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.

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!

What is happening to the stock market?

graph_up2The stock market lately has gone CRAZY! So what’s happening? Well, I don’t have all the answers, but let’s look at some of what’s going on, and see what we can figure out.

At the beginning of this latest market crash, news reports came out about the price of oil dropping drastically. In case you didn’t know, oil is a key piece of the economy. Whose economy? Well, I know the most about the US economy, but oil is an international commodity, so it affects everybody. In essence, we all use oil to drive cars, fuel shipping trucks/planes/trains, and deliver most other goods of the economy. When oil prices fall, other parts of the economy rally. And when oil prices shoot up, other parts of the economy suffer.

So why is the whole market sliding down? One word: panic. Back in the 1970s, OPEC tried to control the oil market at an extreme level, and they actually contributed to a worldwide recession by pushing the oil market too hard. I’m not saying that is what’s happening, but when the price of oil moves a LOT, MANY investors panic.

All the oil stocks dropped off quite a bit. Strangely enough, stocks like VNR, which is 85% natural gas and has little to do with oil, has dropped 50% in the past 2-3 weeks. That is probably because many of the people that bought VNR are panicking that for some reason, VNR is next. In general ALL energy stocks will typically suffer a hit or a rally when stuff like this happens. A nice side effect for people like me that have a more long term aim at things is that I just reinvested a monthly dividend and picked up twice the usual shares.

But what about other things? VMW is a stock I pay attention to, because I still have a sliver of stock option. It has dropped to $77/share. It has nothing to do with the oil market. But many investors freak out and simply want to get their money out of the market when “shaky” situations like this occur.

This is known as systemic risk. Financial planners push mutual funds hard by selling the story of risk avoidance. They make it sound like during rough patches, mutual funds help you avoid such situations by spreading your risk across the whole market. The trick is, in these types of situations, emotions run high and people will pull their money out of everything. Hence, mutual funds will suffer losses just like other things. The trick is, when people cash out, they want their money. Mutual fund managers are forced to actually sell to dispense cash, and thus lock in losses. The time to get back to where you were takes too long and hence we all suffer.

The thing is, I have little money now invested in mutual funds. Instead, I have real estate, an EIUL, and other vehicles (one which I’ll post about soon!) My net worth has hardly dropped at all. And the yield on my investments is just as strong, meaning I’m not waiting for the market to recover nor am I waiting to “get back to where I started”. This saves me from having the proverbial “201K”.

I don’t have all the answers. I can’t tell you what the market is going to do next. But I can point out the risks that exist, and how mutual funds don’t provide the answers their salespeople claim. Everything comes with risk, and I have that nicely managed by having a super sized bank account filled with cash.

Happy investing!


So you want to build wealth? Look for multiplicative ways, not additive ones

“Another day, another dollar” — common expression

This expression is commonly known by many. It represents a common, core feeling we get as members of the vast work force. We go to work, put in the hours, get paid our wages, and go home for the day. This is not the way to build retirement wealth.

When it comes to building wealth, getting paid on a day-to-day basis is additive. To accumulate enough wealth to last for years, we have to put away huge amounts of money. Typically 30% of our take home pay is a minimum amount.

Why do I say that? Because the tools we are being sold on for investments don’t work unless we compensate by over-saving. A good example is the classic skip-that-daily-latte and instead save the money, and it 20-30 years, you will be a millionaire. I had heard that a few times, and figured it sounded great. Until I read an objective analysis of that. Basically take $5/day and multiply it by 365 days. What do you get? $1825/year. Doesn’t sound too bad. Today. But let’s take this concept and back up to 40 years ago. What was the median income for people back then? According to one source, median household income in 1974 was $9780/year. That would imply that saving $5/day, the price of a cup of coffee, was like putting away over 18% of gross salary. If you can assume 28% in withheld taxes, the percentage saved against take home pay would be 25.7%.

