Fluctuations? Well, fluc you, too …

I am pleased to say that I have readers from all around the world, which brings up some interesting problems and opportunities that purely US domestic investors may not need to think about too much.

For example, take Arkhom from Thailand who asks:

Just wondering, and this is a very simplistic view, that altho US stocks are definitely cheap in the long term, wouldn’t the value of US dollar also expected to decline sharply also in the long term? The USD view is conventional wisdom, with all that money being pumped/created for rescues and with current strength due to flight to safety in US treasuries. If that’s the case, it would most probably take the edge off the returns for US investment? Otherwise, in your case, wouldn’t it be more prudent to look for long term investments in, say, Australia?

I mentioned that I was having a little argument of sorts with my wife as to the best place to invest the little bit of cash that we received upon the sale of my Maserati in the US. Since we currently maintain two homes: one in the US and one in Australia, we have a unique opportunity to decide where to ‘park’ our money.

Firstly, let me explain why this is usually not a huge consideration for most small investors:

– If you are US-based, then exchange rate movements only matter indirectly.

By that I mean that the value of US businesses – hence stock prices – don’t necessarily jump directly with exchange rate movements (unless the company is primarily invested overseas, or derives the bulk of its revenues from import/export). But, logic tells me that all businesses are eventually affected … they all buy goods, equipment, and/or components, inevitably some of which comes from overseas.

A strong US dollar makes these cheaper and a weak dollar, more expensive … but, the effects on that company’s stock price are generally slower as they must first flow via the company’s profit and loss statement.

– If you are an overseas-based long-term investor then exchange rate movements may have less effect than you at first intuitively expect.

The reason is that your money may flow into the US (if you are in, say, Thailand), but must must eventually flow back out again so that you can spend the money! So, it is really the long-term CHANGE in the exchange rate that affects you.

– For an investor who lives in two economies (like us), then we can earn and spend money wherever we like and move funds as necessary between the two economies … so, we can make earning and spending decisions independently of each other.

For example, to buy the Maserati we moved funds from Australia to the US at roughly 80 cents in the dollar; and now that the vehicle is sold we can move it back at approx. 66% cents to the dollar, or a ‘net gain’ of 15% or so.

The two questions then become:

1. Can we gain more than 15% over the next 12 months by investing in the US instead of moving the funds to Aus and investing there, and

2. Does it really matter? Where do we intend to SPEND the money?

The answers to these questions usually lead me to: it doesn’t much matter!

In theory, yes, but in practice, no …

You see, if you move the money to invest and move it back to spend, then you are not only gambling on the current currency exchange conditions being favorable, but also the future ones being equally favorable. It’s hard enough to make such predictions today, let alone tomorrow!

Now, exchange rate fluctuations ARE very important for a special class of investor … but, not for the average investor unless the exchange rates are totally out of whack … but, who’s to say where the Aus v US dollar really is set to lie over the next 20 years?

Can you tell me with any degree of certainty?

I can’t tell you … so, all I need to really think about right now is where do I really want to spend my money today, tomorrow, and in 20 years time 🙂

Spending your Net Worth

Currently, over at the 7 Millionaires … In Training! ‘grand experiment’ we have been looking at the 7MIT’s cars and their attitudes, thereof.

I introduced them to the 5% Cars + Other Possessions Rule, which Jeff seems to have forgotten covers all of your possessions outside of your home … not just your car:

It seems like all you’d need to do is wait a bit and eventually your car will depreciate enough to be under 5%.

Does anyone really count their cars as part of their net worth? I view them more as a disposable item and not something that I try and calculate my net worth with.

But, Jeff does touch on an interesting ‘quirk’ of cars and other possessions that is different to what generally happens with houses and investments: they go DOWN in value over time.

This depreciation is something that we can take advantage of …

… you see, we can use the fact that our Net Worth should be increasing – while these other items are probably decreasing – to allow us to go shopping every few years or so!

[AJC: But, don’t forget to always pay CASH!]

