How to Tell if Your 401k Plan Really Stinks


There is nothing wrong with the 401k, but there are a lot of really bad 401k plans out there.  If you’ve never invested, you may not be able to tell the difference.  But it is worth learning how to spot a bad 401k plan because it might be something to consider when looking at a prospective job.  You can also change your behavior if you have a bad plan to improve your investing options.  We’ll talk about this at the end of this article.  But first, here are some things to look for in your 401k.

1.  A lack of index funds.

In the world of investing, there are managed funds and index funds.  Managed funds have a whole team of managers who go out and find “investment opportunities” and “seek to manage risk while providing a reasonable return.”  The trouble is, the vast majority of mutual fund managers don’t do as well as the markets, and all of that research and pontificating comes with a hefty price tag.

An index fund doesn’t try to beat the markets.  It just buys stocks as dictated by some index, which is a hypothetical portfolio of stocks designed to track the behavior of some part of the market.  For example, in the early 20th century, Charles Dow wanted to have a way to see how the large industrial companies in the US were doing.  He chose a group of large industrial companies that covered the different industrial business areas at the time and pretended that he invested an equal amount in each company.  He then began to track what the value of that portfolio was compared to its value when it was formed and the Dow Jones Industrial Average was born.  About 90 years later, a company started an index fund that simply bought the stocks in the Dow Jones Industrial Average, and thus the “DIAmonds” index fund was born.  Unlike a managed fund, the index fund just buys what’s in the index and doesn’t need to pay a team of analysts and managers, thus the costs are a lot lower.

An index fund will typically have fees of 0.25% of assets or less.  This means it will cost you $25 per year if you have $10,000 invested.  A managed fund can have fees of 1% or more, meaning you’ll be paying $100 per year for each $10,000 invested.  While this difference may not seem like much, it means you’ll be making about 0.75% more each year in the index fund, which will add up to hundreds of thousands of dollars over your working lifetime.  A plan that lacks index funds stinks.

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2.  A lack of diversity of funds.

As a minimum, a good plan should have:

  1.  A total stock market index fund
  2. A total bond market index fund.

A better plan would also have:

3.  An international stock index fund.

4.  An REIT fund.  (An REIT is a mutual fund of investment real-estate properties, such as apartment buildings or malls, even cell towers and storage centers.)

The best plans would also have:

5.  Target-date retirement funds.

6.  Small and large-cap funds.  (Capitalization, or “Cap,” refers to the size of a company.  Small-caps are small companies, large-caps are large companies.  Mid-caps are – you guessed it – medium companies.)

7.   Growth and value funds.  (Growth funds invest in companies that are growing, while value funds invest in companies that are undervalued.   This is either buying what is doing well or buying what is considered cheap.  Both strategies work with one outperforming the other at different times.  Most index funds give you both, but some specialize in one or the other.)

Having choices allows you to tune your retirement investing.  The target-date retirement funds also allow you to put your retirement investing on autopilot if you wish.  If your 401k choices only include high-cost funds that don’t really tell you in what sector of the market they invest, your plan stinks.

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3.  Your plan switches in and out of funds.

This really isn’t so much the plan itself, but the people setting up the plan.  Sometimes the board who creates and manages the plan will change the funds available because some funds have not done well.  Assuming the funds don’t have high fees or something, the reason they may not have done well is that the sector of the markets in which they invest may not have done well.  For example, maybe you have a value index fund during a time when growth stocks are doing well, so the value fund returns 3% while the growth funds return 20%.  The board may see this and get rid of the value fund, substituting another growth fund in its place.

This is exactly the wrong thing to do.  Because growth stocks have done well, it means that they may have already gone up in price to the point that they are expensive.  Conversely, value stocks may now be especially cheap.  Think of going to the store and finding that strawberries have doubled in price, while grapes are selling for 80% of what they normally sell for.  While you don’t know what strawberries and grapes are going to sell for next week, you can bet that over time strawberries will not go up in price as much as grapes will.  The same is true for stocks.  While the timing is difficult, you will not do as well buying stocks when they are expensive after a big run-up as you will if you buy them after a drop when they are cheap.  If you find that your funds get dropped when they don’t do as well as other funds, other than due to the fact that the fees are high, your 401k plan may stink.

What to do if you have a stinky plan.

There is not that much you can do if you have a bad plan, but there are a few things.  These are:

  1.  Invest outside of your plan in an IRA.

You can open up an Individual Retirement Account (IRA) with any mutual fund company or brokerage firm.  This will allow you to get the same tax-deferral that you get with a 401k plan.  Inside an IRA, you can invest in almost anything.  If you open an IRA with a mutual fund company, you will often be able to invest in their mutual funds without paying a fee when you buy or sell the funds.  Tax laws may limit the amount you can put into an IRA if you have a retirement plan at work, but you may be able to put some into an IRA.  You will also probably be able to put the full amount (currently $5500 per year) in an IRA for a non-working spouse even if you have a 401k plan at work.

2.  Invest in a taxable account.

While not as good as an IRA, there is nothing from stopping you from investing for retirement in a taxable brokerage or mutual fund account.  If you invest in index funds and hold them for long periods of time, you’ll still pay very little in taxes each year.  While you may pay some taxes on capital gain distributions from the fund, as well as on dividend and interest payments, most of the time you’ll only see a big tax bill if you sell funds at a big profit. If you buy and hold, most of your money will be left to compound just like it would in an IRA or 401k.  In fact, your tax bills at the end may be lower than you’ll see with a 401k since capital gains rates, which you’ll pay on profits from a taxable account, are usually substantially lower than standard income tax rates in the top brackets, which is what you’ll pay for large 401k distributions.  You won’t see a tax break when you put the money into a taxable account, however, like you will when you put the money into an IRA or 401k.

