What to do when $10m drops into your lap …

I was asked the following question:

I’m 28 and just came into some money (8 figures). About 70% is invested in stocks and the rest is cash. I don’t want all the money tied up in stocks. Should I buy apartments or land and build my own apartments?

Now ” 8 figures” is a lot of money … somewhere between $10 million and $99 million; I imagine, more than enough to retire on for any of my readers.

I retired at 49 years old having made $7 million (in 7 years), and had no desire to continue growing my money.

In fact, there’s two things to consider:

1. You can retire very happily on $10 million, and

2. There’s very little likelihood that whatever set of circumstances took you to, say, $10 million will be repeated.

In other words, if you are lucky enough to cash out a life changing amount of money, it’s time to go into ‘lock down mode’ with your money …
So I told her that this was very much the position that I was in, with three key exceptions:

1. You are a lot younger (I was 49; you are much younger)

2. I put $6m cash into my house, you won’t be that stupid

3. I embarked on an active asset management strategy, when I should have aimed for passive much sooner.

This means that I own a house, some real-estate developments, a couple of businesses, and I invest in startups.

Whilst fun & interesting, sometimes, they do nothing to improve my standard of living (ie I already have enough), and mostly & unnecessarily increase stress.

Instead, this is the strategy that I am slowly putting in place now, and the one you should begin with.

a) Stocks are too volatile as a retirement portfolio.

You will suffer mentally when your portfolio drops 10% in a single day … then, keeps dropping. It’s fine when it’s sitting in your 401k & you can tell yourself: “it’s OK, the market always bounces back & I still have my job”.

I have a friend in a similar situation to you; he sold his business and keeps 100% in stocks: he has watched his net worth halve 2 or 3 times since he sold his company … he has not enjoyed that ride.

b) Property is the right place to keep the bulk of your portfolio; but buy to own 100%, live from the income; and, never plan on selling.

Sure property can also correct – Hawaii has been victim of that, more than once – but, in every correction, people still need somewhere to live and must pay rent. Since you are never planning on selling, however, the notional value of your property at any specific point in time becomes moot.

c) Here’s how to put it all together:

1. Keep your cash in place for now. Instead, move your stock market holdings into real-estate. How much you move, and how quickly you move it depends on how bullish you are on the stock market.

I would be comfortable with a max. of 20% or 30% of my net worth in stocks. At the moment, it’s much less, but I still have too many even riskier assets in my portfolio, so my opinion doesn’t count, here.

2. Start buying a balanced portfolio of smaller residential and commercial properties in prime, established areas. Avoid new areas & new (e.g. off the plan) properties. I always buy small, entire buildings (e.g. quadruplex apartment blocks; self-contained office buildings on own title; etc.). Look for current (e.g. modest rehab) and/or future upside potential to increase long-term returns.

3. If you are slightly aggressive, plan to partially-gear these (e.g. borrow up to 50%), so that you can optimize for number of properties owned. Try to make sure that each property is at least slightly cashflow positive, after expenses (incl. mortgage, taxes, repairs, vacancies, etc.).

As you get older, aim to move to 100% owned: no borrowings.

4. After you have become comfortable with owning one or two of these types of rental properties for at least a year or two, you can think about developing your own. This should increase your returns, as you get to keep the developer’s margin & there may be depreciation or other tax benefits.

Warning: developing property is very attractive and very lucrative. In theory.

In practice, it’s also very risky & the great source of my personal stress. When markets turn, developers go bankrupt.

So, here’s the secret:

Only develop real-estate that you can afford to keep.

That way, if you’re having fun and the market is strong, you can sell and do it all over again, but if the market is weak, you simply add the property to your rental portfolio & ride the market out.

5. Aim for a cash buffer of two year’s living expenses at all times.

Since you are young, your expenses do not reflect your likely future expenses. In that case, aim for $500k cash buffer (2 x $250k pa likely future expenses, when you have a family). Double every 20 years, to account for inflation.

Every year, or two, if you have an excess of cash in your buffer, buy – or build – another property. Do not put more money into stocks, unless you plan on keeping it there for 7 to 10 years … even (especially) if the market drops!

