101 Investing Tips

habit-saving-moneyA few weeks ago, during spring break, I was offered a fee to write up a list of investment tips. I thought about it for a bit and ended up writing five. Today, the article is published at Dividend Reference. Go there and find mine at #55. I’ve skimmed the list (planning to read the whole thing when there is more time), and so far, it looks great.

I want to let this one sizzle a little before I publish a follow-up article with the other tips I submitted, but didn’t make the cut. (There were LOTS of submissions!)

Happy reading!

Keep tracking your net worth with a spreadsheet

I’ve written in the past about the virtues of tracking your net worth with a spreadsheet. If you take one thing away from reading this blog, it’s that you need to track your net worth with some frequency.

And to this ode, I have fallen short. I got off my routine back in May. In the past hour, I got back on the horse and caught up. Big four month gap there.

It came with a surprising revelation: my real estate cash account has gone low. There’s still quite a bit, but it is TOO low for my purposes. What happened? I have put out a bit of money to support my wife’s launching career as an author amidst other things.

What to do?!?! With every account in front of me, I reviewed all the monthly cash flows coming in and out and applied a handful of adjustments.

  • Dialed back the bonus principal payments on the smallest investment mortgage.
  • Slightly lowered the monthly payments on the HELOC.
  • Pulled back the monthly amount being routed into  prime checking.
  • A recent stock option exercise recently settled, so I scheduled it to move to this account.

With all these adjustments, the cash balance on my real estate checking account should start to climb. And this is why its important to take a pulse once a month by writing down every asset and every liability.

I also reviewed the state of things now compared to two years ago. My total in liabilities has shrunk by over $60,000 while assets have increased by over $100,000. Net worth has grown by 29% total over that time frame.

Cash, cash, and more CASH

Trying to save money for retirement? Got a plan in place? Does it include slips, bumps, and unplanned things popping up? Well, as my father has often said, “expect the unexpected.”

To do that, you need to have piles of cash lying around. Stacks of cash, ready to handle situations, is a must. Here’s one way to think about it.

Scrape together $1000 for an immediate emergency fund

This may hard. Tough. Seemingly impossible. Look at your paycheck. How much do you bring home each week? $500? $750? More? Try to set aside $50 or $100 each week, each paycheck. (Adjust based on your payout if you must). But get in the habit of setting aside money. Able to set aside $50/week? In 20 weeks (less than six months), you’ll have scraped together $1000. This is handy when your car’s radiators springs a leak and sets you back $500.

Now shoot for $10,000

Got an IRS refund coming next year? This is the perfect time to make plans to use it as seed money for a bigger savings account. Not invested. Not put in the stock market. Not stuffed into a mutual fund or real estate. Pure cash in a handy savings account you can reach should the need arise. Did you automated $50/week going into that first account? See if you can cut another $50 of spending out of your budget and pipe that into this account. Get a chunk of cash from the IRS, from a recently deceased loved one? Or perhaps you have stock options and ESPP plans? Those are all good opportunities to stock it up. Say no to that new furniture set, or a new TV. Put it off for a year. Start this first.

Automate all the things!

That was the title from a fellow software dev. I once had to wait on a colleague for a meeting. He happened to have “The Automatic Millionaire” sitting on his desk. I glimpsed at about four pages before he arrived. The message was to put as much of your wealth building plan on automatic as possible. Slow and steady is the ticket to success.

If you can get comfortable missing those deductions from your paycheck that are routed into savings, it becomes easier next year, to increase from $50 -> $60. Or from $100 -> $125. Get a raise next year? Increase your savings amount at the same time. Sometimes this is called “paying yourself first.”

Got direct deposit for your paychecks? Maybe it will cost you 1-2 hours to contact payroll, sit on the phone, configure a password, or lookup bank routing numbers. But learn how to automatically have your paycheck split up between your checkbook and your cash savings accounts. It will be worth it. Never put the onus on your to remember to set aside savings. Automate, automate, automate. Then, once a year, spend that hour of effort to get back into payroll and bump things up. Up, up, up. Get a 10% raise? Cut something out? Pay yourself by increasing your savings rate.

