The first four rules of investing

So some of you out there might think that the stock market is the key to your growing fortune.  And while you’re mostly right, especially if you have a 401k or use index funds to grow your wealth, you’re also kind of wrong.  Not by much, mind you, just a tiny bit.  The reason here is that more fortunes are lost on Wall Street than won.  This isn’t exclusive to just stocks but extends to private placements, forex trading, futures trading, the commodities market, and even bonds.  The reason here is that many people, quite simply, don’t understand the way the market works.  So here are four rules for investing in individual companies, just to start, to help keep you safe, grow your wealth and keep your mind at ease.

1.  Neither give advice on what stocks to buy nor take advice blindly from people, whether they are brokers, investment bankers or simple some blogger writing about stuff.  Let’s face it, if you don’t know a company inside and out, know their growth record, profitability, when their debt is coming due, etc, you probably don’t know the company well enough to invest in them.  Some people, mainly technical traders who work off trends in the market, might argue that you don’t need to know anything about a company to profit off this.  While this may be true for traders who make millions of dollars a year, it is rarely true for the individual investor putting a couple hundred dollars into the market.

2.  Take your profits when you do and don’t worry about missed profits.  Sometimes you buy a company, sell it for a profit and then watch it keep going up.  Yeah, that sucks.  But you still made money.  Don’t get greedy!  When you invest, it’s the little things that matter.  Making a sure profit is better than taking a loss.

a.  There is of course a minor side note to this rule.  If you’re investing in the market, don’t day trade and make 30 or 40 trades a day! Be selective, find a good investment and hold onto it for the long term. You’ll lower your tax costs on the transaction by turning it into a long term capital gain and you’ll weather ups and downs more easily.

3.  Profits will come and go from day to day.  Some days you’ll be up 3 or 4% while others you may be down 10%.  Don’t let the bastards get you down.  You need to be patient, trust yourself and the decisions you made.  You may have to adjust your stocks over time to account for material adverse changes in some investments but overall, be patient.  It’ll take you much further than panic and fear will.

I think this guy has it down pretty good

I think this guy has it down pretty good

4.  You can’t survive the market without capital, patience, and an understanding of risk.  It doesn’t matter what you’re trying to invest in, eventually you’re going to run into rumors and ghosts.  You’ll hear people telling you to bet big on this one opportunity, that you can make a fortune shorting this penny stock while going long on porkbellies and trying to corner the orange concentrate market.  You’ll need to be patient in your actions, never push your risk beyond what is safe and don’t jump into any market if you don’t have the capital to survive it.

There are two running themes through all four of these rules.  They all have to do with patience and the psychological strength one may possess.  Ultimately, these are going to be two of the most important aspects of any part of your life.  If you’re investing, you need to be patient but also able to walk away from a loss without letting it break your stride.  You need to be patient while paying your debts in life and never be afraid that your plan won’t work.

You may recognize this philosophy a little bit from Mr. Money Mustache and from Stephen Covey’s book The 7 Habits of Highly Effective People.  It has a lot to do with how we run our lives and how we handle investing.  The basis here is that there are only so many things that we can control in our lives but we concern ourselves with many things we have no influence over.  Investing falls firmly into this.  We can’t control where the market goes, which company will be profitable and which company will fail.  Concerns like this are not things we can control.  What we can control is when we buy and sell stocks.  We can control how much profit or loss we will incur.  This is the psychological strength we need in our day to day lives.  It allows us to be patient and strong during market ups and downs and allows us to recognize what we can and cannot control in our day.  

So stop worrying about the market, the debt limit, etc.  You can’t control those things.  If this whole debt limit showdown gets to you, then vote for someone else next time or run for office yourself, because that’s the limit of your control here.  If you’re going to start investing beyond index funds, follow the rules above.  You can’t control how the market will function but you can control your actions on the market.

