Don’t Fall for the Safe Position Fallacy


jehericotopfalls

People like to win and hate to lose.  Basic in the psychology of people who are investing is the idea that if you make money on a position, you have won, but if you lose money, you have lost.  You also see silly ideas like “You don’t lose money until you sell.”

“You don’t lose money until you sell.”  Bad advice.

I’ve found that I’m subject to the same impulses.  When I was younger, I used to sell a stock if I made a certain gain.  For example, I would sell if I made $1,000 so that I could “take a safe position or  “lock in the gain” and eliminate the risk of the position turning south and turning into a loss.  Because I was taking a gain, I had “won,” but if I let the money ride and the stock went back down, I would have “lost.”  Chock one up for the “w” column.  Nevermind that I had to put the money somewhere else and possibly take a loss there.  I was a winner.  This behavior meant that I sold my gainers and held onto my losers.

Because I didn’t want to take a loss, which would then mean that I would “lose,” I held onto the losers, waiting for them to at least get back to the price at which I bought them.   Sometimes I’d hold them and they’d continue on down until I finally sold them in despair or just stopped looking since they weren’t worth enough to sell and pay the commission. Sometimes they would go back up to where I bought in eventually after a year or two of waiting.  Then I would quickly sell because, according to my ludicrous logic, that way I didn’t lose any money.  I didn’t “lose” since I got out what I put into the stock.  Now, in reality, while I had the same amount of money, perhaps a year or three had passed. Those dollars didn’t buy as much as they did when I invested them, so I was still losing money. Even worse than the loss to inflation, however, was the loss of time. I lost the ability to grow my money over those two or three years in a good stock because I refused to sell a loser.  I just ended up even after that time period instead of seeing gains.

After a few years of doing this, selling winners and holding losers, I ended up with a portfolio of stocks I didn’t really want.  I’d sold the stocks that were doing well and probably continued to climb.  I held the bad ideas and the poorly run companies, selling them if they actually turned around just as they started doing well.

In investing, there is nothing as important as time.

If you’re a serious chess player, you know about something called “tempo.”  Controlling the tempo means that you get to choose your moves and your opponent needs to react to what you do.  This keeps him or her from being able to do things that you don’t like.  Someone set back on their heels all of the time can’t throw an effective punch.

Time in investing is important as well.  Investments grow with time, and you make the most during the years at the end when you have the most money.  Each year at the end can mean hundreds of thousands or even millions of dollars in additional wealth.  At the beginning, when you first start investing, it may seem like you have all of the time in the world, so waiting for a stock to turn around doesn’t matter.  Waiting to start investing is even worse.   When you’re young and have fifty years ahead of you, you’ll figure it won’t matter if you wait five years to start investing.  You’re wrong.  At the end, you’ll wish you had just five more years before retirement.

Selling your winners early costs time.  Plus, you’ll still need to put that money somewhere, so you really aren’t reducing risk

When you sell, you need somewhere to put that money.  If you leave it sitting on the sidelines, you are losing time.  You never know when the next huge run-up in stocks will come, and you don’t want to be sitting on the sidelines in cash when that happens.  Selling just because you have a gain may mean getting out of a great company just when they are starting a big climb and putting your money into a stock you don’t like as much.  You might also be buying a stock ready for a fall because it has just completed a big climb and become overbought.

Another strategy is to take a “safe position.”  Here you sell a few of your shares so that you now have gotten out all of the money you invested, leaving a little in case the stock continues to climb.  That leaves you needing to move the money you made “safe” somewhere else, putting it at risk again.  The other choice is to leave the money in cash and be losing money to inflation each year it is not invested.  Why leave a company that is doing well and perhaps you really like to buy into another one that you don’t like so much?

Holding your losers costs time.

Every year you sit holding onto losing positions for them to go back up to where you bought them is a year you could have invested in something that was growing.  There are times when a great stock will go through a sell-off, or a company will drop in price as they reorganize and wait for their industry to recover.  There are also times when the whole industry or the whole economy declines, causing some great stocks to go down in price. Oil producers are in just this position right now, the good and the bad.  These stocks should be held and perhaps your positions added to during the downturn.  This is different, however, than holding stock in a company that is performing poorly and will continue to perform badly, waiting for it to recover.

I did this with Cisco stock, holding from about the year 2000 through about 2012, waiting for it to recover and grow.  I eventually sold the stock I had bought for about $20 at $30 or so.  True, I made a 50% profit, but I should have seen my money double or even quadruple in that period of time.   I lost all of that time when I could have been invested in a growing company instead of an old, tired, bureaucratic company whose time has passed.