Don’t have direct deposit? It may be harder, but make it a habit to stop by the bank of payday. Make it a ritual. Glory in socking away that money. Not everything is going out the window. It can also help you focus on what’s REALLY important. Did you need to buy that DVD? That was $15 you could have saved. What about that dinner out? Another opportunity. I’m not suggested you turn into Scrooge, but cutting back a little here and there makes it possible to sock away bits of cash. And if you start small, you can grow tall in your savings rates.

Cash is what makes the rich

When you have piles of cash sitting around, opportunities become available. Options are on the menu. You car breaks down, and now you can fix it without digging the hole of debt. Your mortgage payment doesn’t line up with a paycheck snafu, but you’re covered.

It doesn’t stop there. An opportunity to buy a discounted note for $20,000 pops up. Now it’s in reach because you have the cash on hand. That’s why if you can reach $1000 and $25,000, you can then think about pushing that pile up higher and higher.

The rich keenly have plenty of cash on hand to plug into opportunities. We can too. (I have!)

Happy wealth building.

Regression to the Mean – it’s everywhere

There is a statistical concept I learned about from Dr. Dave Shafer: Regression to the Mean. It’s a simple concept, but one that when ignored, can cause enormous financial headaches. In essence, things can and do revert back to the mean rates.  The more extreme things get from the mean, the sharper things will swing back to the mean. Hence it is important to learn what the mean rate is, and not build on top of extreme positions.

A financial example

The Dalbar Report has been published for 20 years+. Each year, they do a lookback to see how investors that buy mutual funds fare. And the results are the same: terribly! The average rate is in the neighborhood of 4%. The market itself may grow by a bigger amount. But we aren’t the market, we are individual investors. To shoot for 12% as certain radio personalities advocate would entail getting triple the average rate of everyone around you. If you visit a financial planner and he pitches some precious metals mutual fund that grew by 85% over the past two years, you are setting yourself up for a shocking correction. For something that extreme, a huge correction is coming. See why people say “don’t chase returns?”

A gambling example

This concept appears in other places. A classic one are casinos. I’ve had friends point out that roulette wheels have no memory. The table doesn’t remember the previous spin, so the odds are the same. That isn’t what “memory less” means in betting odds. A betting system with memory is where a form of “state” exists. Such as dealing cards. Each card you receive is impacted by what was dealt previously. Betting red vs. black pays 50/50 odds. If you see red come up ten times in a row, odds are starting to mount that black will be next. The reason casinos stay in business, i.e. make money, is because they count on regression to the mean. They know that red and black will shift back and forth based on these odds. And the casino house DOESN’T PAY the odds. For red and black, they put two extra numbers on the wheel that are neither, but still pay you as if those losing options don’t exist. This is their cut, and is something like 3.5% on the average (if memory serves). Every game they play is based on regression to the mean and they aren’t stupid.

A literary example

As my final example, look at any industry. There are always big, visible leaders. For authors of fiction, there are best selling authors like J.K. Rowling, Michael Crichton, and others. They make big money. This draws other people into the field. In truth, a lot of people never get published. A vast number of people that do, never make big money. Regression to the mean says that if you average all these people together, the industry as a whole doesn’t average big pay for most people. If and when that average starts to climb, basic economics says that more people will flock to it, and pull the average back down. When the average falls, people will leave it, allowing the average to rise.

Take this concept and look around. You may start to notice it elsewhere. So what does it mean? When building a wealth building plan, use the averages to your advantage.

  • Most people don’t save a lot of money. First step: save money!
  • A lot of people count on other people to earn big money for them. Second step: get active and learn how to do it yourself!
  • Too many people get caught up in paying fees instead of picking avenues that actually build wealth. Third step: Shop around for vehicles that have a long history of building wealth and THEN be willing to pay the best experts to do it right.

