“But there has been also the American dream, that dream of a land in which life should be better and richer and fuller for every man, with opportunity for each according to ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”
–James Truslow Adams
Is the American Dream Really an Illusion?
There is a great illusion when it comes to real estate. This illusion is that owning your home is an investment.
When you own real estate and use it to generate monthly income… it is an investment.
When you buy real estate and develop it to sell for a profit… it is an investment.
When you buy real estate to live in… It not an investment. It is a personal expense.
Where did this idea come from that every American should own their home?
I heard that Fannie Mae came up with the “American Dream” idea as part of a marketing campaign that everyone should own their own home. Great idea on their part, but I have not been able to confirm that they were the ones to initiate this idea.
Should I Rent or Buy a Home?
Most people believe that owning a home should be considered an investment. Some go as far to become “house poor” so that they can leverage themselves into a bigger home. What they don’t know is…
Individual Investors Need Help
Individual investors as a group have no idea what they are doing. This has been made clear by a recent DALBAR study spanning 30 years all the way back to 1984.1 This period covers a number of bull and bear markets, giving investors a chance to learn from their mistakes. However it is clear that they are not learning the lessons of proper investing.
The S&P 500 is one of the most widely followed indices and is considered a benchmark for the US stock market. I would consider it a suitable benchmark for this study. These numbers compiled by DALBAR show that the return of the S&P 500 over the 30 year period ending in December 2013 is 11.11%. They also show that individual investors only measured 3.69% over that same period of time. This is a remarkable 7.42% difference annually. To put this in perspective, if you invested $100,000 in 1984 in the S&P 500 and earned 11.11%, today (30 years later) you would have $2,358,275. If you started with $100,000 and invested it over the same time period at 3.69%, you would have $296,556. That is a difference of $2,061,719. It should be clear from these numbers that individual investors have a problem.
“The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against.”
-Benjamin Graham – The Intelligent Investor
Are you gambling with your money?
Investing is not gambling.
Gambling is exciting. Gambling is entertaining. Gambling can make you rich… or so you imagine, but the odds are against you. That is why it is called gambling. That is why casinos are such profitable businesses.
There are professional gamblers who play Texas hold ‘em for a living and do quite well. But they are not gambling, they are playing the odds, they have a system, and they know the probable outcome of their “gamble”. There is certainly a large amount of skill involved as well. Reading people, remembering prior drawn cards, and concentrating for long periods of time.
This does not apply to all games of chance, like the lottery. A friend of mine likes to say, “The state lottery is a tax on people who are bad at math.” If anyone ever looked at their chance of winning the lottery, they would not waste a nickel on it, certainly not the rent money. According to the Massachusetts state lottery, the odds of winning a jackpot in Powerball is 1 in 175,223,510. I assume those odds don’t account for potentially splitting the jackpot with one or more people.1
“Never spend your money before you have it.” -Thomas Jefferson
Have you ever lost your job? Has your car ever required an expensive fix? Have you or a family member ever need funds for a hospital visit?
Now imagine that you didn’t have access to cash to pay for that emergency. What would you do?
The mass issuance of credit cards has allowed people to neglect the need for an emergency fund. This is a mistake. An emergency fund is not only about preparing for the rainy day that you will need the funds. It is also about reducing risk, providing you options, and helping you sleep better at night knowing that your financial emergencies do not have to be debilitating.
According to Go Banking Rates, 71% of Americans have less than $1,000 saved in their savings account. Although some age groups vary by a small margin, 70%+ of them (including seniors) have less than $1,000. If their income is cut off for even a few weeks, how are they going to survive?
“A goal without a plan is just a wish.” – Antoine de Saint-Exupery
12 Smart Actionable Tips For You To Maximize Your Year End Financial Planning Strategies
The end of the year is fast approaching. Now is the time to plan your year end activities so you can make the most of your financial planning and tax strategies.
In a perfect world, you would have a comprehensive financial plan that you review often to ensure you are on track. However, I’m more realistic. I know you are probably not going to do this…
And to be frank, you would not be reading this in December if you had already done your planning for the year.
Having a financial plan is an important step in making sure you have a path to reach your goals. Financial planning is about figuring out where you want to go, putting together a path to get you there, and monitoring your progress along that path to adjust for unexpected events.
While most financial planning should be done continuously throughout the year, many people wait until year end to complete their checklists. This post should help provide you with 12 immediate actions you can take to get up to speed on your financial planning before year end.