Fear, Patience, and Faith in the Process

I was checking out an article the other day about Facebook.  The article basically scolds the people who panic-sold Facebook when it was in the $20’s for being impatient and letting fear rule the day.  This got me thinking about the whole process of investing and how it is connected to what we do in our everyday lives.  I don’t just mean the products we buy but I meant the way we choose to act on a daily basis, both internally and externally.

Let me start at the beginning here.  If you know me, and I think most of you do to some extent, you know that I have a tremendous amount of faith in the process.  What I mean by this is the process that occurs during our lives when we embark upon a normal, everyday commitment.  This can mean getting hired out of college to an entry level position, working your ass off for promotions and better paying jobs, hustling for connections, and then one day, ending up with a job that pays well and that you’re content with.  Or maybe you’re out of shape and decide to go to the gym, eat healthy and put in the effort rid yourself of flub.  Eventually, you’re in shape because you put in the work.  I’m saying is that in life there is rarely a roadmap but there is a direction for us to move in so we can accomplish our goals, whether we know them or not. There will undoubtably be ups and there will most certainly be downs.  Life is a process and it’s constantly evolving. We have to trust in the process, stay humble and patient, and one day our efforts are rewarded. 


Just keep going up that hill...

Just keep going up that hill…

There are two aspects of the process that I see most people struggling with..  First and foremost, people have trouble recognizing that there is even a process to many aspects of life.  They get trapped in the drudgery and bogged down by the nonsense without ever seeing which levers they need to pull to make their lives move forward.  I’ve spoken about this before and I’d have to equate it to the concept of unconscious incompetence: if you don’t see a problem then obviously you won’t think one might exist.  You may be unhappy but just not know why.  Unfortunately, there are way too many people out there like this.  You probably know someone like this.  It’s someone who thinks the system is out to get them or keeps getting in their own way through self-destructive habits but wonders why they are behind all their friends.  If you can’t recognize that there is a process to the many aspects of life, you won’t be able to effectively move forward in the process.  It require reflection on yourself in a way that many people are unable or unwilling to do, because of the hard truths it may reveal.

The second problem I’ve seen is patience.  We ALL have this problem at one time or another about one thing or another.  This is the part of the process that the author of the article on Facebook mentioned above (see, I’m tying it all together!) and is a problem that many of us struggle with every day.  Many of us get impatient in our careers and want to end up in high level roles much sooner than we’re ready.  We get impatient and want to graduate college sooner.  We want to buy a house before we’re ready, an expensive car, etc.  We’re impatient and we know it.  In the article mentioned above, the individuals who took part in the Facebook IPO and then lost money selling their shares suffered from a slightly different type of impatience.  Fear of financial loss led to impatience which eventually caused them to sell their shares, incurring an actual loss.  They lost faith in the process, grew impatient, and let fear drive their decisions.  The moment you allow fear to guide you, you will make mistakes and it will cost you dearly.

No matter your career path, you can’t let fear be a driver of decisions.  If your goal is financial Independence and you begin investing, understand that you will likely lose money at some point.  Life is a process. It’s going to keep going, so trust it, be patient and don’t let fear make the decisions for you.


I’d like to thank Allison from Any Afternoon and my Fiancé from Petite Gourmande for helping to review this post and keeping me from going crazy.  Thanks guys!

Refinancing my car

I’ve been tinkering with the idea of refinancing my car.  This ties into what I was talking about on Monday and really comes down to my desire to maximize cashflow.  Despite my hatred of debt, cashflow is king to me right now.  And looking at this as if I were a business, the best thing I could do would be to refinance the debt to a longer term at a lower debt rate, reducing my interest expense and my principal repayments each month.

The Stocks and Cents mobile

The Stocks and Cents mobile

So I’ve been working with a firm, Blue Harbor Auto (Not an affiliate link, I swear), to get this done.  So far, they’ve offered me very competitive rates on 48, 60, 72 and 84 month terms.  Considering I only have 51 months left, all of this seems a little ridiculous.  However, if we’re talking about investment return vs debt payment, there is something to be said.  The 84 month term would only carry a debt rate of 2.85% for me, a pretty big drop from what my current loan has (6%) and would free up $200 of monthly cash flow.  Even more ridiculous, I’d actually still pay less interest (only about $200, but still) than I would pay in the remainder of my current loan.  Even adding three and a half years to the loan term doesn’t reduce the financial benefits of refinancing.