Happy wealth building!

Annual Wealth Building Review – 2014

Back in 2013, I conducted an annual review. I meant to do the same thing last year, but getting my latest book off the ground ate up my schedule, and I frankly forgot about it until now.

To catch up, I started tracking my net worth month-by-month on a spreadsheet in September 2012. This was after I had started up an EIUL, but before I moved into real estate. As before, I’ll start with total growth and then move into various categories to see how things have gone.

Comparing my current net worth against last year’s annual review (which would be 15 months ago), I have seen a growth of 25.4%. That’s not too bad considering we’ve seen a couple big sell offs of the market. I don’t think we have seen anything quite like the 2000 and 2008 market crashes. But a few times there were things like “market consolidations” and this latest drop tied to the drop in the price of oil. My total growth since I started tracking net worth on my spreadsheet in September 2012 is 132%, which over this time span, derives an annualized growth rate of 45.28%.

As I’ve done so in the past, I again clarify that I don’t expect to earn 45% annualized growth over the lifetime of my investments. Instead, it’s important to look at the long term. Since I started tracking things, the annualized growth rate has been slowly dropping. The first month I tracked it, annualized growth was 118%. The following month it jumped to 258%. Then it was back to 117%. But the truth is, anything of five years or less isn’t very effective at making long term predictions. My various assets need to settle down and continue on their slow, but steady growth in both incoming cash flows and general increase in capital value.

Now let’s dig into the details.

Real Estate

My rental properties have actually declined by 10%, according to Zillow. I warned last year to take these value estimates with a grain of salt. They can jump up and down quickly. You don’t really know until you sell the property. At that time, things like total cash flow compared with operating costs can have significant impact on the value, and I’m sure Zillow doesn’t factor that in.

Our vacation home in Florida has grown in value by 52%. This is much better, but again, not highly critical because I don’t plan on selling it anytime soon. We get a lot of value out of that. The fact that I’m funding it with my company bonus check against a 4.5% 30-year fixed mortgage turns it into a nice piggy bank. If anything, the value of the equity may become useful if I decide at some point to pull out equity and invest. Another nugget of knowledge is that since we bought the unit, they have completed two new building and have started building a third. Definitely a sign of positive economic action. Seeing the current selling prices of the new units indicates that we bought our unit at essentially half price.

Mortgage debt on the rental properties has dropped by $21,878. That is because I have been pouring extra rent into the smallest mortgage. The “estimated” value of the properties may have dropped 10%, but our debt on the rental properties has now fallen by another 5%. 5% may not sound like a lot, but it certainly counts when it comes to building real net worth.


Last year, I had a big position in VNR and was using it to pay off the HELOC on my house. I also had decent growth in Apple, and Berkshire Hathaway, even though I didn’t really have big positions in those stocks. GD has shown great growth by essentially reaching double price from what I initial paid for it.

All in all, my stock portfolio reach a 10% growth on what I put into it. That’s when I decided to sell my entire stock portfolio and use it to kick off a discounted note portfolio.

Discounted notes

I recently blogged about getting into discounted notes. The note that I bought, I essentially bought it at 66% off the cover price. The hope is that I can continue to rake in more cash than I did with VNR, and when it finally pays off in a few years, triple my investment. It should open the door to buying more notes, and paying off rental loans even faster. But since it’s just gotten underway, I don’t any real performance to report. Stay tuned for next year’s report


My EIUL has continue to grow silently and slowly. If you calculate premium dollars that went in, subtract the fees, and then add up the credits, it still hasn’t hit positive. Essentially, you could say I’ve lost money so far. But I ran a spreadsheet that shows that it each month, the loss rate shrinks and shrink. In fact, in about six years, it should turn positive. And the idea is that by the time I reach retirement, it will have reached a very nice annualized rate of around 8%. Then I can start taking out tax free loans and have a nice, risk free source of cash.

Simply put, performance of the various parts of my plan is going well. Stay tuned!

