Archives For Investing

According to my 21 year old self, I was going to be a multi-millionaire at my current geriatric age of 35. Sure, this was the same 21 year old who was doing death rides in shopping carts, throwing watermelons off of apartment balconies and drinking too many Natty lites*… so I don’t really care if he’s judging me now!

I didn’t have a plan then, I only had hope. Hope won’t make you rich, but I have learned what will – something much more exciting than watermelon tossing – passive income!

What I’ve learned is most of us can’t become rich off of our salaries alone due to two reasons:

  1. Lifestyle Inflation: spending will increase to consume full income no matter how much one makes
  2. Salary growth (or lack there of): our salaries won’t grow fast or high enough on our own to make us rich

We live in a system that uses our emotions against us to drive us in a direction that’s not to our advantage. You were more than comfortable in your sweet 1993 Chevy Lumina with maroon interior and cheap Ikea furniture when you graduated college and got your first job, but it’d be an utter embarrassment if you still had the same dull trophies one full year after that, right?? I sure thought so, and I let lifestyle inflation dictate a very small savings or investing rate.**

As for the salary growth, unless you’re able to pull in a huuuggeee income from doing things like being a dirty politician or packaging bad car loans into debt instruments to leverage against and sell to Wall Street banks, you’re going to need some additional assistance to get rich. This might seem dire, but there is hope.

Hello lack of hope, meet Passive Income

Passive income is money you get through automatic channels you’ve previously set up that require very little effort from you. They’re sweet, but they take some time to get going because usually it is returns you make off of your own money. Other people define passive income more loosely like selling a book you wrote on Amazon or selling handmade leather bracelets on Etsy, but those don’t sound passive to me because they require a lot of work and I’m not good at leather working***.

Let’s review the more common types of passive income:

  1. Investing
  2. Real Estate
  3. Building a network of drug dealers
  4. Pimping
  5. Rodan and Fields

1. Investing

I’ve been investing since I was 14 when I bought some gold coins that I would later sell to purchase my first truck. My first stock investments came in the biotech and dot com bubble in 1999-2000 when my dad let me throw in some money to his account as we played the market. It was amazingly fun when our portfolio was going up 10% a day, but when it all came crashing down it took my dreams of my first million before high school with it. I could’ve worn a class ring on every finger and had my own harem of cheerleaders.

My next investments came after college with my first company-provided 401k and an eTrade account with a few hundred dollars of “play money”. It started building up very slowly after a few years to five figures (probably less than $11k) and this is when I realized I would need to make the returns come faster if I ever wanted to be rich. Forgetting my earlier lesson of getting burned in the market, I started playing with futures, options and penny stocks and once again lost most of it. If anyone tells you to day trade or start playing with those dangerous asset classes to get rich, run.

It took me quite a few years to finally realize what investing was all about. Small additions of money invested consistently over the long term in a safe, diversified portfolio. No get rich quick schemes, no day-trading and no pyramid schemes. As you progress in your career, you’ll need to continue bumping up your dollar contributions to really see your nest egg grow and you’ll start to experience compound interest, which Einstein called “the eighth wonder of the world”.

Compound interest happens when your money has babies of its own, and eventually those babies start to have babies. Obviously, the more money you have, the stronger and faster the effects of compound interest. Once your nest egg starts growing big enough, you’ll see passive income really kicking in as your stocks start throwing off dividend payments. Also, unless you’re wasting all of your money on penny stocks, you should see some major gains in the values of the stocks which you can eventually sell for a profit… yielding more passive income.

2. Real Estate

We jumped into the real estate game when we rented our house out in Dallas after fixing up the ‘ol Airstream and traveling North America. We’re lucky to clear over $1,000 a month on our mortgage, so we’re creating a positive passive income. We may lose this stream of passive income when we’re done traveling, but for now it works.

I don’t have too much experience with real estate yet, so I’m not going to BS you, but it’s definitely a secondary passive income stream I want to develop. My goal would be to start acquiring some properties using the 1% rule (gross income should be greater than 1% of the house value) and see if I like it.

The problem is you still need your salary to have enough money to invest in the beginning.

Even when we were both working last year, there were days when the stock market movements would make or lose more money in a day than we made from work! That’s when passive income starts getting exciting… especially when we’re in the middle of a bull market like the one we’re in now. However, obviously, you gotta have some money before you can start buildling these passive income streams.

You need to do all of the dirty little things like budget, sell stuff on Facebook, live off of one income (if your family has two), put the kids to work, make sure the pets pull their own weight and work more. You have to be serious about this for a long time before your money can start making money. You’ll have set backs along the way like a big drop in the stock market, but as long as you’re still investing, that’s a good thing, because you’re able to buy stocks for cheaper.

