Money...For Dummies

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Interestng discussion.

Some people have made some good points. The best being that there are many many ways in which to invest and become rich. It all depends on your age, risk tolerance, desire to actively manage your portfolio, and what your financial goals are.

I am going to get rich buying, selling, and most importantly RENTING real estate. This seems to be the most popular method on the boards and for good reason in my opinion.

That being said, real estate investing is not all roses. There are costs and risks associated with it that are truly unique to that investing style.

The best way to mitigate this risk (unless you are flipping) is to never buy a house that will not produce POSITIVE cash flow. That is, your rents cover your expenses and then some. Notice I didn’t say mortgage.

As has been pointed out, you will have to pay for other things. 5% minimum should be reserved for vacancy. 10-15% minimum should be reserved for maintenance, 5-10% minimum for property management, also your taxes, and your insurance, whatever those may cost. Not to mention rents that are due but never collected.

Much of your wealth will be built in the selection of your property. For example, my wife manages 300 properties in Phoenix, AZ. Most of her owners are upside-down on their mortgage because they didn’t do their research. They blindly assumed that the rent that they would receive would cover their mortgage when it does not in every case! This is not even accounting for the above factors!

In some markets (such as Phoenix) it is very very difficult to find cash flowing properties. In others, such as Houston and Dallas Texas, it is ridiculously easy.

On a side note, just because the market is bad, doesn’t mean that your rent houses will be full. The guy who’s mom owns 30 houses, all of them currently full, is the exception rather than the rule. On the contrary, the rental market has never been more saturated. Owners who cannot sell their houses are putting them all up for rent.

Bottom line is, don’t underestimate your expenses. If you aren’t willing to do your due dilligence in the real estate market then there is a very good chance that you could get burned. That being said, the benefits already outlined in many posts above are insanely awesome.

  1. Positive monthly cashflow.
  2. Equity Capture (Tenants pay down your debt!)
  3. Tax advantages: Depreciation, learn it, live it, love it.
  4. Honestly, appreciation should be last on your list. This is the most speculative (gamble) part of real estate. If you control the other three factors you can’t lose, even if the market is down.
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[quote]RMorrison wrote:

  1. Tax advantages: Depreciation, learn it, live it, love it.

[/quote]

!!!

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Professor,

I have been an investor for 25 years. About half of that as a professional.

Stocks, over time, will offer you an excellent return. Individual stocks have the most risk, but the most return. Start off in mutual funds.

I don’t like index funds but good growth stock funds will pay off over the long haul. Buy a few and mix them up. Make sure you keep the same percentage in them over time.

The one rule I nearly always followed is to be a contrarian. Buy on bad news, sell on good. For example I recently traded fannie mae and freddie mac stocks in the short term.
I am buying financial and banking stocks now. Large blue chips too big to fail. Oil stocks were a tremendous deal a few years ago. About to let them go now. Same thing with real estate. I never lost money in real estate and always bought in crappy markets.

I know you have a medical practice. I have a doctor who is one of my best friends. He started by buying the building his practice is located in (small commercial property)eventually had a nice portfolio of proeprties and sold them to other professionals. Still owns his own office and operates it rent free now.

Good luck. The more you put away now the more it will be worth at 55. By the way 55 will come faster then you think. 45 sure did!

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msd0600 - a couple additional thoughts on your post.

You say you do not have the 4-6 months emergency fund built up. Here is another approach. A Roth IRA allows withdrawal of contributions without penalty. Withdrawal of appreciation comes with a penalty, but your contributions do not. So, when if you are cash strapped, you can fund your Roth IRA and have that also serve as your emergency fund. However, your goal should be to never, ever touch that money. Only for a true emergency. Once you fund your Roth IRA, you can build of a taxable 4-6 month emergency reserve and then fully invest the Roth IRA amount. Thus, you will make sure to fund your Roth and your emergency fund when you are short on cash. (note: free shipping at elitefts doesn’t constitute and “emergency” :))

Regarding American Funds in your 401k: the key issue with your 401k and any other investing for that matter, is to keep your costs low. Minimize all mutual fund fees, account fees, etc. So, look at your 401k for fees. Do the American Funds charge a load fee? Or, are the load fees waived, as they are in many 401ks? What are the expense ratios for the funds? Note, american funds has different share classes that charge different load fees and expense ratios. I would steer you toward any low expense, index funds in your plan. however, low expense, no load american funds can be used very effectively for your investments.

