionaire by 30?

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The best way to become a Millionaire by 30 is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at http://ajcfeed.com ….

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Recently I wrote a post that I consider to be one of the critical “you either get it or you don’t” pieces that will determine whether you will ‘make it’ or not …. if you haven’t seen it yet, fully understood it, or hotly debated it (with me, yourself, or your mother) then I highly recommend that you go and get to it!

Anyhow, Jim wrote a comment:

This video was suggested from one of my posts and I think it gives a pretty good example of your premise. This is Douglas Andrew, author of Missed Fortune…

I watched the video … and, set it aside presuming that because it was so short, the one or two glaring errors (did you spot them?) would have been addressed in the full video (or a Douglas Andrews seminar) …

… then I saw an article on My Money Blog:

The overall moral of this book review is that even though a book finds a publisher, it doesn’t mean the advice is accurate or applicable to you. The book Millionaire by Thirty: The Quickest Path to Early Financial Independence by Doug Andrews & Company appears to be very similar to the other Missed Fortune books by the same author. In fact, from reading the reviews all of these books seem to contain the exact same material.

Housing Prices Always Go Up, Take Out Largest Mortgage Possible!

“Do you rent? Rent is like throwing money down a black hole. It doesn’t matter how much money you have saved or how long you plan on staying in the same place, you should always try to buy a home. If you aren’t going to stay very long you can simply get an adjustable-rate loan with no down payment. Housing prices always go up, so you can enjoy the low interest for a couple of years, and then sell and make a nice profit.

If you are really smart and disciplined, you can even get an interest-only or negative-amortization loan because then you won’t build up any equity at all. Accumulating home equity is bad. Anytime you have any, you should take out a loan on it and invest it somewhere else, like a second home.”

The above are all the dangerous generalizations about real estate contained in this book. Newsflash… Renting can be the best option for many people. Housing prices do not always go up. Thousands of people who bought a home and now have to sell after a few years will have lost tens of thousands of dollars compared to if they had rented.

Summary
Many of the books I read may not be brilliant, but they contain generally good ideas and target a specific type of reader. However, this book is one that could actually hurt more people than it helps. This book is just plain misleading. It would be wonderful if home prices always went up and there was an investment where I could never pay taxes, have no downside risk, and get stock-like returns, but unfortunately both are too good to be true. I’ve tried to lay out my arguments for this briefly, but if you want a better description read the detailed reviews here and here. Clever Dude also shared his thoughts here.

Short version: Don’t read it, don’t buy it, don’t even borrow it from the library

Firstly, I agree with My Money Blog on the home ownership issue to a degree … owning your own home is not always the smartest FINANCIAL option. 

However, here is where I differ: for MOST people, it’s the only way that they will get financially free for lots of psychological/emotional reasons, more than strictly financial. Also, I do agree with the ‘forced saving’ and ‘forced appreciation’ that it can give you (provided that you do something with the appreciation … you don’t want to die ‘house rich / cash poor’!).

The ONLY time you shouldn’t invest in your own home, is to invest in income-producing property instead*.

And, while it’s true that real-estate doesn’t always go up, if you have a 20 – 30 year outlook and can lock in circa 6% interest for up to 30 years (another reason why your own home can be a good idea) … I think the future is exceedingly bright.

So, it is with a little surprise that I find myself actually siding with Doug – warts and all (!) – on this one …

But, I don’t agree with Doug that you shouldn’t have ANY equity in your own home (again, strictly financially speaking, he is probably correct), but I have proposed the 20% Rule that says that you should have no more than 20% of your Net Worth invested in your own home at any one time.

This rule, when understood and applied properly, accomplishes two key things:

1. Let’s you get/stay invested in your own home, but

2. Ensures that you maintain enough of your Net Worth in outside investments.

… without the screaming holes in the get-rich-quick schemes promoted by the ‘nothing down’ brigade!

So, go back and read all the posts that I have linked to … as I said at the very beginning, this could be the key to your wealth …

* or to invest in some other high-reward activity (e.g. buying/starting a business; leveraged
  investments; etc.) ... although, I would still prefer that you ALSO buy you own home 'just in case'

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Hitting Suze Orman out of the ball park …

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… with a fly ball that even Dave Ramsey won’t be able to catch!

As expected, my recent post “Contrary to popular opinion, paying off your mortgage is the dumbest move you can make …” drew a number of comments – but, not as many deep criticisms as I was expecting (hoping for) … I would’ve liked some issues out in the open so that we can really bang them around.