6. You will also need to have a plan to buy a proper house (use cash) one day; you could reduce your stock portfolio when the time comes, to further reduce volatility, since you will probably have a family by then and risk will be even more of an issue then, than it is (should be) today.

In all other respects, live like any other person of your age, spending – and living – no more than 20% more/better than your peers. Aspire & create in the same way they do.

Take chances & enjoy life in the knowledge that you have a secret safety net that you can rely on for when times get tough.

Do nothing, though, that could destroy that net, even if you think it might make you even richer in the long-term. That would not be an optimal Life  Decision.

What is the quickest way to pay off debt?

snowballThe common answer is to arrange the debt that you owe either by size (popularised by Dave Ramsey as the Debt Snowball) or by interest rate (see Debt Avalanche Definition | Investopedia).

But, both of these methods are flawed because they incorrectly assume all debt is bad (see Good Debt Vs. Bad Debt), but this is only true before you take on debt.

But, once you have taken on debt, debt is either cheap or expensive and requires a whole new way of thinking …

There’s an old adage that says a penny saved is a penny earned.

Well, this is also true for debt, where the currency is not pennies, but interest rates:

A percent saved in interest is exactly the same as a penny earned in interest.

This means that you should sort all of your debts and all of the possible ways that you could earn interest on your money in order of interest saved or earned.

It would work something like this example:

I still owe $1,487 on my credit card at 19% interest

I still owe $5,352 on my auto loan at 11% interest

I can invest my money in a low cost stock Index Fund and earn 8% return

I still owe $142,694 on my home loan at 5% interest

I still owe $11,223 on my student loan at 2% interest

I can invest my money in a CD and earn 1% interest

Notice how this list is sorted by amount of interest paid or interest (return) earned?

So, if you would have cash left over each month after making the minimum payment on each of the loans, instead of simply keeping it in the bank (earning 0% to 1%) as most people would do, this table makes it very easy to …

Pay off your expensive debts quickly and safely earn a much higher return on your investments:

Step 1: Instead of making the minimum payment on your credit card, make the minimum payments on your auto loan, your home loan, and your student loan, then

Step 2: Pay as much as you can then spare that month on your credit card. Repeat monthly until paid off.

Step 3: Once the credit card is paid off, move to the next on the list (i.e. your auto loan). Notice how you should have much more available to pay monthly, as you no longer have to make any payments on your credit card – which was your most expensive debt, at 19% interest!

Step 4: Once the credit card and auto loans are paid off, stop paying down debt (this is where the Debt Snowball and Debt Avalanche & all other ‘pay off all debt’ strategies fail), instead:

Step 5: Continue to make the minimum payments on your low interest home loan and student loan, and pay as much as you can spare each month (which should be quite a lot, now, as your most expensive loans are now paid off!) into an investment such as a low-cost stock Index Fund. This is Dollar cost averaging into the whole US stock market, and is Warren Buffett’s preferred strategy for non-experts to invest (source: Warren Buffett to Heirs: Just Use Index Funds).

Step 6: Revisit this list every 6 to 12 months (simply resorting your debts owed and invest opportunities into strict interest-rate (paid or earned) order, and follow the steps, starting at the top and working your way to the bottom.

Note: If any of your loans has a term (i.e. has to be paid off by a certain date) and your minimum payments are not sufficient to pay them off in time, simply withdraw some of your Index Fund balance a few days before the loan falls due and pay it off. Then, resort your list and start again.

You will thank me when it comes time to retire …

{Also published on Quora: https://www.quora.com/What-is-the-quickest-way-to-pay-off-debt}

The One Sign You Will Be Rich?

signLooking back on my last 14 or so years, I can tell you that this really is the one sign that you will be rich (according to a guy who runs a successful startup):

Have you thought about what foreshadows who will become truly rich? It’s remarkable how clear the one sign really is when you think about it.

“There are many types of rich — and I am talking about both external and internal rewards. Being rich is about having an abundance of what matters to you most.”

