Money is a good servant but a bad master.
__ Sir Francis Bacon
The classic American dream includes getting a high-paying job, getting a fancy car, getting married to a good-looking/successful partner, and of course, getting a nice house.
Getting a home is the ultimate success based on the American standard. It helps you build a family's root. It allows you to host backyard barbeque parties. It's where you will spend your retirement, and where your children will spend their childhood. Buying a home has been always considered a "right" move, or... is it? In this article, we will explore why buying a home might not be a good investment as most people see, from a financial perspective. 1) Buying A Home Does Automatically Not Mean Saving Money The classic argument of home buying proponents is that renting is a waste (like flushing money down the toilet); hence, buying a home gives you "something" (equity). This is an inaccurate argument because: a) A Lot of Additional Fees/Costs. This includes agent fees, property tax, closing cost, inspection fee, maintenance fee, etc. Some of these fees are predictable (property tax, agent fee), and some of them are not (maintenance fee). The main issue here is that new home buyers tend to neglect or dramatically underestimate these needed costs to run a purchased home, and hence, they are not financially prepared once these costs show up after the purchase. b) A Long Time to Build "Equity". Most home buyers does not fully understand the concept of equity building. Let's say you take out a standard 30-year mortgage. Most home buyers will think they will build equity steadily and evenly over the course of 30 years. In reality, in the first 10-15 years, you mostly pay for the "interest portion", and receive little equity. Then into the second half of 30 years, you actually start to build some equity. In short, if you buy a home and cannot afford to sustain it through the "interest" period (due to job loss or similar emergency situations), you will be left with almost nothing. 2) Buying A Home is A Great Investment Because Houses Always Appreciate in Value To accurate evaluate if buying home home is a good investment, we must compare it to: a) Inflation: there is credible data shows that housing value appreciation barely meets/exceeds inflation rate. This suggests owning a home is not a good hedge against inflation. Please note the data is aggregate, and we are talking about the housing market overall. Of course, there are circumstances, when certain buyer's homes appreciate value more than inflation due to good a entry price/a good property's nature. Even so, you must figure out real growth rate of your home by using discount methods, instead of relying on the net gain amount, which could be misleading. b) Opportunity Cost/Other Investments: It means you must compare your home value gain with other investment opportunities (usually stock market benchmark). Historically, stock market return has always been more than the inflation rate and the housing market's return. Hence, if you put your money into the stock market correctly (like an S&P index), instead of buying a house with all the extra costs, you will earn a much better return for your money. Conclusion This article does not argue that buying a home is always a bad investment. However, it is recommended that you should do a careful calculation before committing to a home purchase. A typical American moves once every 5-7 years. However, for folks who commit to living in one spot for a long time (to build equity), and can find a fair/bargain deal, owning a home is a decent choice. For folks, who enjoy flexibility/mobility of not owning a home, it is not bad to keep renting and use the extra cash for some other worth wide investments. If you have questions or need to help figure out your financial situation, you can book a FREE session with me, or email me at theresumekid@gmail.com. Happy Investing, The Kid
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What is the main principle that makes investing work? How does investing create wealth for you? These are the most basic questions people ask before they consider putting there money into a brokerage account.
