I recently read an article about a trucker in the Midwest who, along with his wife of many years, had won a Powerball lottery worth over $30 million. When asked by reporters what they were going to do with the money, the couple replied "pay off debts, help some family and friends who are struggling, look for a new house, and buy a new truck." The lucky trucker than went on to explain that he had no intention of retiring to a life of leisure, and that he needed a new truck because his old truck had recently expired after serving him well for over 2 million miles.
We have all heard the story about the friend of a friend who has won a lottery, spent it all in few years, and then ended up worse off than they were before the winnings. The problem, I believe, is a lack of understanding of the responsibility of money.
When you've never had any responsibility before, why should you be expected to be responsible now? I'm not saying our lucky trucker is not responsible, I am saying that he has never had to be responsible for managing a fortune of any size, and has no idea what he is in for. It could be compared with becoming parent for the first time, only you didn't have 9 months to prepare. If he is going to continue to work because he'll get bored fishing and playing golf everyday, he isn't taking into account his new responsibilities to manage his investments, or to at least pay very close attention to the people he hires to manage his new money. He now has the great responsibility to oversee and to make decisions that could make him and his descendants very comfortable, but it will not happen automatically. He needs to begin a long process of educating himself about options, and carefully choosing his advisers. This should be a full time job. In terms of money, he has never been a parent before.
For the rest of use who are still diligently building our fortunes, it is important for us to continue to build our knowledge base as well, and to stay informed about new types of investment options. We have the time to prepare for our future responsibilities, and should be at the very least reading the business section of our newspaper or favorite website. There is a direct correlation between how well we prepare now, and how much responsibility we will have in the future. Other options include watching business news shows, or taking a basic business or accounting class online or at a community college. It is only through this regular preparation that we can be expected to truly gain a working knowledge finance.
Saturday, June 30, 2007
Wednesday, June 27, 2007
Contrary Like the Rich
It's been proven, time and again, that the wealthiest among us do not make the same choices as the majority of us. For example, a recent poll found that most individuals with investable assets in excess of 2 million (that is, assets excluding principle residence) thought that now or the near future was a good time to purchase real estate. I’m not sure if I agree, but I do believe we are headed for a good time for buyers. So if now seems like a natural time to search out some valuable real estate and grab it at a steep discount, lucky you, you’re not alone.
Several years ago I when I was looking for my first house, I was renting an apartment in a quaint little neighborhood in Baltimore City. I had lived in the neighborhood for almost a year, and had already made many great friends and truly grown to appreciate the pre-WW1 Victorian architecture. I had also discovered several local shops, restaurants, and markets where I could buy everything I needed. I no longer needed to drive to get what I needed to survive and loved it. I sold my car and took the bus on the short ride downtown to my job at the time, as a tax consultant with Ernst and Young.
My co-workers at E&Y told me I was an idiot and worse. “Everyone knows real estate in the city never appreciates, if you want to make any money in real estate you need to buy in the county, everyone knows that!” Everyone did know that, which is why I was able to buy a gorgeous 3-bedroom 1-bath Victorian porch front row home with inlaid parquet floors and a perfect tin ceiling for $80,000. This, when my coworkers where buying cookie cutter homes in the suburbs for $250,000 - $500,000, and because of their distant commute to the office, they had to maintain cars and pay $200 to $300 a month just to park them downtown (not to mention insurance, gas, and car payments). I was saving a bundle, and felt that I had found a real value. I figured out that what I was saving would allow me to accumulate the same amount of savings in 10 years that it would take them 30 or more years to accumulate.
I really didn’t care what everyone knew, I cared about what I knew; that I loved the neighborhood and the house. I believed that the carefree, pedestrian lifestyle it enabled me to have was a tremendous value. Even at that time, there were cars parked in my neighborhood with values close to what I had paid for my house, and I believed the real estate prices in the neighborhood would at some point appreciate dramatically. At the closing I joked with my agent, “we’ll sell it when we can get $250,000 for it.” She smiled politely, I’m sure thinking I was a total idiot, but I sold it 6 years later for $260,000. I absolutely doubt my old co-workers homes appreciated at a pace anywhere near that.