You can also buy some individual stocks in a taxable account and not see a big tax bill (until you sell).  You just need to hold them for long periods of time, like ten to twenty years, rather than buying and selling stocks for a quick profit.  The good news is, you’ll do far better buying stocks for long periods than you’ll do trading.  This is like a win-win.  You can also reduce your taxes when you do sell by selling losing positions to offset gains in winning positions

3.  Be sure you still get the company match.

If you do decide to us an IRA or invest in a taxable account, you’ll still want to put enough money into the 401k plan to get whatever matching funds the company provides.  This is like getting a 100% or 50% return on your money right from the start.  If you do this, but your 401k plan stinks, you can always roll whatever is in your 401k plan to an IRA when you leave the company.

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.

Are Working Women Choosing the Wrong Guys?


Traditionally women sought out guys to marry who showed that they could earn money and provide for a comfortable lifestyle.  Looks and personality were also factors, and certainly some women married guys with few prospects to provide an income out of love, but the ability to earn a living was always important. At one point in history this was probably the guy who could hunt and build a cabin, or who had land and could raise crops and animals, but with time it morphed into the guy who could earn a six-figure salary.  The guy with the nice car, nice clothes, and nice watch was the one who got the girl.  Guys would buy the meals and pay for everything on dates, give gifts, and even give an expensive diamond ring when proposing in part as a way to show the ability to provide.

For many guys, attractiveness, both physical and inner beauty, were important factors when looking for a wife.  Finding someone who was fun to talk to and nice to be around, and someone who was caring and nurturing, could also be important factors.  Few guys really cared about a woman’s ability to pay for things because they had always assumed that they would be earning money for the family.  Many guys might even feel intimidated if a woman earned more than them and was the primary breadwinner, and therefore not even seriously consider a woman who was more successful.  Likewise, many women would not respect a man who earned less than them.

Gender roles are all changing, however, with many women are choosing to primarily focus on a career.  Women are moving into top roles at companies and gaining parity with men in many fields.  There are even more women attending college then men in the US, so it only makes sense that many women are moving into the position of primary breadwinner.

Given this shift, one would expect more men to be taking the role of caring for and training the children, along with managing the household since it would make more sense for the wife to work.  Given this trend, you would therefore expect women to start seeking men who would be better at raising children.   You would expect them to be looking for men with qualities such as patience, concern, devotion, communication, an ability for multi-tasking, and selflessness instead of seeking the type-A personality with little patience who is quick to anger.

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And yet it seems as though men’s role has rarely changed, so we have ended up with scenarios in which both parents work and where both are heavily focused on their careers.  This can result in some high household incomes, leading to the generation of lots of tax revenue, but it leaves the children being raised by others or by themselves.  It is as if both parents have decided to leave the cave and hunt because the hunt has become such a focus that both parents have forgotten why they were hunting in the first place.  Society has suffered as the internet and television has raised the last generation of children and imparted its morals upon them, the morals of Harvey Weinstein and individuals in the darkest corners of the world.

Maybe it is time for career-minded women to seek out men who can better fulfill the role of primary caregiver and mentor for their children instead of choosing men based on their ability to provide.  A woman who can ear a six-figure income doesn’t need a man who can do so as well.  Most people who really crunch the numbers will find that a family will actually come out better on one income with a spouse spending time doing things like preparing meals at home and taking care of the children than they will with two incomes.  In addition, time spent in childcare for one’s own children is tax-free, where extra income made at work is taxed at the highest rates.

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Our children really need to become more of the focus.  Why wouldn’t we want to spend time training our children to be good, self-sufficient citizens that share our values and make the world better rather than creating the next report or presentation that will just be forgotten in a week?  Children are our greatest legacy and will make far more of an impact that anything most of us will do in the office.  Why would we be satisfied to pay a stranger minimum wage to simply watch our children rather than to make sure our children are educated, motivated, and cared-for?

So what do you think?  If you are a woman who is focused on your career, would you marry a guy because he would be a good parent instead of finding someone who would be a good provider?  If you are a guy, would you be satisfied raising your family instead of going into work each day, and would you feel important doing so?

Got and investing question? Please send it 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.

What do you think?  Please leave a comment?

Contact me at vtsioriginal@yahoo.com

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.

A Love Letter to the American Press


Mushrooms

Dear American Press,

You have always been an important part of my life.  From a young age I remember sitting at the breakfast bar in our house, reading through the local newspaper.  When I was younger still, I remember that they brightly colored Sunday comics were always anticipated and savored each week.  Through my teens I watched the local and national news each night.  Your anchors and reporters became uncles and aunts to me who would visit each night to tell about things happening around town, around the nation, and around the world.  I particularly remember being impressed by the local weather man, Stu Tracy, who would throw up the suns and rain symbols that would magnetically stick to the map.  I never understood how he would remember just where each symbol would go and was disappointed when he stopped creating the map real-time, instead having it setup before the forecast.

In college I made the decision to spend an hour each day in a particular chair in the student union and pour through the Wall Street Journal, cover-to-cover, as well as Barrons on the day it came out.  I also remember the start of CNN and ’round-the-clock coverage during the first Gulf War.  How amazing it was to be able to be there in Baghdad as the American bombs were falling.  I remember the chill in the air as Saddam Hussein fired scuds at American troops and Israeli cities that could be filled with chemical agents, never knowing where one might land.

              

Yes, I have loved you for all of my life.  But to truly love someone also means to be truthful when that person is making bad decisions that are hurting her.  To act like things were just fine when someone you love it tearing herself apart is not love, but enabling.  Having someone speak up may bring about anger and resentment, sometimes causing an irreconcilable split in the relationship.  It would be far easier to stay silent and not bring up difficult issues, but that would not be love.  God says to treat others as we would like to be treated; that should go doubly for someone we love.  If I were destroying my life, I would want someone to tell me.  So here goes….