Wow! If we are to read that correctly, it suggests that saving $5/day today may result in $1MM, but in 40 years (if you started this when you were 25), $1MM probably won’t be worth much at all. Instead, we should read that correctly as needing to save AT LEAST 26% immediately.

Many people, if they looked at that, would just throw their hands up in the air and give up. But if you’re here, you surely have guessed that I’m going to say something different.

We need to look for options that have a multiplicative effect. What is that? It’s when you make some making by direct action, but the more actions you take, the more they interact with other actions already in progress.

One thing that I realized as I wrapped up the last chapter of my 3rd book, is that doing something as small as writing books on the side can introduce multiplicative money making. Today I finally got some time to watch a TV series with Neil deGrasse Tyson. I’m quite fascinated by astrophysics and his series seems entertaining. In the opening credits, it notes that Dr. Tyson has written ten books. Something I can realize is that the more books you write, the more books you will sell. Not additively, but multiplicatively. Simply put, people that enjoy one of your books are VERY likely to go and buy your others. My first book has yet to earn enough to pay off the advance I received. The second accomplished that about two years ago. My dream is that my 3rd will accomplish that even sooner, possibly through more social media, more people that read my previous works, and that some will even go back and buy my previous writings.

It’s only natural. I read the first Jack Reacher book, got hooked, and have now read ten so far. I read “Schrödinger’s Kittens and the Search For Reality”, and have since ordered the predecessor. When you go out and invest yourself into more and more and more opportunities that can yield more and more wealth, the opportunities grow.

So I highly suggest that you take some time to sit down and think. Simply think. Look at what you are doing today. What you have done for the past week. And think about what else you could be doing that can generate secondary effects. What if you started a blog and wrote on a daily basis? It could be small stuff. But it might grow your public image. It might open doors you didn’t expect. Open your mind to looking for new opportunities such an endeavor could raise.

These are all important the rather narrow vision the corporate 401K plans have. The general idea of a 401K is to sock away money in a fund that doesn’t grow very fast. And when you hit retirement, you are required to cannibalize it. Why do I suggest this? Because the federal government has a schedule after which you are obligated to start taking withdrawals. If you’re retired and doing just fine, it doesn’t matter. The government set things up such that they can collect taxes on your withdrawals and they will NOT be blocked from you doing just that.

In case you didn’t know this, the rich NEVER cannibalize their assets. There is this mantra out there that rich people adhere to: NEVER TOUCH THE PRINCIPAL.

In essence you are on a mission to accumulate wealth producing assets that themselves generate wealth you can live off of. You can’t wait until you are retired to begin writing books, building a blogger reputation, or something else. Instead, that is what must embrace while you still can earn enough of a daily paycheck to keep afloat. This is your opportunity to start buying real estate, dividend yielding stocks, EIULs, and discounted notes. Simply putting away 50% of your take home pay and planning to live like a pauper doesn’t sell very well. Good luck!

Financial math often isn’t straightforward

wealthWhen you decide to pick up the gauntlet of investing for retirement and step away from passively throwing money into your company’s 401K plan, you may enter a perplexing world. Don’t be afraid!

For starters, you might start visiting lots and LOTS of websites looking for opinions. Be aware: many people can and will state opinions wrapped in feel-good language like “think about…it makes sense”. It doesn’t make it right. That’s why you need to learn how to drive a spreadsheet and crunch numbers on a calculator.

The only way to really deduce if they are right is to do the math yourself. This might involve either using a calculator or a spreadsheet. Another tool to have at your beck and call is a mortgage calculator.

Let me pick one example. I have a primary residence, a vacation residence, and four rental properties. They all have mortgages. So what do you do if you stumble across a surplus of cash? Try googling “pay off mortgage early” and you’ll find loads of opinions. People often suggest paying off your primary residence first. Many will state it is way more important than paying off rental mortgages. They’ll probably mention a dozen different reasons.