Think about it, if 75% of our Net Worth is in investments (this is called your Investment Net Worth … it does NOT include your house, cars, and other cr*p that you may have lying around) and 20% is in your house and 5% in your cars/possessions, then you may have a Net Worth IQ asset column that looks like this:

Investments: $75,000 (75%)

House Equity: $20,000 (20%)

Cars: $2,500 (2.5%)

Other Possessions: $2,500 (2.5%)

But, in 3 years time – assuming a ‘normal’ market (and, who can really assume anything these days?!), it might look something like this:

Investments: $105,000 (80%)

House Equity: $25,000 (18%)

Cars: $1,250 (1%)

Other Possessions: $1,250 (1%)

Which allows you a number of options:

a) Pay down some of your mortgage (up to $2,500) to bring your house back to the maximum equity that these rules ‘allow’, or

b) Buy a newer car or some more cr*p (up to $2,500) to reward yourself for your good work, or

c) Decide to become rich(er), quick(er) by realizing that the rules were designed to have a MINIMUM of 75% of your Net Worth in investments … but, there’s nothing wrong with investing more 🙂

d) Some sensible combination of any/all of the above

I like (d) … to be totally honest, I don’t go for the overly-frugal nonsense: once I reach a financial milestone, I see nothing wrong with allowing myself a little enjoyment … that’s why I’m sitting back on my hammock right now with a Pina Colada and enjoying the Aussie sunshine ….

… regardless of how YOU choose to look at it, when you have a set of guidelines that you can follow, doesn’t it make it easy to at least see what the choices are?

Real Cashflow, Fake Cashflow – Part III

This is the third installment of our series on the three types of Positive Cashflow Real Estate:

1. Tax Cashflow

2. Fake Cashflow

3. Real Cashflow

Last week we discussed the first of these (Tax Cashflow), cleverly designed to make Negatively Geared real-estate look like a good deal. As I said:

By allowing you to pay less personal income tax, the promoters of these schemes will show you that the property can pay it’s own way (Neutrally Cashflow or Neutrally Gear) or even Positive Cashflow!

Unfortunately, it’s all on paper … and, it relies on you earning a high income … and, will probably only work for one or two properties because you won’t have enough personal tax to ‘save’ for more properties than that.

Today, I will introduce you to a simple, but powerful concept that will allow you to take any piece of real-estate and create positive cashflow … it’s so simple, you’ll wonder why you didn’t think of it sooner 🙂 But, you’ll quickly see why I call it …

Fake Cashflow

If you want a property to produce positive cashflow without doing a lot of work and research, use the 7million7years Patented Positive Cashflow Formula:

Pay Cash!

Now, this isn’t a stupid idea, it’s actually a valuable – and, under-appreciated [AJC: pun intended] – Making Money 301 wealth-preservation strategy … and, it works because it eliminates a (actually, usually THE) major expense on your investment property: mortgage interest.

Without interest, the chances are that your property will produce enough rental income to cover vacancies, repairs & maintenance and other typical costs, yet still produce a very healthy profit … perhaps even a livable income for a MM301 ‘retiree’.

The problem, of course, is that the rest of us – those still trying to accumulate wealth – (a) don’t have enough cash to buy much (any?) real-estate outright, and (b) real-estate’s growth is typically just around inflation-to-6.5% (depending upon who you believe) … hardly earth-shattering.

But, we don’t HAVE to pay cash for a property to produce this kind of positive cashflow return, we just have to decide how much cash to put in … as best explained by Shafer Fincancial in a comment to a recent post:

Here is how it works. Most folks, including myself, advise re investors to make their properties cash flow for safety (comparing your costs with the rents received). So if one person can get a loan for 7% and the other can only get a loan for 9% in order to make it cash flow, the later will have to put down more capital (down payment). If you are leveraged at 80% LTV and a property cash flows you only have to tie up that 20% capital. However, if you are having to put down 25% to make the property cash flow because of a high interest rate on the loan then you have 5% more capital tied up in the property for the same capital appreciation.

$100,000 property
Person A cash flows with $20,000 down payment
Person B cash flows with a $25,000 down payment

Think about it:

You put 0% down and you have a negatively-geared ‘dog’ … and, if enough people do it, a future real-estate crash (a.k.a. ‘credit crunch’)  on your hands.

You put 100% down and you have a positively-geared ‘retirement investment’ that ‘only’ grows with inflation (unlike CD’s – which ONLY provide some income).

… surely, there is a ‘break-even’ point somewhere between the two, where the property will cashflow positive, but you only have to put in a deposit and you can borrow the rest from a bank like a ‘normal person’?