This is how getting rich will work for the majority of people. Sure, there are phenoms like Mark Zuckerburg who invent an entirely new industry and make billions (maybe this is what my 21 year old self planned to do), but for the majority of us, it’s nose to the grindstone… or better yet, budget to the grindstone.

 

*Don’t judge me, it was in college… and those particular memories were from the summer when I stayed in Stillwater and co-directed a summer camp

**I think it was actually a negative savings rate

***You’d think I could learn while living in a camper for a year, but much like “learning to play the guitar”, my lack of artistic ability may always prevent me from being a proper hippy

It’s a scary time in the stock market right now. Oil is plunging, China’s stock market crashes day after day and the rest of the world seems to be going down with it. Famed investor George Soros sees a crisis in the financial markets that echoes 2008 when of course, we had our last major crash.

The end is near and all of the financial analysts are starting to get on board. Every day investors like us are getting scared and many are probably thinking about getting out.

BREATH… the stock market can be scary, especially when the tides of optimism turn and everyone starts projecting worst case scenarios. The truth is, no one really knows what the market will do and often times the fear or success is already built in before we even know about it.

I’ve failed in trying to time the stock market before, so now I largely ignore it. In fact, I first started day trading early on:

“I was a senior in high school, sitting in my Physics class and watching my road to millions pave before me.  My dad and I started a stock account with $3,000 and within four months took it up to $28,000.  This was too easy.”

I was right, it was too easy and little did I know, we were in the peak of the dot com bubble and months later I’d see those tens of thousands disappear even faster.

So here I am, trying to ignore the fear, but even scarier, I continue to invest and buy more Apple stock when it’s getting even more negative press than the overall market! The benefits of diversification are very real and if you’re not real interested in stocks, you should continue to stay diversified and buy funds like Vanguard’s Total Stock Market Index Fund (VTSAX) – instead of individual stocks.

However, if you’re a little more familiar with stocks, let’s dig a little deeper so I can explain why I’m buying Apple even though it’s getting beat up. To start, from Warren Buffett:

“Diversification is protection against ignorance. It makes little sense if you know what you are doing”

Easy for Warren to say, he has one of the brightest minds (and teams) in the whole financial industry. However, “ignorance” sounds like a pretty harsh word, but in reality, it only means “lack of knowledge or information”. So yes, most of us are very ignorant on the stock market. But what if you had a few stocks you really followed and knew something about. Maybe you do have a chance then:

“And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times” – Charlie Munger

I’ve invested in Apple since 2013 when they had their last major beat down by the market. This article has a pretty good summary of the negative press, but everyone joined it and said Apple was done innovating and had reached “peak iPhone demand”. Their stock was in the dumps and the end was near.

That’s when I bought my first Apple stock at a split-adjusted price of $56 per share. Analysts said it would go even lower and many people agreed with them. Over the course of the next year, the stock price doubled.

You see, as much as we like to pretend the stock market is “efficient” or “rational”, it’s not. It feeds off of emotions and it’s incredibly good at getting you to “quit it” just before it makes the next major jump. The market is an incredible psychological test that isn’t for the faint of heart. The best bet is to remove your emotions, invest for the long term, and think of “Mr. Market” the same way one of the strongest minds ever in investing, Benjamin Graham, described:

“Instead of thinking the market was efficient, Graham treated it as a manic-depressive who comes by every day. And some days Mr. Market says, “I’ll sell you some of my interest for way less than you think it’s worth.” And other days, he comes by and says, “I’ll buy your interest at a prices that’s way higher than you think it’s worth.” And you get the option of deciding whether you want to buy more, sell part of what you already have, or do nothing at all.

To Graham, it was a blessing to be in business with a manic-depressive who gave you this series of options all the time.”

Right now, I think Mr. Market is depressed and willing to sell me stocks much cheaper than what they’re worth – especially Apple. You can find many analysts who disagree and many who agree, but based on my knowledge of their financial strength, their incredible reach around the world and their continued ability to make more money, I’m in. I traveled to Singapore, Bucharest and Bangalore last year and all three country’s residents either had iPhones everywhere or wanted to.

In the end, I’m not a financial adviser, I use a lot of anecdotal evidence, and I would encourage you not to make any investing decisions based on what I say. The best way to invest is to think long term and have a plan to regularly contribute. It’s funny, the last time I wrote a post about investing for the long term was back in August 2011 when the market was in the middle of a 15% correction… and in the next two years it jumped around 50% in value! I may be wrong this time and the market may crash, but if that happens I’ll continue investing just like I do now.

For most people, 401k’s are the best option to generate a large amount of wealth. They’re easy to set up and use, and many companies offer a matching contribution that makes it even more lucrative.

I’ve participated in my company offered 401ks since I started working in the corporate world 11 years ago and even though I was a Finance major and always hear about the dangers of high fees, I never really checked what I was paying. When I started my new job a few years ago, I basically selected an allocation that sounded pretty good and didn’t pay much attention after that.