But simply put, your permanent residence doesn’t yield cash. The only way to get that money back is to SELL your permanent residence. You ready for that? In my situation, no. I’m not moving anytime soon. Sinking any extra of today’s dollars would be flat out stupid.

The plan is to knock out the rental loans as fast as possible to make it an option to liquidate a unit when the time if right. That combined with the accelerated depreciation I’ve set up will generate the biggest bang for the buck.

A finer point in this example is exactly how various pay off scenarios impact the bottom line. Currently, I’m piping extra rent towards the smallest rental mortgage every month. I’m interested in throwing a one time payment against it next month. What impact would it have?

Learn how to drive a spreadsheet and a mortgage calculator

Like the title says, some things just aren’t intuitive. I found a mortgage calculator that includes the ability to add extra on a monthly, annual, and one time basis. The extra monthly amount I’ve been paying is bringing the pay off date from 2042 in to 2020. Nice! What does my tentative single payment next month do? It pulls the payoff date in six months. What?!?! I thought it would have a bigger impact. It doesn’t. The question arises: is this the best usage of such money?

This discovery also raises the question about what if I could make an annual contribution to the rental mortgage? I began to go down my laundry list of extra sources of cash. The two I can think of is using one of my 6-month bonus checks or one of my 6-month ESPP options. The bonus check is currently used to fund my vacation property. But what if I routed one of my two ESPP checks into that rental property? I hastily punched it into the mortgage calculator in lieu of the one time contribution. I see the payoff date move up to 2017, just three years away. That’s more like it!

I’m planning to have a review of everything with Jeff Brown. I’m going to tell him that I can pipe extra cash annually, or even twice a year courtesy of my ESPP. Who knows? Maybe I need one of them to pay for insurance and taxes. One question I have for him is whether or not it really makes sense to put that single lump sum payment on the loan, or perhaps use it to beef up my cash reserves.

To top things off, I used the same calculator to find out where my second smallest rental mortgage would be in 2017, and calculated when it would pay off assuming I apply all the rent from the first unit. Answer: 2020! So, with extra rent added on a monthly basis minus one mortgage payment and throwing in a chunk of ESPP once-a-year, I can pay off the first loan in five years, and the second one three years after that. Estimating the 3rd and 4th units is probably absurd at this point, because there is too much variance that can happen in the next eight years. But I can only imagine that pointing the rent from four units with only two mortgage payments will be grand.

Circling back to the original topic at hand: you need to understand some fundamental concepts and when to use the right calculators. Plug numbers into a spreadsheet on an annual basis, and see how the balance of your loan drops based on paying the minimum vs. an increased monthly/annual/one-time amount. Also consider how you would get your hands on that cash down the road, and think about what you would do with the money at that stage. Buy more rentals? Stocks? Fund another EIUL?

Kicking around some ideas? Send me a message and I’ll be happy to discuss things with you.

Filing taxes is now in progress

TaxesI’ve mentioned before how complicated taxes can become as your wealth building plan gets underway. When you enter the workforce and start punching the clock every day, you have what’s known as ordinary income. That’s IRS-speak for job income.

But if you start adopting some of the practices I’ve mentioned, your income begins to change. I still get a majority of my income from my daytime job, but now I also receive rent, tax deferred MLP distributions, and qualified stock dividends. I also get paid a quarterly check for a book I wrote three years ago. I also had some other awkward sources of money.

One thing I had to dig up was how to handle the fact that I didn’t receive a 1099 INT from any of my banks. I knew I had received interest. It turns out that banks will usually only send you such a document if you earned over $10 in a given account. I didn’t make it. Nonetheless, Uncle Sam still expects you to report every penny so I simply looked up each account’s December 2013 statement and wrote down the year-to-date interest.

As a rule of thumb, I thought about every way that money came into my hands last year. It helped me remember a couple things that don’t come in the mail. I gathered a pile of electronic documents and emailed them to my CPA.