“Inflation is taxation without legislation” -Milton Friedman
Regardless of what happens in the future with inflation in the US, it is important to consider how it will affect your investment portfolio. While I discussed how a hypothetical dividend stock could help you compound the growth of your family’s wealth in the first three parts of this series, I have not mentioned how the effects of inflation can eat away at this performance. This fourth article in the series will discuss both how inflation affects your investments, and how to use dividend stocks to beat inflation. This inflation beating secret could help you minimize the effects of inflation through another form of compounding or super-compounding.
Ever since I was young, I was always good with numbers. I picked up new mathematical concepts very easily even though many were abstract. Once I started studying finance, and real money was involved, it became even easier to grasp many of the concepts.
Wall Street tends to embrace complex systems. Maybe because the creators of these systems think that the complexity will make it more successful, or maybe they believe that because it is complex they have found the holy grail of investing/trading. While these systems are interesting to me on an academic level, in my 15 years of working on Wall Street and studying what works, the conclusion I have reached is that simple is better.
I have seen simple investment systems, multi-million dollar trading systems which require astro-physicists and rocket scientists to run, and everything in between. With all those reference points, one thing that has become crystal clear, adding complexity does not necessarily make things better.
In my last article, Compound Interest- the most powerful force in the universe… Maybe, I discussed the powerful secret of compound interest. This secret works well if you take advantage of the aspect of time. This secret is not for those who want “action” with their investments. People who “gamble” with their investments will find this concept difficult to successfully master. To learn more about investing vs. gambling, read my prior article, Investing is not gambling…if it is done correctly.
Using the element of time to your advantage allows your money to grow and also requires a bit of patience. We are bombarded on a daily basis with ideas, news and emotional triggers which urge us to react to them. The question you have to ask yourself is,
“Does this piece of news change anything?”
“Compound interest is the most powerful force in the universe.” – Albert Einstein
I have heard this quote many times over the years. I, like most people, have just assumed that Albert Einstein said it since it is so widely attributed to him. However when I looked it up, I realized that it may be just another urban myth. There is no context for his quote or specific mention in writing of which he has made it.
Regardless of whether he said it or not, it is a very important concept to understand.
I was recently notified that I was ranked #7 on the Investopedia list of Most Influential Financial Advisors. I am very grateful to receive this honor. It was somewhat unexpected. I have spent so much time trying to help investors that I have not stopped long enough to reflect on the impact I have made in the lives of my clients and social media connections. This award supports that all my efforts to educate investors and help them navigate the uncertain financial markets has not been in vain.
It means a lot to me to be recognized with such a notable group of financial advisors. Investing has always been a passion of mine. This passion started at a young age with small ventures such as a lemonade stand and lawn mowing services. In college, it continued with investing in the stock market. When I graduated, I got my first job at Paine Webber. Almost 10 years ago I co-founded Innovative Advisory Group. Investing and providing financial advice is in my blood.
As my knowledge of investing has grown, so has my desire to help others understand the mysteries of the financial markets. I hope to impart some of that wisdom to you in this post as well as other articles on this site.
Once again, I would like to thank Investopedia for this acknowledgment of my efforts. I also want to thank my clients and social media connections. I would not be where I am today without you.
Top 10 pieces of financial wisdom that can help you invest better
Investing is challenging, but it doesn’t have to be. It requires some extensive knowledge to become a highly successful investor in the stock market, but there are many ways to invest successfully. I will discuss some different ways to figure out how you can invest successfully below, however you will need to understand these simple concepts if you want to be successful long term.
Inflation Monitor – June 2017 – Introduction
“The equity market continue to float on a cloud of who knows what”. | “This is not like any market anyone alive has seen before.” | “There is no euphoria, which is usually not a sign of a market peak.” | “There is enough pessimism for the market to continue climbing higher.” | “The engine seems to be running, but no one has bothered to look under the hood.” — These are just some of the comments I have heard from portfolio managers in the past month.
This month I want to discuss the topic of value. Value is a term that means different things to different people. Frequently. people use the term to describe investments that are “cheap”. Of course, “cheap” also means different things to different people.
“You can be young without money, but you cannot be old without it.” – Tennessee Williams
Imagine… you are sitting on a beach. Listening to the waves slap the sand in a rhythmic melody. It is the same soothing tune you hear each day since you left your job. As you relax in your beach chair reading a thrilling novel on this quiet stretch of sand, a horrible thought comes into your mind. Then, just as quickly as it came, you smile and go back to your reading.…
This horrible thought was that you have not saved enough for your retirement. Fortunately for you, you have prepared for retirement. You don’t need to worry about anything other than what time you are going to tee off at the golf course.
Unfortunately, this is not the case for 41% of Americans between the age 55-64 years old…
I like investment quotes. They are snapshots of wisdom. An insight into the minds of genius investors. Many of these quotes individually could be the basis of an entire book.
