There are many ways to diversify beyond Wall Street’s offerings:
- CDs (Certificates of Deposit)
- Bank at a Credit Union
- iBonds and/or Savings Bonds
- Residential Real Estate
- Commercial Real Estate
- Starting a Small Business
- Collectibles (gold, silver, platinum, art, vintage cars)
- DIY home improvement
Paying down debt is also an investment:
- Paying off (or paying down) credit cards
- Paying off auto loans
- Paying off student loans
- Paying down mortgage(s)
These debt-lowering options have the side benefit of improving your credit score and lead to a healthier credit report.
Additionally, there are “investments” that benefit your finances and offer other non-financial advantages.
- Education and training. Either self-taught or formal. (including reading this blog!) Increase your earning potential.
- Exercise, and healthy diet. The longer and healthier you live, the greater your potential to earn and prosper.
- Strengthen your social network. You will feel happier, more motivated, have more job networking opportunities.
Finally, there are methods to reduce and diversify your cost of living expenses:
- Learn to cook, grill, or otherwise eat at home more often. If you are persistent you may find you are eating better, healthier, and more economically.
- If you like coffee… brew your own. It may take time to learn what you like, but when you do you’ll love it. Whether it is is store-ground hazelnut drip, Vietnamese coffee with Chicory and sweetened, condensed milk, French Roast, or a plethora of other choices you will benefit.
- If you love high-quality craft beer, consider brewing your own. After the initial investment (~$200) you can brew your own for less than $4 per six-pack. Share it with friends, and grow your social network.
- Use those DIY skills to make your house more energy-efficient by installing low-E windows, LED light bulbs, and even update weather stripping and doors.
- Grow a garden.
I have employed all of these financial ideas except commercial real estate (not counting REITs), certificates of deposit, and gardening. My point is that it is possible to invest beyond Wall Street’s offerings. Wall Street now offers some great investments including ETFs, and excellent brokerage companies like Vanguard, Fidelity, and Interactive Brokers (for sophisticated investors). Finance and investing extends beyond stocks, bonds, ETFs, and Wall Street.
It started with a conversation where I said something like, “I’m not talking about overly sophisticated investors, I’m just talking about folks who know what a P/E ratio is.” And she said, “I don’t know what that is.” And I said, “You know a price-to-earnings ratio?”. The reply, “Nope!”
So I asked other people I know — smart people. And good fraction of them, over 1/3 said they did not know what a P/E ratio is. And these are people who own stock. In some cases hundreds of thousands of dollars worth of stock… company stock!
If you read this finance blog much, you probably know that I’m not a fan of most investment advisers. However, if you don’t know what a P/E ratio is, maybe you should find a good one. One who can explain the benefits of diversification… convincingly and persuasively.
Its not that these people couldn’t learn. Its just that they don’t want to. REALLY don’t want to.
Well, I guess there are people like that. And I am unlikely to change their mindset.
However, for people with an open mind, this is the finance blog for them. Finance is my passion. Few people are so wrapped up in finance. That’s cool. I’m writing for folks who care a little bit about finance. Folks who realize that their investment decisions are important to their future.
Investing is serious business, but it is not hard. Really. The hard part for some is overcoming their emotions around investing. But investment choices don’t have to be.
Previously I started blogging about the very different approaches my parents took with respect to money and investing. In this blog post I continue that discussion with a story of how I became even more passionate about investing.
My parents divorced not long after I started attending college. Because of the way divorce law works, my Mom received the majority (perhaps two-thirds) of the family assets plus a fairly significant monthly alimony payment. Over the next ten years Dad rebuilt his financial life, benefiting from the remarkable 90′s bull market and intelligent investing. Over that same period, Mom’s financial fortunes floundered. I witnessed both financial journeys as a powerless spectator.
The sad irony is that Dad, the savvy investor, was willing to listen to my investing ideas, whereas Mom stubbornly refused almost all of my investing advice. I saw Mom make one bad investing decision after another. She put the house on the market but could not sell it because her asking price was about $100K too high. She loaned money to business partners without a written contract… money that was never paid back. Most upsetting to me: She let her investment adviser, Sam W., manage her IRA, losing money with highly under-diversified utilities stocks and funds in the midst of this tremendous bull market. The contempt and disappointment I feel towards Sam still lingers with me to this day. That Mom blindly trusted this man, who likely had little interest in her well-being, and shunned her son’s financial advise left me with stunned disbelief.
I was interested in investing from the time I learned about compound interest at around the age of 9. I was fascinated by the math of computing compound interest monthly, daily, hourly, continuously. I was intrigued by the concept of companies, shareholders, stock exchanges, and business. But it was in watching and living the real-world consequences of my parent’s good and bad investing actions, that my lifelong passion for investing was forged.
These experiences are probably why I am so driven to help people avoid making big financial blunders. I’ve seen and felt the effects of load funds and self-serving financial advisers. I’ve seen the impact of poor diversification. I’ve seen the tears of losing a home, losing a business… due to poor financial choices.