Last year, I had a tremendous tax bill. That was because I had to deal with the aftermath of nuking my 401K. While it was a hefty bill, the results were fantastic. I found a giant source of capital to create my real estate portfolio. Last year, I grossed over 50% of my daytime job in rental income. That’s a hint that things will be GREAT down the road. And need I mention that with a purposeful plan set up by Jeff Brown, ALL of that rental income is tax sheltered?

I’m eager to hear the feedback from my CPA. It’s pure speculation, but I’m guessing I’ll still be short and have to write a check to pay the difference against withheld taxes. But who knows? Thankfully this time, we won’t have to file an extension.

Happy tax season!

Cash flow vs. net worth

Cash flow is what we need to operate. Cash flow pays for food, rent/mortgage, gas, and everything else we need. As one person commented, “you can’t eat net worth”. And he’s right. In fact, his corollary point was that net worth can flutter around based on the state of Mr. Market. Many people will happily point out “cash is king”.

All of these things are quite true. But it’s actually a balancing act. As Jeff Brown has pointed out in many articles, if you focus on growing cash flow, it retards the growth of net worth. Focus on growing net worth, and cash flow will suffer. They are two sides of the same coin.

Both cash flow and net worth need to viewed in their proper light.

  • Cash flow is the money you can tap. 
  • Net worth measures how much cash flow you can generate. The bigger your net worth, the bigger a cash flow you can generate.

To buy Disney stock (or not)

Let me give you an example. Since I took on dividend growth stock investments (not mutual funds) as one of my baskets of passive income, I have been reading a lot of websites with differing viewpoints on stocks. One site I read repeatedly mentions Disney (DIS) as a company that knows how to adapt very well to changes in technology. They have a strong grasp on how to roll out the same top notch movies every time a new way form of technology comes out. Remember buying them on VHS? Then came DVD followed by Blu-Ray. Every time a new way to consume media appears, Disney has their A-game on, and is ready to re-sell you the same movie you’ve been watching for twenty years.

I have a strong attachment to Disney. I love their movies. But that is not all. My wife works part time for Disney. We travel periodically to our vacation home outside of Orlando and take the kids to Disney World. We even took them to trick-or-treat earlier this month. You want to talk about a place that appears to have suffered no recession in the past five years? Disney World is it. I’ve been there for the past five years, and everyday, the place is packed. So I have a strong desire to buy their stock.

But I won’t. Know why? Their dividend rate is 1.1% and they only pay once-a-year. Compare that with Vanguard Natural Resources (VNR), the company you probably have never heard of outside this blog. They’re dividend rate is 9% and they pay on a monthly basis with a tax deferred basis.

How you can beat a 9% paying stock with one that pays 1.1%

On the surface, it would appear that Vanguard beats the pants off Disney, but guess what. If you focus on cash flow you can make Disney beat Vanguard every time. You simply buy ten times as much Disney stock, and your cash flow will exceed that of Vanguard! Disney is solid. I’m sure they’ll continue to stay in business for decades to come. That $10 billion company certainly isn’t “mickey mouse” when it comes to making money.

I’m sure you realize my suggestion at buying 10x DIS is ridiculous. But why? Because if Vanguard is doing that well, why not simply buy ten times more Vanguard? I hope this scenario seems simple to you. The trick is, people don’t recognize that it appears in many other places.

For example, people will buy real estate deals in California and put down high amounts of capital to make it “cash flow positive”. That is the same thing as buying lots of low yielding stock to make it flow lots of cash. They don’t realize they are killing their potential to grow their net worth because they are focused on one thing: cash flow!

If you take your capital to other places, like Texas, you can find real estate deals where you might get the same amount of rent for much less capital input. In essence, if you seek the right market, you can get a better yield.

So always look at both and make sure your total net worth is growing at a suitable level with tolerable risk.