I have been collecting these quotes to add to each post I write. Unfortunately I have way more quotes than I have posts up on this site. So I thought I would compile this list to provide more bite-sized pieces of wisdom for your enjoyment.
Financial Markets are driven by emotions: Fear and Greed
Master your investing emotions, or they will master you
The stock and bond markets are driven by four primary motivations. These four motivations are based on only 2 emotions, fear and greed. Investing is scary if you don’t know what you are doing. It is even scarier if you fully understand the risks through your own experience. Fear is a primal and instinctual emotion. Fear has kept our species from getting eaten by sabertooth tigers and jumping off cliffs trying to fly like a bird.
However when it comes to investing, that same primal instinct clouds the judgment of an otherwise rational educated person and causes him or her to make silly mistakes. In order to be successful as an investor, that fear has to be understood and harnessed in a productive way. I find fear to be the trickier of the two emotions because most people don’t understand how it applies to their own psychology.
Fear: The two fears of investing
The emotion of fear when investing can be broken down into 2 subcategories: Fear of losing money, and fear of under-performing the market (or more commonly known as, the fear of under-performing your friends).
Inflation Monitor Summary – Composite Ranking
Inflation Monitor – March 2017 – Introduction
Wow! What a winter we have been having this year. We have had some big changes in recent inflation data. It is a mystery to most people as to why this has taken place, especially with the pre-election slowdown. However, this month we will be discussing a number of things including, a big surprise to earning growth, the mystery of the big jump in inflation, Trump’s potential impact on inflation, and most importantly the biggest change in inflation trends in the past 8 years. You will not want to miss this month’s Inflation Monitor.
Are you looking for a new self-directed IRA custodian or administrator? Perhaps you are already using one and are not happy with their performance or service. Whatever your reason may be, this report should provide you with a better understanding of self-directed IRA custodians and help you assess which one is the best fit for your investment needs.
The process of choosing a self-directed IRA custodian can be challenging. There are a lot of things to consider, the financial industry jargon can be confusing, and it is hard to find unbiased information. In order to make things easier for you, let’s start off by defining…
This is our 2017 Tax Reference Guide. We created it to make your life easier. Each year we collect this data so you don’t have to. You might want to bookmark this page for future use.
Inflation Monitor Summary – Composite Ranking
Inflation Monitor – December 2016 – Introduction
We have a lot to cover this month in the Inflation Monitor – December 2016. This is the end of 2016. It is a time for reflection for the year past and for pontificating the future. We all know no one can predict the future. And so much is up in the air with the recent populous trend changes, let’s focus on last year.
Let’s start with the US presidential elections. Donald Trump will be our next president (#45) in the US. Some people are happy, and others are sad. Regardless, we have a huge potential shift in the US with the results of the presidential election finalized. The first thing to address is that Trump may or may not pursue the same policies he campaigned on. Every presidential candidate has their platform, but not all of the promises actually happen. Let’s put these in the wait and see category up for discussion after his first 100 days. He will have about 100 days to prove his worth and keep the positive (market-related) momentum going.
While I have seen a lot of positive signs since Trump was elected, the US is overdue for a recession. The S&P 500 had a string of 5 quarters in a row of declining earnings. Apparently, no one noticed. I would consider this a recession, but the markets did not. The markets are always right regardless of what I think. It will be interesting to see what happens once the “new president hangover” wears off.
I have a question for you…
“What is the one industry that you can walk into an establishment and not know what you are going to pay before you get your goods or services? It is this industry where if you ask the price for their service they will say they cannot tell you or don’t know?”
You might guess the legal profession. I have never met an attorney who wants to give an estimate on their services, but they do tell you the hourly rate, so at least you have some sort of baseline to compare with other attorneys.
It’s not the legal profession.
It is health care.
“Wealth is the ability to fully experience life.”
– Henry David Thoreau
“Wealth” — can be defined as assets or resources which are in excess of present or future expected expenses. A more simple explanation is that wealth is made up of assets which exceed what will be needed for this generation, and could be passed onto the next one. Even though a family’s assets may not be needed for this generation, proper stewardship is required to make sure those assets will last for future generations.
The main considerations in protecting wealth for future generations are that the assets must be sustainable over several generations, resistant to inflation, and resistant to political and economic turmoil. It is possible to invest in certain assets that can fortify your wealth against some of these external risks. However, there is a much greater risk of future generations not being good stewards of the sustainable wealth. Whether you are the first generation to create generational wealth, or whether you are researching how to sustain the wealth you have inherited, this list will give you some guidance.