Tag Archives: investing

Embrace the Waste

Posted on by
1

I love that about a quarter of PressingPause’s readers are from outside the United States. Hard to know of course if they’re ex patriot readers, or as I assume, genuine article foreign nationals. The contents of this post will most likely strike them as odd. Especially those with no firsthand experience of living in the United States.

Americans are unusually productive and wasteful. We work hard Monday through Friday and then buy lots of things on Saturday and Sunday that we don’t need. Yin and Yang. Over and over. As a result, our homes, no matter the size, get filled up with all sorts of ridiculous stuff. By which I mean The Magic Bullet. The technical term is clutter.

Given this national characteristic, many moons ago, a tradition was born in the U.S. The garage sale. A garage sale is when a family spreads out all of their leftover, unused stuff in front of their home and offers it for sale to anyone that’s interested. Our neighborhood designates the first Saturday in June to be a “neighborhood garage sale”. Too bad you missed ours or you could have bought a Charlie and the Chocolate Factory DVD; some unused, unopened 10w-30 motor oil; or an outdoor umbrella real cheap. Since my family is more frugal than most, we don’t normally participate. But this year I decided it was time to do some “thinning” of our worldly possessions since it’s been a long time and the youngest is getting ready to depart for college. It was especially fun to partner with her.

American wastefulness is often stomach turning, but Saturday during our garage sale, I realized it also provides opportunities. The sociologist in me loved the garage sale. For four hours I talked to a cross-section of society that I almost never get to. Many were first generation Americans smartly taking advantage of multi-generational American waste. For many it was a weekend ritual that they took very seriously.

Rule one, show up early. If the newspaper advert and signs say 8:00 a.m., start cruising the hood at 7:30 a.m. That way you might just luck into a free wheelbarrow or a nice $20 edger. Remember, the good stuff goes fast. My favorite part of the morning was foreign speaking customers who appeared to be just getting going in the U.S. using their smart phones to research prices.

If you have the time, join the garage sale masses. There are excellent bargains all around. Just make a list of things you need first or you’ll soon find yourself on the selling end.

In the U.S., people routinely fill up their garages so that they have to park their cars elsewhere. And sometimes, the garage isn’t nearly big enough for all of their stuff, let alone their cars. When that happens, people rent a second garage in a storage facility. Thus, if you have a lot more capital than time, invest in a storage facility.

A shiny new one recently opened near us and every time I drive by it I think to myself, “Damn. That’s the perfect investment.” Americans’ waste knows no bounds. You can bet on it. And invest in it. And profit from it. Especially where there’s population growth. Simple to build, storage facilities require little overhead. Unlike a rented house, no one is every going to call you at 1 a.m. to complain that the toilet is clogged again. There may be downsides to the investment, but I don’t want to know them. My ignorance makes me blissful.

Do not try to talk me out of it. I’m taking the $160 I made this weekend, embracing the waste, and going all in on another storage facility. I probably need other investors to buy the needed land. Care to join me?

Why I Ignore Stock Market Doomsayers

Posted on by
4

Doomsayer—a person who predicts impending misfortune or disaster. Mike, a good friend and running partner, is a stock market doomsayer. Routinely, like this morning, he tells me to sell. The doomsayers are certain that the mother of all corrections is right around the corner.

What Mike and his ilk get wrong is that when it comes to personal finance, the value of the Dow, the S&P, and the Nasdaq aren’t nearly as important as one’s income, investment income, expenses, and “historical risk return”.

If you asked me to help you with your personal finances, I’d want to know four things. 1) What’s your take home pay? 2) If any, what’s your annual passive income? 3) On average, how much do you spend each month? 4) If any, how much of any stock market-based investments can you accept losing in the next few days?

1) Annual income. This is straight forward. In the new economy, nearly everyone’s challenge is increasing it without working inhumane hours. That’s why people continue their education, work hard for promotions, and sometimes decide to work long hours.

2) Passive income. This is the money your savings generate. Nearly everyone’s challenge is increasing it in our zero interest rate world. Historically, cash has generated 3-5%. Today money markets and certificate of deposits earn pennies, so when adjusted for inflation, they’re slowly losing value. That’s why people invest in stocks, bonds, and real estate. Passive income includes stock and bond dividends, capital gains, and rental income. I also consider company matches a type of passive income. And social security for the 67+ set.