The additional $200 a month would be a huge step forward for me.  It would increase my current savings dramatically each month and would hopefully grow at a much larger rate than 2.85%.  If my investments only grow at an annualized rate of 7% for the next 51 months, that extra $200 a month will add up to just under $12K.  Even if I keep my current loan and then invest the full value for the three years after, I still will not save that much money.  From a pure numbers stand point, this is a no brainer!

The good thing about this is that there are no prepayment penalties if I pay extra or pay the loan off early, so I can still tackle the debt while investing if I choose, just utilizing a much smaller debt rate.  After doing some number crunching here, this means that if I choose to pay the exact SAME amount that I pay now, I’ll actually have my loan paid off in 45 months, as opposed to 51.  So if I were to refinance at the 84 month rate and still pay my current amount, I’d actually save myself half a year of payments.

Chances are I will probably go through with refinancing my car through these guys.  They did, however, try to sell me on an extended warranty which I declined, so I think I figured out where they actually make their money.  I’ll keep you updated as I go through the general negotiations involved with this.  I’ve never done it before but I’m hopeful this is significantly easier than trying to close a bank account with Bank of America (for the record, it’s near impossible).


Image courtesy of Stradablog

Invest or Pay down my debt

If I choose to jump on the debt, this is how I'll do it.  A ridiculous avalanche off of half dome.  That's right Sallie Mae, I'm going to dump your body off half dome in the middle of winter!

I’m not sure if you’ve noticed this about me through my writing but I tend to think a lot, sometimes too much.  This blog is limited to personal finance mostly but still, you’ve probably noticed that I go back and forth on concepts and ideas, wavering on the execution and which strategy is best for which time.  Which brings me to my current dilemma: should I be investing my money or putting every extra penny into paying down my debt?

I go back and forth on this all the time.  I’m already paying extra into my debt to knock it back but still, I feel like I could do more.  I look at the $750 a month I spend there and literally drool at the investments and returns I could be making.  I already put away $400 a month outside of my 401k, so if I was able to put aside $1150 a month?  Now we’re talking.  At the same time though, I enjoy putting money into my investments.  Watching my $400 a month grow into something is exciting and gives me hope that I just might be doing something right with my money!

When I look at how my net worth has changed over the past year, what I see is that my debt has just slowly, moderately decreased, while my investments in my 401K and Vanguard account have led a massive charge forward.  Since I started tracking my net worth like a crazy person, in January of 2012, my debt has decreased by only a total of $7,900 while my investments have risen by $12,500.  There is a huge disparity here and while I’m not going to say I dislike it (I do like having more money as opposed to less), I tend to think about the road not traveled.

The thing is, my investments massively outperformed the interest I paid on my stocks.  Since January 2012, my investments have paid a return of over 22%, outpacing the weighted average of 5.25% of my debts (not taking into account the tax deduction for student interest).  I can look at those two numbers alone and know that my money is being put to better use by investing it.  The bigger question now is, now that I have enough savings to feel safe in case something truly awful happens, should I just do it?  Should I just go for it, cut my 401k and my investing and just knock away my debt?

I’m honestly not sure about this.  On the one hand, I hate debt.  I truly loathe it!  It’s one of the only things that can keep me up at night and I don’t even have that much of it!!  I hope I never have a mortgage, otherwise I’ll never sleep.

If I choose to jump on the debt, this is how I'll do it.  A ridiculous avalanche off of half dome.  That's right Sallie Mae, I'm going to dump your body off half dome in the middle of winter!

If I choose to jump on the debt, this is how I’ll do it. A ridiculous avalanche off of half dome. That’s right Sallie Mae, I’m going to dump your body off half dome in the middle of winter!

