The Hero’s Journey to Financial Independence (print edition) is available on Amazon.com
The Hero’s Journey to Financial Independence (Print and Kindle versions) on Amazon.com
Reply
Tag Archives: Investing
The Hero’s Journey to Financial Independence is in the Kindle Store
Who owns the U.S. Debt?
In an interesting story over at Business Insider, the owners of the U.S. treasuries are enumerated. I had always assumed that China was the number one purchaser of U.S bonds. It turns out that Uncle Sam is the majority holder. This is just like Japan who owns a majority of Japanese public debt. I learned of the Japanese holding in much the same way I learned of the U.S. percentages, In a time of crisis. The Japanese nuclear disaster highlighted their domestic vulnerability much like the U.S. debt ceiling crisis is shining a bright light on our vulnerability.
While China, Japan and the U.S. make up the top 3 creditors, we hold a lions share of U.S. debt:
The U.S. owes the U.S most
Here is a breakdown of all of the creditors to the U.S. :
Who we owe
source: Business Insider
The Wall Street Journal has a live blog of the debt debate that is worth checking out.
Question: What changes have you made in your personal finances as a result of the ongoing debt debate?
I have reduced my exposure to equities recently and have increased cash. I could miss out on some gain and dividends but the market uncertainty leading up to the artificial debt deadline could precipitate a big correction or crash. Nobody knows.
I do hope they sort this out soon, though, it is really a dangerous political sideshow that is doing grave harm to our reputation around the world.
-WR
| Who? | How Much? |
| Hong Kong | 121.9 |
| Caribbean banking centers | 148.3 |
| Taiwan | 153.4 |
| Brazil | 211.4 |
| OPEC | 229.8 |
| Mutual funds | 300.5 |
| Commercial banks | 301.8 |
| State, local and federal retirement funds | 320.9 |
| Money market mutual funds | 337.7 |
| United Kingdom | 346.5 |
| Private pension funds | 504.7 |
| State and local governments | 506.1 |
| Japan | 912.4 |
| U.S. households | 959.4 |
| China | 1160 |
| The U.S. Treasury | 1630 |
| Social Security trust fund | 2670 |
Worthwild Financial Snapshot: Cinco de Mayo Edition
Happy Cinco de Mayo!
First, Let me dazzle you with my Margarita Recipe:
2 Ounces of freshly Squeezed lime juice (Pulpy is good)
1 oz triple sec
2 oz tequila ( Get a bottle of Dos Gusanos, or Two Worm Tequila and share with a friend)
Ice, Kosher salt and a few wide rimmed glasses.
Ok, Now that’s better. Let’s do a Worthwild Roundup. Here are a few stories and articles I found worthwild this week:
1. SCORE blog: Successful Entrepreneurs Share Stories.
My favorite line: Self-employed individuals have a certain entrepreneurial spirit that’s hard to describe. But, you can see it in his or her facial expressions and hear it in their voices. Once you catch the bug, it is hard to think of anything other than launching your business. How true
2. Budgets Are Sexy: Help a Reader- pay off student loans or start saving
My Advice?: Get moving on building an (at least) 6 month contingency fund. This is not a matter of current need, local situation or any other fleeting reason. It is a matter of philosophy. Building and maintaining a contingency fund forces you to make tough value choices and build enormously powerful lifelong habits. You’ll realize that having this critical safety net allows you to make better choices about almost everything else in your financial life. Try to refinance your student loans to lower rates + longer term. One thing different about student loan debt than most other forms is that *hopefully* your earning power will climb over time.
3. Consumerist: I am so glad to see an American company be so profitable, Wait! What? http://con.st/10018507
4. Deal Seeking Mom: Lots of coupons going on!
5. Get Rich Slowly: Pack Smart To Save Money
Great article. My personal tips are to pack sandwiches, water and a bag of veggies for long road trips and picnic instead of restaurant. You get on the road quicker and can spend the time walking and stretching your legs (instead of sitting in a booth at a Shoneys). You save a ton of cash, too!
