Money...For Dummies

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81

[quote]PRCalDude wrote:
And remember, the growth rate above of 3.2% is very low and realistic. some years are less, many years are more.

Great. Inflation is now running at around 5% here. You can get better rates in a CD. [/quote]

You’ve totally missed the point, well done.

Again, a previous post pointed out that real world (in Aus) the past 37 years has seen the median house price rising in excess of (IN EXCESS OF) 4% above inflation rates.

Tell you what - if I put my savings of say $100,000 into a CD for whatever great rate you’d care to mention is possible, how do you suppose that’d stack up against the 4% p.a. I’d be getting on the $3,000,000 in property?

In one year at 4% I’d create $120,000 growth. So your CD suggestion, based on $100k deposited, would have to earn 120% in it’s first year.

If they’re doing that over in the US - I’m movin’

Putting my sarcasm aside, my money is leveraged into the property, hence the huge gains possible. Of course I pay interest on that leverage, but I have tenants who help to pay that interest, as well as a tax deptartment that rewards me for my efforts. So my costs on this leveraging are well down.

And finally, if it didn’t work, I wouldn’t do it.

82

[quote]Tristram wrote:

Duke, you seem to be a very knowledgeable bloke in this area, and one of your earlier comments kinda stuck with me. I believe it was that all investments had risk. Technically this is true, yet most regard U.S. T-bills to be risk free, and last I checked they were earning a rate of return around 3.85%. It is also possible, but not likely, to set up a riskless hedge with two assets that share a perfect negative correlation. It is my opinion, however, that this can only be done in textbook examples and research cases though, but if you know of an example of it I would be delighted to read about it.[/quote]

Tristram, as pointed out to me by someone else, the inflation rate over there is 4 or 5%. T-Bills earning 3.85% isn’t a good wealth creation vehicle based on those numbers.

Dan Erickson’s suggestion of buying bullion, not a bad ploy - but again, there is risk, there’s always risk if it’s going to be worthwhile.

Risk = reward… ergo - no risk… ?

As I’ve said, I’d be inclined to take a risk, but a managed risk. If you can manage the risk then you can ‘gamble’ with a pretty good ‘sleep at night’ factor, knowing what your worst case scenario might be. If you can’t deal with your worst case scenario, don’t do the deal.

As for the riskless hedging - yes it can be done, take a look at options trading for example. The problem is that the costs of the hedging virtually wipe out the profit of the risk, and then when you compare the reward to risk ratio, you’ll ask yourself why you bothered at all. A good way to make brokers rich, that’s about all.

83

Wouldn’t be the first time. I missed the “in excess” part, obviously. Sorry about that.

Anyways, the 10% you’re getting is obviously good. You’re comfortable in assuming the amount of debt you have. A lot of people aren’t. The 7 year doubling of your money agrees with a 10% compound interest rate - it’s the “rule of 7.” It’s possible to do the same with mutual funds and not assume the debt risk though. Rainjack’s strategy is one way, and DRIPs doubled my money every 7 years also, meaning I got 10% compound interest with no debt risk.

84

[quote]PRCalDude wrote:
DRIPs doubled my money every 7 years also, meaning I got 10% compound interest with no debt risk. [/quote]

Cool! Imagine if you’d taken a risk and leveraged into it.
Just sayin’
I’m kidding - each to their own hey.

85

Everything in life has risk…don’t be pussies. It’s probably more riskier to drive, you can die in a car accident but money can be made again.
You have more to lose by not getting on the bandwagon imo.

Risk can be managed. How much risk your willing to take entirely depends on your situation but thinking only about the negatives will get you nowhere. Emotions play a big part in this, and the how isn’t always the most important thing. Mindset is and the same principles have been written in articles on this web site.
Just because the stock market is falling doesn’t mean shit either. You can make money in a bear market if you know how - and the how really isn’t that hard.