Discounted notes vs x% 401K company match

house_cashI saw a post about someone that seems to have defied the averages and made over 12% on their 401K. Part of their follow up was asking “what product do you offer competes with my company matching the first x%?”

Well I can think of one. Discounted notes. It may be tricky to see because its kinda of opposite. But in the end, the net effect is the same.

With a company match, some amount, like the first 6% that goes in is matched by your company. That is free money and money people jump at the opportunity. With a discounted note, you are buying a loan, say $100,000 for a discount like $70,000. You will receive payments on that $100,000 debt. And at some likely point in the future, you will receive a pay off for that loan. Since you only paid $70,000, there will be $30,000 of profit included.

So just like your company giving you pure profit up front, you will receive pure profit. It just happens on the back end. What’s the downside risk? There is always downside risk.

A 401K with a company match typically only offers mutual funds. Most of them average 2% annual fees. If you build up $1 million, we are talking $20,000/year in fees. Did you catch the part where that is every year? Enter retirement that lasts twenty years, and you are talking $400,000 in fees. Yikes! Who knows? Maybe you’ll do better.

With notes, some of the risk is that the payer will stop paying. You have to foreclose, claim the property that is backing the note, fix it up, put it on the market, and sell it. Then you get to collect whatever money is left over. It might be more or less than your $70,000 investment after all fees have been paid. That is why finding the right note is critical, and why shopping for them by yourself can be hazardous to your wealth building health. If you don’t have a 1st position note, then your not first in line when a foreclosure happens.

If it’s not obvious, there is a lot more entangled details you have to manage when it comes to notes vs. 401K mutual funds. Which is probably why you stand to earn much better money with a discounted note. And why its worth every nickel to find the right expert to help shop for the right note to buy, in order to mitigate the risk of ever having to foreclose.

Some of the best wealth building strategies are simple yet subtle

I took my kids to visit Disney World recently. Frequent readers of this blog already know I own a town home outside Orlando.

You might disagree with The Disney Company’s efforts to extend copyright law, but you cannot ignore the sheer brilliance of Walt Disney’s core idea to tap the public domain for stories.

That man has taken vintage stories from the past and breathed new life by writing music, creating cartoons and also attractions you can ride to enjoy these timeless classics.

Couple that with our constant rise in technology and Disney’s ability to re-release their movies in new formats with more bonus material, and you’ve got a recipe for success.

I was again reminded of how the parks and resorts appear to have suffered no recession whatsoever. You might disagree with the price if tickets, etc., but as a tentative investor, this company is rock solid.

Do I own any DIS stock? Nope. It’s not on my short list either. I find the dividend yield too low at around 1%. That and the fact that they only pay once a year simply moves it much lower than my other prospects.

But I would never fear the stock crashing or becoming worthless. People will be coming to the parks and the movie theaters for years to come.

Growth rates and their statistical fallacies

Have you run into some fund or investment vehicle where the seller advertises a tremendous growth rate?

Watch out, because you might be getting played for a sucker!

When you come in here, you look for the sucker. And if you can’t find him, then the sucker is you. –Mark Cuban, Shark Tank

Let’s imagine a very tiny index fund. It’s worth a measly $1. What is the total growth rate if it climbs to $2? 100%!!! Someone can legitimately tell you they have a fund sporting 100% growth. Of course, it only grew by $1 total.

What if your fund was worth $100,000,000 and increased by $1,000,000? The growth rate would be a tiny 1%. But it still grew by $1,000,000.

What this says is the percent and absolute dollar are BOTH important metrics.

A tale of two 401K funds

401K Fund #1

wealthA long time ago, I shifted the money that was going into my old 401K into an EIUL. This vehicle is geared to survive negative downturns and hence, only go up. In a sense, I think of my EIUL as my new 401K. Again, it doesn’t participate in market down swings, which has huge advanages. It also has better odds at beating the earning average of mutual funds.