On the other hand, I love watching my investment account grow.  I love having money as opposed to giving it away.  In the end, I’m almost positive that I will take stashing money into a Vanguard account over paying off my debts any day.  The more quickly that account grows, the quicker my net worth heads towards positive and the less I will worry about my debt just hiding off to the side, slightly out of view.

Opinions here are appreciated.  What do people think?  I know a great deal of people choose murdering debt while others would rather build up their cash stash.  Let’s hear it, what road should I take?


Photo courtesy of somewheregladlybeyond

What’s a million dollars worth anymore?

A million dollars, courtesy of Jeffrey Putman
A million dollars, courtesy of Jeffrey Putman

A million dollars, courtesy of Jeffrey Putman

Why is it that we have this fascination with getting a million dollars in our bank account?  Besides the fact that we love round numbers, why is it that a million dollars is so important?  The reason I’m asking this is because, while thinking of my goals for the future, for retirement, for getting the life that I want to live, this number keeps standing out.  One Million Dollars.  Over at Budgets are Sexy, J Money has started a little club, with just over 100 members who are trying to become millionaires.  Whenever you read about retirement, whether on Forbes or Bloomberg, you read about the million dollar nest egg.  So, what can I even do with a million dollars?  Would it be enough to retire on?  Let’s run down some numbers and figure out what makes sense.  Is one million dollars the goal?  Is it more?  Could it be less?  How the hell do I even get to a million dollars??

Well, let’s start with the easy one question first: How the hell do you even get to a million dollars? I’ve spoken about this briefly before but I didn’t delve into how long it could actually take.  Let’s look at some basic assumptions and then figure out the timeline with Dave Ramsey’s Investment Calculator.

  • Starting Value of $10,000
  • Annual rate of return of 8.00%
  • Contribution of $400
  • Contribution and Investment timeline of 35 years

If we look at a situation like this, you’ll have saved up just over one million dollars in those 35 years.  But I’m on a bit of a more restricted timeline than that.  I’m 26 and I want to be out of the rat race inside of 11 years!  So, let’s look at a slightly more aggressive timeline.

  • Starting value of $10,000
  • Annual rate of return 10.00%
  • Contribution of $900
  • Timeline of 11 years

$420K.  Damn.  Not even half way.  That’s pretty discouraging.  I adjusted the rate of return up a a little bit because I’m considering that in the future, I will use real estate to get some of my income going and that has a bit higher rate of return (12-14%), so combined with stocks and bonds, I think a 10% returns is possible for this.  But, still, this doesn’t get me to where I need to be!  But let’s think about the above situation.  I’m saving $900 a month.  That’s only 25% of my monthly take home salary.  If I’m able to save 50% of my salary, well, I might get a bit closer!  After 11 years, I’d have saved just under $900K.  Not quite one million but it would definitely be able to take care of my day to day life!  Especially if I’m able to save 50% of my monthly take home, $900K should be able to provide more than enough income from dividends, real estate returns, etc.

But still, what does one million really get me?  Well, the median home price in the US was $221K as of 2012.  So, if we think we’re living a little bit large, this little cash hoard could buy two homes outright: one for living in and one for renting out, providing a good little income stream.  Since I’m not one to want ultra luxury things, it would probably get me a cheap, diesel car as well.  With the rental income from the house, dividend and bond income, I’d have more than enough to survive on and, plus any consulting or freelance work, even save up and grow my nest egg even more.

There it is!  A million dollars isn’t worth what it used to be but it can definitely provide a frugal family with a decent buffer from the rest of the world and maybe even allow them to leave the corporate world behind for more fun things, like kayaking or coaching.

The Dow, Standard and Poor’s, and a Bubble walk into a bar

New York Stock Exchange
New York Stock Exchange

New York Stock Exchange

With the Dow and the S&P 500 reaching their all time highs with the rest of the economy still suffering from a bit of a hangover, one has to be wondering what the hell is really going on!  All we hear from Washington is that the economy is struggling, it contracted in the last quarter of 2012 and something about sequestration.  On the news, whether it is CNN or Fox, we hear about the same things.  So how exactly did the stock market end up exactly where it was before this mess happened?  Is it possible that we’ve got yet another bubble forming right under our noses?