86

[quote]Duke wrote:
orion wrote:
It is just that if you are talking nominal growth instead of real growth you are actually losing money each year because the dollar inflates faster than 3.2%.

You might own 5,63 million in 20 years (3*1,032^20) but they will only be worth 2,57 (3,75/(1,04^20))in todays money if the US inflation stays at only 4% each year.

Before I did that I´d rather spend it on hookers and booze.

Or aim at 3-4%, which is easy as you say, and invest it abroad.

I understand your maths but not sure about your logic. You’ve stated that you know too much and it’d be hard to get down to basics, but if you can bear with me, I’d like to address your logic;

Firstly - the figures stated by me are example only. it assumes I bought $2m of property in one hit 13 years ago. I didn’t. Therefore the growth rate is an example only. E.G, the property I mentioned that I got for $38k had a growth rate of 73.2% - that beats 4% doesn’t it.

Secondly - if you’re saying that the future value is ‘only’ $2.57m in 20 years, after discounting it by the CPI, so you’d rather spend the money on beer and hookers… I think you’d need to be very careful about offering advice to someone on how to invest if you plan to spend tens of thousands a year on booze and hookers.

Thirdly - If you’re going to discount the future value of the investment by the CPI, shouldn’t you also discount the future value of the debt by the same amount?
If you agree, and how could you not, then the future value of the $2m debt would be $913k.

Therefore, the ‘20 year investment’ adjusted for CPI will still net you $1,653,000 profit… in future dollars, that’s $3,622,000

More simply put - the CPI in Aus over the past 37 years is around 6.1%. The average housing value is compounding over the same period at 10.3% - That’s more than 4% ahead of the CPI! and therefore negates the argument anyway.

How can you NOT make money - put the calculator down, you know how to use it, but do you know how to invest - it becomes common sense.
[/quote]

So if you re-arrange your numbers as to make economic sense they do.

Congratulations.

I was just pointing out that your numbers didn´t if you were talking nominal growth.

Since you are talking real growth and since 10.3 minus 6.1 is in the ballpark of 3-4% each year you probably were; you should say this, because a lot of people do not know the difference.

When I posted that I probably knew too much I meant that a) noone is helped if I hold a seminar in Austrian tax and a ccounting law and b) that there are basics most people that know something about a topic take for granted and those are often the most important ones.

Like compound interest, leverage and different levels of taxation when it comes to persons or corporations.

PLus, spending my money on booze and hookers now, rather than having it stolen by the government via inflation makes perfect sense to me. Afterwards it is gone anyway, but version one is way more fun.

87

[quote]Tristram wrote:

Duke, you seem to be a very knowledgeable bloke in this area, and one of your earlier comments kinda stuck with me. I believe it was that all investments had risk. Technically this is true, yet most regard U.S. T-bills to be risk free, and last I checked they were earning a rate of return around 3.85%. It is also possible, but not likely, to set up a riskless hedge with two assets that share a perfect negative correlation. It is my opinion, however, that this can only be done in textbook examples and research cases though, but if you know of an example of it I would be delighted to read about it.[/quote]

There are funds that hedge against losses.

That can be done easily, but limits your possible earnings too.

The numbers I remember were a 16% win in the best scenario and a 2% loss in the worst. I´d expect other funds to be in that ballpark.

You do not have to do this yourself, some funds allready do that for you.

88

[quote]Professor X wrote:
It sounds like the best bet is buying an apartment complex or a home and then renting it out.[/quote]

Or waterfront property, nothing appreciates like waterfront.

I don’t now how appplicable this is to your location, but if you can find a cottage/fixer upper, you can make a lot of money off of them.

89

(1) invest in yourself with an education, if needed.

(2) start your own business, if possible

I know that Prof X is an oral surgeon so he needs no further education. He will not get rich working for someone else, as they keep most of the money, so he should have his own practice, if possible.