Churning is costly.

When you sell a winner, you need to pay brokerage commissions (both for the sale and for the purchase of something else).  You also need to pay taxes on the gain, perhaps at a rate of 25-40% when you include federal, state, and local taxes.  If you stay invested, the money rides tax deferred until you sell.  This means your money, even the money that would have been paid out in taxes, compounds.  Over a lifetime, this could be hundreds of thousands or millions of dollars.  (I use that phase a lot, don’t I.  This is a costly thing to get wrong.)

Got a question or comment about personal finance or investing?  Please leave a comment.

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.

When Investing, We’re Often Our Own Worst Enemies


About five years ago I changed from my normal style of investing, whatever that was, to what I call serious investing.  I now find only the best companies – those that make me really excited because they have a strong history of earnings growth, little or no debt, good prospects for future growth, and a great management team in place.  I then buy a significant position – 500 to 1000 shares – over a period of time, buying on dips and stalls, and plan to hold indefinitely as the company grows and matures.  I’ll often find just one or two stocks in a given industry and concentrate there, rather than spreading out to several companies in the same sector.  I do this in addition to being invested in a diversified set of mutual funds in my 401K and to a lessor extent in my IRA and taxable accounts, just in case I do badly at stock picking in my taxable account.  In 2004 I had probably 20 stock trades to list on my tax return.  For 2014, there were none because I’m buying and holding, letting the money compound tax-deferred.

This strategy has paid off well over the last several years.  Rather than lagging the markets by unknown amounts as I did before (I never really checked that hard), I’ve been beating the market, and by sizable amounts in some years because I’m putting my money into only the best choices.  I’m sure that some years I’ll lag the markets since some years my picks may be taking a pause, having run up in past years, but over long periods of time I’m hoping to pick a couple of stocks that grow like Microsoft or Home Depot and provide 1000% or 10,000% returns over a decade or two.

Another thing I’m doing is buying larger positions.  I found that in the past I would selects a good stock, but 100 or maybe 200 shares, see the price go up maybe 20 or 30 points in a good pick, only to make a few thousand dollars.  Now when I pick well, I can make life changing gains.  I then shift some of that money into mutual funds to diversify and keep the gains I have and let the rest stay with the company that has done well (assuming it still seems like a great company).  Sure, I’ll have some bad picks, but a 100% gain on one stock will wipe out a 100% loss on another (which almost never happens – a 50% loss is more likely).  A 500-1000% gain on a stock will do a lot to make up for bad choices.

In the past, I would also sell fairly often.  If a stock gained enough so that I had made a $1000 profit, I would sell out, telling myself that I was “selling high.”  What I was really doing was selling my winners and keeping my losers, leading to a portfolio full of losers after a period of time.  Now when I buy I plan to stay invested unless the company fundamentally changes and I don’t like the change.  I don’t worry about the economy or the markets because I know I have the best companies that will just emerge stronger than ever.  I plan to let my money compound over years and decades and grow into truly sizable positions.  If something gets too big (meaning that it would hurt me significantly if it went to zero the next day) I’ll sell a few shares and cut the position back down to size.  I might also sell covered calls for a period, although I’m finding that doing so just sets me up for the risk of seeing a big fall in the stock.  Plus, I usually find I would be better off just selling the stock since it may go well above the strike price before the expiration date comes and the shares get purchased.

Given that things are working pretty well with this strategy, you would think that I would be sticking with it, and for the most part I am.  Still, I find myself sometimes reverting to my old ways.  I might see that an old, stodgy company with little opportunity for growth that has a good dividend and buy some shares.  I might buy a hundred or two hundred shares, planning to come back later and pick up more shares until I build up the position, only to forget about it.  I then see the company double in price,  leaving me wishing that I had kept building the position.  

Probably the worst thing I did was my actions last summer, when I decided that I would try to add “protection from inflation” by adding oil and other energy companies.  Never mind that stocks are natural inflation hedges in themselves because stock prices will go up as dollars become less valuable.  These oil development companies were doing well only because the price of oil was high.  I’m not sure how I expected to protect myself from inflation by buying into companies that produce a product that was already highly inflated in price, but there I went.  Most of those positions have seen a drop by 50% or more as oil fell back down to earth and worse yet – the Saudis have made fracking unprofitable and clearly show they plan to keep prices this way until all of the frackers have left the market for good.  Because I diverted from my standard plan, I ended up buying into an overpriced market.  The only good company I bought was Greenbrier, a producer of rail cars, including oil tanker cars.  Because they are more diversified, they have other businesses to support them even if oil shipments from the Dakotas cease.