Yes there is, and we ‘twist’ the Shafer Financial example (he was talking about the ‘cost’ of different interest rates) to illustrate the point very nicely: Property B may be a ‘dog’ with a 20% down payment @ 9% interest, but if you just up it to a 25% down payment also at 9% interest, you lower your monthly mortgage payment just enough to make it break-even on a monthly (or yearly) basis, or even cashflow positive.

So, fiddle the numbers on a spreadsheet (with the help of your accountant, if necessary – they LOVE this kind of stuff!) and you will find the break-even point (i.e. the point where the property JUST starts to cashflow positive) and if you can afford the deposit, perhaps you have a ‘winner’?! 😉

But, it comes at a ‘cost’ or two:

1. You need to come up with a bigger deposit … which, means that you may not be able to buy as big/many properties as you like, and

2. The more money you put in, the lower your overall return (annual compound growth rate); again, Shafer Financial explains nicely:

The interest rate on mortgage debt on investment property does curtail capital appreciation …

$100,000 property
Person A cash flows with $20,000 down payment
Person B cash flows with a $25,000 down payment

Property appreciates 3% for five years. Aproximiate value of $116K.
For simplicity stake; No excess cash flow for five years (unlikely)
No tax advantages.

Person A ROI= 12.47%
Person B ROI= 10.4%

Having to put that extra $5K down to make the property cash flow cost you 2% in the return department. Note that the property only appreciated 3% per year, yet the rates of return were 10% and 12%!

Now in the real world you must account for the cash flow over time and the tax advantages to compute ROI. But this is a perfect example of how interest rates effect return. Also, note that the higher the leverage (above 75% LTV for most folks) the higher the interest rate is likely to go. So, there is usually a break even point for leverage/cash flow that takes into consideration the interest rate.

This is that ‘leverage’ thing that makes real-estate such a wonderful investment, producing returns (for well-selected / purchased real-estate) well above the naysayers moans that real-estate only grows “according to inflation” or “6.5% a year” (depending upon who you believe).

So, the problem with Fake Cashflow is that – while we can ‘force’ a Positive Cashflow out of almost any piece of real-estate by simply putting more of our own cash in it up front – it tends to reduce leverage, hence reduce our overall returns. This is why I call it ‘Fake Cashflow’ …

There has to be a solution … and there is: see you in the final installment in this series, where I show you how to find ‘Real Cashflow’ 🙂

The fallacy of dividend paying stocks – Part II

Over the past few weeks, we’ve taken a deep dive into a strangely emotive subject: stock dividends.

In fact, the two articles (the first being a reader poll) that I wrote on a hypothetical real-estate transaction was not really about real-estate at all … it was also about DIVIDENDS.

Did anybody pick up on that?

You see, the problem with the real-estate deal is that if the property isn’t good enough to generate its own profits, the Rental Guarantee forces the developer to dig into project reserves, excess cashflows, or even future profits (by borrowing more money to pay the investors the ‘guaranteed’ amount) … none of these things are good for the project, the developer, or (ultimately) you as an investor!

Lets face it, everybody who invests wants to make a profit … so, do your due diligence before you get in and let the project deliver what it can …

Similarly, a company that focuses on issuing ‘high’ dividends through thick and thin to attract shareholders – with a board of directors that doesn’t adjust their dividend strategy to market realities quickly enough – is facing just the same problems as the developer forced to offer income guarantees to attract investors to a real-estate project … it’s all great when things are going well, but when the economy sours, things change – for the worse – very quickly, under these sorts of deals.

Now, I haven’t said that you shouldn’t invest in dividend-paying stocks … others, are just saying that you should – just because they are dividend payers – which is just plain dumb.

To my mind, the fact that a company offers dividends is just one factor – a relatively small one at that – in my decision to invest in a stock …

… to my way of thinking, it’s like choosing a dentist for your kids on the basis of the volume of candy that he hands out at the end of the visit:

– Shouldn’t we choose the dentist on the overall quality of his work (and, maybe price as well)?

– Doesn’t handing out candy at a dental practice seem somewhat strange to you?

Well, that’s exactly what you are doing if you choose a company because it pays great dividends …

… now, you may use other criteria as well, but if you are EXCLUDING great companies from your list because they DON’T happen to pay a dividend, then this also applies to you!