I bought the house because I believed it to be a value when no one else did, and I happened to be right. The rich buy assets when they are a value, and sell them when they are expensive, they buy low and sell high. Supply and demand, when everyone is a seller, be a buyer, and when they are all buyers, be a seller, be a contrarian.
Several years ago I when I was looking for my first house, I was renting an apartment in a quaint little neighborhood in Baltimore City. I had lived in the neighborhood for almost a year, and had already made many great friends and truly grown to appreciate the pre-WW1 Victorian architecture. I had also discovered several local shops, restaurants, and markets where I could buy everything I needed. I no longer needed to drive to get what I needed to survive and loved it. I sold my car and took the bus on the short ride downtown to my job at the time, as a tax consultant with Ernst and Young.
My co-workers at E&Y told me I was an idiot and worse. “Everyone knows real estate in the city never appreciates, if you want to make any money in real estate you need to buy in the county, everyone knows that!” Everyone did know that, which is why I was able to buy a gorgeous 3-bedroom 1-bath Victorian porch front row home with inlaid parquet floors and a perfect tin ceiling for $80,000. This, when my coworkers where buying cookie cutter homes in the suburbs for $250,000 - $500,000, and because of their distant commute to the office, they had to maintain cars and pay $200 to $300 a month just to park them downtown (not to mention insurance, gas, and car payments). I was saving a bundle, and felt that I had found a real value. I figured out that what I was saving would allow me to accumulate the same amount of savings in 10 years that it would take them 30 or more years to accumulate.
I really didn’t care what everyone knew, I cared about what I knew; that I loved the neighborhood and the house. I believed that the carefree, pedestrian lifestyle it enabled me to have was a tremendous value. Even at that time, there were cars parked in my neighborhood with values close to what I had paid for my house, and I believed the real estate prices in the neighborhood would at some point appreciate dramatically. At the closing I joked with my agent, “we’ll sell it when we can get $250,000 for it.” She smiled politely, I’m sure thinking I was a total idiot, but I sold it 6 years later for $260,000. I absolutely doubt my old co-workers homes appreciated at a pace anywhere near that.
I bought the house because I believed it to be a value when no one else did, and I happened to be right. The rich buy assets when they are a value, and sell them when they are expensive, they buy low and sell high. Supply and demand, when everyone is a seller, be a buyer, and when they are all buyers, be a seller, be a contrarian.
Sunday, June 24, 2007
Exercise Like the Rich
This past weekend I went for a mountain bike ride with a great friend of mine who happens to own a small chain of photo development stores, a dying business to be sure, but he may have just found the right niche of enthusiast to sustain a nice living.
The ride was treacherous. We went over large roots, rocks, ruts and through all possible unforeseeable circumstance. My friend, a well practiced regular rider, had little to no trouble. Throughout the entirety of our journey, he waited for me just over the next hill. Twice I tried to keep up with him, and twice I was thrown from my bike, first by a tree I saw and could not avoid, and second by a large root i didn't even see. I wasn't prepared for the ride.
This same friend who led me through my first mountain bike ride, often comes to me for financial guidance. While he is spending his spare time reading bicycling and outdoors magazines, and watching shows about extreme sports, I am reading Fortune magazine, The Wall Street Journal, and Kiplinger's Personal Finance. While he spends his evenings working in his basement on his bikes and out on rides with friends, I am in my home office analyzing my portfolio's performance, plotting my next move, setting future goals, and assessing how well I've met my past goals.
Investing is like a sport, if you want to be good at it, you must practice regularly, and the Rich practice. Just like I couldn't keep up with my experienced friend on our bike ride, just like he had to wait for me over each hill, I must wait for him when we discuss investments, I must guide him through the myriad of opportunities, and just as he has improved his skill on his bike and on the trials far from what I could have reached without ever practicing, I have grown and improved my portfolio and investing skills far more rapidly then he has.