Another place where people often do themselves in is in their 401k accounts.  If you put 10% of your paycheck into your 401k, invested it split between a large cap fund and a small cap fund, and did this for your whole career, you would never need to worry about retirement.  Unfortunately, a lot of people tap into their 401k accounts after ten or twenty years, end up spending it all, and then complain that 401k plans aren’t as good as pension plans once were.  Note that pensions only provide maybe 5% returns, but people aren’t able to take the money out until retirement.  People are actually far better off in 401k accounts, which can easily provide 8-10% returns, but only if they leave the money alone instead of spending it at 40 or 50 and then starting all over again.  It is the last five years, after investing for 40 years, where the real gains are made.

Got something to say?  Have a question?  Please leave a comment or contact me at vtsioriginal@yahoo.com.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

You Can Beat the Market


Many people try to “beat the market,” which is to say that they try to get a better return than some index such as the Dow Jones Industrial Average, the S&P 500 Index, or the Russell 2000 index.  There are many strategies that are tried, including looking for patterns in the prices of the stocks, buying stocks considered to be undervalued, finding stocks that are going up and buying in, hoping that they will continue to go up, and trying to find stocks that are likely buy-out candidates.  While some people may beat the market for a period of time, these strategies rarely work for longer than a year or two.  If someone actually does find some strategy that works because of some inefficiency in the market or something, other people pile in and the strategy no longer works.

There are a few people who do beat the markets, however.  One of the most famous people to do so is Warren Buffett, but there are hundreds, perhaps thousands of others who have done so as well, although perhaps not to the same extent.  The strategy they use is available to all and isn’t subject to the same issues that dooms others to failure.  Perhaps the strategy also goes against human nature, which wants a quick return, and that keeps too many people from using the same strategy to the point where it no longer works.

This strategy is what I refer to as serious investing.   It is not for those who want to invest for entertainment.  It is for those who want to beat the markets and become financially independent.  It takes some degree of stock picking, but more so it takes discipline and patience.  Lots and lots of patience.  

So what is this strategy?  Here are the steps:

Step 1:  Give in to the fact that you have no control over the markets and what they will do to your portfolio in short periods of time.  Anything you know about a given stock or the economy is already known by millions of others.  Any idea that you have about the effect of this or that on this company or that industry, others have as well and they are making trades at the same time you do.  The reason that great parking space is open is because the guy is parked over the line and no one else could park there either.  If he weren’t parked poorly, it wouldn’t be there when you pulled up.  Accept the fact that the markets will do what the markets will do and you will not outperform the markets by jumping in and out.

Step 2:  Start thinking like a venture capitalist.  Venture capitalist put their money into companies that they think have lots of room to grow.  They also find companies that have a very high probability of success and only buy in if they can get a good price that will allow them for a big return if things work out.  They then put their money in and plan to sit and wait for things to happen.  They don’t make a small gain and jump out.  They wait for the huge returns that make up for the companies that don’t work out.

Step 3:  Invest regularly.  Remember step 1.  You’ll never hit the timing just right.  The more often you invest, the more you average out the prices you pay and improve your cost basis.  Plan on making an initial investment, then plan on buying more on dips and falls.  This means putting aside money regularly so that you can acquire more shares.  

Step 4:  Make significant investments.  If you make only small investments in several different companies, you might as well be investing through mutual funds because that is what you are creating.  Find your best companies and focus your resources on them.  Spread out into different sectors of the markets, but only buy your top pick in each sector.  Larger positions mean much larger profits when your positions pay off.

Step 5:  Only invest when you’re really excited.  Don’t buy a stock just because you have some money to invest or it has a decent dividend.  Find stocks that have great prospects and make you very excited about where they may be in five to ten years.  Develop a watch list of these stocks and then buy the one that have the best price when you have cash available.

Step 6:  Sell when things change or a position gets too large.  If you buy a company because they have a great line of sportswear and then they start selling dress clothes, get out.  Likewise, if a position grows to the point where it constitutes a significant portion of your portfolio, cut the position back to manageable levels and put some of the money elsewhere.

Step 7:  Be in it for the long haul.  Truly great, life changing profits are made over decades, not months.  Why sell out just when things are getting good?  Find a great company that has a great products and room to grow, then don’t worry about the small ups and downs.  Wait for the huge payoff that comes from years of compounding.  