After all, my view is diametrically opposite to the ‘pay off ALL debt INCLUDING your mortgage’ view espoused by the likes of Suze Orman and Dave Ramsey!

With some suitable flaming of the “you’re just another Make Millions In Real Estate Like I [wished] I Did guru” or “Robert Kiyosaki knows what he’s talking about compared to YOU” kind, I’d at least be able to dig in and show you why my view is correct for MOST people.

I’d also be able to explain why, perhaps counter-intuitively, it’s actually the more conservative option.

Instead, let me make do with the much more polite, and more thoughtful, comments that one reader – Chris – did leave on that post:

AJC – I completely understand and agree with your concept. I think the reason why you and Suze Orman differ is because you target a different group, or have a different approach.

You talk much more about leverage. Suze Orman wants to get people to stop buying frivolous things and instead pay down debt (because most people are buying junk and creating more of it).

While anybody can start a business, a rental, etc. There are people who don’t have the ambition or the stomach for it. The concept of leverage and more involved ways of wealth appreciation get lost on those people.

The point that needs to be made is, if you aren’t going to leverage that debt properly to grow wealth, then paying it off is better than buying useless things. Perhaps for some people we need to focus on getting them to be frugal spenders first, and then wealth builders later.

I would also note that I think paying off mortgage debt should rank much lower than other investments in reducing higher cost debt, a business (including rentals) or retirement accounts. But for some people, putting an extra $100 towards a mortgage is a great way for them to start being more financial considerate.

The assumption is that my approach is different to Suze’s and Dave’s because:

1. I aim at a different audience

2. Their approach is a more sure way to a comfortable retirement

3. They focus on ‘frugal living / debt free’ which comes before wealth building

It seems logical, safe, and conventional … and, I agree on one point, my approach isn’t for everybody …

… it’s just for anybody who doesn’t want to retire on the poverty line!

By that, I mean that I am targeting anybody who wants to retire with a nest-egg of MORE than $1 Million in LESS than 20 years.

Now, that is almost everybody that I have ever known or met– and, I’ve known and worked with a LOT of people from call-center people to CEO’s – because $1 Mill. in 20 years (the typical target for the ‘save your way to wealth’ crowd) simply gives you the equivalent of $15k per year in today’s spending-dollars!

For every extra million dollars, you only get an additional $15k per year to live off … and, for every 10 years that you will retire sooner, you get another $7,500 per year ‘pay rise’.

So: how much do you need to live off now? How much do you need to live off when you ‘retire’ and by when?

I don’t know the answers to these questions, so you do the math …

I can tell you this: if all you do is live frugally and become debt free you will be poor, with a roof over your head … if you don’t, you will be poor without a roof over your head.

Neither seems like a great option … so, you can understand when I say that the Suze Orman / Dave Ramsey ‘save and pay off all debt’ approach still seems a tad ‘risky’ to me, and a sure approach to a fairly uncomfortable retirement.

Given that Door 1 and Door 2 pretty much suck [AJC: OK so one door sucks more than the other … are we here to measure degrees of ‘suckiness” or what?!] what’s left is Door 3 …

If you live on the same planet that I come from (Planet Save a Little, Spend a Little … Enjoy a Lot), then we simply have to aim for more … a lot more!

That’s where leverage comes in … and, it has to come in WHEN saving, WHEN learning to be frugal, WHEN paying off all debt (and, probably BEFORE paying off some debt) …

… and, if you are aiming to retire somewhere above the poverty-line, then you are simply going to have to find the ‘ambition or the stomach’ for something.

I never had the ambition or stomach for work … I simply had to do it or starve. Don’t you?

I never had the ambition or stomach for investing … I simply had to do it or figure on retiring near-broke. Won’t you?

If the government takes away your social security safety net … if your employer takes away your pension … if your rich relatives die and forget to leave you anything … it’s going to be that simple: do it or retire broke.

OK, if that hasn’t turned you on, then nothing I ever write will … otherwise, here are some options, in decreasing order of risk and difficulty – but, also decreasing order of financial outcome:

1. Start a business

2. Buy a business

3. Invest in real-estate

4. Buy your own home

5. Leverage into Stocks

6. Leverage into Index Funds

In every one of these cases, you borrow as much as the banks, convention, your gut, your advisers tell you to … then you hold – preferably for ever.

[AJC: Speculative ‘investment’s such as: rehabbing/flipping real-estate; trading stocks/options etc. all belong in Category 1. Start a business]

Now, go do it …