I’m often looking for ways and words to become more persuasive. I’m looking for ways to help people build interest and confidence in shaping their own financial destinies. I’m working to develop tools to simply and explain the financial world. I’m working to create this financial education blog which will someday become part of a personal finance book.
Finance is my passion. This passion is often hard for people to understand. Perhaps this blog article will help people understand. Probably some of my readers share a passion for personal finance and investing. If you have a similar passion, I hope you will consider sharing your financial stories that shaped your financial lifestyle.
Even though it is very unlikely that Balhiser LLC will do any hiring in 2010, it makes sense to lay out a rough sketch of expectations and policies. In many ways I’d like to follow the HP Way as outlined in David Packard’s excellent book. So here is a first pass.
Balhiser LLC is:
- A for-profit financial company seeking to produce long-term returns for its shareholders.
- A company where every employee is a shareholder.
- An innovative, conservatively-managed company that values bold ideas and prudent actions.
- As true of a meritocracy as humanly possible.
While I as president retain final say-so, salary and other financial information will be governed as follows (as permitted by law):
- Transparency. All employees and stockholders will have access to the company’s financial books. This includes salary, other compensation, and ownership information.
- Employees will play a key role in hiring their co-workers.
- Employees will, as much as possible, have say-so on who is on their project team.
- Friendly competition between project teams is encouraged.
- Competition between project team members is generally discouraged. Teamwork is strongly encouraged.
- Salary and compensation adjustments will be based on the following (in descending order of precedence):
- Company performance
- Project performance
- Individual performance
- Company performance is #1 because without reasonable performance the wants of the shareholders and employees simply cannot be met.
- Project performance is #2.
- Individual performance is #3 because:
- It is often difficult to measure objectively.
- Competition between individuals for salary, position, etc is frequently at odds with teamwork.
- Time spent on “getting credit” and “looking good” is time wasted. What matters is enjoying work, finding solutions, and making money.
- In the long term individual performance is still rewarded because:
- The teams with the strongest individual performers will tend to be more successful.
- The importance of project team success will result in high-performers being highly sought-after.
- Long-term low performance that is detrimental to the team is unlikely to be tolerated by the team.
As a final bit here is what currently constitutes Balhiser LLC:
- Invests company resources to make cash-flow and profit.
- Financial commentary and general (not-individualized) investment advice.
- Financing long-term investments and constructing a long-term financial portfolio with a strong balance sheet.
- An investment property (that is currently generating positive cash-flow).
- A business checking account.
- A handful of websites/domains.
- Over 75 articles on various financial topics.
- A computer, and other office equipment.
- A modest collection of accounts receivable.
Disclaimer: The Crazy Ivan Account (CIA) is not a Balhiser LLC asset. Commentary about the CIA is.
Zen is uncomplicated. Investing is uncomplicated, until it isn’t.
I like the short Zen story about attention. It starts out
There’s an old Zen story: a student said to Master Ichu, ‘Please write for me something of great wisdom.’
Master Ichu picked up his brush and wrote one word: ‘Attention.’
On some level the concepts are simple. They are also profound. On some level Zen is remarkable, stunning. On another level unremarkable.
Investing concepts are similar. Simple, profound.
Possibly the most difficult investing thoughts to grasp and put into action are the most simple.
I believe these simple words capture all you need to know to be a wise investor. Like ‘attention’ these ideas benefit from lots of practice.
To ‘Save’ is easy for some, difficult for others. Investing starts with savings. For those not born into a great inheritance savings is crucial. Savings is the art of spending less than you make. The art of delayed gratification. Keeping some of your income and keeping it safe. For many the verb ‘save’ is easy in the way that the verb ‘diet’ is easy. Simple concept, challenging action.
‘Balance’ is a deceptively simple term. Martial arts train balance. Speed skating, ice skating, and tight-rope walking showcase balance. In the investing arena ‘balance’ refers to two key ideas: diversification and emotional equanimity. Diversifying means balancing risks between different types of assets. Emotional balance means “Caring about your investments, but not THAT much.”
To fully ‘own’ your investments you must understand, control, and value them. In the same way that a stable master may own and value a prize horse without understanding veterinary medicine, a stock holder may own and value a stock without being a financial comptroller. An owner cuts out the middlemen and makes decisions. An owner weighs decisions and responsibilities carefully because the financial buck stops with her and no one else.
Finally, to ‘see’ your investments you must see beneath the surface. You see that all investments inevitably change. You see that some good investments go bad. You see the fog that shrouds some investments so thickly that you move on by. You see that taxes are constantly changing and possibly that an accountant may see the ever-changing tax waters more clearly than you.
That’s it. To invest with wisdom is to save, balance, own, and see.
Now for a curve ball. If you have been shot by poison arrows, first carefully remove them. Do not dwell on the cause of their intrusion into your flesh. After you have recovered, you may be tempted to ask “Why was I shot?”. It is the ‘why’ that takes most of the ‘attention’. The same is true for investing. The ‘why’ is the tricky, time-consuming, complicated part.
