Month: July 2014

The Sacrifices and Rewards of Gaining Financial Independence


Maybe financial independence isn’t for you.  If you aren’t willing to limit your home purchase price to what you can afford with a 15-year fixed rate loan, you aren’t ready.  If you need to have a new car every few years because you like the prestige and new car smell, it’s not for you.  If you want to go to resorts all over the Caribbean while you’re in your twenties and look good in a bathing suit, it’s not for you.  If you absolutely need to have every cable and movie channel there is while you’re in college, it’s not for you.

Well, that’s not quite true.

Actually, getting to financial independence doesn’t require you be perfect; it just requires you be better than average and take advantage of the tool you have – your income – to reach the goal of financial independence.  You might be able to have some of the things listed above, but only if you make enough money to take care of the important things first and still afford them.  You can’t be buying new cars without first putting away 10-15% of your pay for retirement.  You can’t have the expensive phone plan without saving regularly for your children’s college.  You can’t be eating out every day for lunch without putting a few hundred dollars away each month for investing.  These are the things you need to be doing to become financially independent.

I’ll periodically get a comment that the strategies I outline are not realistic.  People can’t get a reasonable home for that price.  They need a new car for work because they drive clients around.  They really enjoy travel and want to get out while they’re young.  Understand that many of the tactics I put forth are things you could do to get you towards financial independence faster.  Some suit your life, others do not.

The trick is to be doing enough and making the sacrifices you need to make to get to your goal.  How fast you get to that goal and how the status you’ll have depend on what you are willing to do to get there.  Personally I would not give up eating dinner with my family and being at the kid’s activities to work a second job, but doing so would certainly build my portfolio faster.  Some people may think it is worth the sacrifice, or perhaps it is the only way they can get to financial independence with the income choices they have.  Some people take jobs for a period of time in their lives where they work 80-100 hours a week to build up some cash, and then quit those jobs and take a more reasonable schedule once they’ve gotten over a financial hurdle.

There are also emotional reasons that go beyond money.  Maybe you want to drive an expensive sports car when you are 22 and the ability to do so is worth making all kinds of payments.  Maybe you want to travel the world while you are young and able to do things you can’t when you’re older.  Maybe you want to go to an expensive private college just so you can have the experience of doing so.  Just realize that doing so comes with a cost, so don’t be surprised when you are 45, the car is long gone, the trips are but a memory, you are still paying off the student loans and you have no money in the bank.

There are huge advantages to financial independence.  You don’t need to worry about your job because you can pay for everything even if your job vanishes, allowing you the time to find the right next job instead of needing to take whatever comes along.  You don’t need to worry about when bills are paid because you have plenty of extra cash to cover the float until the next paycheck or dividend check.  You can take more vacations, buy more cars, and send your children to expensive private colleges and have these things only be a small fraction of your income because you have so many assets adding to your income.  You’ll also pay a lot less since you won’t be paying interest on them and you might even be able to get a cash discount, so you’ll get to use your whole paycheck.

So how do you know if you are doing enough to get to financial independence?  Well, the growth of money is really quite predictable, especially with the number of online calculators now available:

1) See how much you are putting away in your 401k and plug it into a calculator to see what you’ll have if you retire at 60, 65, and 70.  Assume a return of about 12% if you are investing mainly in equities (stocks).  If you aren’t happy with the results, see where you can contribute more.

2) See how much you will have in your personal, taxable investment account.  Once again, plug the amount you are investing each month into an online calculator and see where you will be at 40, 50, and 60.  Maybe see when you will make your first million, or when you have enough to stop working if you wanted to.

3) Look at your children’s college costs and see how they compare to what you are putting away.  If the two won’t meet up, see what you can do to put more money away.  Once again, see if there are things you can cut to free up more cash to save and invest, or see if there are ways you could raise your income, at least for a period of time.  Maybe see if you can pay down some debt with a temporary second job and free up cash that way.

Some people may still say that they are not willing to give up the things needed to get to financial independence.  That’s a choice that is made.  Just realize that you have the choice and look at the longterm impacts of your choices instead of the short-term sacrifices.  You won’t get to financial inpendence through hoping.

Follow on Twitter to get news about new articles. @SmallIvy_SI.  Email me at VTSIOriginal@yahoo.com or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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BJ’s Restaurants (BJRI) Takes a Jump


BJ’s Restaurants, Inc. (BJRI) took a jump Friday as earnings came in better than expected.  The shares were up more than $4 per share, to almost $35 per share.  This is nice to see because I have quite a few shares of BJ’s scattered between my regular and retirement accounts.  I have also been planning to write covered calls on some of the shares, but the price has been too low.  I may take advantage fo this jump to write some calls on Monday.  I could probably sell the August $35s for $0.80 per option, or $800 for 1000 shares.  That would be a return of $800/$35,000 = 2.3% for the month, or about a 27% annualized return.  Then again, I may just sit pat since I usually find I do better if I stay long than if I write covered calls.