Annual Wealth Building Review

It’s been a year since I started tracking my net worth. This started after I had made the big withdrawal on my 401K but before I purchased any real estate. It has been an exciting and tumultuous year! All I can say is that I wish I had started tracking my progress years ago. I might have realized sooner that things weren’t working. But there’s no value in lamenting the past.

I’ll start with total growth and then break things down to my various assets. In the past year, I’ve seen 85.48% total growth of my net worth.  That is pretty good considering I paid a 37% effective tax rate this year due to the penalties of making an early withdrawal on my 401K. With that tax burden out of the way, I’m hoping next year delivers a strong performance.

Real estate

My real estate holdings have grown by 20% since first purchase. Now take that with a grain of salt; the values are based on Zillow. I won’t really know the value until I sell a unit. But at least it gives me some sense of their value.

My Florida town home has increased from it’s purchase price by about 12%. This isn’t of much value, because I don’t plan to sell it. But instead, it gives me reassurance that I bought it at a good price. All the other short sales that were going on in the same subdivision are gone, and they have even built a new building in this yet uncompleted neighborhood. These are all signs of the real estate recovery in Florida. It definitely shores up future opportunities in case I need to open a HELOC against it to access any cash.

Mortgage debt on my rental properties has dropped by $7200. That’s only a 1.7% reduction in rental debt, but I just started paying off the smallest mortgage by an extra $1000 this month. So, you’ll have to read next year’s annual report to see how well this feeds my wealth building plan.

I could pencil in the value of my new home I purchased back in March and look at its appreciation, but there is no value in that. Nor is there any benefit in looking at the growth of my previous residence either. Instead, what’s more important is how I used this unplanned opportunity to open a new position in wealth building. Which leads us to…


My biggest stock position is Vanguard Natural Resources. But you can’t measure it’s performance by growth in value. That’s because the monthly dividends are being used to pay off my HELOC. The price of the stock doesn’t show a big growth history like Berkshire Hathaway. To best way to illustrate its growth is to take its value and subtract the HELOC balance.  That would show where all the spare dividend cash has been going.

I started with a little over $1000 of VNR a year ago. I have increased that position several times. But back in March, I plunged in by putting the left over cash from the sale of my previous home (made possible by the HELOC used for financing) into more VNR. So far, I have reduce my HELOC balance by -0.82%. It doesn’t sound like much, but I have only been using this cash flow machine for a few months. Next year, the fruits of that should begin to show much better.

My position in Berkshire Hathaway has grown by a modest 6%. My position in Apple has grown by 21%. That is partially because I bought more Apple when it dipped below $400/share. I still believe Apple will continue to grow and innovate, and with the amount of cash they have, it feels like a safe investment to me.


My EIUL has done exactly what is was supposed to do. My contributions were increased back in May by 4% to represent cost of living increases. It is slightly ahead due to some small credits being paid. It’s actual value compared to the amount of contributions represents a 5.1% growth factor. This isn’t bad considering I’m paying big values. But the most important thing it is doing right now is locking in its growth. The value of it will not go negative, and when the next market correction appears, it will keep chugging along even as my stock portfolio takes a hit.

401K and Roth IRA

I still have my 401K with my current employer. It’s value has grown by 31%. My Roth IRA, which are refocused on holding stocks and reinvesting by DRIP, has grown by 22%.

If I assume that the real estate holdings are unrealistic, it might suggest that the rest of investment plan is actually doing worse than these plans. But these plans are currently riding the tide of QE from the Fed and other factors. When the next correction hits, they will probably get a hard knock. My Roth IRA might be okay, because I have refocused it on stocks and not mutual funds. But considering I can’t put any more money in it, it’s fine where it is.

