Ten Things I Learned While Working for the Rich


I read a great article from Free Money Finance on the things he learned about how rich people handle money while working as a financial adviser to ultra-wealthy clients.   Basically the things you learn from The Millionaire Next Door hold true.  The wealthy people he met didn’t tend to drive fancy cars or wear expensive clothes.  He also found that they were very nice people who were involved in their churches and their communities, not the evil, arrogant, elitist folks the stereotypes would have you believe.   Check out the full article here.

 

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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.

Why You Really Need to Invest


You’ll find a lot of blogs on people getting out of debt.  Perhaps they start out with a student loan balance of $150,000 and pay it off over a period of three years.  If they are persistent, and particularly if they see their income rise, perhaps because they get a lot of revenue from their blog and affiliate advertising, they will make their way out of debt.  But what then?

What happens after you pay off that last student loan?  After you close that last credit card account?  You make your last car payment?  You make your last mortgage payment?  And what if you never got into debt in the first place?  Often that’s where the blog stops.

If you want to move from just being debt-free to being financially independent – being able to pay for things without needing to depend on a paycheck – you need a way to make money efficiently.  There is only so much time in the day.  Even if you get a second job, unless you have a phenomenal salary, it is really difficult to simply work and save enough money to reach financial independence.  Plus, your income level is usually limited and it will top out at some point in your career.  If you make an average of $60,000 during your working career and save 10% per year, you’ll have $240,000 over your entire career.  If you save 20%, you’ll still only have about half a million dollars at age 60.  To sustain yourself, you’ll probably need something north of $2 M unless you live a very meager existence.
                           

Great beginner investment guides.  

One way to attain financial independence is to start a business.  If you start a business and run it well, your potential income is theoretically limitless.  If you open a store and do well, you can open a whole chain.  The same thing goes for a lawn care business, or a manufacturing business, or a restaurant.  Because you can hire people to work for you, and take a small percentage of the amount of money they generate, you can expand your income.  But many businesses fail, and you often need to take a big risk to start a business, possibly borrowing a lot of money.  Starting a business when you already have a family that depends on your income is also risky.  Is there another way?

The answer is investing.

When you invest, it is like you are buying an ownership stake in a business, which means that, just like starting a business, your theoretical income is limitless.  There are people who bought a $5,000 stake in Home Depot or Wal-Mart who are now millionaires.  The beauty of investing is that you get to enjoy the possibility of growth that you get from starting a business, but don’t have all of the headaches that come from actually running a business. You don’t need to check inventory, order supplies, or manage employees.

Not only that, but you get to benefit from other people’s good ideas.  You probably didn’t get the idea to build a search engine that everyone would use, let alone go through the hassle of coding it, getting servers set up, and getting the word out.  But you can buy shares of Alphabet and benefit from the efforts of people who did.  You can buy shares of Walgreen’s and have drug stores on all of the best corners in every city in America.  You can buy into a successful restaurant, a successful credit card issuer, or a successful tobacco company.  If it trades publicly, you can get a stake in the company and take advantage of other people’s good ideas, execution, and hard work.

 

Want all the details?  Try The SmallIvy Book of Investing.

There are some people who will become rich by working really hard and saving  every dime.  There are others who will become doctors or lawyers, get hired by the right firm or practice or start their own practice, and live on little enough to build up their savings and become wealthy.  There are still others who will start a business and work hard to grow it into a huge company and become wealthy.  For the rest of us, investing is the way to wealth.  If you’re interested in learning how, pick up a copy of The SmallIvy Book of Investing and keep reading The Small Investor Blog.

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.

How to Manage your 401k


Ocean

Investing in stocks in a 401K is actually quite simple.  The reason is that, unlike a traditional brokerage account where your investment options are nearly limitless, your choices of investments are usually fairly limited in your 401k.  The secret is simply to create an account with as much diversification as you can and then maintain that diversification.