Another friend of mine was recently recognized for her outstanding achievements in visual arts. The award came with a cash prize of several thousand dollars. She is an artist and while she does have some investments, her knowledge of investing is very low. She asked me what I would suggest she do with the money. Based on her other investments, I suggested a low cost international index fund for however much of the money she was comfortable investing. She invested half the money, and within a few hours of mailing the check she became very nervous and upset. She regretted sending the money and wished she could get it back. She even got upset with me for suggesting she invest some of her prize money. Thoughts of losing every lucky dime ran through her mind, and what if there was a major emergency (she already had an emergency fund I had previously advised her to establish) that whipped out her savings? Then what? She tried to imagine all of the unforeseeable circumstances ahead, but did not know how to avoid them, control them, or how they would affect her.
Within 24 hours of sending the check, she had called her bank and put a stop payment on it at a cost of $25. Once the money was safely back in her bank account, she generously took out me to a very expensive dinner to apologize for the blaming. She is practiced, experienced, and comfortable with fine dinning.
The amount she had intended to invest was completely inconsequential to me. I have invested sums many, many times larger and not felt a ting of guilt or remorse. After reflecting on what happened, I realized that she had attempted to ride in a bike race without ever learning to first ride a bike. Although she owns bikes, she cannot ride them. She was so out of shape in her comfort level of investing, that this relatively small amount of money seemed like an impossible amount to put at risk. She needs exercise, training, and regular investing to get into shape.
At our dinner I explained my theory of why she became so upset, and suggested she start with a smaller amount, no matter how small, just a little bit beyond her comfort level, and then steadily increase it. She smiled and nodded, and I'm sure forgot a moment later. What was that art thing she mentioned?
The ride was treacherous. We went over large roots, rocks, ruts and through all possible unforeseeable circumstance. My friend, a well practiced regular rider, had little to no trouble. Throughout the entirety of our journey, he waited for me just over the next hill. Twice I tried to keep up with him, and twice I was thrown from my bike, first by a tree I saw and could not avoid, and second by a large root i didn't even see. I wasn't prepared for the ride.
This same friend who led me through my first mountain bike ride, often comes to me for financial guidance. While he is spending his spare time reading bicycling and outdoors magazines, and watching shows about extreme sports, I am reading Fortune magazine, The Wall Street Journal, and Kiplinger's Personal Finance. While he spends his evenings working in his basement on his bikes and out on rides with friends, I am in my home office analyzing my portfolio's performance, plotting my next move, setting future goals, and assessing how well I've met my past goals.
Investing is like a sport, if you want to be good at it, you must practice regularly, and the Rich practice. Just like I couldn't keep up with my experienced friend on our bike ride, just like he had to wait for me over each hill, I must wait for him when we discuss investments, I must guide him through the myriad of opportunities, and just as he has improved his skill on his bike and on the trials far from what I could have reached without ever practicing, I have grown and improved my portfolio and investing skills far more rapidly then he has.
Another friend of mine was recently recognized for her outstanding achievements in visual arts. The award came with a cash prize of several thousand dollars. She is an artist and while she does have some investments, her knowledge of investing is very low. She asked me what I would suggest she do with the money. Based on her other investments, I suggested a low cost international index fund for however much of the money she was comfortable investing. She invested half the money, and within a few hours of mailing the check she became very nervous and upset. She regretted sending the money and wished she could get it back. She even got upset with me for suggesting she invest some of her prize money. Thoughts of losing every lucky dime ran through her mind, and what if there was a major emergency (she already had an emergency fund I had previously advised her to establish) that whipped out her savings? Then what? She tried to imagine all of the unforeseeable circumstances ahead, but did not know how to avoid them, control them, or how they would affect her.
Within 24 hours of sending the check, she had called her bank and put a stop payment on it at a cost of $25. Once the money was safely back in her bank account, she generously took out me to a very expensive dinner to apologize for the blaming. She is practiced, experienced, and comfortable with fine dinning.