3) Average monthly expenses. Few people know this. Start keeping track of every dollar you spend using MINT or something similar and then read this recent blog post from Mr. Money Mustache, The Principle of Constant Optimization, for a great tutorial on managing spending. In particular, I second this suggestion:

Make a list of your ten biggest monthly expenses and tape it to your fridge, just so you know they are all there, constantly using up your money, so they had darned well be worth the resources they are consuming. If they are worth the expense, continue to enjoy them. If they are not, optimize them away. Look at your daily routine from an outsider’s perspective, and figure out if you are really getting the most value from each one of your hours.

4) Historical risk return. Where I invest, I can see my entire portfolio online. And with one link I can see a detailed analysis of my holdings including the all important “historical risk return (1926-2012)”. Right now it says the worst year an investor with my assest allocation has experienced is -17.2% in 1931. Ironically, it also says investors with my asset allocation have experienced losses in 15 of those 87 years or 17.2% of the time. So if I round up, on average, I have to expect to lose money every fifth year. Also, if I have $100,000 invested, I have to be prepared for that to turn into $82,800 overnight. That’s the price of admission to a historic stock market run up.

Here’s what the stock market doomsayers won’t acknowledge. As of May 15, 2013, the S&P 500 is up 141.5% since March 5, 2009. While they’ve been crying wolf, someone that had $100,000 invested in the S&P 500 on March 5, 2009 now has $241,500. Here’s what you won’t hear the doomsayers say, “We missed a historic rally because we we’re too afraid of the downside.”

Nor will you hear them say this truism, they’re not smart enough to time the market. Despite Mike’s dire warnings, I’m going to stay partially invested in stocks because I can accept a 17.2% historical risk return in exchange for what my portfolio analysis reveals to be my 87 year average rate of return, 7.6%.

Tune out the doomsayers and forget trying to time the market. Instead, control what you can. Most importantly, whether your earned income and passive income regularly exceed your expenses.

Why We’re So Susceptible to Decision-Making Paralysis

Posted on by
3

The short answer. Because we succumb to self-induced pressure as a result of thinking about big decisions in zero-sum, make or break, right and wrong terms. Is this the absolute best college to attend? The perfect person to commit to? The ideal number of children? The best job? The best possible residence? The right investment?

The longer explanation. Thanks Bill Pollian, former Indiana Colts General Manager, for a very helpful alternative perspective on big-time, life decision-making. Asked why Peyton Manning signed with the Denver Broncos and not the Tennessee Titans, San Francisco Forty-Niners, or any of the other NFL teams he recently talked to, he said, “The decision to play for Denver wasn’t the important decision. What’s most important is all the decisions he makes from this point forward.” Beautiful. My interpretation. If he continues to do the things that have made him so successful throughout his career, outworking everyone else, he’ll continue to win no matter what color uni he’s wearing.

Some high school grads think there’s one best college for them. Pollian would argue it doesn’t matter if you get into your preferred college. What matters more is whether you apply yourself at whatever college you attend. Do you take full advantage of the opportunities? Do you do the reading, take challenging courses, develop self understanding and practical skills, pursue internships, figure out what work might be meaningful, build social capital?

Some people think there’s one “soulmate” for them. Pollian would argue it’s less important that you feel a mystical “love at first sight” connection to your partner than how determined you are to make the relationship work. Based on Pollian-logic, there’s not one right person, just proven processes. Mutual physical attraction is a wonderful thing, but the physical elements of love lessen over time. Long-term committed relationships are less about flashy wedding ceremonies and more about day-to-day decision-making, mutual respect, shared values, interpersonal skills, kindness, and resilience.

A final example. Building wealth is less about picking the absolute best stock or creating the perfect asset allocation and more about distinguishing between “wants” and “needs”, day-to-day discipline, and regularly saving more than you make.

The next time you have an especially important decision to make take some pressure off by remembering that a positive outcome hinges mostly on the long-term, cumulative effect of the numerous daily decisions that follow.