First, let’s go over what a bubble actually is.  If we go check out Investopedia, we can see that a bubble is “an economic cycle characterized by a rapid expansion followed by a contraction.”  Basically, some part of the market, whether it is tech stocks or real estate, grows way faster than it should, getting bigger and more overvalued than it should.  Eventually, the market steps in and people begin to sell, fast, and the bubble bursts.  We’ve seen this throughout history, with examples occurring all over the place.  What’s happening is really simple: humans get super excited about something, everyone wants it and then, all of a sudden, it’s done.  Remember beanie babies?  Or ferbies?  People went nuts for those things.  They were toys but people were purchasing them with the intent to make an easy buck, turning them around and selling them to whomever would buy it.  In the lead up to the financial crisis, a lot of stuff like that happened only on a much, much bigger scale.

The market correction for the financial crisis (aka, telling the guy with the ferbies that you’re not buying) was swift and painful.  The stock market dropped 45% in about 6 months, costing trillions of dollars.  Some estimates say it was a $7 trillion loss, some go as high as $11 trillion.  Either way, it was a huge loss.  Since the market bottomed out on March 6, 2009, we’ve seen a pretty big jump in the equities market.  It’s jumped up 111% in the time since then, making back everything that was lost and then some.  But the economy was dragging throughout the entire period the market was going up.  Government bonds are super low, the Fed is pumping money into the economy to try to jump start it, mortgage rates are low, everything is low!  But the stock market grew by 111%.  How the hell did this happen?

Honestly, I think the answer is pretty simple.  Most people, institutions, businesses, retirement funds, etc, don’t want their money to languish away in the low interest prison of savings accounts or US bonds.  Yeah, people are still going to put their money there but why?  You’re barely getting a return!  You’re definitely going to lose money once you take inflation into account.  So people put their money into companies.  They saw that after 2009, most companies had cut down on debt and personnel and were running lean, profitable machines.  Sure the economy was only so so and barely growing but the truth is, a lot of companies were still profitable.  Money poured into equities because they were the only viable option for getting an actual return.

And now here we are.  Markets have hit an all time high and some people are saying that they can only go higher.  While that’s not entirely false (the markets will always go up in the long, long run), I think it may be time to hold back on that big investments.  This may not be a bubble right now but it is definitely starting to look like it could be one.

You’re probably wondering how you could ever spot a bubble and what you could do.  Well, that’s the bad news.  You’ve read everything I just wrote and realized that in general, if there’s a bubble, it’s going to burst and it’s going to suck.  So here’s what you can do: Don’t panic.  The worst thing you can do is to panic sell everything you’ve got.  A lot of people jumped out of the market in January and February 2009.  They stuck in it a while but ultimately, they just handle the stress of watching their portfolio drop every day.  When they eventually bought back in, they purchased the same stocks, the same mutual funds, as they had before at the same price they sold it at or a higher price.  Panic selling is one of the worst things you can do.

Let’s face it, the market is going to go down eventually.  It’s also going to go back up eventually.  The stock market drop in 2008 was one of the worst in history.  Every major recession of the past 50 years has had a huge drop like that and each time, the market fights and claws its way back.  So whether we are in a bubble or not, keep your cool and don’t panic!

*DISCLAIMER: Please remember, I’m not an investment professional, CPA, CFA, or JD.   Nothing I say should be construed as legal or financial advice.  Please, always consult with a licensed professional when it comes to legal or financial matters.

Investing 101 – Dividend Investing

It was brought to my attention the other day that I may have jumped into things before explaining to my readers what everything actually was, especially with dividend investing.  I tend to do that.  I just go off on tangents or talk about things that seem normal to me and are just way off the beaten path for everyone else.  Sorry about that.