– Shouldn’t you choose a stock on the basis of its great past/future BUSINESS performance?

– Since CASH is the lifeblood of a business and the driver of future investment and growth (eg for R&D, retooling, opening new stores, etc., etc.) shouldn’t we prefer a business that conserves it, rather than one that doles it out like candy to attract shareholders?

Look, just because a company issues dividends doesn’t mean that it’s making profits … the two SHOULD be directly related, but often they are not:

1. Profits (better yet, free cash flow) are a function of a sound business model,

2. Dividends are at the whim of the board of directors.

So, why not go direct to the source: look for companies with a strong current and (expected) future cashflow, and take your money out when YOU need it, not when the board of directors says you can have it?

So, is there a place for investing in dividends … surprisingly, YES.

But, not when and how you think:

Instead of laying out dividend paying stocks against other Making Money 101 and Making Money 201 activities, hold your thoughts until you reach your Number and are looking at preserving your wealth (i.e. with various Making Money 301 strategies).

You COULD then invest in solid, dividend-paying stocks (although, you may elect to go for a company’s Preferred Stock, rather than their Ordinary Shares) because having a semi-reliable income stream may be more important to you than overall return (i.e. you are trading off convenience for you against leaving your children or church a sizable inheritance) …

… or, you could try one of these MUCH better Making Money 301 strategies:

1. Buy Inflation-Protected TIPS (treasury bonds) or inflation-Protected MUNI’s (municipal bonds) with 95% of your portfolio, and put the remaining 5% in year-long call options over the S&P 500, to give you exposure to the potential upside of the market.

2. Buy (and hold) a rental property or five – live off the income (well, 75% of the income – leaving the rest as contingency against vacancies, repairs & maintenance, etc.) and bequeath the capital appreciation to your children/charity/church.

3. If you MUST look for dividends, buy Preferred Stock instead of ordinary/common stock (just as Warren Buffett has of late); these are a special class of stock that act more like corporate bonds, but: are less volatile than a stock; have more upside/downside than a bond; often produce higher dividend returns than the dividend on an ordinary share in the same company; and, are more likely to be paid … the issuing company usually pulls out all stops to maintain the dividend on these Preferred Shares even while lowering dividends on Ordinary Shares (a.k.a. Common Stock).

There, you are now better equipped to make decisions on dividends – at all stages of your financial life – than 99% of so-called ‘dividend experts’ 🙂

Car or curse? 7 case studies …

fred-flintstone-barney-rubble-carWe all have a car … otherwise, we’d be cycling to work. But how much car? Do you buy new/old or somewhere in-between? After all, our car is one of our largest purchases … if not, largest purchase outside of our own home.

So, here’s 7 case studies from our 7 Millionaires … In Training! ‘grand experiment’.

Let me know what you think …

Scott – like so many of the 7MITs featured here – loves his BMW’s … in fact, even AJC happens to have one, at the moment! The best thing, for Scott, is that his employer provided his current BMW for ‘free’ … but, is there really such a thing as a ‘free lunch’? We explore that very issue …

Ryan also likes BMW’s, which cause Josh to recommend buying a new one because it means NO “maintenance bill for 4 years, 50,000 miles” … is this a good deal?

Josh is obviously the other BMW-fan; we use his post to re-introduce the 5% Rule for cars and other possessions; should Josh have broken the rule to get int his first car? You might be surprised by the answer (it’s in the comments)!

Lee sure knows how to run a truck into the ground! Take a look at his attitude towards financing vehicles and how long you should hold on to your truck for …

Mark – the savvy investor – shows the other BMW-lovers how to buy a good used one off e-Bay and negotiate the price lower AFTER you have already ‘bought it’ … nice!

Diane and I have a discussion around what comes first, the “debt or the car”? It’s moot … Diane know what she needs to do!

Jeff has the cars the boat and the airplane (well, the airplane is supplied by the Navy!) … but, at what point is it better chartering a boat than owning one?!

… oh, and I finally come clean on my own car-related successes and failures, here

Let me know about yours!?

Where do all these rules come from?

I’m a maverick, yet I like rules … how do you figure that?

Well, the rules that I like are actually ‘rules of thumb’. You see, when I was $30k in debt, I was in the financial wasteland with no idea how do dig my way out …

… so, I did the only thing that I am really good at: I read books. A lot. All non-fiction. Mostly about how to make money.