If you want to delve in to this in more detail, I suggest posting your detailed questions in this forum Personal Investments - Bogleheads.org. Read this message to get the format for your questions right Asking Portfolio Questions - Bogleheads.org.

MSD - a few more general thoughts on getting started with your investing:

  1. Treat all your financial accounts as one portfolio. Eventually, you will have a 401k, IRA, taxable, and possibly education accounts. Treat all of these financial investments as one portfolio. Treating them as one portfolio allows you to put highly taxed investments (like bonds) in your tax advantaged accounts (Roth IRA for example), which saves you money. If you have questions on this point, just ask.

  2. Keep it simple and never buy anything you don’t understand. A simple portfolio that only buys 4 or so mutual funds (or asset classes) is really complex enough. Do not make your financial investments more complex than you are comfortable with.

  3. (assuming your 401k is not too expensive) Max out your 401k and IRA investments. I know it is hard when you are cash strapped and starting a career. But, do it. Take bonuses and raises - spend a little on fun - but put most of it to an increase your 401k and IRA.

  4. Invest each extra saved dollar in roughly the following order:

Roth 401k up to 6% match
Roth IRA (Max it out each year or you lose the opportunity)
Pay off High Expense Debt (your 3k credit card)
Continue Roth 401k up to the maximum (yes, the maximum your company allows you to contribute)
Taxable investing (keep it in low cost, tax efficient index funds)

  1. Once you pay of your $3k of credit card debt, never carry a credit card balance again. Only use credit cards if you pay the balance off in full every month. If you have any tendency to overspend or to not pay off the CC in full each month, you should get rid of the credit cards. Paying credit card interest rates is a sure way to jeopardize your long term financial security.
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"I don’t like index funds but good growth stock funds will pay off over the long haul. "

Are there any that actually beat the various indices over the long term? Financeguy just said the exact opposite.

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PRCalDude - note there are index funds that are also growth index funds.

I haven’t seen any data that suggests actively managed growth funds outperform broad indexes over the long haul. In fact, actively managed growth funds are likely to pay much more in taxes - due to trading stocks in the mutual fund - than a broad index fund. That’s one benefit of index funds is that the are “tax efficient”. They keep tax cost low if you are investing in a taxable account.

Actually, in at least one segment, growth underperforms the broad index. Take small cap stocks. Small cap growth stocks are known in financial circles for a low rate of return relative to their risk - when compared to the total index of small cap stocks. So, at least in one case, growth definitely doesn’t outperform the broad index.

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[quote]financeguy wrote:
PRCalDude - note there are index funds that are also growth index funds.

I haven’t seen any data that suggests actively managed growth funds outperform broad indexes over the long haul. In fact, actively managed growth funds are likely to pay much more in taxes - due to trading stocks in the mutual fund - than a broad index fund. That’s one benefit of index funds is that the are “tax efficient”. They keep tax cost low if you are investing in a taxable account.

Actually, in at least one segment, growth underperforms the broad index. Take small cap stocks. Small cap growth stocks are known in financial circles for a low rate of return relative to their risk - when compared to the total index of small cap stocks. So, at least in one case, growth definitely doesn’t outperform the broad index.[/quote]

My dad had a lot of money in a managed account. He finally asked them to prove that they were outperforming the S&P. When they finally plotted out all the growth, they were underperforming a plain old S&P index fund. Guess where his money is now?

There are indexed ETFs and SPDRs now also, aren’t there? Know of any good ones?

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PRCalDude - Managed accounts (or wrap accounts) are notoriously expensive with fees of 1% to 2% or higher. And, as your dad experienced, the active managers usually do not beat the indexes. They definitely don’t beat the indexes after their fees are factored in.

Yes, there are indexed ETF’s and SPDRs. Since your whole portfolio works together, to diversify your risk, it is impossible to recommend one good one. A better starting question would be, what do want your portfolio to look like? Once you determine that, the the choice of ETF’s/SPDRs or other mutual funds is straightforward.

A good starting point portfolio for consideration might be:

Total US Stock Market ETF
Total International Stock Market ETF
Total US Short Term Bond Market ETF
Prime Money Market Fund (for holding cash)

Put the bonds and total US Stock Market (to the extent possible) in your tax advantaged accounts (IRA,401k) and the rest in your taxable accounts.