Your reporting is full of incomplete and biased information – even some flat-out lies at times – and that is causing people to not trust you anymore.

OK – there it is.  Right out on-the-table.  I know that you think that people are generally ignorant and even dull, such that they would not know that you were trying to manipulate them through the facts you tell and the ones you leave out, the words you choose, and even the stories you choose to cover and those you don’t.  But they are seeing right through you and it is causing them to turn away.   They don’t want to be around you because you’re trying to get them to believe an alternative reality and then to act accordingly.  You want them to think that nationalized health care is a great thing, while they see the premiums rise and their doctor networks shrink.  You want them to believe that higher taxes, government programs, and strong regulations are the road to happiness for the middle and poverty class, but they have seen jobs disappear, wages stagnate or decline, and poverty increase as these things have come to pass.

Bottom line:  They no longer feel like they can trust you.

          

Need a little Honesty?  It’s such a lonely word.

And you see, trust is everything for you.  People don’t buy your papers or watch your newscasts because they like your witty writing and snappy graphics.  They don’t give a couple of hours of their valuable time each day to watch the evening news and read the morning paper because they want to be told what they should think, particularly when there are such clear holes in that thinking.  They do so because they have a need to know the truth about things for which they can not discover the facts themselves.  They cannot go to Iraq or Afghanistan and see the conditions and the interaction between the local people and American troops.  They cannot spend all day in Washington D.C. and see if their representatives are passing laws with which they agree and spending the people’s money wisely.  They cannot go to the police stations across the country and see if laws are being enforced fairly and effectively, if certain cities are safe or dangerous, and if government agencies are being run efficiently.  The desperately need someone to do this for them so that they then have the information that they need to make the right decisions.  

You are supposed to be the one who finds out the truth for them.

This is why your prevarication, equivocation, replacement of opponent viewpoints with straw man arguments, and manipulation of the facts is so damaging in your relationship with them.  If your product is truth, “All the news that is fit to print,” as one of your publications says, then damaging that trust is the worst possible thing that you could do to them.  They can tolerate mistakes, but they cannot tolerate lies and distortion.  There are plenty of more interesting things they could watch on TV for entertainment or tabloids they could find in the checkout line if they want to read great fictional stories.  They go to you for the truth, but you have let them down time and again, and they know it. 

                   

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Right now, I see that you are shaking your head.  You say that you may stretch things from time-to-time, but your overall purpose is to guide people to a bigger truth and the way you see the world, so changing things around once in a while or selectively leaving some things out that would just confuse people is justifiable.  And that is a big part of the problem.

You lack so much diversity of thought, since all of your employees coming from places where only one point-of-view was allowed, that you don’t even know that you are seeing the world through terribly distorting lenses.

People – evil people who want to seize control in America by centralizing power in a large government – have gone into the universities, then even the high school and grade schools, and filled them with people who all have the mindset that big government is good and socialism (and even communism) are better than free enterprise and capitalism.  The education you received did not include all of the facts, plus it included a lot of unverified conjectures.  If anyone questioned what was presented as facts, they were chastised and humiliated by the teacher and their peers.  People who initially didn’t believe in socialism either dropped out of the major or were made to change their minds.  They may have seen the inconsistencies, but they felt it was for the greater good that they just go along.  And so they came out of the classrooms and went into the newsrooms unable to objectively examine the facts.  They were sent with a mission to convince the readers and viewers that the orthodoxy they were taught in their schools is the right one.  

They became propagandists rather than journalists, even if they did not realize it.

Even once your journalists enter their careers, they continue to shelter themselves from other opinions.  Your newsrooms are echo chambers where everyone agrees with what they say, and your employees live in cities where everyone feels the same.  They are so sheltered that they come to think that their opinions are those of the average American.  They also think that they are far smarter than most people.  That everyone else has the intellect of a child compared to them.  Smart people think the way they do – anyone else is either ignorant or trying to take advantage of the foolish.  Hmm….  They are so convinced that they know better that even when they are proven wrong, such as in the last election when they were sure which candidate would win and the other did, they think there must be some sort of mistake.  Or some boogeyman like the Russians changed things.

          

And another thing….

Referring to the land occupying 90% of the United States as “fly over country” and thinking that those who live there are unimportant isn’t a good way to keep readers and viewers.

Now before you say that they watched and they read and they listened just fine before the internet came along and took their attention, let me counter.  You are right that fewer people are reading your newspapers and watching your evening news casts because of the internet, but it is not because the internet is more exciting or convenient.  If that were the case, people would be flocking to your online content as they stopped getting a daily paper.  But they aren’t, are they?  And no, it isn’t because of right-wing propaganda from talk radio and Fox News either, although both of those sources are part of your problem. 

Alternative news sources like the internet, Fox news, and talk radio are providing the facts that you are leaving out.

They are also providing alternative viewpoints and explanations.  They are giving different reasons why things may happen as they do.  They give different predictions about the effects of policies and government actions.  They also provide logical explanations for their predictions and assessments, rather than just focusing on people’s emotions or dictating how people should feel and what they should do.  They don’t just provide conjecture, using a snooty voice to make their listeners think they need to think the same way or they are stupid.  “Obviously, trickle down economics don’t work.”  “Even a fool should know that raising tax rates brings in more money for the government.”    The alternative news sources are resonating with the hearts of people because those who have worked a real job, built something, or had the real experience of trying to raise a family can tell logical explanations and ideas from, well, what they’re stepping in sometimes in fly over country.