BJ’s is one of my longterm, core holdings, despite it not getting very much love until Friday.  Even after the jump, one columnist on Motley Fool didn’t think much of the move.  The reason that I like BJ’s is that they have a great business that has been successful at increasing earnings, plus they have room to expand.  I therefore plan to hold it both in good times when all of the newspapers and investing sites are recommending it and during the down times when everyone is panning it.  I don’t know when it may make a big jump like it did Friday, so trying to jump in and out of the stock would be very risky.

During down times I accumulate more shares.  I have faith in the business, so when the shares drop and become inexpensive, I buy more.  I may sell a few shares, or write covered calls on some of the shares I hold, if the price shoots up to the point where it is expensive relative to expected earnings.  I still keep a core position, however.

So would I ever sell?  I follow the annual reports and watch the commentaries in Value Line Investment Survey, which come out about every three months for BJ’s.  I don’t worry about short-term impacts like dips in the economy or small missteps.  I see what management and Value Line thinks of the longterm prospects.  As long as it looks like the company will continue to grow, I’ll hold on.  If it looks like they have grown about as much as they will, or if it looks like a new management team is changing the fundamentals of how the company is run, I’ll probably sell out.  Otherwise, I’ll stay in, taking out money here and there.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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Sometimes A Lagging Investment Return is Good Enough


I always hate it when I look at the returns in my 401K because, while they may be really good some periods, they aren’t as good as they could have been.  I have my 401k funds invested about as follows:

15% Large Cap Index Fund

20% International Index Fund

15% Large Cap Value Fund

15% Mid Cap Index Fund

10% Small Cap Index Fund

10% REIT Fund

7% Developing Markets Fund

8% Convertibles Fund

Note that I currently don’t hold any bonds, since I think interest rates have nowhere to go but up, making bonds risky.  Instead I have the REIT fund and the convertibles fund that provide investments somewhat uncorrelated to the equity investments and which also provide some income to soften the blow during down markets and provide return when the markets are stagnant.

Lately the small caps and mid caps have trouncing the large caps.  I therefore have 25% of my portfolio going up 35-45% per year, while the rest is only going up by 15-25% per year.  Looking at this, I can’t help but wish the large caps were doing as well as the small caps, or that I had a lot more in small caps.  International also did badly earlier in the year, although it has recovered somewhat lately.

These feeling of wanting to chase returns are natural, but miss the whole point of diversification.  It is true that I am not doing as well as I would have been if I had put 100% into the small caps fund.  Still, I am doing better than I would have been if I had invested it all into large caps, a bond fund, or the international fund.  Because I have some money in small caps, I do better than I would have if I didn’t hold any small caps.  Likewise, if large caps do well over the next year as analysts expect them to do, this becoming an old bull market where large caps tend to outperform small caps, I’ll do better than I would if I were entirely in small caps.

In fact, small caps have done so well that many analysts think they may be due for a correction or at least a breather while they wait for earnings to catch up to their lofty prices.  It that is the case, I’ll be happy to be partially in large caps instead of being fully in small caps, thinking that the rally will continue for another year.

Because I don’t know which segment of the market will do better this next year, I want to have some money everywhere.  That way no matter which segment is having a good year, I’ll be making money.  If I have two investments, one that makes 12% and the other that makes 20%, if I hold equal amounts of each I’ll make 16%.  This isn’t as good as I could have done if I had invested it all in the second investment, but still  it is a lot better than I would have done if I had been wrong and invested it all in the first investment.

So when investing in a 401K account, or investing a large amount of money in general, sometimes you need to settle for good enough.  The truth is the analysts don’t know what will do the best during any period of time and neither do you.  You always want to have some money in the winning area, even if it means you don’t have all of your money there.

Does this mean you should always have bonds and fixed income investments as well?  No.  While bonds may be the big winners over stocks in some years, over long periods of time bonds don’t perform as well as stocks, and therefore you’ll be giving up a significant amount of income if you are 50% in bonds, say, from the time you are 20 until the time you are ready to retire.  Bonds are for the time when you are nearing retirement and need to worry about wealth preservation more than growth.  Before that, most of your money should be in stocks.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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