Got something to say?  Have a question?  Please leave a comment or contact me at vtsioriginal@yahoo.com.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Finally – The First Book


Finally, I have completed the first draft of the first SmallIvy Investing Book, The SmallIvy Book of Investing.  For those who have been waiting, it should only be a couple of months now until the first edition comes out.  Things should go fairly rapidly from here as I edit and then find a publisher (from what I’ve seen so far, it may be difficult to find a good book-on-demand publisher, which is a shame given that the technology is there to finally break the publishing monopoly, especially with e-books.  If anyone knows of a good one, please let me know!)  I’m hoping to have both print and e-book copies available by early Spring.

The book provides a lifelong strategy to investing and growing wealth.  Ideally someone will pick it up when they are in their early twenties and use the advice to learn to handle money and invest, thereby becoming financially independent by the time they are forty-five or fifty.  Those at other stages of life who are new to investing or just not doing well with their investments should find it useful as well, however, since it gives a lot of good information on stocks, bonds, and other investments and investing strategy.  Also, while it is much easier for someone who is 20 to become financially independent, with enough determination there is no reason someone starting in their forties cannot be debt free and have a good nest egg by the time they are ready to retire.  It just takes more work.

An outline of the book is as follows:

  1. Investing
    1. Reasons for Investing – growing wealth, maintaining wealth
    2. Assets for growing wealth
    3. Assets for maintaining wealth
  2. Investment Options
    1. Common Stocks
    2. Bonds
    3. Preferred Stocks
    4. Mutual Funds
    5. Real Estate and REITs
    6. Commodities – Gold, Silver, Platinum
    7. Derivatives – Options, Warrants, LEAPs
  3. Understanding Risk and Reward
    1. Investing, Speculation, and Trading
    2. The relative risk of investments
    3. Asset Pricing and The Risk Premium
    4. Risk and Reward of Common Stocks
    5. Risk and Reward of Bonds
    6. Risk and Reward of Real Estate
    7. High Risk/High Reward Speculations
    8. Stages of investing
  4. Investing in your Stage of Life
    1. Factors to Consider
      1. Volatility
      2. Diversification
      3. Time Frame
    2. How the Small Investor can Beat the Mutual Fund Manager
  5. The Investment Strategy
      1. Stage 1– Early Career (Ages 16-30)
      2. Stage 2– Late-Early Career (Ages 31-45) 
      3. Stage 3– Middle Career (Ages 46-58)   
      4. Stage 4– Late Career (Ages 59-70)  
      5. Stage 5– Retirement/Second Career(Ages 70+)
  6. Early Life Investing
    1. Getting Ready for Investing
    2. Setting up an Investment Plan
    3. Budgeting and Saving for Investing
    4. How to start investing in stocks
    5. Dollar Cost Averaging
    6. Stocks or Mutual Funds?
  7. Mid-Life Investing
    1. Rebalancing a portfolio
    2. Shifting from Growth to Preservation
    3. Mid-Life Goals
  8. Late-Life Investing
    1. Getting Ready for retirement
      1. 401K Transfers
      2. Unrolling an IRA
    2. Asset Protection
    3. Income Generating Strategies
    4. Giving Money and inheritance

If interested, please send me an email or leave a comment.  I’ll let those who indicate their interest know when the book is available for purchase.

Once the first book is done, I’m planning to start working on a second book on picking stocks.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @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.

Preparing Children to Handle Wealth


Handle large amounts of money requires a great deal of character.  Perhaps in many ways it is better for a child to start out penniless than to start out with a lot of money.  How many children of pop stars and corporate titans can we think of who live meaningless, empty lives?

If you have been following the advice of this blog and are saving and investing, chances are good that your children will end up with a couple of million dollars in inheritance when you die.  If your children also follow down the same path, their children may be deca-millionaires or even billionaires.  Chances are also good that you will have a million dollars or so by the time your children are ready to leave the home, meaning that they will probably have a good variety of college choices and have become used to a fairly high lifestyle.

Bringing up children in such a way to be able to handle large sums of money starts early.  Part of the training is learning the mechanics of investing and handling money.  One way to do this is to have them start investing small amounts when they are around 12 years old.  Perhaps transfer 10 shares of a company you own to them and have them keep the certificate so they’ll receive the dividend checks directly.  As they get more mature you can establish a uniform gift to minors act (UGMA) account and start to transfer some money to them (while staying under the gift exemption each year) and help them build a portfolio.  Note that eventually they will need to start filing a tax return, so check with your accountant.