However, now that I’m trying to figure out when we can retire (a later subject for another post), I’m really starting to understand the impact of half a percent! The common number people use when determining the amount they can safely withdraw from their nest egg in retirement (SWR = Safe Withdrawal Rate) is 4%. If you have a million dollars, that means you could pull out $40,000 per year with a pretty good chance of your money lasting 30+ years. However, if you’re paying a financial adviser or other fees of 1%, you’re automatically taking away $10,000 per year away from your retirement.

Anyway, that’s what made me think about my 401k and how much they’re charging. It turns out I was making some dumb decisions. Check out the table below which is the actual investments overview for my 401k. I’ve hidden some things and added the “FEES” column on the table because of course they wouldn’t make it that easy to find. Let’s take a look:

This is an actual screenshot of the funds available through my 401k

This is an actual screenshot of the funds available through my 401k

My biggest mistake was contributing to three funds that were charging .35%, .51% and .67%. Why did I even invest in those funds in the first place? After doing a little research, I think I know why. The area that is blacked out in each fund title is my company’s name… and yes, those are the four funds with the highest expense ratios. I probably put money into those funds because I was comfortable with the company name and it felt okay.

Ohhh, but no, it turns out they’ve created these “specialty” company funds so they can make more money off of us! Yes, that’s what really led to the HOLY CRAP moment! Check out the highest fee’d fund (SM/MID-CAP EQUITY) with the rate of .67% and compare to the similar fund (US SMMID CAP EQ IDX) with a tiny .05% fee and it has better returns over one and three years!

It may seem pretty tiny, but let’s see how these little HOLY CRAP fees add up over time. We’ll use two different starting investment amounts, $100k and $1 Million so you really see the impacts. To keep things simple, I used a future value calculator and estimated the value different of going from a .5% fee down to a .05% fee.

Basically, it’s a calculation to see how much bigger your nest egg can be by paying lower fees. I used an investment return of 7% annually. Let’s get to the chart:

Investment Fees Impact Table

HOLY CRAP! Yes, that right columns means if you cut your expense ratio from .5% to .05%, you’d have almost $45k more on $100,000 investment and over $440k more on a million dollar investment! That’s what these innocent sounding little fees will actually cost us! That’s pretty messed up – especially if you have similar funds available with lower fees.

So what should you do?

Log into your 401k or other investment account and check out your fees. You don’t have to make any changes right away, but at least make sure you know how much you’re paying. Then look at the table below and realize how these fees eat away at your investment annually:

Killer Fees

Now you might be getting angry enough to actually make a change. Your company determines the funds you can choose from in your 401k, so you should look through your list and investigate the fees on each one. These are still pretty hidden, but you can usually click on the fund name and it should be on that page. If you have any high fees, you should look at changing those investments to fund with lower fees if similar investment classes – you can exchange funds within your account.

If you have a stock account outside of your 401k, you should do the same thing. The best low cost funds are all usually from Vanguard. If you need something right away to put your money into, I’d recommend Vanguard’s “VTSAX” which is their Total Market Index Fund and charges a mere .05% if you have more than $10,000 to invest in the fund.

These little numbers can make a huge different in your retirement nest egg over time. So go on… you can easily do this in a few minutes while your boss gives that boring update in your conference call that you’re not really listening to anyway. If you need more investing help check out my post on how to start investing.

Investing is a foreign subject for most of us – whether we like to admit it or not. Even though I majored in Finance, it still took me a long time to learn what the whole “investing” thing was all about. Fear not, just like the timeline of an entrepreneur, you can now see where you stand in the progression of investing!! For many of us, it goes something like this:

1. “Dow”, “NASDAQ”, and “stock market” might as well be Latin for as much as you understand them
2. Hear someone on TV talk about the importance of investing
3. Realize you should probably start paying attention
4. Your “friend” the financial advisor offers to meet with you
5. Decline their offer for the fifth time but know you are running out of excuses
6. Google the term “Investing” and 230,000,000 websites pull up offering to help you get started – you learn what “Dow” means
7. Close the webpage because Modern Family is on
8. Parents ask you if you’ve started investing yet, you lie and say yes and explain to them what the “Dow” is
Continue Reading…

How to Start Investing

February 2, 2013 — 8 Comments

So, you’re ready to jump into investing and working on your first million…. the only question you might have now is how to start investing! It’s may seem very complicated, but if you start slow, I promise you that it’ll slowly start making sense.

The most important factors in your investing success are time and normal contributions. You should start investing as early as possible, regardless of the amount. Excuses not to start are easy to find, but you should do everything you can to begin contributing on a regular basis and investing for the long term.

I’ll give you an example that shows the importance of learning how to start investing early. Let’s say your goal is $1 million dollars (read like Dr. Evil) by the time you’re 65… believe it or not, someday you will be 65! I’ll assume an 8% market return.