So what is a dividend?  According to the all knowing Investopedia, a dividend is a “distribution of a portion of a company’s earnings.”  So when we talk about dividends, we’re talking about the money that we receive on a monthly, quarterly, or annual basis just for owning a share of the company.  For example, may issue a dividend of $0.25 a share a year.  If the stock has a value of $10.00 a share, that means the dividend is a 2.50% return on your money. Better than your savings account!  However, if the stock rises to $50.00 a share, the dividend is now a return of 0.50%.  Better than most savings accounts but not as good as before.

However, this huge capital appreciation doesn’t often happen with dividend producing companies.  You see, companies with dividends tend to be more mature companies with established revenue streams and earnings.  In fact, Standard and Poor’s produces a list of the “Dividend Aristocrats,” a list of companies that have increased their dividend every year for at least 25 years.  These are companies we all know, like AFLAC, Chevron, Target and many others.  These companies are ideal investments for the everyman (or woman) because they have easy to understand products and businesses.  You look at them and you just know what they do!  Even better, their stock prices do not fluctuate as much as others.  Because they are big, blue chip stocks with dividends to their shareholders, they tend to be more stable.  They go up less in the good times and they go down less in the bad times.  They’re an ideal investment for someone who wants better returns than a CD or savings account but is still too risk averse for a tech stock or an early IPO.

So how do we use this knowledge of dividends and what they are to start a dividend investing program?  Well, with dividend stocks, you have two possibilities: you can take the dividends as income or you can reinvest them back into the company tax free.  In dividend investing, you’ll typically do the latter.  Why is this?  Well, it helps your portfolio in two ways.  The first way, and I think the most important, is that you’re taking that 2.50% from our first example and you’re using it to buy more stock in the company, which will produce more dividends which will buy more stock which will produce more dividends etc etc.  Add in the capital appreciation and you can have some serious growth on your hands.  In fact, using the handy dandy dividend reinvestment calculator we are able to see just HOW much this can help.  If we were to invest $10,000 in Aflac in January of 1980 and you chose to not reinvest the dividends, you would have just over $1.4 Million today.  However, if you reinvested the dividends, you would have $1.65 Million.  An extra $250K is nothing to sneeze about when you only put in $10K (if adjusted for inflation, it would be the equivalent of $28K invested today).

The point here is that dividend investing can help build a strong portfolio if you start when you’re young and use your iron nerves to avoid selling the moment you have a miniscule profit.  If you do this, your dividend invest can eventually turn into dividend income for retirement, something everyone wants!

Let me know if there are other topics or subjects which you need explained.  Passing on my knowledge is what this is all about!

Retirement planning in your twenties and thirties

I was roaming Investopedia today and I came across a great series of articles related to retirement planning in your thirties.  Not wanting to be left out of the party, I decided to take a look and read it.  As with most of the articles and series on the site, it was well written, well structured, and had a lot of great ideas in it.    In general, a lot of the ideas can be taken to someone in their twenties and applied with ease.  Or even if you’re, you know, actually near retirement.  I mean, the important thing is that you’re trying, right?

Needless to say, the key points were awesome.  I’d really like to highlight three of them off the bat:

1. Increasing your Savings Rate

We’ve talked about this before and the methods you can employ.  You can save more of each raise or you can cut out things in your life that are too expensive or have inexpensive substitutes.  The biggest thing is to Save More.  Whether this is through reducing your taxable income by contributing to a 401k and a regular IRA or but putting 50% of every raise into your Roth IRA and your Taxable investment account, savings is key.  If you keep saving at a low rate from when you’re young, you’ll never get there.  Granted, you’ll have a huge leg up on the guy that doesn’t start saving until he’s 40 but if the savings aren’t growing, you’re not going to have an easy retirement.  Rule of thumb: save 10% of your income.  Once you do that, start increasing it until you can eventually save 25% or even 30%.  Some people (Financial Samurai, I’m looking at you!) have been able to save 50% or more of their taxable income.  While that’s amazing, it is also not for everyone.  Remember, this is a process.  Baby steps folks, baby steps.