Money and happiness, although complex, are linked says economist Justin Wolfers. Obviously, there are many ways to measure wealth — whether it’s having a $250,000+ salary, volunteering the most time at the local animal shelter, or having the most playtime with your children. Whatever you value, you are rich if you have an abundance of it.

Whilst I agree that ‘rich’ can be measured many different ways – not just in monetary terms – in this blog, I am ONLY talking about getting rich in traditional, monetary terms … in fact, this blog is about reaching at least $7million in 7 years.

So, what is the ONE, sure sign that you – or somebody you know – is likely to become $7million in 7 years kind of rich?

So, here is what I believe predicts who will be rich.

The one sign you will be rich is that you work harder than everyone else.

Whether your riches are measured in friendships, fitness, talent, or money, those who have an abundance, get it by working harder to secure it.

There is often a backlash against working hard to secure wealth — some may call you a workaholic or a perfectionist. Some may despise your inability to set “work/life” boundaries. And others may still wonder when you will take a “real” vacation. But there is no other way to be great and fully rewarded.

“Don’t let the skeptics fool you, winners just work harder than others think is possible (or want to themselves).”

But it’s not a winner-take-all equation — we all want different kinds of wealth. But those who do work harder are rewarded proportionally.

So, work harder, and enjoy your proportional benefits … after all, you will deserve it 🙂

What are the most important lessons to learn about personal finance?

Screenshot 2014-05-21 13.38.29Everybody has an opinion about the most important financial lessons that you can learn about personal finance. Just look at how many personal finance blogs there are [Hint: over 7,000 are listed] … and, here I am adding one more blog to that long list.

What do these blogs suggest? What do they say are the most important lessons that their authors have learned along the way?

Is it to avoid debt? Probably [here are 50 blogs just focussed on debt reduction].

Perhaps, you need an emergency fund? Of course [Googling “emergency fund” brings up 1,050,000 results].

How about spending less than you earn? Naturally [Googling “spend less than you earn” brings up 844,000 results]!

Sure, each of these can be important …

… equally, each of these can actually hurt you!

It all depends on what your ultimate goal is. For me, it’s to live my Life’s Purpose, but let’s just wind that back a little to a more generic goal – one that doesn’t require a degree in philosophy to understand:

The most important financial goals are:

1. Satisfaction – having sufficient money on hand to satisfy your most important needs, and

2. Security – having sufficient surety that your most important financial needs will always be met.

Think about these carefully, as they appear to be similar … but, they are not the same:

One (satisfaction) points to understanding your true needs (physical, environmental, emotional, etc.) and ensuring that you have sufficient income to provide for them, whilst the other (security) points to forward planning of the cash-flow required now, whilst you are working, and in the future, when you are not.

And, financial satisfaction & security is only really achieved when you have:

1. Sufficient money invested to safely fund your required lifestyle (not to be confused with your current lifestyle) – by a date of your choosing and for the rest of your life – without needing to work, and

2. Sufficient cash buffer to ensure that you can maintain that lifestyle for a reasonable period should something go wrong (market corrections; real-estate vacancies; etc).

EVERYTHING else that you do (financially-speaking) has to take you closer to achieving the above.

To illustrate the importance of this, let me give you three examples:

1. If you are young (say 25), happy to work in your current profession for the next 40 years, and living a frugal lifestyle is sufficient to satisfy your needs for the rest of your life, then financial security can be easily achieved for you simply by saving the equivalent of half your current after-tax salary (indexed for inflation) until you retire.

Of course, it would help if you avoid piling up debt, and put in place the necessary insurance (incl. an emergency fund), in case of any glitches along the way; in any event, most such issues will likely be nothing that another 4 or 5 years of hard work can’t resolve.

2. If you are in your 30’s or 40’s, entrepreneurial, and have desires in life that only early retirement can satisfy (e.g. you want to be a full-time artist; writer; traveller; and, so on), then you simply won’t be able to save enough to maintain the security of your lifestyle when you stop work in 5, 10, or even 20 years (even if you somehow manage to save 25% – 50% of your salary, accumulate no debt, and build up a huge emergency fund).