As they learn, start to explain the concept of cash flow.  Explain how the cash flow of a normal person sees income come in through work and then go out to liabilities.  Explain that the cash flow of a person who becomes and stays wealthy involves using earnings to buy assets, and then getting income from both working and those assets.  Explain that to maintain wealth, you should only spend a portion of the earnings from investments and reinvest the rest.  Never touch the principle.

When they get to college, they may have a fairly large investment account at that time.  Expect them to make some mistakes, perhaps thinking they can day trade to riches.  Hopefully they will learn their lesson before they lose too much.   If they seem to have matured, you can continue to transfer some funds to them even through college and beyond.  If not, you can wait a bit longer for them to grow up.

If you find that they are well into their forties and still can’t handle money, it might be better to set up a trust for them, perhaps one that pays them a yearly stipend from the earnings.   You could also look at establishing a trust that provides funds for something like the college education of your heirs, a family gathering each year, or some like goal.  Maybe you could provide a nest egg to each of our heirs when they reach the age of 25 or something, just in case one of your descendents is better with money.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @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.

If I Want to Grow Rich, How Wealthy Should I be at 22?


Everyone knows that they will need a lot of money when they retire, yet few people actually save enough when they are younger.  You see, if you can save just a little when you are young it is a lot easier to have enough at retirement than if you wait until you are 55 and try to save every dime.  The reason is the power of compounding.  If you start at 55, you need to earn pretty much every dime through working.  If you start at 20 and invest, you will only need to earn only a few pennies for every dollar you’ll have at retirement.  For example, $2,000 invested today by a 20-year-old will be worth about a quarter million dollars at age 69.  If you just put away about $2000 per year for the first four years you were working, you would be a millionaire at age 70!

The trouble is that most 20-year olds aren’t going to put away $2,000 for retirement.  They are going to spend in on alcohol, or cars, or stuff for their apartments, or a trip to the beach.  They may just spend it going out to eat or at the mall and not really know where it all went.  30-year-olds aren’t that much better.  Instead of alcohol, they’ll probably be spending on things like home improvements, things for the children, cars, and vacations, but they will still not be putting money away like they should.

There is always something that seems more important.  Retirement seems like a long way away.  And having a few million dollars eventually seems impossible when you’re 22.  But you don’t need to have a million dollars when you’re twenty.  You just need to save enough, and then let time and the power of compound interest do the rest.  Today, let’s look at where at should be financially at 22 if you want to be wealthy.

Credit card debt:  $0

It is almost impossible to save money if you are paying 20% interest rates to a credit card.  It is better to never touch a credit card.

Student loan debt:  $0

If you can get through college without piling up a mountain of debt, you are that far ahead.  If you do need to take out loans, at least pick a major that will give you a good chance of paying it off quickly, then continue to live like a college student for a couple of years after you graduate and use your earnings to pay off the debt.  Also, minimize any loans by finishing as quickly as you can and not using your loans to finance dinners out and a lavish apartment.  Think dinners at home, pizza, and a rented room or a small 1-bedroom.

Car Debt:  $0

You can easily have over a million dollars at retirement if you go without a car payment your whole life.  You can buy a very reliable car for $2000-$4000 from a private owner that will last for several years.  If you want, you can save up additional money and trade up in car in a year or two.  The other great thing about cheap used cars is that they don’t drop in value much.  Some people actually make money by buying and selling cars regularly, looking for deals.

Savings account:  $9000

As soon as you can, put enough money in the bank to take care of car repairs, minor medical bills, and other emergencies.  This will keep you from getting into credit card debt in the first place.

401K/IRA: $4000

Start an IRA or a 401K account and start funding it regularly.  While the amounts saved may seem ridiculously low at first, you’ll be amazed how much you’ll have in five or ten years.  The trick is to invest regularly.

Investment Account: $0

At 22, when you’ve just started a job, you need to be concentrating on setting up your emergency fund, putting money away for retirement, and getting a reliable used car.  It’s OK if you don’t have anything to invest yet.  You have time.

At 22, if you can avoid debt, put together an emergency fund, and start putting money away for retirement you will be far ahead of your peers and well on your way to becoming wealthy.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @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.

The Stages of the Financial Life of a Future Millionaire


Millionaires are not normal.  They are not special.  They are not lucky.  But they are not normal.