The amount she had intended to invest was completely inconsequential to me. I have invested sums many, many times larger and not felt a ting of guilt or remorse. After reflecting on what happened, I realized that she had attempted to ride in a bike race without ever learning to first ride a bike. Although she owns bikes, she cannot ride them. She was so out of shape in her comfort level of investing, that this relatively small amount of money seemed like an impossible amount to put at risk. She needs exercise, training, and regular investing to get into shape.
At our dinner I explained my theory of why she became so upset, and suggested she start with a smaller amount, no matter how small, just a little bit beyond her comfort level, and then steadily increase it. She smiled and nodded, and I'm sure forgot a moment later. What was that art thing she mentioned?
Friday, June 22, 2007
Prosper
Most of the individuals who are fortunate enough to have amassed wealth so great that the wealth itself can work harder and earn more than the individual, have done so in an nontraditional manner. That is, they have done things that most of the rest us would not have considered or even desired to do.
Sacrifice and risk are both adjectives we all most definitely try to avoid, but are of course unavoidable in the land of investments. That is unless you are so obsessed with investing (like me) that you eat rice and noodles because you know the future compounded value of that $2.50 your saving. But not all investment require the same sacrifice, and they definitely don't all entail the same amount of risk.
Take Prosper.com for example. For those of you who do not know, Prosper.com is the finance world's response to Ebay. Prosper.com allows individuals to lend money to other individuals. It effectively cuts out the big banks who used to (and often still do) take all the profits. Prosper charges a very reasonable fee, about 1% to 1.5%. Rates are determined by a reverse dutch auction, that is, the borrower enters the amount they would like to borrow and the rate they would like, and lenders bid down the rate to lend money.
Making loans on Prosper can be addicting. It's exciting and a challenge to try and find the best loans to purchase at the best rates. I also enjoying knowing and choosing who my money is being lent to. For example, having had family members caught in the credit card trap, I enjoy lending to borrowers who are interested in consolidating high interest credit card debt, and I still earn a nice return!
I have to date made 14 loans, all of which are the minimum amount that can be lent, $50. You see, the 'lenders' are only purchasing a part of a loan that prosper actually makes. But prosper will only make the loan after they have enough lenders committed to buying the loan. The smallest portion of the loan that can be bought is $50.
Of my 14 loans, one is currently 3 days late. This is the first late payment I have had since I started my prosper career 3 months ago. Did I mention that I was earning an average return of 15.9%? I am still in the experimental stage of prosper.com investing, but do the math yourself, the prospects are quite enticing. Nontraditional and rather risky? Absolutely!
Sacrifice and risk are both adjectives we all most definitely try to avoid, but are of course unavoidable in the land of investments. That is unless you are so obsessed with investing (like me) that you eat rice and noodles because you know the future compounded value of that $2.50 your saving. But not all investment require the same sacrifice, and they definitely don't all entail the same amount of risk.
Take Prosper.com for example. For those of you who do not know, Prosper.com is the finance world's response to Ebay. Prosper.com allows individuals to lend money to other individuals. It effectively cuts out the big banks who used to (and often still do) take all the profits. Prosper charges a very reasonable fee, about 1% to 1.5%. Rates are determined by a reverse dutch auction, that is, the borrower enters the amount they would like to borrow and the rate they would like, and lenders bid down the rate to lend money.
Making loans on Prosper can be addicting. It's exciting and a challenge to try and find the best loans to purchase at the best rates. I also enjoying knowing and choosing who my money is being lent to. For example, having had family members caught in the credit card trap, I enjoy lending to borrowers who are interested in consolidating high interest credit card debt, and I still earn a nice return!
I have to date made 14 loans, all of which are the minimum amount that can be lent, $50. You see, the 'lenders' are only purchasing a part of a loan that prosper actually makes. But prosper will only make the loan after they have enough lenders committed to buying the loan. The smallest portion of the loan that can be bought is $50.