Step 1: Selecting a Contribution Amount

When you start working Human Resources will send you a form, along with all of the packet of other forms, on which you specify your 401K contributions.  Typically one defines a percentage of your pay to put away each month. 

Books on Business and Investing at Amazon

You should be contributing about 15% of your pay to retirement.  This will allow you to save enough to replace your income in retirement without depleting your resources.  Using the different accounts available, here is how you should allocate that 15%:

1.  Fund your 401K up to the amount that the company matches.

2.  Fund an individual IRA up to the limit.

3.  If you have money left over, fund your 401K up to the limit.

4.  If you still have money remaining (lucky you) fund a private investment account.

Step 2:  Selecting Initial Investments

In contributing to your account, you typically specify the percentages of your contributions which go to each fund each month.  You can also periodically redistribute the funds you have built up among the different funds.  You should spread your contributions out to different investment types.  This provides stability, since one sector of the market will typically do well when others are doing bad.  The types of funds available will vary, but something like the following should be used:

20% Large Cap Stocks

20% Mid Cap Stocks

20% Small Cap Stocks

10% Aggressive Growth

20% Bonds, or a growth and income fund

10% International


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Another asset allocation would be by the fund’s investment strategy instead of by company size.  An allocation in this scenario might look like this:

10% Aggressive Growth

25% Growth

25% Value

20% Growth and Income

20% International

Note that if there are more than one choice of funds in each category, choose the fund types that charge the lowest fees.  Index funds or Index ETFs are ideal for their low fees.  Looking at fund return history may seem like a good strategy, but funds rarely repeat past performance. By buying a fund that has done well you are actually increasing your chances of buying a basket of stocks that are high in price.

Step 3:  Rebalancing

During any span of time some funds will do better than others.  For this reason, about once a year, you should rebalance your portfolio. 

In doing this, exchange securities until your assets are allocated again according to your strategy.  This means you will be selling shares of funds that have done well and buying shares of funds that have done poorly.  You are therefore selling high, locking in profits, and buying low while the funds are at a  discount.  Often your 401K plan will allow you to simply specify the percentages you will have in each fund and the needed sales and purchases will be done automatically.

For example, if you originally setup your portfolio as specified in the first example above and large caps have a great year compared to small caps, your allocations may look like this after the first year:

Large Caps: 30%

Mid Caps 18%

Small Caps: 15%

Aggressive Growth 12%

International: 8%

Growth and Income: 17%

You would reallocate until your allocations matched your original plan.

 

Step 4: Unwinding

As time passes you should start to unwind your account, generating cash and moving more assets into income producing funds.  In particular, when you are about 10 years from retirement you should start raising cash in your 401K. 

You should have 5-10 year’s worth of cash when you retire, so the first step is figuring out how much you will need to pay expenses including food, utilities, hobbies, travel, and medical expenses in retirement.   You should perhaps move between 1/2 and 1 year’s worth of expenses from your portfolio into a money market fund in your 401K each year.

Note it also makes sense to pay off any remaining debts you have when you enter retirement.  The security of having ownership of your house and a lack of car payments are well worth the expense.  Ideally you should save and pay these debts off quickly using your working income, but as a last resort using 401K money to retire these debts might be advisable.  Just remember that you will be paying taxes on the distributions, so plan distributions carefully with your CPA.

If you have a significant amount of money in your 401K, which you will have if you started early, you will be able to get by with less cash since you’ll have enough cushion in your account to handle market swings.  In this case you will want to shift a good portion of your assets into interest paying funds (bond funds, utility funds, etc….)  Ideally you will set up the account such that the dividends and interest you receive each year will exceed your living expenses. 

In this way, as long as the funds continue to pay the needed interest rates, you will be able to meet living expenses without needing to sell shares.  The price fluctuations of the shares will become immaterial at that point. Some buffer of cash should be kept even in this case, however, just as added protection in case unexpected expenses occur.

Managing your 401K is really not the daunting task it seems to be.  The keys are diversification and periodic reallocation.

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.