I posited my opinion on who should get the Bin Laden bounty
Let me know what you think.
The Debt Ceiling Thought Experiment
Update: With some accounting magic, Treasury Secretary Tim Geithner reset the new Doomsday date to Aug. 2, 2011. Gives us a bit more time to pontificate.
Armageddon or Life as usual?
These are the cardinal extremes we hear will happen if Congress does not raise the debt ceiling by May 16th.
Will failing to pay the principal and interest on our loans create a death spiral for the U.S.? Some highly regarded economists seem to think so. I agree. For several decades the U.S. Treasury has issued a neat little financial vehicle called a savings bond. This has been recognized internationally as the safest investment in the world. When wars break out, natural disasters occur and political unrest seems to erode the stability of the local currency. The U.S. Treasury will provide an investment that is “backed by the full faith and credit of the United States government.”
That sounds pretty great… Until it doesn’t.
Politicians are now playing chicken with the entire financial health of our country. It is absurd. I understand the ideologies at play and the mandate that some Tea Party Republicans believe they have from their constituency.
This, my friends, is not that.
The mandate was to achieve fiscal responsibility, not to plunge our nation into a double-dip recession or even a depression.
The specific results of the U.S. Government failing to fulfill it’s financial obligations is mind-numbing. I ‘ll try to paint a scenario:
May 16th hits with no action on raising the debt ceiling. So what?
First, investors will start to get cold feet and ‘quietly’ move away from Treasury bonds, redeeming them for cash. This starts to accelerate. Worldwide T-note dumping occurs.
Social Security checks stop getting mailed out. AARP reps on Fox and CNN are self appointed harbingers of the end of the world for seniors. Widespread Panic. Stocks plummet, Corporations hand out massive amounts of pink slips. The Great Depression: Part Deux is in full swing.
Recovery is not certain or swift. In fact a decade could pass before things begin to stabilize. Even then, The next time a US program wants to raise money it will have to pay higher interest to do so. The U.S. Dollar, once the worlds reserve currency, now sits alongside the Zimbabwean Dollar as a curiuos relic of the past. Back when a U.S.A backed financial instrument could always be counted on.
The creditworthiness of the U.S. should never be some political poker chip that hack politicians can use to barter with. This is the bedrock of our entire society. Social Security, Medicare and many thousands of institutions that have placed their ‘safe’ money in U.S. treasuries would lose that faith and pull out. It is a confidence game.
Imagine that you have $1,000 dollars in U.S. Dollars. You are to be cryogenically frozen in about a week and revived in 30 years. (Think Han Solo in Carbonite).Here is your question:
Where would you invest your $1,000 ?
An individual stock? Apple? GM?
An index Mutual Fund? Vanguard S&P ? Fidelity ?
Real Estate? (Remember, you won’t be around for 30 years to unclog drains or find trustworthy tenants)
Would you buy silver or gold coins and bury them somewhere? (hope you remember where you put the map)
Would you bet on an emerging market? Asia? Latin America?
Now the big question: Would you buy U.S. Savings bonds or Treasuries?
What would you do?
The Wisdom of Warren Buffet
Warren Buffet is amazing. He is one part folksy, one part frugal and all parts genius. Anyone interested in achieving financial independence would benefit from his sage advice. Anyone interested in investing their lot successfully would benefit from reading a book he considers to be the best treatise on investing ever written The Intelligent Investor
Anyone who would like an annual insight into his methods, successes and failures would do very well by reading his annual letter to the stockholders of his company, Berkshire Hathaway.
I never, ever read stuff like this. Annual report to shareholders? ugh. Like reading the instruction manual for a microwave. (Why do they even have these. Should say, “If you do not know how to use a microwave, please return it to the store or ask someone to help you”.)