2.  Managing your Investments

If you’re going to read any bit of the series on Investopedia, read this.  This is fantastic.  It breaks down many of the financial instruments you can invest in for your retirement, the different risks involved, and gets a bit into asset allocation by age.  Basically, you shouldn’t have the same asset allocation at 25 as you do at 40.  You also shouldn’t have the same asset allocation at 40 as you do at 65.  It’s a constantly changing and balancing thing and what it all comes down to is one thing: you.  Are you able to accept risk?  Can you tolerate short run losses or will you get fidgeting watching 40% of your portfolio disappear?  If you want to have a strong retirement or even an early one, you have to active in managing your investments and choosing the best items to give you a good future.

3.  Minimize withdrawals

One of the worst things you can do is take money out of your retirement accounts years or decades before you retire.  The time value of money and compounding interest is hugely powerful device and taking out a portion of your nest egg to buy that jet ski will set you back.  If it’s to buy your first home, something you’ll live in for twenty years, I can understand that.  That makes sense!  But for a car or a vacation, it’s just not worth the loss.  The less you take your money out of the retirement accounts, the more money you’ll have once retirement actually arrives.

Investopedia consistently has great series on investing and retirement and this was no different.  I strongly suggest that you all go check this out and make sure you’re following at least some of the advice given in the article.  You won’t regret it, I promise!

Starting your own business | Start ups

As some of youmay or may not know, I work at a sort of startup.  Not like a google, free food with all crazy stuff start up.  My company is in finance, as I’ve mentioned, and we have a foreign parent providing all the capital.  Instead, we’re run with the intent of being as nimble and innovative as possible while having the immense financial backing of a foreign parent with a whole lot of cash and an incredible long term view of how to make money (not going to lie, I love it).  The result is that I’ve seen a lot of things that start ups have gone through: the scaling of a product, the building of the workforce, the decision between hiring an extra person or just letting things ride for a year.  And because we weren’t created with the concept of building an idea to sell for a profit inside of three years, we’re focusing on sustainability.

This kind of thought has been on my mind a lot lately and I feel like working it out.  It’s not quite personal finance and is more entrepreneurship but still, hear me out.  I’m sure there is a finance lesson in here.  I promise, as with most of my inane ramblings, there will be a point.  That point: investing.

Facebook seemed like a great investment to a lot of people.  A billion users, everyone is addicted, how could it not make money.  And then the IPO happened, the stock rose, it fell. Then it fell some more.  NASDAQ got sued, Morgan Stanley got sued, everyone got sued.  In general, everyone was pretty pissed.  Well, except Facebook.  You see, they did everything right.  They raised the most money possible, according to demand, for their company.  Of course now it sucks for everyone that bought the stock (with a short term viewpoint) but that’s life.

IPO’s, especially start type companies that haven’t been around for a while, are tough.  If you had purchased stock in the company that makes Annie’s Mac and Cheese (my favorite, if you ever want to get my some food) instead of Facebook, you would have brought home over a 30% return by now.  Why is this?  Annie’s was private too, how come their stock went up.  And this is what drives us deep into the concept of the start up as an investment.

You see, Annie’s wasn’t a start up.  Not all IPO’s are actually.  In fact, several IPO’s each year are mature companies with solid business plans and proven track records of profits.  While there is risk, as with any equity investment, there is a history you can use to discern whether or not the IPO gives you good value for your dollar.  With a start you don’t have that chance.  Instead, you have to figure out if the deal is worth while.  Even then, you’re still stuck.  Start ups have the unique problem in business of growing even when nothing else is.  A start up in a mature industry will grow, like crazy, simple because the market dictates that they have to have a bit of the pie (if they are run correctly).  So you’ll look at their numbers and think that they can continue the torrid pace and become the biggest open source software company working on a linux platform in the industry.  Then the plateau, see no more organic growth and that’s the end.  Or maybe their picture filtering software can’t match instagram.  Or their fake gold on their fake mafia facebook game just isn’t popular enough anymore.