The short answer is compound interest. In this article, we will examine the most fundamental aspects of compound interest to see how it goes along with investing. 1) Multiplication. This is involved in arithmetic and geometry. In arithmetic, the core concept is addition. For example, let's say you play 18-hole golf for some money, and the first hole is worth one dollar, and each subsequent hole is one dollar extra; hence, when you hit eighteenth hole, it will be worth $18. Now if we apply arithmetic, the first hole is still worth $1, but it will double every time you move into another hole. In other words, the second hole will be worth $2, third hole $4, fourth hole $8, and so on. When you hit eighteenth hole, it will be worth $134,072 (I'm not kidding, you can do the math yourself to confirm 1 x 2^17). Investing belongs to geometry because your gain will stack on top of whatever you've already earned. In other word, your money will grow exponentially. 2) Time. Time is the second recipe for the power of investing. Multiplication or compound interest only works when it combined with the element of time. True investing takes time, usually years to see results. 3) Patience. Since it takes a long time for compound interest to show results, investors are required to have/endure extreme patience. This is probably the most important aspect since it is controllable by investors, if they're disciplined enough. Conclusion. Congratulations! Now you have understand how compound interest works. It is true nobody can guarantee any result when it comes to investing. However, with the power of compound interest combined with your patience and discipline, you can take advantage of capitalism and get to your financial freedom a lot faster. Bonus. Albert Einstein once said: "Compound interest is the eighth wonder of the world". Happy Investing, The Kid In the past few years, crypto currencies have exploded in terms of market value, variety, and popularity. Many investors struggle to consider if crypto belongs to their portfolio. This article is not about the debate about the legitimacy of crypto, but rather look at crypto from a financial/risk standpoint.
1) Crypto as A Currency. You can use crypto for a lot of things from buying food to making donations. The current limitations of crypto is the payment speed, which is not instant, some time quite slow depends on the type of crypto. Also, crypto's value fluctuate widely, which makes it hard to determine the exact amount of the transaction. Hence, we can conclude that crypto can serve as a currency, but you may not want to use it to replace regular currency hedge in your portfolio. 2) Crypto as A Storage of Intrinsic Value. We both arguments: proponents, like Peter Thief - cofounder of Paypal, argues that crypto is similar to gold for holding values; whereas opponents, like Warren Buffett, states that crypto has zero intrinsic value because it does not produce anything. Again, only time can tells which side right. Nonetheless, we can agree that since crypto is extremely volatile, it cannot be used as a stable/reliable storage of intrinsic value, as least for now. 3) Crypto as A Speculated Asset. This is no doubt to be an accurate statement. Crypto is still in the very early state of development (think about the internet in the 90's); hence, there is a trade-off between chance of failure and chance of successfully taking off. Investors should be aware of this possibility when considering crypto. So what can an investor do with crypto for their portfolio. The answer is it depends on your personal goal/situation. Let's say if you are in your early 20's and have no debt obligation; plus you have some extra cash that you are comfortable with losing in exchange for a probability of decent gain, then crypto might be one of your choices. On the other hand, if you're in your 60's and are retiring within a few years, crypto is very unlikely to be your top choice of allocation. Remember one golden rule of investing, regardless you invest in whichever assets, only invest what you can afford to lose. Happy Investing, The Kid If you have read my other posts, you will see that investing is the core principle toward financial security. However, without saving, you cannot start investing. Below I will list a couple of tips to start saving as soon as right now:
1) Ask yourself "Do I need it or do I want it?". It happens to all of us, at least myself, when we buy things out of the blue for no reason. We buy a new couch because it's on sale although the couch at home is perfectly fine. Asking yourself this question helps you determine if your decision is impulse or is a true need, especially at Starbucks. 2) Ask yourself "If I was the only person who know about this purchase, would I buy it?". Keeping up with other's lifestyle is proved devastating. To avoid "showing off", ask yourself this question repeatedly, especially when buying luxurious items such as cars, electronics, or even a house. 3) Save more for tomorrow. If you argue, at the moment, you cannot save any penny from your earning. Fine, I get it. However, by promising to commit a percentage of your future pay raise into saving (most people have their salary increased over time), you will be able to put something into your saving (assuming you don't upgrade your lifestyle accordingly). For example, if you promise to have 20% of future pay raise put into saving, when you get a raise of $10,000 per year, you will put $2,000 toward saving. Saving is straight forward, but tricky. Like investing, saving is not about technique, but rather psychology. For me, every time I buy unnecessary things, I always ask myself "How much this money will be worth in the next 10-15 years?". I am not advocating people should be cheap (which affects others). I am arguing people should be frugal and logical in spending (it is alright to fall into marketing tricks some times). Now you have mastered some simple tricks to help boost saving. Let's start saving for tomorrow or retirement, for you or for your loved ones. Happy Saving, The Kid You have saved up some money, let's say ten thousands dollars. Now you have to decide how to invest your money. You are also a busy; hence, you surely do not have time to study investing. In this case you have two options: buy mutual funds or indexes. There are many reason why indexes are much better investment choice than mutual funds:
1) Lower Management Fees. Indexes are designed to match the average market returns; hence, not much attention needed to manage indexes. On the contrary, mutual funds are actively managed; hence, a much higher management fees are mandatory. For indexes, fees can be as low as 0.1 - 0.15% (such as Vanguard's). For mutual funds, it ranges from 1 - 3% (10 - 30 times higher). Also, don't be fooled by funds saying it's only "a few percents of fees". Average return of S&P 500 in the past several years were 6-10%. This means 1 - 3% of fees equal 15-50% of total return. 2) Lower Trading Fees and Taxes. With active mutual funds, managers are pressured to "make some moves"; hence, they trade a lot, which incur much more trading fees (average brokerage fee per trading transaction is around $6-7). Also, gains received less than one years are taxed at higher rate (ordinary income) instead of favorable capital gain (maximum 20%). 3) Higher Return. Historically, more than 90% of mutual funds fail to match the market. If they want to break even, they have to achieve 6-10% per year plus additional taxes, transaction costs, and management fees. If some managers present you with his/her brochure, be sure to distinguish survivorship bias and marketing tricks. 4) Peace of Mind. With indexes, you sleep better. You don't care if the market crashes, if the president is dead, or if a terrorism event happens. Combined indexes with dollar-cost average (invest same amount over periodic time), you will free your mind from fear and greed. Now, I hope you are ready to select indexes over mutual funds. If you are a passionate and amateur investor (like me), and want to test your stock picking skill, you can designate a fixed amount of money to try (recommend maximum 5-10% of your net worth). This will help limit your loss exposure and prevent total wipe-out of your capital. Ignore buying mutual funds and bragging about gains (during bull market) at the barbecue parties and buy indexes. Happy Investing, The Kid Getting ready to retire is one of the most important goals most of us have in life. Want it or not, everyone gets old (unless in future, humans have the technology to reverse/defer aging). Hence, having a retirement account such as 401(k) will give you an additional tool to combat retirement costs. Nonetheless, a defected tool is worse than having no tool at all. Below are common 401(k) mistakes most people make: 1) Not Doing Adequate Research. Not all 401(k)'s are created equal. Many 401(k)s are loaded with huge hidden fees (some have 17 different hidden fees). Make sure you read through your company 401(k)'s policy. Contact HR or someone who is familiar with investment terms to help you decode. 2) Not Participating. After careful research (assume your company's 401(k) is beneficial, if you still do not participate in 401(k), you are leaving money on the table. 3) Not Selecting Roth Over Traditional. Selecting Roth will provide more benefits than Traditional in most cases. For example: the 2019 contribution for 401(k) is $19,000, if contribute maximum amount, $19,000 will be your net and later, when you take out funds, it will be taxed based on your retirement's rate (which likely to be higher than current's). Nonetheless, if you choose Roth and contribution the same amount, $19,000 will be the net, but this money is already taxed; hence, at retirement, the funds you take out will NOT be taxed again. Most 401(k) plans are traditional by default. Call your HR and request to switch to Roth. If you already have a traditional 401(k), you still better switch to Roth by simply paying tax on the current balance 3) Not Contributing More as Income Increases. Most people start out their 401(k) with a small contribution to "test the water". It is fine. However, as their wage increases, most forget or do not want to contribute more. Ideally, for a comfortable retirement (assuming you are working for your company for a decent amount of time), you should contribute up to 12% your income). 