This one is different. Buffet’s annual letter to shareholder’s is the investment world’s Steve Jobs Keynote. Instead of dropping the cloth from this years i-Thingy, It is a look into the thoughts and philosophy of the worlds greatest investor. It is an anomaly. A shareholder letter should not be easy to read and funny. These literary vessels are supposed to obfuscate performance and hide the CEO’s mistakes, right? Instead, Buffet’s letter is clever, open and even whimsical. Full of interesting ideas and quotes with impact.
In his discussion of Clayton Homes, Builder of manufactured homes (Trailers), Buffet discusses the plight of the American homes industry. In just a few paragraphs he sums up the conundrum. While Fannie, Freddie and the morally bankrupt mortgage industry were populating their stick-built homes with warm bodies (only to dice up the loans and resell them as commodities) , Clayton was in the unenviable position of selling and mortgaging small affordable dwellings without the help of the big government backed organizations. Why bother helping a working class family into a starter home they could readily afford when we could lure them into a McMansion and profit twice! First when the loan is sold and again when the home is eventually seized. The collusion and corruption we saw in the entire real estate sector (including the U.S. government involvement) is legendary. We will be reading about this era as a warning for a long time to come.
Buffet offers an unorthodox and outstanding solution:
“Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”
Well said. My wife and I started off in a starter home, not a manufactured one but a structure 75 years old and small enough to be called a shed if looked at with squinted eyes. This was during the boom times and every lender I spoke to ridiculed me for not leveraging more. We bought that home (still own it as a rental) for a little over what I earned in 1 year. I used an online calculator that told me a conservative choice would be in the 400-420k range. I knew that was crazy. We found a home for 100k, drove used cars and worked hard to make it just right and never looked back. I am not suggesting that I made no mistakes (ask me about my WorldCom investments) but I do assert that your big choices need to be made using your own wisdom, intuition and clarity. A Bank and a Real Estate Agent will not have your best interest in mind when telling you what you can afford.
He is just as wise in summing up the subsequent credit crunch:
“Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.”
We should all have cash in our portfolio. This is not just a contingency fund that waits for us to make mistakes, it also awaits our moment to seize a unique opportunity. To Zig when everyone else is screaming “ZAG!”.
“By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well.”
In short, Buffet runs his enterprise just as one should run his or her home and life. Keep an eye on value, be frugal, be optimistic in spite of the naysayers around you.
Here is the link to the letter: http://www.berkshirehathaway.com/letters/2010ltr.pdf
Let me know what you think.
-WR
The Cult of frugality: Part II
Frugality is no longer a fad. (That ship has sailed)
Fads come and go
- The most recent wave of the fad of frugality is on it’s way out. This fad comes upon us when jobs are scarce and people are scared. Now that things are looking a bit rosier I urge you not to let it go. Donate your Crocs, Uggs and lowrider jeans but hang on to your frugality.
- The Dow Jones Industrial Average is hovering above 12,000. Consumer spending is up. Credit card interest rates are up as well according to this CNN Money article. It seems that the credit card reforms left out the most obvious culprit in the ‘debt is the slavery of the free‘ equation: Interest Rates.
- One of my favorite radio programs is APM Marketplace. Kai Ryssdal, besides having a pretty cool name, puts on an amazingly informative and entertaining half hour money talk. Today the Marketplace team reported that credit card use has risen while savings rates have dropped. Hmmm. I remember wondering last march how many people would retain their frugal mindset. What do these numbers seem to tell us? It is too early to tell but I think most of us have or will soon revert to previous habits of spending. If your pre-meltdown habits were frugal, great. If you, like millions of others, got caught up in the spend-for-all then you should probably hide your plastic right about now. Couple the past few years of recession fatigue with good news of the economy and an early spring and you could be in for some difficult consumer temptations.
-
Spring is near!