They don’t accept the “truths” of life.  That you must always have a car payment.  That you should buy the biggest house you can afford.  That you need to use a credit card to build your credit.  That you need to go to an expensive school and take out student loans to succeed.  That rich people have some special connections and that no one in the middle-class can ever become wealthy.

Future millionaires are weird.  They drive old cars and just don’t care what people think.  They bring their lunch and eat at their desks.  They buy modest, unremarkable houses in the established part of town and when they buy them they put down a big down-payment, or pay cash for the whole thing.  They don’t care about having the latest electronic gadgets.  They don’t play golf.  They don’t dress for success.

They know that the way to become wealthy is to spend less than you make and to earn money from their savings.  They receive extra income from investing, rather than paying extra money to credit cards and car finance firms.

The weirdest thing about future millionaires is that they have a plan.  They know where their money goes each month because they tell it where to go.

The stages of the life of a “normal” person and a future millionaire are as follows:

Eighteen:

Joe Normal: Goes to the expensive college, taking out student loans to do so.  Takes out extra loans to pay for meals and an apartment.  Has difficulty choosing a major, so spends 5 or 6 years getting a degree.  Graduates with $50,000 in loans.

Sam Millionaire:  Could go to an expensive school, but chooses a state school because of the low tuition.  Gets as many little scholarships as possible the summer before starting.  Works a part-time job during school and full-time during summers to pay tuition.  Graduates in 3 1/2 to 4 years with a practical degree in something like engineering or business.

Mid-Twenties:

Joe Normal:  Starts his first job.  Buys a new car and a new house with 0% down.  Starts paying student loan debt.  Gets premium cable with NFL Sunday ticket.  Has a phone with the full data plan.  Eats out all lunches and most dinners.  Goes to the bars on the weekends and buys several expensive drinks.  Has no idea where his money goes.  Has no savings and spends every dollar he earns.

Sam Millionaire:  Starts his first job.  Buys a used car and rents a room in a home or gets a small apartment.  Saves up money for an emergency fund and then start putting 15% of his pay into the company 401k plan and an IRA.  Brings most lunches in and eats out about once a week.  Splits the meal and eats the rest for lunch when he does go out.  Starts an investment account once his emergency fund is formed and starts putting extra money into stocks a little at a time.  Knows and tracks and plans for where each dollar goes.

Mid-Thirties:

Joe Normal:  Continues to climb the corporate ladder and make more money.  He buys new cars every couple of years and has made some renovations to his house.  He has also acquired a timeshare that he never seems to be able to visit.  He has two children and spends most meals eating out, feeling too busy to cook.  Despite making almost $100 thousand per year, he has only a couple of thousand dollars in the bank.  He has amassed $20,000 in credit card debt due to all of the unplanned expenses like car repairs and home repairs, along with a few vacations and meals out he has put on the cards.  He also still has $35,000 in student loan debt, owes $30,0000 more on his home than it is worth due to a HELOC he used to pay for the renovations.  Any equity he has amassed has been used to pay down credit cards.  He has also cashed out his 401K to pay down debt and take a vacation, despite the 50% in taxes and penalties he paid to do so.

Sam Millionaire:  Sam moved into his first house five years ago, paying a 50% down-payment and taking out a 15 year loan that he can easily afford.  He has already amassed about $100,000 in his 401k.  He still drives used cars, although the quality has increased considerably, having enough income beyond his expenses to easily pay for four-year old cars out of his savings.  He also has about $100,000 in investment accounts, from which he can float home repairs and other expenses.  He also has two children, and has created college savings accounts for them into which he puts the maximum each year.

Fifty:

Joe Normal:  Despite making a couple of million dollars in earnings, has no real savings to show for it.  Still has some student loan debt, and continues to have credit card, mortgage, and car debt which are taking about $15,000 per year from his income in interest payments.  Both children have completed college and are coming out with tens of thousands of dollars in student loan debt.  At this point Joe Normal is starting to get a little worried about retirement and start contributing what he can to his 401K, which has been decimated a couple of times and therefore only has about $20,000 in it.

Sam Millionaire:  Sam made his first million at about 43 and has since doubled that split roughly between retirement savings and his other investments and assets.  He has no debt and his earnings from investments are more than enough to pay for all of his expenses, although he continues to work anyway because he likes his job (or alternatively, he starts a different career, using the freedom gained from his investments).  He paid off his first home loan at 39, several years early, and continued to save.  Deciding he wants to have home in a different location with more amenities, he buys a more expensive home, paying cash.  He also buys a cabin as a weekend getaway.  He thinks about renting it out but decides that it is not worth the hassle.