I can read a 100-pager non-fiction book in the matter of an hour or so and absorb most of the salient points … I may then go back and work at snails pace through detailed explanations, if necessary.

And, I like to read books for instructions: do this, do that. Which I’m then pretty good at modifying for my own use.

So it was for my financial troubles; I started reading:

First Rich Dad, Poor Dad – the first book (and best, in terms of how it opened my eyes) on personal finance that I ever read.

Then The Richest Man In Babylon – which explained the power of compounding and reinvesting.

Then every other Robert Kiyosaki book that came out over the next four or five years.

And, I attended every financial spruiker seminar that came to town (Robert Kiyosaki, Peter Spann, Brad Sugars, and so on … )

… all the time looking for the ‘rules of the money game’.

What I found was that there was no ‘one size fits all’ set of financial rules that everybody should follow … but, there were various recommendations as to what you should do in this circumstance or that.

Over the years, by trial and error (largely a lot of trial – and tribulation – and plenty of error) I found various ‘rules of thumb’ that seemed to make sense to me, and some that I had been following without even realizing it, just like the rules that Jeff questions:

Where are all these rules coming from? Did I miss a bunch of information in the brochure?

If I understand correctly, we have the 20% rule for home equity vs. net worth, 25% rule for mortgage vs. income, and now the 5% rule for cars.

I had been following these rules, largely by coincidence, for most of my successful working life (i.e. during my 7 year journey), when I chanced upon a book that I had never heard of, written by a guy I had never heard of, who lived in a (now) bushfire ravaged area not far from my home in Melbourne, of all places!

Naturally, I had to read the book …

He worked from the premise – one that I happened to agree with – that at least 75% of your Net Worth should be in investments – OUTSIDE of your home, your car, your possessions, and basically anything else that is unlikely to yield you an income or be readily salable at a profit (where will you live if you sell your house?).

That leaves 25% of your Net Worth to spend on: houses, cars, possessions, as follows:

20% House

2.5% Cars

2.5% Possessions

Simple; except that I’m happy to blur the lines a little between cars and other possessions into one 5% ‘pool’.

Of course, this only helped to understand how much equity to hold in these items, and not how much you should finance on a house (that’s where the 25% Income Rule comes in) and cars/possessions [AJC: Easy … buy used and pay cash!].

I have explained how these rules work in practice in these three posts (please follow any backlinks):

Your House



Your Cars and Other Possessions


Left Brain v Right Brain


Are you left-handed?

I find myself noticing actors in movies and on TV who are left-handed …. it seems (but, maybe my reticular activating system is blinding me to the statistics) that more leading actors are left-handed than the typical 10% or so that is the society ‘norm’.

Artists, too …

So, is there truth that the right-brain controls the left hand? And that the right-brain is responsible for our emotional / creative side? In which case, left-handed people are more creative?

I’m not sure.

But, I DO know this to be true:

Most decisions are made emotionally then justified rationally

I heard this once many, many years ago … and, even though it is widely quoted, I have not managed to find the source … but, I have found it to be true in business, investing, and in life.

It helps to explain impulse purchases despite reading the classic ‘frugality’ blogs like Get Rich Slowly.

It helps to explain the behavior of the stock market, supporting the findings of the Dalbar Study.

It helps to explain my wife 🙂

It helps to explain why the real answer to the Deal or No Deal conundrum is “Not Sure” …

… the reality is, you will NOT know what you will do in the same situation until you are faced with the same ‘on the spot decision’ yourself.


Unless You Have A System to Guide You

Anytime you have a ‘rational’ decision to make – and, you can at least anticipate that you will one day need to make such a decision – then you MUST prepare ahead of time with a system that  you strongly believe that you must follow in order to achieve [insert very strong emotional outcome of choice].

The System, of course, will be a rational system: it will be well grounded in research, logic, and proven results.

And, it must be one that – in advance of the real decision that you will face – you strongly believe and/or have faith in.

Religions offer such a system for Life … if you subscribe to one, you do it because of Belief and Faith and then you follow it ‘religiously’ – according to your level of belief – or suffer the consequences …

… consequences that may range from guilt and/or discomfort on the mild end of the ‘consequences spectrum’ to great fear of [insert religious punishment of choice] on the extreme end of that same spectrum..