- Now, it is true that we need consumers (you and me) to go out and spend. Buying stuff is the engine of capitalism. Just make sure that you are building your contingency fund and investing in your long term wealth first. There is no benefit to our society when unhinged spending leads to a personal financial disaster. One of my all time favorite quotes is from public speaker and author Jim Rohn:
- “I will take care of me for you, if you will take care of you for me. ”
- Jim Rohn - It is important to understand that while it may seem like there is a direct cause-and-effect relationship between one and the other, The Stock Market is not The Economy. Experts use the economic indicators and stock indices to predict the future but are often wrong in their prognostication. The only relatively sure path to financial independence is to practice the fundamentals:
- 1. Give your money or time to a worthy cause (here’s a good one: Lovedrop)
- 2. Be frugal
- 3. Build a contingency fund
- 4. Park your money in well-balanced investment vehicles
- 5. Strive to find your bliss and follow it
- If you will do these things for me, I will do the same for you.
- -WR
- btw- I have a ton of Silly Bands, real cheap, if anyone is interested…
Love Drop: Giving back with style
A Picture Is Worth A Million Dollars
I thought it would be fun to create a flowchart based on the stuff I put in The Hero with a Million Dollars. They say a picture is worth a thousand words, I think my picture is worth maybe 2-300 words. More importantly for me though, It has been worth many thousands of dollars.
Before we look at the chart, there are a few questions that come up right away when you look at this process:
Q. If I give 10% to charity, pay 10% to debt elimination and fund my 6-month contingency fund with 10% that leaves only 70% to live on.
A. Was that a question?
Q. How can I be expected to live on 70% of my meager salary?
A. It ain’t easy but it can be fun if you look at it the right way. Living frugally and trading down to wealth help us create rituals that serve us. The rewards are delayed somewhat but once the habit is set we swiftly forget about the downside.
Q. No. You don’t get it. I have a mortgage, car payment, student loans, credit card payments…did I mention my mortgage?
A. I get it. I’ve been there. Trading down to wealth takes some time but you can start where you are. You can start to look for a reliable, pre-owned car that makes sense for you. You can start to look at a living arrangement that encourages frugality. This could be buying a smaller house in a nice neighborhood. It could be renting a less costly room or apartment. How many new things do you own that could have been purchased pre-owned for a fraction of the cost?
It is the habit that counts most. You must develop positive money habits. The percentages can be adjusted at first while you are starting out. Try 5% – 5% – 5% [Charity- Debt Elimination - Contingency ]
Q. Can I just skip the charity stuff? I need charity more than I need to give charity.
A. Nope. Lots of reasons but I like this one best: Helping others is a fundamental human need. You send yourself a powerful message when you contribute to the health, happiness, growth or well-being of another. Most of us will work harder, longer and strive to be more effective when we know that others will benefit from our toil. Trust me on this one. It is vital. Also, helping others is being a good human. You want to be a good human, right?
If you can’t feed a hundred people, then feed just one.
-Mother Teresa
Q. What is Asset Allocation? What do I invest in?
A. Asset Allocation in this example is simply the percentage of stock index funds vs. bond index funds. When you are young – (20s & 30s) 70-100% of your investments should be stock-based. As you age, bond funds should start to garner a heftier slice of the pie.
As for what to invest in, I encourage you to read The Elements of Investing by Burton G. Malkiel and Charles D. Ellis. I wrote a short review awhile ago.
I have invested with T. Rowe Price for a long time and while some of their expense ratios are a bit higher than Vanguard and Fidelity, I especially like their Automatic Asset Builder program that allows you to start building a world-class investment portfolio for as little as $50.00 per month. Set it and forget it! Whichever investment house you choose, you can’t go wrong.
Q. I have a secure job, do I need a contingency fund?
A. Yes. See my article Contingency Theories for more info on this important but sometimes overlooked topic.
This hypothetical Q&A could have happened but did not. I made it up. If you have real Questions, let me know.
Some of you have commented that this site has been quiet for a little while. While I have been working on several projects and closing a few deals, I am eager to provide more regular updates. There are also 2 things I want to mention:
Trent Hamm’s book “The Simple Dollar: How One Man Wiped Out His Debts and Achieved the Life of His Dreams” is a good read, especially if you are young and struggling with your finances. His blog, The Simple Dollar, is a favorite of mine.