Because of the educational IRAs and other investments his children have graduated without student loans.  In fact, he was able to provide money as gifts during their high school years and set up investment portfolios for them that allowed them to pay for a lot of their college expenses with the earnings.  When they graduate, they already have a good cushion that provides a more than adequate emergency fund and will give them money for a down payment on a house.  Because they have become accustomed to investing they naturally contribute funds from their jobs to grow the investment account.

Sixty:

Joe Normal:  Joe realizes that the best he can hope for in retirement is a savings of about $200,000, which will only provide about $12,000 per year in income, and realizes that this will require a drastic reduction in his lifestyle.  He works all of the extra hours he can to save as much as possible.  He takes much more risk in investing that he should because of the small amount of time left.  He decides he will need to work until he is at least 70, and possibly beyond, and hopes that he is healthy enough to do so.

Sam Millionaire:  Sam is now worth about $5 million and knows that he will be worth about $15 million by the time he is seventy.  His wealth is split among the properties he owns, a stock account, a bond portfolio, and a couple of savings accounts.  The earnings from his work seem trivial compared to his investment earnings, but he keeps working because he really likes his work.  He has also found that not worrying about his income has allowed him to pick the work he likes rather than doing what is needed to climb the ladder.  He takes a nice vacation each year, paying cash generated by an investment account he has set up specifically for travel, and also spend weekends frequently at his cabin.  He has also made several improvements to his home, again paying cash each time which has allowed him to get discounts from contractors.  He also gives generously to charities and individuals.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @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.

What is Wealth?


A few days ago I heard on the news that because home prices were starting to rebound, people were feeling wealthier and therefore were spending more.  While I’m glad to see home prices rebounding a bit (although now more people can actually afford a home), the fact that people were “feeling wealthier” shows that there is a misconception of what wealth is.  Your home going up in value does not necessarily make you wealthier, and it certainly is a bad reason to start spending more money.

Wealth is the ability to create income without personal labor.  A large stock portfolio is wealth.  A successful business is wealth.  Even a large amount of cash, because you can invest it and create income, is wealth.

Home prices are a bit different.  In general, home prices increase with inflation and replacement cost.  This means that if your home goes up in value, so do home prices everywhere.  Just because your home is now worth more therefore does not make you wealthier because you need a place to live and therefore cannot really use the value of your home.  It is locked away and while the value may be interesting, it really doesn’t affect the amount of money you have available to spend.

There are times that increases in the value of your home can make you wealthier.  For example, if you live in an area where prices increase more than elsewhere and you are willing to sell and move to a lower cost area, increases in hme values can increase your wealth.  Another example is if you are in a large house which goes up in value and are willing to sell and buy a much smaller house and invest the difference.  You can then free up some of the equity you have and use that money to generate income.  Most people will not do this, however, so increases in home values do not cause their ability to generate income to increase.

My main point is that just because your home increases from $250,000 to $300,000 doesn’t mean you should go out and spend more.  Your income did not increase just because your home’s value increased, and because of this the amount you will have for investing to build wealth will decrease if you do so.  For “normal people” who spend all they take in normally, doing so will cause then to go further into debt and actually make them less wealthy.  (Taking on debt makes you less wealthy because you need to generate more income before you have any money to spend.)

It is good to own a home since it allows you to reduce your monthly obligations (the amount of money that is already allocated before the month begins), which is particularly important as you enter retirement and see your income from work disappear.  Spending levels, however, should be guided by how much income you have from different investments and not by the value of your home.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @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.

What Wealth Building and Weight Loss Have in Common


Getting out of debt, and then building wealth, and weight loss really have a lot in common.  Most people weigh more than they want.  They also have a lot less money and a lot more debt than they want.  It isn’t that they don’t want to have a healthy weight or have financial security.  The problem is that their lifestyle doesn’t match their goals.

People know what causes them to be overweight.  They eat out too much.  They eat too much when they eat out.  They have that large soda with dinner instead of a glass of water.  They eat desert when they aren’t hungry.  They don’t exercise as much as they should.  And yes, some have a harder time than others due to their metabolism.

To maintain a healthy weight requires a lifestyle in which you take in only as many calories as you need and get exercise.  Your meals need to be the right size.  You can’t be getting a lot of extra calories at happy hour or at potlucks regularly.  You can’t be stopping for 1500 calorie coffee drinks twice a week.