(3) If he starts to accumulate wealth, he should then buy property in exurbia. Americans will be migrating away from cities and suburbs as those things fall apart and crime soars. He may even move his business there — small resort type towns far from any big cities. A town like that in New Mexico or Colorado would be ideal.

90

[quote]orion wrote:

PLus, spending my money on booze and hookers now, rather than having it stolen by the government via inflation makes perfect sense to me. Afterwards it is gone anyway, but version one is way more fun.

[/quote]

LOL, thats my kinda of investment!

91

[quote]Professor X wrote:
It sounds like the best bet is buying an apartment complex or a home and then renting it out.[/quote]

Housing is one of the best markets, just because property appreciates in value.

The housing market IS down, but what people don’t notice is that’s even better for landlords. You can buy houses for lower prices, and because people aren’t buying/building houses, they rent. My mom owns upwards of 30 houses and has them all full at this time. She’s been buying like crazy (5 this year so far), because of low prices.

when you buy, either look for houses that have been on the market a while(desperate owners to sell), because sometimes you can lowball offer up to $15-20k less than assessed value and they’ll take it, OR look for foreclosures owned by banks. The banks just want to get these off their hands, so you can get them VERY cheaply sometimes. When you evaluate buying a house, look for things you’ll have to put capital improvements into, i.e. If it’s painted exterior, you have to paint that every 3 years or so, while if it’s vinyl siding, you have more like 15+, check the roof extensively, try to persuade them to give you basic appliances with the house, or if they don’t, offer $2k less.

Keep your houses nice, just because you CAN make money off being a slumlord, but you’ll get tenants who’re a lot more likely to trash/abandon a house. It’s better to aim for the middle layers of society, and pay a little more into your houses.

The hardest (financially) part of being a landlord is the taxes. You pay property tax out the ass, which will be tough to come up with initially, due to the fact a large portion of the rent will be going back into improvements and the payments until you have the house payed off.

That’s the basics i’ve learned from working with my mom and her rental business since the time i was 10. more info on specifics available if needed.

92

My bro works for a bank so I follow his advice. My plan is basically to buy a lot of stocks with high dividends and make money off that. I own a lot of bank stocks and even though they’re not doing well I’m still making cash of the dividends and those stocks will slowly rebound. Keep in mind, I mostly have Canadian Banks, which are in better shape than in the states.

I can’t stomach too much risk…so I tend to stay away from tech stocks, but I might get into those in the future. My personal philosophy when it comes to investing is that slow and steady wins the race…if you try to “get rich quick” you’ll probably end up losing your money.

When it comes to buying a house it’s good to rent out the basement. That’s my future plan.

93

For Duke & the other investment savvy posters:

What’s the general consensus of investing in the US dollar and how hard is it to do ?

Thanks in advance.

94

Admittedly I’m not a financial adviser, but I do have a pretty good knowledge about wealth building. There has been quite a bit of unusual information posted in this thread and hopefully my list of 10 wealth building principles can clear some stuff up.

It’s not that complicated.

  1. Compounding growth is the most powerful wealth building tool and anything you do to build wealth must take advantage of compounding.

  2. ALWAYS build wealth by always living below your means. The easiest way to do this is with a realistic budget and automated savings(401K, automated deposits, etc.)

  3. Know your risk threshold. The longer your investment horizon the higher your tolerance for risk should be. I.E, if you have 20+ years until you plan on retirement then focus a larger portion of your money to wealth building investments as apposed to income earning investments.

  4. Maximize your 401K - pay into your 401K up to the legal limit ($15,500 I believe) every year. This reduces your current taxable income - another key to wealth building.

  5. Non-managed mutual funds are wonderful investments. You can’t beat the market and neither can most fund managers. Instead invest IN the market - choose funds with minimal fees (usually a VERY nominal amount) that cover a broad spectrum of the market. In my experience Vanguard has a great fee structure (almost free) with many broad spectrum mutual funds with reasonable minimum buy-in’s. I can recommend a couple if you would like.