My friend (If he will let me call him that) J. Money over at Budgets are Sexy has one of the most open and refreshing sites on personal finance I have seen. There are so many “Do what I say not what I do” blogs out there it is nice to find one that is at once authentic and interesting. I find myself rooting for him and hoping his investments go well. Worth a look!
Here’s the flowchart. Tell me what you think…
How to become wealthy
Book Review: The Elements of Investing by Burton Malkiel and Charles D. Ellis
I have to say right off the bat that I am a big fan of Burton Malkiel’s A Random Walk Guide to Investing. I have applied his recommended strategy very successfully in my own portfolio. It was not always that way for me though. When I was forming my investment philosophy I naturally gravitated to the top selling books. I figured the best sellers list was where all the good knowledge was. If I just read the top 3 or 4, I would have everything I needed.
Timing, Value, Hyperactive Vs. Passive, Day Trading Vs. Let it Ride, Secret Formula after Secret Formula. There was no shortage of answers. The only problem was that none of the strategies espoused in these wonderfully marketed books actually worked in a predictable way. I tried a few stock-picking strategies with the little money I had to invest and lost most of it. It turned out that the timing was right for A Random Walk Down Wall Street to be my eye-opener. Keep in mind that this excellent book was originally written in 1973 and is more of an academic treatise on market efficiency than a what to do with your money guide. At 400 pages it is a daunting read but worth it if you need convincing that trying to beat the street is probably not for you. A Random Walk Guide to Investing is the cookbook version that has a more pragmatic slant but could still be considered a bit wordy for a nuts and bolts investment guide. That is where The Elements of Investing comes in. The Hardcover is only 176 pages, the dimensions of a trade paperback and typeset with a large, easy to read font. It distills the intelligence of A Random Walk Down Wall Street and A Random Walk Guide to Investing with a few additional years of wisdom and validation.
Malkiel is a proponent of the Efficient-Market Hypothesis. The idea is that markets have in them all the information they need to perform efficiently and an individual investor will not be able to outperform them consistently. This flies in the face of the CNBC money gurus who seem to make their money by helping you lose yours:
“If I had only followed CNBCs advice I’d have a million dollars today…provided I started with 100 million dollars”
-Jon Stewart – The Daily Show
I read The Elements of Investing in PDF format for this review. It was a few days later at the bookstore that I really had a chance to appreciate one of its greatest assets. Elements is a small, light, easy to read book that is packed with everything you need to make excellent investment decisions. There is little theory, no filler and no unnecessary self-gratifying gibberish that defaces many otherwise good finance books. It’s as if the authors are saying, “it’s the information, stupid” instead of preaching from a high pulpit. These authors indeed do not waste our time with self promotion for they seem to be genuinely interested in providing us sound financial advice.
The book is divided into 5 simple concepts that form the basis of an excellent investment strategy:
1. Save regularly and start early.
2. Take advantage of tax efficient retirement investment vehicles.
3. Diversify broadly: Own the whole market.
4. Rebalance annually to stay within your target asset allocation.
5. Stay the course, ignore market ups and downs. Focus on the long term.
These ideas and strategies are not new. They are the proven strategies we have been told about for years, scattered among the rocks and hidden in plain sight. It is the laser-like focus that this tiny book provides that makes it so valuable. It needs to be on our shelf in a glass case with a little hammer adorned with the words “in case of severe market correction; break glass”. It is in these gut wrenching moments when we need this sort of wisdom.
There are a few minor changes from previous works here as well. There is more of an emphasis on global investments and the author’s share with us some stock-picking stories perhaps to remind us that they too, are human and get caught up in market timing from time to time.
Having Malkiel on your bookshelf and in your portfolio could be the smartest financial move you ever make. It certainly was mine.
The Elements of Investing by Burton Malkiel and Charles D. Ellis is available on Amazon.com
Have you read this book? What did you think?
-WR