If you start investing at age 25, you’ll need to invest $300/month to hit your $1 million by 65. If you start at age 35, you’ll need to invest $750 a month to hit the same $1 million dollar target. If you start at age 45, you’ll need to invest over $1,500 per month!! Check out millionaire chart in the money tools that expands these scenarios further.

If you get paid every two weeks, that’s $150 gone from your paycheck if you’re 25. Can you handle that?

After you learn how to start investing, you must maximize the advantages offered to you. I’ve created a chart to help you determine where to start investing. It’s mostly dependent on what your employer offers as a retirement program. If they don’t offer anything, your best bet is to move to Tier 2.

How to Start Investing

Retirement accounts are nothing more than ‘vehicles’ where you put investments. The Tier 1 and Tier 2 accounts are all considered retirement accounts. The Tier 1 accounts are offered through your employer. If you work for a corporation, the most likely option is a 401k or Roth 401k. If you work for the government, you’ll probably have a 403b.

Many Tier 1 accounts offer the unique benefit of matched contributions. For example, many companies will match a pre-determined amount of your 401k. My first company matched .50 on each $1 up to 6% of my salary. This is free money, and you should take advantage of it. In my example, I would receive a full company match if I invested at least 6% every paycheck.

Tier 1 accounts also offer tax advantages. Most of them are pre-tax accounts. This means you put the money in before it’s taxed; your money is pulled from your paycheck before the government can even touch it! However, they will tax it when you retire and pull it out of the account.

The Tier 1 Roth 401k is a post-tax account, meaning you contribute income that is already taxed. The “Roth” title means your money will grow tax free and you can also withdrawal it tax free. This can be very advantageous for young investors because you effectively ‘guarantee’ the amount you will pay on taxes because you’re paying them now. The assumption is that most of us will pay higher taxes when we’re older, due to a combination of possibly increased income and higher taxes.

If you don’t have access to invest in any Tier 1 accounts, then you should automatically move to Tier 2 accounts. Tier 2 accounts offer advantages of their own, but they generally aren’t as advantageous as matched Tier 1 accounts. Tier 2 accounts can be opened by any individual who has a source of income.

Tier 2 accounts consist of IRAs and Roth IRAs. IRA stands for individual retirement account. They don’t allow you to contribute as much per year as most Tier 1 accounts. The regular IRA uses pre-tax money, but the Roth IRA uses post-tax money as mentioned before.

Many people will choose to contribute to a Roth IRA before a Tier 1 account that isn’t matched. That’s because the Roth IRA offers tax-free growth and withdrawals along with more flexible withdrawal requirements. Once you put your money in a Tier 1 account, it’s stuck until retirement unless you want to pull it out early and pay taxes and a penalty on it. Cashing out a 401k is generally a bad idea unless it’s a true emergency. Even if you switch jobs, you should roll your 401k into an IRA before you cash it out.

Anyone can open a Tier 3 account. They don’t offer any tax advantages, but it does allow you invest.

For a quick one-pager on how to start investing, reference the Investment Accounts cheatsheet within the Money Tools section to determine contribution amounts, tax specifics, and withdrawal information for all of the tiers. Each type of account is a little different in what they allow.

If you work for a company or the government, you can work with your HR department to determine how to start investing. If you don’t have access to a Tier 1 account, you’ll typically want to open a Tier 2 account through any normal brokers that you typically hear about on TV or the Internet.

Once you open the account, the first thing you’ll need to do is put money in it! You can then fill them with many different investments, such as stocks, mutual funds, and bonds. If possible, try to contribute 10% – 15% of your income.

The type of investments you purchase is up to you. Stocks are considered the riskiest because you aren’t as diversified if you only buy one or a few stocks (all of your money is in one basket). Mutual funds are a collection of individual stocks that are ‘bucketed’ together. You buy a share of a mutual fund and get a piece of the many different stocks included. This increases your diversification and lowers your risk.

If you’re not willing to put time into researching companies, your best bet is to probably go with mutual funds or exchanged traded funds (ETFs). ETFs are similar to mutual funds but can be purchased and traded like stocks. You can buy an ETF that mimics the major averages (DOW, NASDAQ, etc) or other investment types (gold, high tech companies, etc).

When buying mutual funds, do some work to explore annual fees and load fees. This will determine how much you pay to get into the fund and the amount you’ll pay annually. I like Vanguard funds because they’re known for having some of the lowest fees. Another advantage of ETFs is that they’re fee free.

The best way to learn how to start investing is to start today, but you should enter slowly. Don’t expect to learn everything in one day because it takes time. Also, don’t expect to get rich overnight because that usually leads to you losing money!

Now, do you know how to start investing?? Do you have any questions related to the information above? If so, feel free to leave them in the comments section.