You have to do some work to get the percentages in each asset class, but this is a very solid, simple portfolio that could take you through retirement.

Vanguard generally has the lowest cost ETFs and mutual funds in these categories.

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[quote]Stuyou wrote:

Short term CD’s and Money Markets usually have about the same return. The difference is that with Money Markets you are buying shares over time that fluctuate in value and as such you can take advantage of dips in market value. [/quote]

This is not correct. A money market never fluctuates in value. The NAV is always constant at $1/share. If a fund were to ever deviate from that, known as “breakeing the buck”, well… let’s just say our financial system would be in trouble.

Buying into shares that fluctuate in value is known as dollar-cost averaging, and is impossible with a money market.

Prof X - there’s some good advice on this thread, don’t know if you want/need more or even a brief tutorial, but PM me if you so desire. I do this stuff for a living.

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[quote]Agressive Napkin wrote:
Sorry if this question is at all redundant, I hope it’s not, and I imagine it’s of interest to a few people other than me.

I’m 18 and about to start college. I have a (very) small income at a job where I get $10 an hour, plus the random odd job I can find (moving furniture, etc.).

What can I do right now to get the ball rolling so to speak? I’m not sure if this would be any different than someone who already has a steady job/income, but I figure it would be worth asking. Seeing as I can’t own a home or make any sort of significant investment like that (yet), does anyone have any advice for what to do in both the short and long term.[/quote]

Hey AN -

I’m kinda a newbie in this realm too, however, I can offer you some basic advice. You’re not taking in much money now, but there is ALWAYS room to eek out money for savings.

Rule number 1: Save some money every month. A good goal would be 10%, but if your expenses are such that it’s not possible, 5% is a hell of a lot better than nothing. Put this money in an account that is accessible, but not too accessible. I use ING for this purpose.

Rule number 2: Have a budget and follow it. Don’t make your budget so conservative that you can’t meet your expectations. Don’t forget the little things. If you have a car, save a bit each month in case something goes wrong with it.

Put aside a bit of money each month for entertainment. It’s kinda like long term cutting diet without built-in cheat days. If you don’t have it there, you will eventually break down and metaphorically eat a couple pizzas, a root beer float, and a bag of jelly bellies.

Additional advice: A short term goal would be to save up enough money from your 10%/month to live off of that money for a few months if something bad happened and you lost your job. Say your expenses are $1500/month. When you’ve successfully saved $4500, start looking at better investments for your 10% (CDs, mutual funds, or other lower risk investments).

After you graduate and have a bit more dough to play around with, a lot of the other advice in this forum will be more useful to you.

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[quote]PRCalDude wrote:
"I don’t like index funds but good growth stock funds will pay off over the long haul. "

Are there any that actually beat the various indices over the long term? Financeguy just said the exact opposite.[/quote]

There are two schools of though on this:

One is the mainstream EMT, the efficient market theory. It basically says that everything the market knows and expects is already priced in and that you will never be able to consistently know more than the market.

Most managed funds do NOT beat the market. As in 99,99% don´t in the long run.

Those that do are not necessarily smarter but higher leveraged, but if you want to get in debt to buy stocks you can do that on your own. Such funds can work for years, but they can also spectacularly crash in a heartbeat. The managers will make millions in the good years and tell you to go fuck yourself when they have tanked your money.

The Value Investing crowd thinks that the market consists of hysterical sheep and that yes, you should be able to outperform the market.

Since most big funds not only act in the market but actually make the market they have to move very slowly when buying or selling positions, so you should, theoretically, be able to outmaneuver them if you are small enough.

That requires constant attention though and the knowledge of how to use the instruments any good on line broker should give you.

So, in conclusion, beating the index funds by using managed funds will probably not only not work because they will not beat the market, you also pay management fees.

Knowing when to get in or out off the market is probably better. Meaning, buy an index fund when the last bubble has burst and get out before the next one does. Ride it out with bonds, get in when they scrape the fund managers from the pavement.

And repeat.

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Duke, for someone young where would you suggest they begin to learn about investing. Any specific books? sites?