  6. Don’t pay interest on consumer purchases!!! Only pay interest on items that build wealth (homes and education). If you can’t write a check for something then you can’t afford it!

…including vehicles

  1. Unless you have the time and inclination to educate yourself and babysit your investments, do not invest in individual stocks, commodities, or currencies (including gold).

  2. If you have a long investment horizon don’t freak out when the market takes a turn for the worse. In fact, a down market is the best time to increase your investment in the market (i.e. right now for stocks or real estate).

  3. Rental real estate has the potential to build a lot of wealth through appreciation AND rental income. However, rental income involves a lot of effort on the part of the investor. Be realistic with yourself before going into this market. If possible, go into the rental real estate market with partners to lighten your work load.

  4. You have a long time to build wealth, so don’t worry about getting there quickly - be patient. Take managed risks, but don’t be stupid. Remember that any information you get has already been processed by thousands of people more investment savvy than you…there is rarely such a thing as a “hot tip”. Remember that the markets (stock, real estate, bond, etc.) always win so there is no need to try to beat the markets - just invest in the markets. If you want to “play in the market” take a small part of your portfolio and play with it - but only do this with an amount that you are willing to lose.

I will admit that my advice is fairly conservative, however I have seen these principles applied many times with very rewarding results.

Also, I’m a CPA - not that it makes me a credible financial adviser, but due to my profession I have seen many people successfully build wealth with little income and many more people lose everything even though they had enormous incomes.

If I was just starting out, I would first maximize my 401K (choosing the riskiest portfolio option), then either max out a Roth IRA or start putting cash into a very broad mutual fund.

Note on budgeting - try to get your total living expenses (including taxes) down to around 60% of your income then investing becomes a lot less painful.

95

[quote]Stuyou wrote:

Note on budgeting - try to get your total living expenses (including taxes) down to around 60% of your income then investing becomes a lot less painful.

[/quote]

I’m working on that now. I’m happy because I just paid off my first “real” car today. I am expecting it to fall apart now, but at least I can say I actually own something. Those monthly payments won’t be missed either.

96

[quote]Professor X wrote:
Stuyou wrote:

Note on budgeting - try to get your total living expenses (including taxes) down to around 60% of your income then investing becomes a lot less painful.

I’m working on that now. I’m happy because I just paid off my first “real” car today. I am expecting it to fall apart now, but at least I can say I actually own something. Those monthly payments won’t be missed either.[/quote]

Great!!

Take care of that car and drive it for a decade. If you can live significantly below your means then you will be able to easily pay cash for your next car. It’s interesting how much you lose your desire for a new expensive car once you commit to paying for it with cash. Since you are used to making your car payment, I suggest you immediately divert that monthly amount of money to a savings/investment account. At the very least, open a money market with ING or Vanguard while you determine how to invest your cash. It’s a good idea to build a significant amount of cash savings for an emergency savings and/or savings for significant purchases. I like to keep about 2 months worth of income in cash in a money market account.

Edit:
Keep in mind that wealth building is very similar to bodybuilding - consistency is the key. If you average 7% on your car payment (assume $350/month) for 25 years your will have amassed a painless $285K. Keep in mind that it’s not very difficult to earn 7% over 25 years. If you are able to average 9% over that same amount of time then you will end up with $400K. That is by doing nothing but what you are already doing - making a monthly payment.

97

[quote]Stuyou wrote:
Professor X wrote:
Stuyou wrote:

Note on budgeting - try to get your total living expenses (including taxes) down to around 60% of your income then investing becomes a lot less painful.

I’m working on that now. I’m happy because I just paid off my first “real” car today. I am expecting it to fall apart now, but at least I can say I actually own something. Those monthly payments won’t be missed either.

Great!!