401K Fund #2

house_cashBut that is not all. I travel with my family periodically to Florida, specifically to the Orlando area. My wife works for Disney, and we take their kids there 2-4 times every year. Spending money on hotels would have been outrageous. My wife heard from someone a few years ago cheap condos were. We finally bought one back in 2011 after I figured out that my bonus check that comes every six months could fund the entire thing, mortgage, utitilies, and all. Perhaps you’ve heard of the 401K condo?

On one hand, we have enjoyed every moment spent there. It’s great. Fully furnished. Appliances, bedrooms. I even have WiFi. The memories we have built are the best and only getting better. But that is not all. We bought it on short sale. Since then, the housing market has recovered and it’s estimated value has doubled. By paying it off slowly but surely, we are building equity. In the future, if need be, I can always refinance, invest the money into discounted notes, and pay off the loan. It’s another powerful real estate asset that offers more options.

“The investor with the most options wins.” –Jeff Brown


Are you saving enough?

Financial speaking, the money that goes into both of these avenues is coming from my company salary. The total dollars is about 20% of my take home pay, which is not bad.

I’ve spoken before of this terrible investment exercise where people suggest you skip your daily $5 mocha and instead put that money into a mutual fund. According to those selling mutual funds, if you saved like that for 40 years, and 11% year after year, you would accumulate $1MM.

Except that in 30 years, $1MM won’t cut it. Assuming a 4% inflation, that dollar figure would be roughly equial to $208,000 in today’s dollars. Drawing 4% yield from that (as recommended by these same people) will grant you $8,320 Surrender 20% to Uncle Sam, and you’re left with $6700. We’re talking $560/month. What?!? So does skipping that daily mocha really turn into the cash generating machine you think it does? And do you really think you can earn 11% every year for 40 years, when Dalbar reports that people buying mutual funds can’t even average 4%?

That is pretty bad. If we are to turn things around, imagine that today we had $1MM.  How much would we need to start saving if we started 40 years ago? Doh! $5/day! So, set the wayback machine to 1975 and start chugging away. What is $5/day? About $1800/yaer. In 1975, median household income was about $11,800. This means that to save over $1800/year would translate to save almost 17% of gross income. Assume that 20% of that household income goes to the government and the savings rate against media take home pay would almost 20%.

So according to this, I’m on track to earning something the equivalent of $1MM in today’s dollars. My odds are much better because it isn’t based on earning 11% in mutual funds. And it isn’t based on having 40 years to save. Very few people start saving relentlessly when their 25. Instead, it happens in people’s late 30s/early 40s. They start to realize that their savings plan isn’t getting anywhere. So shift that 20-25 years of good solid savings.

Isn’t it time to switch to something that works with the odds rather than against them?


VNR cuts dividend in half

newlogo7.9.10Vanguard Natural Resources, a stock I have written about many times, has cut their dividend from $0.21/unit to $0.1175/unit. That is an almost 50% cut. Good for me that I moved that money to discounted notes a few months ago.

Perhaps you’re wondering if I would continue recommending it? I would if it fits the need. For any critical analysis, you must understand the business. VNR is 85% natural gas. This has nothing to do with the oil market, which caused its price to tumble in the first place. In essence, a lot of people panicked and took a lot of the energy market down. In my opinion, VNR has been acquiring solid assets. They have a strong history of paying dividends.

To be honest, this appears like a great opportunity to collect some VNR stock at a discount. Again, if it suits your purpose. My purpose in owning VNR stock was to pay off an interest only HELOC. If my monthly payment on that debt was cut in half, it would no longer be the right tool for me.

My prediction (take it or leave it) is that VNR will eventually recover and slowly but surely be able to raise its dividend again. How quickly? I don’t know. But MLP stocks have a high payout ratio due to their corporate structure.

Thankfully I moved my money into a warrantied, discounted, first position note. It is paying off my HELOC at a higher rate than before and isn’t linked to tremors in the stock market.

I’m not a financial advisor. Don’t buy or sell anything simply based on my opinions. Do your own analysis and make your own decisions.