So, it is with great sadness that I now need to tell you that I’m leaving. I no longer want you to show up on my doorstep in the morning.  I won’t be there with you before dinner or at night before going to bed.  I won’t waste my time listening to what you have to say, because I cannot trust what you are telling me and I have better things to do.  I also will not be telling you what I have to say, by writing letters to your editors, since doing so only helps you continue on your destructive course and gives you hope that continuing along the same path will eventual lead you to a better place.

No, it is better to step away and let you hit rock bottom, for it is often only by hitting rock bottom that people decide that they need to change.  I wish you best of luck.

Take care of yourself, because I won’t be there until you change your ways.

With great sadness, love,

SI

Got a comment?  Please use the form below to let me know what you think.  Please also leave a comment or contact me via vtsioriginal@yahoo.com if you’ve got an investing question you’d like to see featured.

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.

Sample from the Cash Flow Book: The Cash Flow Diagram.


fig1basiccashflow

As I’m working on the second book, Cash Flow Your Way to Wealth, I thought I would put out some samples from the book.  Here is part of Chapter 1, which presents the basic idea of personal cash flow and the cash flow diagram.  Look for the book to come out in a couple of months.  Enjoy!  SI

Most people mistake income for wealth, but the two are very different things. Income is the amount of money that you have coming into your household – the size of the stream entering your canyon. Wealth is the storage of money that you have – the level of the lake in your canyon. Huge amounts of water flow through the Grand Canyon in the Colorado River each year, yet there is far less water in the Grand Canyon than there is in Lake Mead behind the Hoover Dam. The difference is that in one case the water is allowed to flow right through, where in the second it is stored.

People who have high incomes tend to drive fancy cars, have big houses, eat at expensive restaurants, and wear expensive clothes. People who have large amounts of wealth tend to drive modest cars, have modest houses, eat at home a lot, and wear average clothing. There are a few extremely wealthy individuals who do display their wealth somewhat, but even then the cost of their lifestyles are well within their income level.

Luckily, you don’t need the income of Bill Gates to become wealthy. You just need to start storing some of your income, then invest to increase your income. This is not an overnight process – it takes time. Decades, in fact. But with a bit of persistence and patience, most people can join the ranks of the wealthy. Because most people spend all that they make and then borrow more, it isn’t that difficult to become one of the top 10% or even top 1% of wealthy individuals, currently around $1 M and $8 M, respectively.

Now let’s get to the heart of the matter – the cash flow diagram. A lot of people create budgets. Budgets are fine, but a budget is a flat canyon with no dam – you balance inflows and outflows with nothing saved and stored up when you’re through. A cash flow diagram directs your money into investments, which in turn create more income, increasing the size of the stream entering your canyon. In this chapter we’ll introduce the diagram and give an overview of each of the boxes that comprise it. Then, for the rest of the book we’ll go into each of the boxes in detail and show how to setup your own cash flow to build wealth.

A basic cash flow diagram is shown in Figure 1. Income flows in through Box A, rests briefly in Box B (Cash on Hand), then is distributed to various expenses or savings/investments. Income includes your paycheck, any income you make from side jobs, investment income, alimony, and gifts from uncle Bob. Cash-on-hand is your bank account or checking account – money that you have readily available for use whenever you want. Expenses are money flowing out of your bank account, never to be seen again. Investments are places where you put money at risk in order to generate more income.

Cash flow through your cash-on-hand is required to follow the familiar PISO equation:

Production + Inflow = (Change in) Storage + Outflow.

This says that all money produced by your investments, plus any inflow from salary and other sources, must equal the change in your cash-on-hand plus outflows to expenses. Rearranging we have:

(Change in) Storage = Production + Inflow – Outflow.

In other words, if you want to increase your storage of money (your wealth), you need to make the sum of your production of money (investment returns) plus your income (salaries, etc…) exceed your outflows (expenses). Or, as your grandma used to say,

Spend less than you make.”

What a simple concept: If you want to increase the amount of wealth you have, spend less than you make. And yet few people ever build any real wealth over their lifetimes, so few people follow this principle. In fact, most people spend more than they make, so they are destroying wealth before they ever have the chance to earn it. No wonder the fiscal health of society is so poor!

OK – so this all makes sense, but what does it have to do with Figure 1, the cash flow diagram? Well, your inflows – your income – is given in Box A. Box B is your change in wealth storage. Boxes C, D, and E are expenses, which are outflows of cash. Finally, Boxes F and G are investments, producers of wealth.

Notice that there is an arrow from Box A to Box B. This means that Box A increases Box B – your income increases your cash on hand, just as inflows increase the storage of wealth. There are arrows from Box B to boxes C, D, and E. These are the outflows, which decrease the amount of wealth you have stored. If the cash flowing in from Box A exceeds the cash flowing out through to Boxes C, D, and E, your wealth will increase. If the opposite is true and the flows to Boxes C, D, and E exceed cash flowing in from Box A, your storage of wealth will decrease. When everything is balanced, such that inflows from Box A exactly equal outflows to Boxes C-E, then your wealth will remain constant.

Going back to our vision of the river and the canyon, the canyon is Box B. The water flowing into the canyon is the arrow from Box A into Box B. Water flowing out of the canyon are the arrows to Boxes C-E. If you have a small salary, the money flowing from Box A to Box B will be small – a creek. If you have a large income, it will be substantial – a raging river. It doesn’t matter how much money is coming into Box B from income, however, if the amount flowing out of Box B to C-E is equal to or greater than the amount flowing in – the water in the canyon will never rise, it may  even decline. The amount of wealth stored in Box B will never increase or it will even decrease until there is no more stored wealth.

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.

Hey Republicans – Here’s Your Chance. Don’t Blow It.