4) Borrowing or Take Out Money. This is the worst thing you can do with 401(k) or any retirement account since you will be fined 10% for early withdrawals. Do not take out funds to cover living expenses, especially during job switching periods. If you have to take out funds, it means your financial plan is flawed and you may not have enough cash reserve. 5) Changing Investments Frequently. The point of having retirement accounts is to minimize your emotional reactions. Although, your 401(k) is tax-sheltered, you will still incur trading fees and likely be involved in "buy high and sell low". 6) Buying Too Much Employer's Stock. The second principle in investing is diversification (after asset allocation). You are already making wages/salary from your employer. Buying additional stocks from the same source is extremely dangerous. Simply look at Enron's scandal when thousands of its employees had to say goodbye to their retirement when Enron's stock drops to zero. 7) Retiring Too Soon. The longer you accumulate your account, the more it pays off. The age you can take out funds is 59 1/2. The age most people choose to retire is 65. The age you can no longer make contributions and have to take minimum distributions is 70 1/2. Hang on to your retirement into 70 year-old if your health conditions allow. 8) Withdraw Too Much Money each Retirement Year. Ideally, for most people, spending less than 4% per year of retirement should be good. Spending 5% annually will require a very stable portfolio. Spending 6% annually will make you go broke in no time. Now you have mastered pitfalls of 401(k). Time to get up and start/adjust your plans accordingly. The earlier you act, the more money you get for your retirement. Happy Investing, The Kid In a person's lifetime, you purchase various things and you label some of them as investments. Different people consider different objects as investment. Let me define investment for you: something that increases value over time. Based on this definition, the worst "investment" you can make is a new car because:
1) It Loses Value Instantly. As soon as you drive your new BMW (or whatever brand you choose), the car lose around 25% of value instantly. The other place you can lose your money 25%+ is probably casino. 2) It Loses Value Over Time. Have you ever heard your friend complain a low price by trading-in his/her car for a new one? (okay, maybe your friend did not even bother telling you). Cars lose value over time very fast in a very short time. As soon as next year's model comes out, your current model will be "behind". 3) Miscellaneous Costs. Not only your new car loses value fast, it also requires maintenance fees, insurance, gas. The more expensive your car is, the more it costs you to operate (you know you should not pump "unlead" into your Audi right?). 4) Possibility of Total Loss. If you own a bond or a stock, and your house is burnt down (hypothetically), you are still fine since these investments do not get affected physically. On the other hand, hitting you brand new Lexus to an old Ford at 60 mph could result in total loss, not including chances of physical injuries. Same concept applies for thefts, natural disasters, etc. 5) Interest Rate. If you invest in stocks, you may get dividends. If you invest in bonds, you likely get interest payments. If you "invest" in a new card, you pay interest payments (around 4-7% for most consumers with good credits and 10%+ for youngsters or bad-credit consumers). In summary, what kind of investments that lose value fast, costs you fees and payments, and has a possibility of total loss? Now you should have a good answer. What I recommend you to do is not to ignore cars at once and buy your yearly bus subscription (or buy a junk from Ebay), but rather to be ware of marketing tricks from ads, dealers, and influences of your friends. All the aahing and oohing will disappear after people seeing your new ride for a while (or worst, nobody would pay attention to your new ride). Of course, if you are one of the very few pros who understand (really understand) cars, you are better off doing business with cars (collecting antiques, buying/reselling, etc.) I would recommend to find a decent used car with reasonable price and use the rest of your hard-earned money to do real investing. In short, treat cars only as a mean of transportation. Note: I am still driving my first car; 2006 Chevrolet Cobalt LS at 130,000 miles, and I am very happy seeing my money grows everyday in my brokerage account, not for the dealership or the loaning banks. Happy Investing, The Kid Money is a scary subject for most people, and I get it. Finance has been told as a dark, dangerous place where investors are exploited by professionals, by the institutions, by the Wall Street. Hence, it seems to make sense to hire a guide who knows the "jungle" and lead you to victory, to the fountain of wealth. Below you will find reasons why you should or should not hire an "expert":