Women Make Better Money Managers

Posted on by
Reply

If you’re of the male persuasion, slowly step back from the check book or computer, and find a woman to take over your financial decision making.

According to Ronald T. Wilcox, a growing body of research reveals distinct differences in how married men and women approach money and investing. Because men tend to be overconfident, they trade stocks and bonds more actively because they think they know what the next market movement will be. As a result, they incur various transaction costs associated with trading but don’t pick assets any better than women. They’re also less likely to listen to financial advice.

Women are less confident than men about their financial abilities, switch investments less often, and are more likely to listen to financial advice. As a result, they generate risk-adjusted returns superior to those of men.

The Wall Street Journal summarizes Wilcox’s findings thusly, “Men may think they know what they are doing when it comes to investing but often do not. Women may think they don’t know what they are doing but often do.”

Truth be told, you can plug in anything you want for “investing” in the last paragraph. Now if you’ll excuse me, the market is about to close and I have some trades to make.

Bonus link—a couple that has figured out how to enjoy a better quality of life despite making considerably less money.

My “not motivated by money” award nomination double bonus link—and favorite 2012 US Olympian and favorite youth sport parents—Missy Franklin, Dick Franklin, and D.A. Franklin.

Market Volatility and the Invisible Gorilla

Posted on by
1

Familiar with the invisible gorilla social science research? Learn about it here. It demonstrates that although we think we see ourselves and the world as they really are, we’re missing a whole lot.

The personal finance invisible gorilla is the precise difference between your average monthly income minus your average monthly expenses. Understandably, right now, with the stock market fluctuating wildly and ultimately losing value, many peeps are obsessing on the declining value of their stocks and bonds.

Meaning they’re not paying nearly enough attention to the two things that will determine their financial well-being medium and long-term. (1) The relative difference between their average monthly income and expenses and (2) their time horizon.

Forget investing altogether until your average monthly income exceeds your average monthly expenses ten to twelve times a year every year.

A friend bought some AAPL shares during last week’s roller coaster ride and I’m probably to blame because I’m a fanboy, I own it too, and occasionally talk it up (everyone talks about their gains, not their losses, my term for this is”gain bias”). His first day of ownership just happened to be a good one so he emailed me, “Nice amount of returns in 24hrs.” To which I replied, “Dear Usain, It could hit 300 before 400. Financial independence is a marathon.”

Should probably trademark that line before I start hearing it on MSNBC. I’m learning not to sweat large paper losses during market corrections because I know that overtime, my modest income/expense differential, which translates into monthly cost-averaged investing, will lead to greater wealth in five, ten, twenty years.

Taking the long view is not a panacea because there are two other vexing challenges: 1) increasing one’s average monthly income and 2) reducing one’s average monthly expenses. People focus too much on 1 (offense) and not enough on 2 (defense). If only we could all find jobs that paid mad money or find more hours in the day to work or get others in our orbit to kick in more on the income side. Defense isn’t that complicated. Resolve to eat out less. Camp out. Buy movie tickets at Costco^. Commute by bike. Buy clothes at Costco^. And most importantly, quit bringing sh*t home you don’t need.

And speaking of gorillas, not a sci fi guy, but still loved really liked (moms says you can’t love something that can’t love you back) The Rise of the Planet of the Apes.

^ Full disclosure, should of held them, but I sold my Costco shares awhile back. For a loss.

My new old lunch box

Winning Personal Finance 2

Posted on by
Reply

I’ve been successful for several reasons: 1) most importantly, my parents’ work ethic, saving habits, and frugality have been deeply imprinted in me; 2) second most important, I chose to marry someone who wants to live a similar lifestyle as me; 3) I’ve educated myself reading and studying lots of material; 4) I found Vanguard early on which has saved me a lot in investing costs; 5) I’ve come to enjoy managing money so I set aside a few hours every week to continue learning and make decisions; and 6) I almost always avoid impulse purchases.