McKiosk?

                        McKiosk?

A couple of months ago, it looked like America was going to choose Socialism.  Like the Soviet Union and Venezuela, we would have seen jobs (continue to) stagnate, inflation rise, cronyism and corruption become the only way to become wealthy, and government in every aspect of our lives.  MSNBC was writing the obituary of the Republican party, and deservedly so, given the pitiful performance we saw the last time Republicans were in control of the White House.

Instead, Republicans have gained almost unprecedented control.  Not only do they control both houses of Congress and the White House, but the Governorships and legislatures of 25 states.  They now have the power to get most legislation that they want through and create or do away with all sorts of regulations.  They have gotten here by campaigning against an ever-expanding government, increased government control of virtually every aspect of the economy, and large amounts of government debt.  The question now is, will the Republicans actually do what they promised and replace government control with free enterprise and free markets, or is it all just talk and they’ll continue to use regulation and tax policies to enrich their friends as they’ve done in the past?

The last Republican President that we had who truly believed in the free market was President Reagan, and like President-Elect Trump, those in the Republican establishment hated him.  But President Reagan understood how government policies, in particular tax policies, affected the economy.  As he explained, as a high earning individual paying the highest tax rates on the last dollars of his income, there was a strong incentive for him to limit how many movies he made a year.  With progressive tax rates very high beyond a certain level of earnings, the second, third, and forth movies he made in a year would result in much less of a payday than the first one.  Since he was getting so little, relatively, there was a strong incentive for him to sit at the pool rather than get up and go into the studio, or travel somewhere in live in a trailer for several months, after he had made the first movie or two and had enough income to take care of his needs.

But movies don’t just make money for the stars.  There is a whole movie crew, caterers, set-builders, hotel workers, gas station attendants, restaurant workers, theater workers, and theater supplier network that benefits by more movies being made.  If Ronald Reagan just sat home rather than make more movies, there would be less work for these individuals.  Most of these people were not the wealthy, but the working class and those just starting in the economy.

So President Reagan cut the tax rates in the middle of a dismal recession, ignoring the cries that he would destroy government revenues and hurt the economy.  The terms, “trickle-down economics” and “Reaganomics,” were coined to mock the President and his policies.  What followed was an economic expansion that continued for 19 years until the higher tax rates imposed by Presidents George H.W. Bush and Bill Clinton brought the expansion to an end.  Instead of falling, government revenues actually grew with the economy.

Today, as government has taken control of the healthcare markets, we’ve seen premiums prices and deductibles soar.  More distressing, we’ve seen provider networks shrink and many doctors leave the market.  For the first time in modern American history we’re seeing people having difficulty getting the care they need because there are no providers that take their insurance near them and waiting times are growing to see the few that remain.  Imagine needing a heart surgery immediately and being told that it will be a month or two before you can get into the operating room!

The answers to America’s healthcare costs are simple and based upon free-enterprise principles.  Require everyone to save some of their money so that they’ll be able to pay for their own basic care out-of-pocket.  This will cut costs for everyone who is paying since they won’t need to pay for others’ medical care and since the costs for billing by the doctor’s office will be less.  Require everyone to get a major medical insurance policy so that they’ll be covered should a major health event occur.   Require doctors post their true, no-kidding prices in a way that would allow smart phone apps and websites to direct patients to the low-cost providers in their area.  This will eliminate the inefficient market that currently exists that causes aspirin to cost $10 each at a hospital or the same procedure to be $5000 at one clinic and $700 across town at another.  Get patients to care about the costs they are paying.  Get healthcare providers to compete for patients so they are motivated to improve quality and/or make their practices efficient.  Expand the deductibility of charitable giving to hospitals and clinics that treat those who cannot pay so those who would otherwise fall through the cracks could be covered.

You’ll notice above that I am suggesting the government require people to do things like save for healthcare and buy major medical insurance, which is not a free enterprise principle.  As with auto insurance, there are a lot of irresponsible people who will not save for healthcare or buy major medical insurance unless they are required to do so, so I do believe there is a government role to ensure people do the responsible thing.  This protects both them and society from the burden they will impose when they are not responsible.  True free-enterprise would be to allow those who don’t save to go without healthcare as a motivator to be responsible, but obviously that is not a choice in a compassionate society since there would always be some individuals who would get caught, so the requirement to at least save and buy insurance for major events, while not dictating how that money is saved and having competition among insurance providers, will strike a good balance that protects both society and individual freedom.

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.

Welcome to the Small Investor


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In case anyone is finding this site for the first time, having made the New Year’s resolution to do better with money and therefore deciding to scroll around to personal finance blogs, lets me first say, “Welcome.  I’m glad you’re here.”

There are a lot of blogs on the internet of people trying to get out of debt, or talking about their personal journey to pay off debt or perhaps grow their wealth.  There are also sites where people talk about their stock trading or other types of trading.  I’ve tried to make this site different by focusing in on something few people seem to cover – a financial strategy for building wealth, with information on investing and economic commentary thrown in for good measure.

The whole process begins with managing your cash flow – basically setting up the way you handle money to direct some of the money you earn to things that will help you grow wealth rather than just make and spend money.  I spend a lot of time talking about investing for retirement, since that is the biggest expense most people will face and it takes a lot of work to be ready.   I also talk about making good choices, such as buying used cars for cash rather than carrying a car payment your whole life.  Just doing that and investing the rest can leave you a multimillionaire at retirement.