Next year

Next year’s report should be more exciting because I have upped the pay off of one rental mortgage by $1000/month. That combined with 100% occupancy is also helping me to increase my rental cash reserves by $1000/month as well. When things get replenished, I can direct that money towards a rental mortgage and knock it out even faster.
Do I expect the same amount of growth? Hardly. 85% growth in one year is actually way above the mean. You should never depend on it or think you can keep it up. A big piece of this is Zillow telling me my rentals are probably worth more than I could actually get for them. In the next five years, when I finally sell one, I’ll get a proper correction to my net worth.

But there is one thing I’m sure of: everything is doing much better now that I have taken an active role in wealth management.

Is your net worth built to survive inflation?

Two big factors that can impact your net worth are taxes and inflation. In this posting, I want to discuss inflation.

Essentially, the government pumps out a certain amount of money periodically. The Big Idea behind this is to smooth things out by having a steady increase in money supply. You can debate whether this works or not in some other forum. I only want to discuss how this impacts your net worth.

If your money is invested in fixed instruments like treasury bonds, CDs, or fixed interest bank accounts, then inflation can be very hard on your net worth. A pile of cash can lose its purchasing power when it grows at 1% (or less) while inflation grows at 3-4%. Inflation is a complicated concept. There are a couple of ways to look it up. One is the base rate that the Federal Reserve lends money to banks. Since banks make money by adding a little profit on top of this, all other interest rates are above this. Given that you can borrow money today at rates like 3.5%, you can imagine how low the Federal Reserve rate is.

Another is called the Consumer Price Index (CPI). The CPI is essentially a basket of goods whose purchase price is tracked periodically. As the prices rise, an estimated rate of increase is derived, i.e. inflation. But going back 20-30 years, we find that this basket of goods has been altered on multiple occasions. For example, in recent years, beef and oil have been removed from the CPI. Official inflation metrics may report somewhere in the neighborhood of 4%, but the price of beef has risen much faster than that in recent years.

Suffice it to say, the subject of inflation can be talked about to death. But it’s real and here to stay. Which means we must deal with it when it comes to retirement investments. Take a real example. Imagine you own a home and need to replace the roof. If you do it right now, there is a certain cost. What if you need replace the roof again 25 years from now when you are retired? The price will have certainly risen. Other home maintenance costs will slowly rise as well. Fixed income instruments don’t lend themselves well to handling this rise in home repair costs. Other things that increase in cost is groceries, medicine, and gasoline. All these things are good you will need in the future when you are retired. Simply paying off your home mortgage won’t shield you adequately from needing to deal with this.

Assets that weather the storms of inflation

Some tools we use for investment purposes are ravaged by inflation while other things tend to compensate. One asset that can handle inflation is rental property. In times of inflation, rents tend to rise along with the value of the property itself. They may not grow at the same rate, but generally, rents rise. Now in past articles, I have presented numbers on the value of real estate based on NO rent increases. That was to make sure things were sound without depending on these increases. Sometimes rent doesn’t increase when inflation grows. Or at least it might not rise immediately. But in the long run, and real estate is a long term investment, rents rise and that’s a good thing.

Do you know what else weathers inflation pretty well? Dividend aristocrats. These are long term companies that have been paying increasing dividends over decades, some more than 50 years. These are from companies that are producing quality goods that are able to raise the prices of their goods in line with inflation. By owning positions in some of these companies, you can keep receiving increasing dividend payments that tend to compensate for inflation.

The strategy to building up an inflation-proof plan

Okay, that headline is misleading. Nothing is inflation-proof. Maybe inflation-resistant. Every time this country has suffered high levels of inflation, the reasons have varied. Some people think we are poised to enter a high level of inflation, or even hyperinflation. I’m not sure I agree with that. Those opinions have to be counterbalanced by whether the ones making the boldest predictions are selling.

To get this conversation on track, the question should be, what strategy must I use to handle future inflation?