I believe that for the beginning investor the why can be unimportant. For the enlightened investor the why is also unimportant. The journey to investing enlightenment is about discovering the why and then letting it go.
As we reflect on Thanksgiving, here are some personal finance things I am thankful for:
- Decimal stock pricing. Remember all those pesky fractions? Decimal pricing is so much easier. And the spreads are much better too.
- Online stock trading. I don’t know about you, but I don’t want to talk to a broker. I want fast quotes and cheap trades without the conversation.
- Free online financial data. Thank you all you online publishers of stock data. It’s 2:00 AM and I just have to know the market premium on the BEP closed-end fund — No problem.
- Index funds. Thanks John Bogle and others for these diversified, tax-efficient, cost-efficient funds.
- Good financial planning. Thanks, Dad, and others along the way who taught me money management, investing, and financial planning.
- 401K, IRA, and Roth IRA accounts. These tax advantaged accounts were spectacular ideas, and they work.
- Good accountants. Thanks for helping me make some sense of the US tax code.
- Buying opportunities. Every now and again a great investment comes along and a great price. Doubling my money on PCU comes to mind. Such opportunities are what make investing fun for me and keep me searching for the next great buy.
- Dividends. Even when stocks are down, many still pay dividends. A lot of stocks are currently repaying 3% dividend yields. These quarterly dribbles of cash do feel good to receive.
For investors, there is a lot to be thankful for. Yes, our equity investments are generally down, and our economy is lethargic. Equities have been a wild ride to nowhere in the last decade. But bonds and, yes, in many places even real estate have fared much better. And as long-term investor I am excited about the prospects finding buying opportunities. I wouldn’t say equities are cheap, but I am thankful that they are not all that expensive either. I am looking forward to the next 10, 20, 30+ years of investing.
One or twice a year I take some time to reflect on my investments and investment decisions. This time I’m writing up this process for the world to see. Here goes…
Questions I’m asking myself this time (5 point scale, 1=poor, 5=excellent):
- In the last 10 years, how has your personal portfolio performed against the S&P500 in terms of return?
- … In terms of volatility?
- How have your returns compared against money markets? (softball benchmark usually, but no so much in 1999-2009 period)
- Rate your investment tax efficiency.
- Rate your diversification.
- Rate your objectivity of investing decisions (esp. for big-scale asset allocation changes).
- Rate your savings rate. (1=negative, 2=none, 3=up to 10% of gross income, 4=20%, 5 =>30%)
- Progress toward retirement goals?
- Understanding of your portfolio and its performance?
- Paying reasonable fees and expenses?
And here’s how I score myself:
- 5. I definitely crushed the S&P500 over the last 10 years. (S&P went from 1422 down to 1105 in this period)
- 4. Much less volatile than the S&P500, but still volatile. Could have made better use of options to dampen volatility.
- 3. My overall returns have, in aggregate, not performed dramatically better than 10-year money market returns.
- 4. Good, but not great. Managed cap gains very well (keeping them long-term and largely unrealized). Still payed lots of tax on interest income. Could have made better use of municipal bonds.
- 5. Broadly diversified including international exposure, real estate, bonds of various durations and styles, etc. Almost completely avoided the tech bubble.
- 4. Steady and disciplined decisions. Reasonable and contained risk taking.
- 5. At least 30% AGI on average saved. If anything I saved a bit too much.
- 5. I am on track to “retire” early. Maybe by age 50 or 55.
- 5. I understand my investments and follow their performance.
- 4. My average expense ratio is approx 0.7% including commissions for trades.
So how did I score? I gave myself 44 out of a possible 50 points, or 88%. In my book that’s a B+.
The 2009 401k contributions limits are up from last year. You can contribute up to $16,500. If you are 50 or older the limit is a whopping $22,000 this year.
I spent a semester studying bonds, and I was just scratching the surface of the subject. However, rather than regurgitating a bunch of facts and boring data, lets keep it simple and start with Bond Funds. I recommend a few:
1) PIMCO Total Return
2) Vanguard Total Bond Funds VBMFX, VIPSX, and others: Vanguard Bond Link
The question used to be “why buy bonds?” Lately the question is “why didn’t I own *more* bonds?”
Either way, I seldom recommend sudden large changes to portfolios. Assuming you’ve been beaten up by stocks (I have) and have lost some of the risk tolerance you thought you had, maybe its time to consider looking at bonds. Rather than moving funds around, why not just change your allocation of new funds. If you have a 401(k) consider changing your new investment elections.
Bonds and bond funds can help you sleep better at night. Especially Treasury Bonds and TIPs.
Another bond-like investment is a CD (certificate of deposit). The FDIC insurance (now up to $250K) helps peaceful slumber. The wrinkle is getting them into your retirement account.
Bottom line: Any portfolio should contain bonds (or bond-like) investments to be considered balanced.
P.S.: Today’s Fun money update: $21,066. Decreases in my SPY call are approximately offsetting decreases in my SPY underlying. (Yes, that sentence is correct.)