Take care of that car and drive it for a decade. If you can live significantly below your means then you will be able to easily pay cash for your next car. It’s interesting how much you lose your desire for a new expensive car once you commit to paying for it with cash. Since you are used to making your car payment, I suggest you immediately divert that monthly amount of money to a savings/investment account. At the very least, open a money market with ING or Vanguard while you determine how to invest your cash. It’s a good idea to build a significant amount of cash savings for an emergency savings and/or savings for significant purchases. I like to keep about 2 months worth of income in cash in a money market account.

[/quote]

I know this may sound stupid, but could you explain the difference between a Money market account and a basic savings account?

98

[quote]Professor X wrote:
Stuyou wrote:
Professor X wrote:
Stuyou wrote:

Note on budgeting - try to get your total living expenses (including taxes) down to around 60% of your income then investing becomes a lot less painful.

I’m working on that now. I’m happy because I just paid off my first “real” car today. I am expecting it to fall apart now, but at least I can say I actually own something. Those monthly payments won’t be missed either.

Great!!

Take care of that car and drive it for a decade. If you can live significantly below your means then you will be able to easily pay cash for your next car. It’s interesting how much you lose your desire for a new expensive car once you commit to paying for it with cash. Since you are used to making your car payment, I suggest you immediately divert that monthly amount of money to a savings/investment account. At the very least, open a money market with ING or Vanguard while you determine how to invest your cash. It’s a good idea to build a significant amount of cash savings for an emergency savings and/or savings for significant purchases. I like to keep about 2 months worth of income in cash in a money market account.

I know this may sound stupid, but could you explain the difference between a Money market account and a basic savings account?[/quote]

The easy explanation is that a money market account is a savings account that pays a significantly higher rate of interest. To earn this higher interest rate you agree to a higher minimum balance and a slightly more restrictive withdraw policy. You also have the option to choose a non-FDIC backed money market account which earns even higher rates of interest.

In short, if you have enough in savings to meet the minimum balance, then you should ALWAYS choose a money market over a traditional savings account. I prefer Vanguard for no other reason than there excellent customer service. They have a few money markets to choose from, but you can’t really go wrong with any of them.

99

[quote]Stuyou wrote:
Professor X wrote:
Stuyou wrote:
Professor X wrote:
Stuyou wrote:

Note on budgeting - try to get your total living expenses (including taxes) down to around 60% of your income then investing becomes a lot less painful.

I’m working on that now. I’m happy because I just paid off my first “real” car today. I am expecting it to fall apart now, but at least I can say I actually own something. Those monthly payments won’t be missed either.

Great!!

Take care of that car and drive it for a decade. If you can live significantly below your means then you will be able to easily pay cash for your next car. It’s interesting how much you lose your desire for a new expensive car once you commit to paying for it with cash. Since you are used to making your car payment, I suggest you immediately divert that monthly amount of money to a savings/investment account. At the very least, open a money market with ING or Vanguard while you determine how to invest your cash. It’s a good idea to build a significant amount of cash savings for an emergency savings and/or savings for significant purchases. I like to keep about 2 months worth of income in cash in a money market account.

I know this may sound stupid, but could you explain the difference between a Money market account and a basic savings account?

The easy explanation is that a money market account is a savings account that pays a significantly higher rate of interest. To earn this higher interest rate you agree to a higher minimum balance and a slightly more restrictive withdraw policy. You also have the option to choose a non-FDIC backed money market account which earns even higher rates of interest.

In short, if you have enough in savings to meet the minimum balance, then you should ALWAYS choose a money market over a traditional savings account. I prefer Vanguard for no other reason than there excellent customer service. They have a few money markets to choose from, but you can’t really go wrong with any of them.

[/quote]

I just called the bank and it sounds like CD’s are better than money market accounts. Is that correct?

100

Usually. You just can’t get your money out until the term of the CD expires.

If you’ve got a brokerage account (for example, Smith Barney, etc), the people there can usually tell you where (i.e. at which bank) the CD rates are the best.