Of my 14 loans, one is currently 3 days late. This is the first late payment I have had since I started my prosper career 3 months ago. Did I mention that I was earning an average return of 15.9%? I am still in the experimental stage of prosper.com investing, but do the math yourself, the prospects are quite enticing. Nontraditional and rather risky? Absolutely!
Tuesday, June 19, 2007
The Emergency Fund
The rich have emergency funds. An emergency fund is money that is not used for any purpose that can be foreseen. It is used to let the rich sleep at night: knowing that no matter what disaster may occur in the near or distant future, they have the cash to quickly bail themselves out.
The rest of us should also have this most precious luxury, and we can. How much do we need? That depends on your living expenses. These are the things you need to pay for to survive, the cost to maintain your other assets, and to pay your liabilities or debts. If you're single and all alone in this world, with no one who depends on you, poor you, but lucky you, too, because you don't need as much cash sitting in your emergency fund to sleep at night. Three months of expenses will probably do just fine. But if you have dependents, you should consider amassing an emergency fund that will sustain you and your family for a longer period of time, 6 months is a good rule of thumb.
Be careful to not underestimate your expenses, but don't plan on dining out every night either. You will likely need cash to make changes to your life when the unforeseen strikes. For example, you may need to travel to find a new job, need to move when you do find that job, pay for health insurance, rent another place to live, and you wont want to forfeit travel plans that have already been partially paid for.
Another thing to keep in mind: the smaller your living expenses, the smaller the amount you will need to maintain in an emergency fund, so there is a compounding effect of a frugal lifestyle.
Where do you maintain this small fortune? I recommend high interest earning money market accounts, and places where it will take at least 5 or 6 business days to gain access to the funds. This removes some of the temptation to access your emergency fund to buy a new car or kitchen when its not really an emergency. INGDirect has a great online money market account, and several of the big mutual fund companies have money market funds that i would also recommend. You don't want to invest these funds in a place that would put them at risk of market fluctuations or make them so accessible to yourself you could access them to buy groceries, rent movies, or get into via an ATM.
I like to maintain one years worth of expenses. I use an online money market account, and can't get the money into my hands for 5 business days. The more I saved to accumulate the fund, the easier it was to keep it. I view this fund as the foundation of my portfolio. The fund makes it possible for me to take greater risk with the rest of my investments, and allows me a great sense of security.
The rest of us should also have this most precious luxury, and we can. How much do we need? That depends on your living expenses. These are the things you need to pay for to survive, the cost to maintain your other assets, and to pay your liabilities or debts. If you're single and all alone in this world, with no one who depends on you, poor you, but lucky you, too, because you don't need as much cash sitting in your emergency fund to sleep at night. Three months of expenses will probably do just fine. But if you have dependents, you should consider amassing an emergency fund that will sustain you and your family for a longer period of time, 6 months is a good rule of thumb.
Be careful to not underestimate your expenses, but don't plan on dining out every night either. You will likely need cash to make changes to your life when the unforeseen strikes. For example, you may need to travel to find a new job, need to move when you do find that job, pay for health insurance, rent another place to live, and you wont want to forfeit travel plans that have already been partially paid for.
Another thing to keep in mind: the smaller your living expenses, the smaller the amount you will need to maintain in an emergency fund, so there is a compounding effect of a frugal lifestyle.
Where do you maintain this small fortune? I recommend high interest earning money market accounts, and places where it will take at least 5 or 6 business days to gain access to the funds. This removes some of the temptation to access your emergency fund to buy a new car or kitchen when its not really an emergency. INGDirect has a great online money market account, and several of the big mutual fund companies have money market funds that i would also recommend. You don't want to invest these funds in a place that would put them at risk of market fluctuations or make them so accessible to yourself you could access them to buy groceries, rent movies, or get into via an ATM.
I like to maintain one years worth of expenses. I use an online money market account, and can't get the money into my hands for 5 business days. The more I saved to accumulate the fund, the easier it was to keep it. I view this fund as the foundation of my portfolio. The fund makes it possible for me to take greater risk with the rest of my investments, and allows me a great sense of security.
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