What might one and two mean for you? When it comes to family history and partner, I’m a personal finance +/+. The gal pal and I have probably had as many financial arguments as the next couple, but they’ve ebbed in number and intensity over time, and ultimately, our personal financial values are very similar. What if you’re a personal finance -/+ or the dreaded -/-? While it’s impossible to completely undo a “losing personal finance” family history, financial counselors can help minimize the damage and your time and resources are probably best spent working with them on minimizing the effects of negative role modeling before turning to asset allocation, minimizing taxes, and the like. Similarly, if your partner and you aren’t in sync, financial/couples counseling is probably more important than technical financial advising. Proactively, the more premarital counseling focused on each person’s financial history, values, and goals, the better.

What about reasons three, four, and five? How much time do you set aside each week to educate yourself about saving, investing, minimizing taxes, and related personal finance topics, not counting paying bills and balancing your check book? Put differently, how much time do you spend thinking about the forest that is you or your family’s financial well-being? My guess is, on a weekly basis, the average person spends very little time thinking about where they’ve been, where they are, and how to reduce expenses. Quiz. What was your net worth, assets minus debits, on 12/31/09? Will you recalculate it at the end of this month and then every quarter? If my assumption is right, is it any surprise that so many people are unsatisfied with their personal financial situation?

Reason six leads to tip five or experiment one, don’t buy anything that hasn’t been on your “To Buy” list for at least a week. Personal example. Three plus years ago I bought eight pairs of $120 running shoes for $60 a piece. Running shoe companies “update” their shoes regularly, every year or so. As far as I can tell, “updating” shoes means “we changed the colors”. If you’re savvy, you can pick up the “old” model at half price. When the big box of eight shoes arrived, it blew the daughters away. “Dad, you saved $480!” “Tru dat.” Fast forward, I’m halfway (250 miles) through pair eight so I’ve started to shop for a similar deal. No luck until last week. I found my Mizuno Wave Creations, model 10, for $65. Model 11, $135. Only two sizes were available, one was mine. Darn if the website would only let me buy two pairs, so I called them. They said they’d investigate and get back to me. Long story short, they found a third pair and all three are in transit. Normal cost for three pairs at $135 and 8.5% taxes, $439.42. After thanking the salesperson I said, “I saw something on-line about a Costco or Triple A discount.” “Yes, what’s your Triple A number?” Cost went from $201.50 ($6.00 shipping) to $181.50. Let’s see you do that on your fancy pants iPhone with the barcode application.

Now my $9,000 loss is a mere $8,742.08.

Winning Personal Finance 1

Posted on by
Reply

Everyone is hocking financial advice so how does one decide whose to follow? For example, why on earth should anyone pay any attention to the personal financial advice I offer below? What makes one advisor more credible than another, credentials, their popularity, their marketing savvy, something else? Credentials are nice in that they create a floor with respect to technical knowledge, but they don’t tell you much about the person’s ethics, integrity, or track record. Ultimately all credentials tell you is they succeeded in passing exams.

If I was looking for a financial advisor I’d look for someone that managed their own money well and emphasized saving, investing simply, and had other values that jived with my own. But how do you know if someone manages their own money well when we’re loathe to talk about our personal finances?

Tip one. Ask anyone wanting to manage your money to prove that they’ve managed theirs well. That will probably reduce the pool from which to choose in at least half. Take me for example, I have managed my family’s money well, but for privacy reasons, I won’t provide details except to say that for every ten financial decisions I make, I tend to make seven or eight good ones. Were I in the biz, I would completely understand if that lack of specificity caused potential clients to walk away.

Tip two. Ask any potential financial advisor about some of the mistakes he or she has made and what they learned from them. Last year I made a $9,000 mistake. I repeat, last year I made a $9,000 mistake. It was a brutal, self-inflicted wound that took time to shake. My goal is not to be perfect, but to consistently make more good decisions than bad. Look for a humble advisor who acknowledges complexity and doesn’t over promise. That will probably reduce the pool of potential advisors by at least another half.

Tip three. Even if you find a financial advisor that meets all of those criteria, don’t decide to work with him/her without first looking at yourself in a mirror and repeating several times, “No one will ever care about my financial well-being as much as me.”

Tip four. Never accept any financial advice passively. Instead educate yourself and recognize that no one will ever care about your personal financial well-being as much as you. More specifically, become your own financial advisor. That’s the best financial advice I’ll ever offer. Become your own financial advisor.

Well, the best advice until Part Two.