The point is that not every idea is profitable.  Start ups are fun.  They create cool things, they have great people working for them and when things work out, they turn into Microsoft or VMware.  But most of them end up like…well I can’t remember the name but they were not a good start up.  Should this fact deter you from investing in a start up or working for one?  No!  Working for one, although in the enterprise space, is one of the best decisions I’ve ever made.  Learning how to run a business from the ground up will benefit me for years.  It’s a masters in entrepreneurship except they pay me for it.  On the same hand, investing in a start up (at the IPO or through a website like sharespost) is also worth it.  However, the company needs to make sense.  For example, Warren Buffett didn’t invest in Facebook.  Also, sorry, I talk about Mr. Buffett a lot.  Whatever, he’s awesome.

Anyway, the general idea here is that if you can understand what a start up is doing (oh, you’re offering networking gear that has open source, linux based software that can be configured for any business? Right on!) they aren’t necessarily a bad investment.  Even more, they might not be a bad place to work.  As I mentioned earlier, I’m learning more from working at a start up that I would at a regular firm.  And working for one of these firms is just as much of an investment as buying into them.

When all my rambling is said and done, what I’m really trying to say is that if you evaluate a start up, either as a job or a capital investment, you will find that if you don’t understand it, the risk isn’t worth it. However, if you understand it, whether it is a new oil pump company or an electric motor or a networking software firm, you’ll realize that this can be something.  What it comes down to is you.  And in investing, that’s almost always the case.


Index Funds | Investing for the rest of us

Yesterday I wrote about actively investing your money, something that many people are not comfortable with. Realizing this, I decided to write about investing with Index Funds, something I’ve mentioned before but haven’t gone too in depth with.  Yeah, I kind of just went a bit crazy the past few weeks and jumped into some more advanced topics on investing and saving than I probably should have.  My bad!  Investing with index funds is not an advanced topic though.  In fact, it’s one of the greatest ways to build your wealth over time.  I use it for most of my money and tend to speak my opinion about Vanguard and their amazing collection of index funds to pretty much everyone I meet.

But why, you ask?  I know what you’re thinking, you want to BEAT the market, not just match it.  Well here’s the thing about that: in the long run, very few mutual funds can beat the market.  It’s a fact.  Many of them can match or slightly under perform the market, which you might think isn’t that bad.  But then you realize that the returns you’re looking at don’t take into account the fees of the manager.  Typically the annual fee will be between 1.10% and 1.50% for an actively managed fund.  So if you were able to match the return of the market, well, you just lost to the Vanguard S&P 500 fund, which only costs 0.17% on an annual basis, keeping your returns in your pockets.  Just taking into account the costs of the index fund makes it a significantly better idea!  Who wants to pay for below average returns anyway?  If your 401k plan has an indexed mutual fund, take it!  The lower expense ratio will save you boatloads of money down the road!

Another aspect we want to take into account is obviously the return.  I mentioned above that it’s rare for a mutual fund to outperform the market and your index funds in the long run and of course, being long term focused on retirement and financial freedom, we’re all about the long run.  So what has Vanguards S&P 500 fund averaged for an annual return since its creation in 1976?  10.55% a year, not including dividends paid out and reinvested.  At that rate, your money will double every 7 years!  Granted this rate is smoothed out but still, it’s a better return than you’ll see on any savings account or CD account.  If you take $20k today and split it into two separate accounts: $10k in an ING savings account with 0.80% interest and $10k in Vanguards S&P 500 Index fund and just leave it for ten years, what do you think the difference would be?  The savings account would have grown to a whopping $10,832 in those ten years.  The S&P index fund, maintaining its historical growth, will be $28,587, more than double your original amount without dividends reinvested.  Granted, the stock market could fall again but any student of the market knows that you can’t be too concerned with the ups and downs of the market if you’re investing passively.

By passively investing your money into index funds you can achieve good returns and you can balance your portfolio easily, without having to constantly buy and sell stocks and incur huge broker fees.  Save yourself some time, set up a Roth IRA and start saving your money.  The earlier you save, the better!


If you have thoughts or questions about investing or index funds, leave a comment or send me an email!