  1. Develop a good reserve fund. This is where I agree with the many pundits who are talking about building up a 6-12 month reserve of liquid cash, like in a savings account. 
  2. Eventually, owning a home with a fixed-rate loan is a good thing. While property taxes and homeowner’s insurance may rise, a fixed payment of debt will tend to shrink as inflation grows. This also helps you avoid rising cost of rents. It’s no reason to buy a home RIGHT NOW before having your cash reserve built up, but eventually, a fixed house payment will help reduce the risk of being on the wrong side of rising rents (your own rent!)
  3. Start acquiring cash flowing rental properties and dividend paying stocks. As dividend payments come in, reinvest them periodically, and as extra rent comes in, use it to pay off investment debt.
  4. Plan to increase your inputs in various investing vehicles each year to compensate for lost power of the dollar.
This list, while seemingly detailed, is very non-specific on when to do each, or how much time it should take, etc. That’s because everyone is different. You can send me a note if you want to chat a la email, skype or on the phone to talk about things in more detail. There are no promises to be made when it comes to dealing with inflation, but certain approaches are better than others. The bottom line is that investing in real estate and cash yielding stocks are good tools that have a long history of helping to compensate for inflation. Both of these things are better than gambling on mutual funds being able to match or exceed inflation through the pure appreciation of mutual funds.

One man’s panic is another man’s opportunity

While scanning the latest performance of my stocks on my iPhone, I noticed a curious news article linked to Berkshire Hathaway.

Apparently, CNN Money was granted tour of the Oracle of Omaha’s office. I watched this short clip, and noticed how he keeps certain inspirational news stories framed and hanging on his walls. One was what looked like a stock certificate. It apparently involved a company that went into a panic.

During the tour, Warren Buffett indicated that he keeps his eye on when companies enter a panic, because that is the best time to buy.

You see, this investing philosophy he has demonstrated for decades shows that a company’s business may be solid. Their products may be good. But certain circumstances can make stock investors panic and try to dump their stock. When the herd is evacuating, it may be your best buying opportunity.

When everyone is buying up a certain equity, that may be a sign that it’s stock price is becoming overvalued, and would actually be time to sell.

There is more to this than just buying low and selling high. Some companies nosedive right before they dive. This is where you have to do your homework and understand the fundamentals of the business before buying. And I said fundamentals of the business, not fundamentals of the stock. Stocks suffer from a lot of human emotion. There are many companies out there that are solid and doing well.

You can say as much about Apple. But in the past couple of months, their stock price has swung between $700 and $500, with news reports about people predicting the best to the worst. I think Apple is a solid company with plenty of cash reserves to weather many storms. They have built pipelines of popular products, several which I use, and continue to develop newer pipelines leading to continued sales. Whenever I visit an Apple store, it isn’t empty. Instead, they are full of customers. I have been there to get my laptop fixed, and the service was excellent. I have also been there to buy the latest iPhone 5, and again the service was excellent. These are all the hallmarks of a top notch company, catering to their customer’s needs, and selling valuable products. These types of companies last a long time.

To step back from this high level analysis of their business and instead look at the historical trend of their stock, it is clear Apple has had strong growth at least since the 80s. This is what leads me to believe that they will continue to show good growth for many years to come. They didn’t reach this level of quality overnight. They have been building it for years.

When I see the stock panic, I evaluate whether I have enough cash on hand to invest in more Apple stock vs. my other holdings, or if I should route that money towards my real estate portfolio. I have a strongly armed set of rental properties that are already paying me well, even though I have 75% occupancy. This is a good position to be in, and I look forward to next year and tracking my net worth, to see it grow. I hope to be able to buy up more Apple next year. The key is to have enough reserve cash standing by to buy up when a big drop strikes.

Is your portfolio well armed with solid companies and solid real estate investments? If not, then recheck your assumptions. Are you just following the herd of investors that are throwing money at their 401K and hoping it will work out in the end? If so, you may be in for a rude awakening. I just hope your awakening comes sooner rather than later, so you have time to do something about it. Drop me a line if you want to discuss what’s in your portfolio.