So, you will need to take my path: focussing on growing income first, then saving second (e.g. simple math shows that investing 25% of $250k a year will get you much further than saving 50% of $50k a year). Starting a business and actively investing as much of the proceeds as possible into real-estate, stocks, and bonds (rather than in your own lifestyle) has a better chance of taking you to an early, self-sustainable retirement [a.k.a. Life After Work] than any amount of debt reduction, emergency fund building, and so on.

3. If you have retired early (or late; it doesn’t matter), you are pretty much stuck with whatever level of lifestyle you have been able to satisfy from the retirement nest egg that you have built up … now, the main financial goal you need to focus on is security.

My recommendation is to now focus purely on capital protection and income:

Purchase real-estate outright and live from 75% of the net proceeds, and keep 2 years cash as an emergency fund, or purchase inflation-protected federal treasuries. Forget stocks; you will put too much strain on your heart and psyche as you watch your net worth double and halve every 7 to 10 years. That’s pretty much it.

So, when people tell you their ‘Top 10 Strategies for Financial Health’, ignore them …

… any such set of strategies is meaningless unless you can first put them into context:

How do they help you achieve your desired level of financial satisfaction and security?

I am 21 and clueless …

Screenshot 2014-05-21 12.37.01This is quite typical of the types of questions that I receive from time to time:

I’m 21, and am clueless about finance. I want to start up a business at my mid 20s. Should I opt for endowment plans or unit trust?

The first thing you’ll notice is that there are no further details, as though there’s a ‘pat’ answer for every clueless 21 year old.

Still, let me suggest the following if you are 21 years old and also want to start a business ‘one day’:

1. If you consider yourself clueless about personal finance, start by reading everything you can.

Since you are young, start with I Will Teach You to Be Rich – I was weaned on a diet of Rich Dad Poor Dad, The Richest Man in Babylon, and so on …

Warning: The important thing to note is that these books are only to whet your appetite, they will  NOT make you rich … once you reach a certain point, much of the advice will have to be discarded.

2. If you want to start a business in your mid-20’s the best way to prepare is by starting one now:

It doesn’t matter if the business is successful or not, the idea is to learn by doing.

While you are studying, you can easily start an online business: become an eBay seller; start a drop-shipping business; write a blog about your passion (or, perhaps about your financial journey) and package up some of the posts into a series of information products that you can sell.

3. If you are worried about company structures, don’t!

Just get started … and with your first $1,000 in savings (from 1.) and/or earnings (from 2.) see an accountant and do what they suggest … this isn’t the place for such technical advice.

If you do these simple things, you will be financially better off than 99% of your peers within years, if not months, and should remain so for the rest of your life.


Because they will remain clueless, whilst you will not 😉

Advice for a new multimillionaire …

shoppingI realized that I’ve been talking a lot on this post how to become a multimillionaire, but I haven’t talked a lot about what to do when you get there!

Let me rectify that right now: for my first example, take this young (and, new) multimillionaire:

What advice can you give me, as a new 32-year-old multimillionaire, that you wish you had known at that age?

Firstly, I told her, don’t overestimate your wealth …

Spectrum (a Chicago-based consultancy that specializes in understanding the High Net Worth individual and family) surveyed a number of people whose net worth was in the $1m, $5mill, and $25m+ ranges about how much money that they would need in order to feel wealthy.

Almost invariably, the answer was: “about double”.

Having lived through the ups and downs of wealth, I think I understand the reason: wealthy people spend capital. What they should be spending is income.

That’s another way of saying that it’s very easy to live beyond your means no matter how much money you have.

Here’s how to control your wealth:

1. Take your capital and divide it by 20. That’s roughly how much you have a year to live off (if you’re going to live on bonds and savings, well, divide by 40 instead).

2. Invest 95% of the capital as though it’s the last money that you will ever see (because, it most likely is).

3. Be Rent Wealthy, not Buy Wealthy. Rent Wealthy means that you rent what you need: want to holiday in Aspen? Rent a villa … but do not, under any circumstances, buy one. Want to travel? Go First Class but do no buy the plane!