People also know how to build wealth.  At the very least, you spend less than you make and put some into savings.  You put money into your 401K (at least 10%, 15% would be better) and you spread it across 4-5 mutual funds.  You know that the kids are going to want to go to college, so you drop $2000 per year per child into an educational IRA or a 529 (just put $340 per child away each month like any other of your bills).  If you are able, put a bit more for college in a separate savings account because you know college will be expensive.  Maybe even create mutual fund accounts that you will give to your kids when they leave the home to help them get started with an emergency fund (check with your accountant to get the tax planning right).

If you’re a bit more motivated, you put some money into an individual IRA.  If you’re really motivated, each time your savings account reaches about $15,000, you send $5000 off to a mutual fund, or even start buying a few individual stocks of solid growth companies that have shown they can make money and have lots of room to expand.

With weight loss, many people go on diets, maybe lose some weight, but then it all comes back again within a year or two.  The trouble is they stop exercising and go back to their old eating habits.  There is always an excuse.  To keep weight off and live at a healthy weight you need to have the lifestyle that will maintain that weight.  You can’t just go on a crash diet and expect to keep the weight off.

Likewise, you can’t stick $50 in a savings account one month but then pull out the credit cards each time there is an excuse.  You can’t take out more and more debts each year and then expect to work overtime for a few months and have enough money to last you through 30 years of retirement.  You need to plan and budget your expenses so you can see where the money goes and make sure you are doing the things you need to do to reach your goals,  You need to live below your income each month, not just during the fall or spring.  You need to be putting money away religiously since it is a lot easier to grow wealth when you have interest on your side instead of against you.

For keeping a healthy weight or a healthy fiscal life, you need to change the way you live.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @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.

Are you Investing or Speculating?


Ask SmallIvy:  Please send investing questions to vtsioriginal@yahoo.com or leave in a comment.

If you are looking for entertainment, speculation is great.  You will not make much money, and you will spend a lot of time, but you’ll have some great stories to tell.  There are a lot of people (especially men) who engage in speculating.  Just like gambling, there is a certain rush that comes from speculating.  When you take a chance and win, you feel good about yourself.

Unfortunately, speculating is not a good way to make money.  While there will be some wins, there will be a lot more losses.  Also, when you win, you’ll pay taxes and fees on your winnings.  When you lose, you won’t receive anything for your losses and you’ll still need to pay those fees and commissions.  Just like playing red and black on roulette, the house will slowly eat away at your bank account until there is nothing left.

In investing, the odds are in your favor.  True investing is really quite boring.  It involves slowly building up assets and holding them indefinitely.  While it will not be the talk at the bar, it is the way to truly become wealthy.

Part of the issue, though, is that people don’t always understand the difference between assets and speculations.  Right now you hear people talking about investing in gold.  You hear that your home is your biggest investment.  You need to get a car wash weekly to protect your investment in your car.  Perhaps you’ve heard a pitch to invest in a time share, or Iraqi dinars, or a new wardrobe.

To tell the difference between and asset and a speculation, look at the way in which money is made.  As asset is something that can be used to generate income by itself.  One does not need to sell and asset to make money – you can make money through the use of an asset.  This isn’t to say that assets can’t be sold at a profit to generate income – it just means that assets can generate income even if it are not sold.

For example, common stocks are assets since (eventually) they will start paying out earnings as dividends.  Likewise, bonds pay interest.  Real estate can be an asset since it can be rented or used as a location for a business.  Even a computer can be an asset if it allows one to generate income (by using it to create and sell web pages, for example).  A lawn mower can be an asset if one uses it to mow lawns for pay.

Things that are not assets must be traded to make money.  Gold is not an asset.  Currencies are not assets.  One’s own home, unless big enough to rent out rooms, is not an asset.  A car, unless used for deliveries or other business uses, is not an asset.

When investing in assets, one should think like an investor, not a speculator.  A speculator may purchase a stock because the share price seems low and he thinks he can sell it quickly for a profit.  He may see a stock going up and figure that the momentum will continue, allowing for a quick profit.  She may guess that a company may be bought out and buy shares in hopes of a high offer.

An investor will look at what kind of income the company can generate, and evaluate the kind of return that can be received through operations.  When buying real estate as an investment, one would look at what kind of rental income can be generated and the return on investment rather than at what price the property can be “flipped.”

If you have lots of money and are looking for entertainment, speculating is fine.  If you really want to make money, however, look to invest and find assets.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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.