And, this blog is slowly unfolding such a system for Personal Finance. If you do not follow it, you may (on the mild end) feel guilt and buyer remorse, and (on the extreme end) fear that your money may run out before your do. Somewhere in the middle should be the very real fear that you won’t achieve your Number in time (i.e. by your Date)

The key is that when the decision pops up, the emotions around failing to follow the system must outweigh the emotions (temptations?) leading you towards the irrational decision …

…. ultimately the execution of the decision will always be made ‘in the moment’ and emotionally, and then you will justify your success – or failure – rationally later on so that you can live with your choice.

That’s why you need to commit the 7million7years version of this ‘truism’ to memory:

Most decisions are made emotionally then justified rationally unless you have a system to guide you!

Now, go find a system for personal finance that you feel that you MUST follow – and, a strong reason for doing so (e.g. so you can get on with living your Life’s Purpose … seems a pretty strong reason to me; how about you?) – and then follow it, or suffer the consequences … harruummph! 😉

Real Cashflow, Fake Cashflow – Part II

Last week I told you that there are three types of positive cashflow Real Estate:

1. Tax Cashflow

2. Fake Cashflow

3. Real Cashflow

Today, I want to discuss the first of these … cleverly designed to make Negatively Geared real-estate look like a good deal!

Tax Cashflow

In the first installment, I explained that most real-estate (especially residential real-estate, and single family homes and condos in particular) has more costs (e.g. mortgage interest, vacancies, repairs & maintenance, provisions, etc.) than income (i.e. rents), forcing us dumb investors to gamble on the future appreciation of the property … and, we can see where that has lead us!?

So, those developers and promoters with lots of real-estate that costs way too much to buy found some money to help you cover your losses and turn them into a ‘profit’ … from this, comes our first opportunity for the Holy Grail of Real Estate: Positive Cashflow property i.e. one that puts money INTO your pocket each year.

Now, I said each year for a reason: tax.

Uncle Sam will help you to help these property promoters to become rich by encouraging you to buy their overpriced, under performing real-estate! Take Scott, for example:

My wife and I have been pondering this very same topic with our rental(which was our previous home). We are negatively geared by $250.00/month on that property, have great renters that have completed their 6 month lease and are continuing to rent month to month while they continue to try and get their home in Connecticut sold, then move on to purchase their own home here in Louisville.

Money seems to be tight for them from all that I can see, however they are able to make this rent each month, so I’m a bit afraid of raising rent on them, but it really troubles me to be negatively geared for the moment. This property (according to this years filing) has given us a pretty large tax deduction, which has certainly saved us money, perhaps enough to pay us back the monthly amount we have lost to make us break even. Not to mention, it is in one of the most premiere areas of the city and has enjoyed one of the highest appreciation rates this city can offer, but as your post suggests, we don’t want to get caught up in the hope of appreciation.

As Scott has discovered the ‘secret’ is in tax-deductions …

… naturally, almost all the expenses that you have on an INVESTMENT property are tax-deductible, not just including mortgage interest (as in your own home) but, also ‘business’ expenses like repairs and maintenance … even vacancies allow you to earn a little less income, so you pay a little less tax … but these will probably not make a property cash-flow positive on their own.

Actually, the real secret is in the ‘provisions’ … a provision is a fund that you build up over time to allow you to cover major costs later (e.g. an Emergency Fund is a kind of provision).

You see, Uncle Sam allows you to ‘build up’ a fund over time to replace the building that you have on the property, and all the things that you have inside the property (e.g. stoves, lights, carpets, curtains, etc., etc.). You probably borrowed the money to buy all these things – and, are tax deducting the mortgage interest – but, the nice people at the IRS allow you to take a ‘double deduction’ in the form of a Depreciation Allowance on these items, as well.

It becomes another expense that you can get a tax deduction on, and because the property may not have enough income (hey, it’s already Negatively Geared!) you can lower your personal tax bill instead.

By paying less personal income tax, the promoters of these schemes will show you that the property can pay it’s own way (Neutrally Cashflow or Neutrally Gear) or even Positive Cashflow!

Unfortunately, it’s all on paper … and, it relies on you earning a high income … and, will probably only work for one or two properties because you won’t have enough personal tax to ‘save’ for more properties than that.