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[quote]A good starting point portfolio for consideration might be:

Total US Stock Market ETF
Total International Stock Market ETF
Total US Short Term Bond Market ETF
Prime Money Market Fund (for holding cash) [/quote]

Thanks. I’ve got a global index ETF. It’s relatively new. Given what inflation is at right now, I’d be losing money at the rate in that money market fund. I’ve got my cash in CDs.

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PRCalDude - The global index etf is a great choice to keep things simple, if you are comfortable with a greater international weighting. Good call.

I was thinking of Money Market more in context of the portfolio, where you can have dividends and interest hit, so you can reinvest.

Also, being in a high state tax state like california, Treasury Money Markets and California Municipal Money Markets can help increase your after tax return, since they are exempt from state taxes. CD’s are fully taxable. So, a money market may still be a reasonable alternative, depending on your tax bracket.

Seraphim - here is the best starting point I know Investment Planning - Bogleheads.org.

It is short and gets you started on the right course.

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[quote]xXSeraphimXx wrote:
Duke, for someone young where would you suggest they begin to learn about investing. Any specific books? sites?[/quote]

Mate, there’s already been a stack of books recommended in the thread so far, not to fob you off by any means, but I doubt that I could recommend any better reading material for you, unless you’re interested in something from Australian Authors?

I have educated my 3 stepkids in wealth building and would be glad to assist if I can. I fyou want more than what’s already been recommended, by all means ask again and I’ll do what I can.

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[quote]doubleh wrote:
This is not correct. A money market never fluctuates in value. The NAV is always constant at $1/share. If a fund were to ever deviate from that, known as “breakeing the buck”, well… let’s just say our financial system would be in trouble.

Buying into shares that fluctuate in value is known as dollar-cost averaging, and is impossible with a money market.

Prof X - there’s some good advice on this thread, don’t know if you want/need more or even a brief tutorial, but PM me if you so desire. I do this stuff for a living.
[/quote]

Doubleh,

Thanks for the correction - I would hate to be associated with bad advice. I am not sure why I got confused r/money markets but it seems like when deposit into mine (Vanguard Prime) they always send me a statement saying that I purchased x shares at y price…but I may be confusing it with one of my mutual funds that appear on the same statement.

dollar-cost averaging…for some reason I couldn’t remember the phrase.

Again, thanks for the correction.

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[quote]PRCalDude - The global index etf is a great choice to keep things simple, if you are comfortable with a greater international weighting. Good call.

[/quote]

financeguy,

I guess I’m betting that the world will continue to create wealth and that the global economic pie is expanding. I’m less confident about US economic practices, so I guess I consider investing in strictly US markets to be a greater risk. Maybe this is overly cautious since there’s a bunch of global companies on the NASDAQ and NYSE. Anyways, averaged over time, doesn’t the S&P grow at about 10%/year?

The guy at Smith BArney that I deal with claims that their job is to find funds that beat the Dow and S&P indices. I agree that that’s their job. I’m not sure they’re doing it or that it’s possible.

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PRCalDude - don’t take my previous comments as criticism. I am just impressed with how receptive you are to Int’l investing. Most people don’t realize that if they put all or nearly all their investments in the US, they are running a lot of country specific risk. But, most are reluctant to invest internationally, because they perceive it as more risky, when it is just unfamiliar. You have a great perspective on Int’l investing.

Yes, the US market has grown about 9% to 10% over its history (depending on the time frame and data used). But, in the future, who knows what the growth rate will be?

The data suggests the guy at Smith Barney (or any other money manager for that matter)will not be successful in choosing an active mutual fund, picking a stock, or timing the market. Buying, holding and rebalancing a diversified, low cost portfolio of index funds will do better for the individual investor most of the time. Your Global Index ETF is a good solution.

Keep in mind that when you have both taxable accounts and tax deferred accounts (401k, IRAs) that it may be worthwhile to split your Global Equity index ETF between the US and Int’l. Why? International equity mutual funds get a Foreign Tax Credit (FTC). The foreign Tax credit reduces your Personal Income tax - if you hold the international equities in taxable. Just a thought for future fine tuning.

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I wanted to say thanks to everyone who contributed. I am sure there are many others interested in this topic also.

My goal was to get basic info and that is what most provided.

I am hoping to make any money I do have do more work FOR ME instead of the other way around.

I think I have a jump off point now.