[Note my rule on personal ‘capital purchases’ (eg houses, cars, boats, etc.): only buy something when it makes absolutely no sense not to]

4. How you invest your money during Life After Work (a.k.a. early retirement) is VERY different to how you might invest your money while you’re still trying to build your fortune:

– Pre-retirement investments include: businesses, francises, property development, share trading, and so on.

– Post-retirement investments include: TIPS (inflation-protected bonds); dividend stocks; 100% owned commercial real-estate, and so on.

Not many people can make the mental switch from high-flying entrepreneur/investor/big-wig to conservative investor … in order to survive post ‘Your Big Windfall Event’ you’re going to have to make the switch.

Debt free or financially free?

A recently-graduated student asks:

What would be a better investment than paying off $30K of subsidized low-interest student loans?

Money available: 30k
Interest on subsidized student loans: 3-4%
Principle: 30k

Do I pay them off, or look for a better investment, and keep the spread? What would be a better investment?

If you’re also trying to decide whether you should pay off debt or start investing, here’s what you need to decide right now:

Do you want to live debt free or do you want to live financially free?

If you choose the former (debt free), you may make some GREAT investments: eg paying off your 19% credit cards (probably the best investment you will ever make in your life; avoiding this kind of debt will be your second best investment).

But, if you blindly pay off ALL of your debt, you will also make some TERRIBLE investments: eg paying off your student loans will only ‘return’ 3% – 4%.

So, let’s list all of the debt (and their interest rates) that you may have on one sheet of paper, and all of the investments that you may like to make – with their likely (historical) returns – on another.

Now, on a third sheet of paper, put the items from BOTH other lists into one new list, strictly in descending order of interest rate and/or return.

THAT’S where you should allocate your money … from the top down.

Here’s a practical example for you:

Your current student loans are costing you 3% – 4%, and I presume you have no other debt (or, I assume you would have mentioned it).

The Dow Jones (i.e. the top end of the US stock market) has NEVER had a 30 year period where it has returned less than 8%.

So, provided that you are in this for the long term …

Put your money into a low-cost index fund, until you learn the skills to reliably invest at even greater long-term returns than 8%.

What do you do with the student loans? Pay them down slowly (safest) or let them sit until you have to pay them off (more risky).

Now, that’s how to start the process of becoming financially free.

How lucky are you?

luckyMy son and I had a great time in Washington (where he was competing in a student entrepreneurship competition); the life of an entrepreneur can often be a lonely one, so it was good for my son to meet others following the same ‘student entrepreneur’ path.

The trip got me thinking about the interrelationship between ‘luck’ and ‘success’ …

It’s clear to me that the most successful – and, wealthy – people of all ages are indeed lucky … certain things had to go ‘just so’ in order for that big breakthrough to be made.

BUT, I think the luck factor is a rear view mirror effect

… that is, if you position yourself for success, the luck will come but you won’t know exactly when or how.

Richard Wiseman a researcher in the field of luck (he wrote a series of books on the subject) says that lucky people generate good fortune via four basic principles:

1. They are skilled at creating and noticing chance opportunities

2. They make lucky decisions by listening to their intuition

3. They create self-fulfilling prophesies via positive expectations

4. They adopt a resilient attitude that transforms bad luck into good

I’m not sure that this is the same as visualization techniques (a la The Secret), I just think it’s a difference in attitude.

In this context, Richard gives some advice on how to turn your luck for the better:

Unlucky people often fail to follow their intuition when making a choice, whereas lucky people tend to respect hunches. Lucky people are interested in how they both think and feel about the various options, rather than simply looking at the rational side of the situation. I think this helps them because gut feelings act as an alarm bell – a reason to consider a decision carefully.

Unlucky people tend to be creatures of routine. They tend to take the same route to and from work and talk to the same types of people at parties. In contrast, many lucky people try to introduce variety into their lives. For example, one person described how he thought of a colour before arriving at a party and then introduced himself to people wearing that colour. This kind of behaviour boosts the likelihood of chance opportunities by introducing variety.