Probably the best way to find your way around the site, other than just subscribing and reading each new post, is to use the categories on the side bar to bring up posts of interest.  In particular, check out “How the rich invest and handle money” and “401k investing” to read what I think are some of the best posts.  If you’re brand new to investing,  just look at the categories of “investing,” “For the new investor,” and  “Investing definitions and basic information” to start learning about investing.  If you like to hear about economics and my thoughts on why free enterprise is way better than socialism, or you just want to read things you may disagree with because your argumentative, check out “Commentary” or “Economic theories.”  If you want to hear my ideas of how to fix paying for health care and poverty, go to “Small Ivy’s Big Ideas.”

So kick back and enjoy.  Maybe throw in a comment here and there to give your take or let me know where I’m wrong.  If you feel the urge, consider buying a copy of the book.  I think you’ll really benefit from it, and it gives me a financial reason to keep on making blog posts rather than spending my time doing something else.  Once again, welcome to The Small Investor.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment.

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

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.

A Better Welfare System


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An ever-growing share of US Government spending is going towards welfare programs, including food stamps, child care, housing, medical care, preschool, and even debit cards with a certain amount of spending cash.  And yet there are still children going hungry over the summer and weekends because they aren’t in school and the adults who should care for them don’t, and therefore they don’t get meals provided.  Most schools now offer breakfast and lunch.  Many soon will probably offer dinner and meals during summers and weekends (some are already starting).

The fundamental issue with the current welfare system is the same one that is always seen with any sort of central planning:  It is impossible for a few individuals, no matter how well-intentioned, to do what is best for millions of different people.  As a result, some people abuse the system.   Politician then try to put in safeguards to stop the abuse, usually in the form of additional hoops to jump through. This results in the people who really need help finding it extremely difficult to get the help they need.  And yet those who abuse the system still find a way to do so.

Another issue is that, with central planning, it is just easier to send out a check than it is to do what is needed to make sure the money is spent prudently.  We’re sending money to people, many of whom have already shown that they do not handle money properly and do not make good life choices, and then expect them to somehow take care of their needs in a conscientious manner.  The issue again is that there are too few people to provide the monitoring and personal attention needed.  Sure, a lot of people find ways to turn their food stamp money into cigarettes and alcohol, or maybe buy porterhouse steaks for themselves (and let their kids starve) when people buying their own food are buying ground chuck, but it is too hard to fight the abuse.  So we end up paying for their food and then end up paying again when their children show up at school hungry or when the adults run out of food mid-month and come to the food pantry or the soup kitchen.

We also provide just enough support to let people stay on drugs or make other bad life choices.  At times we even trap people by giving just enough for necessities and to sustain a modest existence, but then take money away if people actually start to work and provide for themselves.  While taking a real job and working your way out is the way to end up in a better place eventually, many people don’t want to go through the temporary pain that such a transition would cause.

The solution is to decentralize welfare.  Imagine how much good local groups could do if they received the money currently spent on welfare and gave it out instead.  Local groups would know about local needs.  They would know who really needs help and who is gaming the system.  They would be able to put in the time to know the community and do things that actually help people.  They would have the time to make sure the help being given actually helped people improve their lives, rather than enable them to stay on a destructive path.

But then there is still the issue of getting the money to these groups.  Just as there is corruption when the government sends out checks to individuals, there would be corruption if the government were sending out checks to aid organizations.  There would be scam artists who create phony charity organizations.  There would also be side deals as politicians sent the money to their friends and donors, who could then use the government money to gain power just as corrupt politicians do.

The answer is simple – cut the government out entirely.  Here’s how:

Create a new tax credit for charitable giving that replaces the need for existing government programs.  Allow individuals to reduce their taxes, dollar-for-dollar, by up to 10% of their income when they give to organizations that provide these services.

Let’s say that you make $80,000 per year and would owe $9600 in taxes.  Assume also that you’ve paid $12,000 in estimated taxes, so normally you would be getting a $2600 refund while the government gets $9600, $8,000 of which would then go to welfare programs.  You decide to donate $8,000 to the local food bank, which would then buy $8,000 worth of food and distribute it to people in your area that needed food.  You would simply indicate on your form that you donated $8,000 to the food bank, which would reduce your taxes by $8,000, and then the food bank could receive an $8,000 check from the IRS while you still received your $2,600 refund.  Alternatively, you could have been making monthly donations of $667 dollars to the food bank, such that you would have given $8,000 throughout the year, and reduced your withholding by the same amount.  In the end, you would have paid $1600 in taxes and donated $8,000 to the food bank.

People who need food would receive $8,000 worth of food.  The only difference is they would get it from the food bank, which would be able to verify need and maybe push those who could provide for themselves into doing so, rather than getting a check from the government.  People at the food bank could also stretch the money and make it go farther than would many of the people who received food stamps.  In addition, if the money had gone to the government and then out through welfare, something like $6,700 might actually make it back to people in need, after various people in the government took their cut along the way rather than the full $8,000.  Note that people in higher-cost areas also make higher salaries, so they would be able to give higher amounts to their local charities, offsetting the higher cost of living.  People in New York City would receive just as much food, clothing, housing, and other services as those in Fargo, ND.

The system would also police itself.  If people thought that a charity was not doing a good job, or if they found that everyone in their area was taken care of and additional money was not needed, they could give to charities in other areas.  They could also give to foreign peoples through charities, just as the government gives foreign aid, or support other things like the arts, scientific research, or other areas.  Again, there would be no loss in income to these institutions since money no longer sent from the government would now be sent directly by the people – in fact overall the causes would get more money since the distribution system would be more efficient.  If a charity or other provider was wasteful, the local individuals would be likely to see this and donate somewhere else.  Just as in free enterprise, the charities that did the best job would receive the most money.

So that’s the plan.  Very simple – just a new line on the tax form.  If you like this idea, please tell your Congressman.