When you ‘run out’ of personal tax deductions you can’t make any more properties Tax Cashflow Positive … it’s all smoke-and-mirrors.

So, when it comes to real-estate, you want tax deductions and you want tax cashflow, but you don’t want to buy a property that only has this kind of cashflow, if you can find something better.

In the next installment, we’ll look at something even more fun: Fake Cashflow.

My spectacles are still cracked!

On the subject of diversification and rebalancing (you can’t have the latter without the former, although the reverse is certainly NOT true), Rick says:

I don’t expect the market to behave consistently over any significant period of time. The reason I chose an example with no gains was to show that rebalancing can make a profit from volatility even when there is no underlying price appreciation. I suspect that is the mathematical explanation behind the study SiliconPrairie referenced. If a market was continually increasing then 100% stocks should do better- not that that is very realistic either!

I can believe some rebalancing could do better- especially with all of the market volatility we’ve had this year. I really wish I could time the market. I console myself with the fact that no one can really time the market with long term success.

I can rebalance though- as it can be done with a calculator rather than a crystal ball!

What Rick says is true …

… just understand that if you are committed to a diversification / rebalancing strategy, you will most likely:

a) under-perform the market over LONG periods of time (simply because you will have less in the market – on average – than a 100% stock portfolio)

Remember: the market (DJIA) has NEVER returned less than 8% in ANY 30 year period over the past 100+ years – I strongly suspect that if you were 100% invested the day before the market started to crash in October 2007 and simply waited 30 years, the same will hold true – and,

b) have to content yourself with not being able to reach a Rich(er) Quick(er) Number:


That’s OK for some … but, the premise under which I write is that it’s not OK for my target audience. That’s all 🙂

Is it OK for you?

No such thing as a free lunch …


This concept has come up three times recently, so it deserves a post of its own!

First Time

My son asked me why he can’t buy a car (when he’s old enough) on finance, and I explained it to him…

… he then asked me the million dollar question:

What about if there is a 0% finance deal on the car? Can I finance it then?

And, my answer was:

There’s no such thing as a free lunch.

Second Time

Ryan was posting about his car and Josh commented:

I would suggest buying used until you have cash to buy a new…BMW, you have no maintenance bill for 4 years, 50,000 miles.

And, my answer was:

There’s no such thing as a free lunch.

Third Time

I wrote a post about a hypothetical real-estate deal, with the key feature of a rental return guarantee. Rick said:

The description sounds like a good deal to me for a low risk- a guaranteed 7.5% return + possibility of great appreciation. It really sounds too good to be true.

And, it is (too good to be true); you see:

There’s no such thing as a free lunch.

… really, there isn’t. Somewhere along the line you are paying.

Let’s take the last case first: guarantees are usually not worth the paper they’re written on. Especially when they are “thrown in” to make a “great deal” sound even better. In the real-estate deal the ‘guarantee’ could actually cost you money, if the developers/promoters have to borrow money against the future value of the project to make a current payment to you.

In most  new projects where, say, a 2 year rental guarantee is offered, the value of the guarantee is built into the price that the property is offered to you at … might explain some of the very dramatic rises and falls in RE values in Florida, for example.

Similarly with the second example of the ‘free servicing’, which is – of course – built into the price of the car. Naturally, if you simply MUST have a brand-new BMW then you will get the ‘free’ servicing with it. On the other hand, if you can buy a used BMW just after the ‘free servicing warranty period’ has expired, you will be buying at the best possible price point, because (in a normal market) you should expect a sudden drop in the value of the car … this sudden drop represents the real, current value of the ‘free servicing’.

If you understand this concept, then so-called 0% down deals should become obvious … YOU are actually paying for all of the interest, at commercial rates, up front!

I did some consulting work for a finance company that underwrote so-called “2 year interest free” loans on furniture sales for large retailers; they made their money because the store paid a fixed amount up front when you signed up to the deal, then the finance company HOPED that you would not be able to make all your payments on time, because the ‘fine print’ on the deal then let them charge you interest at credit card rates (19% p.a. to 29% p.a.) on the entire financed amount for the entire time that you had the “0% loan”.

Here’s the test; always ask:

… and, if I don’t take the [insert: free lunch du jour] how much do I have to pay then??

Then you can decide if the free lunch is something that you can afford!