1) Time. Like buying any product or service, time is an important factor. If you work multiple jobs and absolutely have no time left to do anything, it is justified to hire external help. If you go home and do random things from 7pm to 2am (stop watch the f***king "LOST"), you have time to learn about your own personal finance and need no help. 2) Money. It is obvious that few/no service is free. Financial advisers can charge you per hour ($100-$400) or per session or per project. If your budget is tight, you better go on Amazon and buy some finance self-help books. 3) Return. If you think financial advisers can give you a better edge in terms of high returns, you are at the wrong club. Advisers are supposed to guide you to earn your fair share (6-10% per year, unless you're hiring Warren Buffett). If any adviser tell you that he/she can make you rich in short time, please watch you wallet. 4) Discipline. Are you a person with a strong mentality, be able to control your psychology most of the time and stick with your plan(s)? If the answer is yes, it is meaningless to hire a financial helper. Remember, your financial expert is hired not to manage your money, but to manage you. Now you should have the answer whether you should hire a financial helper (consultant, expert, planner, adviser, etc. however they name themselves). The final decision is yours and so is the according outcome. Happy Investing, The Kid If you are an average investor, chances are you know in the long-run, stocks usually outperform bonds and other investments in general. Then why the pros, like Ray Dalio or Warren Buffett, are buying bonds. Are they stupid? The real question is what will happen before the "long-run", before stocks outperforms bonds? Below are a few reasons why buying bonds is beneficial if done correctly:
1) Reduce volatility and offer protection. Many of us still remember the chaotic 2008-2009 financial crisis. During depression or recession, bonds and cash equivalents are king. Nobody (I repeat nobody) knows exactly when financial incidents happen; hence, buying bonds offer protection for stock's volatility and potential big gains. 2) Higher return than stock in short-term. Again over a very long-term, stocks outperform bonds. However, again, it matters what happens before the long-term (which is composed of many short-terms). There are periods, in which there is no crisis, bonds still outperform stocks. In the 117 years since 1900, bonds have outpaced stocks in 42 years; in the 112 five-year periods, bonds have outpaced stocks 29 times.; and even in 103 fifteen-year periods, bonds have outpaced stocks 13 times. 3) Bond's yield is better than dividend. With public companies now prefers buying back their shares rather than issuing dividends (more on this topics on another article), average dividend now is around 2% which is much lower than bond's yield ~3%. Nobody can predict interest rate, financial crisis, or special events. Having some bonds in your portfolio can be very beneficial, preferably treasury bonds over corporate bonds. Happy Investing, The Kid If you've been following my articles about investing, by now, you should have a rough idea about something called investment. Nonetheless, I apologize that I have never shared with you one fundamental concept; something non-negotiable: never lose money.
Here are the reasons why losing money is not an option in investing, at least in the long run: 1) Why Bother Investing. The main goal of investing is to obtain gains over time. If you participate in investing and lose money, you might as well consider putting your money in bank saving accounts (usually with 0.01% interest) or better, under your mattress. 2) It's Hard to Recover. Assume you invest $100 in Apple's stock, and suddenly, this year, all consumers abandon Apple's products and instead switch to Banana's, the stock drops 50%. This means you lose $50, which is 50% of your initial investment. Most people assume if you lose 50%, you only need to make up 50% profit to break even. However, in fact, you need to earn back $50, which is now 100% of your current investment. 3) It Helps to Keep You Sane. If you keep this principle in mind at all times, it will make you be aware of risks (both inherent risks or created risks) and invest defensively. Remember, there are old investors and there are bold investors. But there are very few old bold investors. As Warren Buffett said: "Rule #1, never lose money. Rule #2, see rule #1." If investing is exciting, you're then actually gambling or betting with overestimation of gains and underestimation of risks and losses. Happy Investing, The Kid |
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