Please contact me via vtsioriginal@yahoo.com or leave a comment.  Check out other ideas by selecting “Small Ivy’s Big Ideas” from the menu at the top under “Commentary.”

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.

How Are You Doing, Financially. Examining Your Level of Safety.


sailboat_IpodIf you were to go to a financial advisor and the first question he asked was, “How are you doing, financially?” what would you say?  If you are paying all of your bills on time, driving a nice car, and taking regular vacations to nice places, you might say that you were doing just fine.  You might even say that you were doing great.

If he then were to ask how you thought you were doing compared to other people, you might need to think for a moment.  There are a lot of people out there on the road with shiny, new cars.  There are a lot of people at those resorts with you.  How could you tell how well you were doing compared to them?

The way to really tell how well you are doing financially is to look at your level of safety.  How far away are you from the cliff?  If the ground were to start crumbling off of the edge, how long would it take for you to be pulled into the abyss?  If you walked into work today and the boss greeted you with a cardboard box, saying that the firm was downsizing, how long would it be before you missed a car payment?  Or a mortgage payment?  How long until you would need to start selling things?  How long until the bank would repossess the car and evict you from your home?

On the flip side, what will your retirement life be like, given your current trajectory?  Are you going to have all the money you need to do the things you want to do?  Will you not really care is Social Security is there or will you be waiting for that meager check to come so that you can buy food for the week?  (My guess is it will not be there, unless the current system is scrapped and accounts privatized, given our demographics and $20T in debt.)  Will you only be able to go to places with a senior discount, or will you be treating everyone at top restaurants?  Will you need to move back in with the kids, or be able to stay independent?  Will you leave your children a pile of cash, or even start a family scholarship fund or another legacy, or will you leave with a pile of debt?

Thomas Stanley developed a measure to determine which people were likely to become multi-millionaires and which people had large incomes, but very little financially security.  He wrote about his system and his findings in his books, The Millionaire Next Door and  The Millionaire Mind, books that everyone should read.  He said the place to look was net worth, not income.  He found that those with a net worth greater than one-tenth of the product of their salary and their age were exceptional wealth builders and likely to become multi-millionaires if they weren’t already.   For those who have forgotten your mathematic jargon, that criterion is:

Net Worth > (Income) x (Age)/10

For example, if you are 35 and have an income of $50,000 per year, if you have a net worth (the value of everything you have, including retirement accounts, stock options, bank accounts, things you could sell, properties, home equity, etc…) of more than $175,000, then you are one of the rare individuals who has the potential to become very wealthy and reach a high level of economic security.  Think about it – if you had $175,000 and $50,000 of it was liquid, you could go an entire year without a job without changing your lifestyle a bit.  The chances of not finding a job in that period of time are pretty slim, so you have a high level of economic security.  If you cut back a bit, you could probably go a year and a half.  After that, you could sell your home and move into an apartment to regain your home equity, or tap into retirement savings to sustain yourself.  These aren’t things you would want to do, but it is better than sleeping on the street.  You would have a few years of economic security.

Of course, this criterion doesn’t work well for those just starting a job.  If you’re 25 and just starting a $60,000 per year job, you aren’t going to have $150,000 instantly.  It also doesn’t work well late in life.  For example, if you’re 60 and have a $100,000 per year job, hopefully you’ll have a net worth of a few million dollars since you have retirement in your near future, rather than just $600,000.  It is best applied for people who have been working five to ten years but less than maybe 25 to 30 years.

So what do these people with high net worth look like?  Well, they won’t be the people next to you in the shiny new car.  They will probably be the ones in the older, nondescript car.  They also won’t be the ones in the McMansion in the posh subdivision full of McMansions.  They’ll be in a safe but modest neighborhood, probably in a modest home with a well-kept yard.  You can find many examples on the blog, The Surprise Millionaire.  They often won’t be CEOs or bank presidents.  They may be janitors, teachers, lunch ladies, small business owners, engineers, professors, plumbers, or secretaries.  They will be the ones who seem calm during times of layoffs or turbulence.  They won’t need to be repaid immediately for expenses because they’ll have plenty of money to float the bill.  They’ll be financially secure, which is worth forgoing a big home and a shiny new car every couple of years.

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.

Why Rich People Don’t Smoke


FountainEver notice that rich people don’t smoke.  I’m not talking about some Hollywood star or starlet who receives millions from each picture – many of them are smoking cigarettes and a lot worse things.  I’m also not talking about some futures trader who makes a million dollar bonus each year, or some partner in a law firm who makes millions each year from the firm.  While some of these people may be rich as well, they may only be high earners, going through money as fast as they get it.  Perhaps they may even have high credit card balances because they are going through more money than they are making.  Remember Michael Jackson who was going bankrupt before his untimely death despite making hundreds of millions from albums in the 1980’s and continuing to receive royalties from not only his works but for the rights that he purchased from other artists.

I’m talking about people who are truly wealthy.  Those who could quit working or sell their business and have enough money to live comfortably upon for the rest of their lives.  These are not the kind of people one would find shopping on Rodeo Drive or in the boutiques of New York City.  The certainly could afford to do so, but they would rather save their money for more important things than clothes and gadgets.  They would also know that they could get the same stuff for far less in locations without all of the flash and high rents of these upscale shopping districts.  The fact is, they know the high mark-ups of retail and would prefer not to pay them.

Sure, some of these people may enjoy a cigar once in a while.  Perhaps a special blend that they get through one of their connections.  They would not be down at the convenience store buying a pack of cigarettes with their morning coffee, however.  They would look at the high cost, both the price of the cigarettes with all of the taxes, and the increase in their life and health insurance costs.  More importantly, the high cost in the form of the effects on their health would be of concern.