Lucky people tend to see the positive side of their ill fortune. They imagine how things could have been worse. In one interview, a lucky volunteer arrived with his leg in a plaster cast and described how he had fallen down a flight of stairs. I asked him whether he still felt lucky and he cheerfully explained that he felt luckier than before. As he pointed out, he could have broken his neck.

Hopefully, reading this blog is one giant step along the path to making you a lucky person, too 🙂

Speculating on stocks; how much is OK?

Twitter IPOAs I mentioned in my last post, my 19 y.o. son’s online business is doing quite well …

… well enough for him to start thinking about investing in stocks. Or, real-estate.

But, right now, he’s thinking mainly about stocks.

Unfortunately, his thoughts are more towards Tesla and Twitter than GE and Unilever.

At least, he knows they (TSLA and TWTR) are speculative 😉

So, this is how the conversation went:

AJC Jr: I want to invest in Twitter. How much should I invest? I have quite a bit set aside …

Me: How much you have to invest is the least important part of your decision-making process.

AJC Jr: Oh! What’s the most important part, then?

Me: Well, son, you’re considering speculating in a technology stock that could go in any direction. How much to invest actually depends mostly on how much you’re prepared to lose?

AJC Jr: Hmmm. In that case, I think I’m prepared to lose $10k.

Me: OK. Now, how far do you think the stock is likely to fall.

AJC Jr: I think it’s going to go up!

Me: Of course you do 😉 BUT, if it does fall, how far do you think it will go … worst case?

AJC Jr: If I wait for a while – for all the IPO hype to die down – and buy Twitter at more reasonable $30 a share, then I think the most it will go down is $10.

Me: In that case, if you are prepared to lose $10k and you only think the stock will drop by 1/3 worst case, then you could invest up to $30,000.

AJC Jr: But, I could afford to invest a lot more in stocks!

Me: Sure! Just not in risky stocks … and, not more than $30k in Twitter. Now, take look at this stock chart for a nice, safe, boring trash dumping company I’m considering investing in …

When investing, decide if you’re in it for the long-term, or if you are simply blindly following some boom/bust tech trend; if the latter, look at how much you’re prepared to lose and make your decision on how much to invest based on that.


The New-Age Lemonade Stand …

Lemonade StandPeople think my son is following in his father’s footsteps …

… but, I didn’t even think about beginning my entrepreneurial journey until I was 26 (and, didn’t actually start until I turned 30).

My son, on the other hand, started his entrepreneurial journey when he was 12.

Whereas most children begin by starting a newspaper delivery round, or opening a lemonade stand – although, at age 10, he wanted to start a cake shop outside his grandmother’s house (naturally, she would bake, he would sell) – my son was a little different:

At 12 years old, AJC Jr came to me and asked for $50 to start his new business on eBay. He offered me 49%. I accepted, just to see what would happen.

And, something did happen: a week later a package from China arrived at our front door, and over the next week a few smaller packages left the same way.

Two weeks later, my son came to me and said “here’s your $50 back” … he bought me back out!

[I didn’t have the heart to tell him that it doesn’t work like that. That’s probably the only non-commercial assistance that I’ve given his business in the last 6 years].

Since then, after growing his eBay store for 3 or 4 years, my son ‘graduated’ to an online service-based business that nets him in excess of $60k p.a. (turning over $100k++ p.a.) and has bought him a car whilst still in high school.

He contracts programmers in India and has 2 full-time customer service contractors in Manila. One of them just sent him a Christmas present and a card thanking him, saying that – because of my son – he can now fulfil his life ambition of opening up his own coffee shop.

Not only is my son setting up his own life, he’s changing other people’s lives already … and, he’s just finished high school.

With luck, and your encouragement and support (but, NEVER, EVER push) your children may embark on a similar journey … after all, the barriers to starting a business (i.e. by going online) have been lifted.

Why should your entrepreneurial child start a mere lemonade stand, when any child can now start an online marketplace for anybody who wants lemonade and anybody who can make it (or supply the ingredients and know-how)? 😉