You see, these people have learned to control their impulses and bring discipline to their lives.  They evaluate every situation with logic more than emotions.   They are wealthy not because they make a large income from their career (although many of them do) but because they are disciplined in the way that they handle money.  In many cases that large income they have is due to sacrifice and patience in investing or building a business.  They realize that if they delay a large purchase until they can pay cash, they will save thousands of dollars in interest.  They know that in purchasing a house with a 30-year loan one will pay more than the value of the home in interest over the life of the loan.  If one chooses to save up a large down payment and buy a home with a 15-year loan, or save up and buy a home for cash, thousands in interest can be saved.  That savings of interest could be invested, which would increase their income further.  They will have the home and the money too, instead of just having the home.

That same discipline in handling money translates over into other areas of their lives.  They realize that eating too much will make them gain weight, so they use discipline in what and how much they eat and make sure they get enough exercise.  They know that by being physically fit and at a good weight they will suffer fewer health problems and live a healthier, happier life.

Most of all, they know that the person they stare at each morning in the mirror has the biggest effect on the state of their lives.  If they squander their incomes it is not the fault of MasterCard and Sax Fifth Avenue.  If they ruin their health with smoking it is not the fault of Phillip Morris or Benson & Hedges.  If they gain too much weight through over eating and not exercising it isn’t the fault of McDonald’s or the TV networks.  It all is has to do with the choices that they make.  If they wish to be wealthy, or be healthy, they make the necessary choices to do so.  The plan on what they want to do and make the necessary decisions to get there.  This is why the rich do not smoke.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment.

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

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.

Hey GenY, You Really Aren’t a Socialist


IMG_0123About a third of those in the GenY/Millennial demographic back Socialism according to an April Harvard Institute of Politics Survey, while just under half support Capitalism.  This trend has been seen in the support for Bernie Sanders in the Democratic primary among young voters.  Yet I wonder if all of those young voters are rejecting Capitalism, or just what passes as Capitalism in the US lately.

Capitalism is when the free markets decide on wages, prices, and success or failure of a business.  At the core of Capitalism is the need to provide for the needs of people in the most efficient way.  Companies that are able to serve the needs of the most people the most efficiently are rewarded and grow.  Those that don’t serve needs effectively fail.  Think about two restaurants across the street from each other.  Both serve your need to eat.  If one had slow, surly service and charged $20 for a baloney sandwich, while the other had fast, friendly service and charged $6 for a hamburger and fries, you and virtually everyone else would go to the second restaurant.  They served your needs better and more efficiently.

Socialism, on-the-other-hand, is when the government either owns the businesses/provides the services directly or has so much control of businesses through regulations that they effectively own the businesses.  Under Socialism, businesses that have the best connections politically are the ones that succeed because government officials adjust regulations to benefit those with pull.  Also, groups with political pull get special advantages over others.  The needs of the customer rarely gets much thought because the government generally doesn’t answer to the customer.

In our restaurant example, under Socialism, the baloney place  might stay in business if the owner had connections in the government because the burger place might be taxed and proceeds given to the baloney place.  Maybe the baloney place charges $20 for a sandwich because they pay their workers $15 per hour, and they are therefore seen as more benevolent than the burger place that pays workers $7 per hour.  Under Socialism, the burger place might also be forced to raise their wages to the point where the burgers cost $25 each and the quality was lower to keep the price from going even higher.  The workers would then be getting $15 per hour, but they wouldn’t be able to get a meal below $20, so they really wouldn’t be doing any better.  There would also likely be fewer workers since the restaurant might need to automate to cut costs, or maybe just the owner and his family might run the place without workers so that they wouldn’t need to pay the high wages at all, so there would be no jobs.

Really, the things that millennials find so distasteful about the US economy are due to government interference with the economy.  In other words, Socialistic actions.  For example:

  • Under Capitalism, the investment banks that made the bad loans in 2008 would have failed.  The CEOs and bankers who made the bad loans would have been out of a job and had to leave without their golden parachutes.  In a few days, new banks would have sprung up, hiring most of the people who had worked at the old banks, because banking services are needed.  They would have bought the loans worth buying from the failed banks.   Instead, the bank CEOs who made gobs of money when times were good were bailed out with our money by the government, leaving the same people in leadership positions.  If you want people to be rewarded only when they grow jobs and provide good services, and you want people whose greed and mismanagement results in the ruin of companies and lost jobs to be removed from leadership, you are not a Socialist.
  • Under Capitalism, if you wanted to start a hot dog stand (or another business), you would just go buy the cart, hot dogs, cooker, condiments, and a sign and open for business.  Existing businesses, however, have used their connections in the government to create all sorts of regulations, making it difficult for you to open your business.  Public safety is often used as a reason for the regulations, but many regulations just place a burden that keeps new companies from starting.  If you want the ability to start a business easily, you are not a Socialist.
  • Under Capitalism, there would be many businesses for most services,  This would lower prices to the minimum reasonable price since charging more would result in a loss of business.  Socialism would limit choices since you wouldn’t be able to start a business without the OK of the government, or there would just be one business – the government.  This would mean that you would pay more for things because there were limited choices.  If you don’t like to get overcharged because you have no choice, you are not a Socialist.
  • Just as Capitalism creates competition for consumers which lowers prices, it creates competition for workers which increases wages.  With Socialism, you are paid on a preset scale, usually based on the amount of time you have worked at a location.  You might also be paid based on perceived need.  If there is corruption (as there always will be), people who have political pull will be paid more.  If you want to be paid based upon the value you bring to your company, you are not a Socialist.

So, if you dislike business bailouts, big monopolies, lack of opportunity, high prices, and wages based on political pull and tenure, you are not a Socialst.  Maybe it’s time to reconsider that Bernie support.

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.