Posts Tagged ‘investing’

Is Staying Fully Invested in the Market the Right Move?

Should you always be 100% invested. It depends on your circumstances. Sometimes cash is the better investment. Cash can also grow your long-term investment returns.

Should you always be 100% invested. It depends on your circumstances. Sometimes cash is the better investment. Cash can also grow your long-term investment returns.

Most of the time the stock market is climbing north. Interspersed between bull markets are those times when rookie investors act as if the sky is falling.

Long bull markets turn normally intelligent investors into casino gamblers; they even use gambling terminology: we’re due for a bear market or as they say at the casino, “Red is due after 8 black spins” at the roulette wheel; as if the ball has a memory. The odds of it coming up red are the same as it was last spin, in case you were wondering.

Of course, long moves in the stock market sets off our sixth sense that this can’t last forever. Before long you’re not fully invested (a religious mantra of many investing circles) which smacks of market timing.

This brings up a good question: Should you always be 100% invested in the market?

If only it were as simple as a yes or no answer.

The truth is many people should NOT be fully invested in the market and some people SHOULD be and it has nothing to do with market timing. The trick is to know when to be fully invested and if not, by how much.

It boils down to your personal situation: where you are on your journey to financial independence, how close to retirement you are (or if you are in retirement), spending habits and viable alternative investments.




Investment Levels

Whether you should be fully invested or have cash in money market accounts includes many variables. The easiest decision is when you are starting out.

Under $100,000: When your net worth (this should probably be liquid net worth) is under $100,000 and you are a good distance from retirement age you should be fully invested at all times.

This is the time to super-charge your tax benefits by funding retirement plans to the max. Employer contributions (if available) are an added bonus.

With time on your side you have to stay fully invested. Markets declines will come and go, but the risk is being out of, rather than in, the market. Riding out the storm of a bear market is only a minor speed bump in the rear view mirror so fully invested you should be.

Fully invested requires some explanation. Fully invested applies to your retirement and non-qualified accounts. These funds are earmarked as long-term investments and should be where they have the greatest opportunity for gain: broad-based index funds. You still need an emergency fund or at least some liquid assets easily accessible should your employment situations change or a major expense arise. We don’t want to be in a situation where we are forced to borrow at unfavorable terms or sell an index fund at market lows. A modest amount of liquidity is necessary and has nothing to do with market timing.

Your level of cash involves several factors. If you own a home and have access to a line of credit, it might be better to keep everything invested always and use the LOC if the need arises. This allows your savings to be working to your advantage. As the economy and business grows, so does your wealth.

In any case, when you are young and just starting out, the more you keep invested the better. Dividends and corporate profits keep climbing with only modest, short-term declines. You need the out-sized returns of the market to reach financial independence in a reasonable amount of time. The broad market averages 10% per year (some years more, some years less) while money market and bank accounts barely keep up with inflation if at all.

Investing can feel like a balancing act. Should you invest in the market or keep some in cash? There are good reasons to keep cash instead of investing.

Investing can feel like a balancing act. Should you invest in the market or keep some in cash? There are good reasons to keep cash instead of investing. Please share on Pinterest.

$100,000 – $1,000,000: The first $100,000 is the hardest. You earn every dime to get your account value up. The higher the account balance, the easier it is to get it compounding with meaningful numbers.

As your net worth climbs, having more cash can be beneficial, especially if you invest in individual stocks or have real estate investments.

When starting out it is important to invest in less risky investments. While the stock market does go down, the long-term gains are enviable for those with a modest amount of patience.

As your account balance rises you may consider alternative investments. Income property comes to mind. So does Peer Street and similar types of investments. (Most alternative investments should be a minor part of your portfolio.)

Retirement accounts will remain fully invested unless you are in or entering retirement where about 2 years of living expenses should be in a money market account.

Non-retirement accounts are a different story. The higher your liquid net worth the more likely you will keep some money in cash. High net worth individuals have more opportunities to invest than low net worth people. (Consider this an incentive to grow your account values.)

With a higher net worth you are either closer to retirement than those starting out or in retirement. A long-term investment horizon makes index investing almost a necessity. However, once retirement pops above the horizon or is your current lifestyle, more cash needs to be held in liquid money market accounts to satisfy normal (and sometimes abnormal) living expenses.

As your net worth grows you tend to learn how to ease up on traditional labor. Ample money allows you the freedom to choose between more time at work or more time with family; most people choose more family time. Because you now have the resources to spend less time in a formal working environment, you will need liquid funds to cover expenses wages may not.

Over $1 million: Even index funds keep a small percentage of their assets in cash to cover expenses and for withdrawals. Now that your liquid net worth reached seven figures you need to consider the same strategy.

Millionaires start to see their income get lumpy. This means you don’t see a steady income, but larger chunks from sales of assets or from your business or commissions, rents, dividends and interest. While wages can still make up a sizable part of your income, other passive forms of income generally dwarf your earned income. (The stock market gaining an average 10% in a year on a $1 million account yields a $100,000 unrealized gain and $20,000 in dividends at a 2% dividend yield.)

More alternative investments tend to show up now that your stash has climbed to million dollar status. The easiest way to invest a small sum is in an index fund. With a larger pile alternatives play a potential role.

We preach index fund investing a lot around here, but everyone I work with that has at least seven figures of net worth has accumulated several alternative investments. Once you begin investing, opportunities abound. Just be careful it isn’t a scam; they abound, too.

There is a difference between a few dollars and a million plus. With a million dollars you now spend more time allocating assets: how much real estate should I own and where, do I own bonds, individual stocks, gold (please, no), micro lending investments and so forth.

Most of the people I work with that have a large net worth tend to keep a small pile in cash. Five percent of a million dollars is $50,000. It sounds like a lot, but a small amount compared to the whole. $50,000 sounds like a lot until you realize circumstances could require you to need this liquid cushion. Remember, income tends to gets lumpier when your net worth gets reasonably high (and even worse when unreasonably high).




Business Owners and Side Gigs

Readers living off business income have a unique set of challenges. Businesses need working capital so uninvested money needs to be easily accessible for operating expenses or opportunities to expand the business or spike profits.

Businesses must have an adequate cash reserve! Every business owner enjoys surprise opportunities unannounced. Some of my best money-making opportunities were the result of having cash available when competitors didn’t.

Cash is king! 100% invested all the time can hurt your investment return. Find the right balance between cash holdings and index fund investments.

Cash is king! 100% invested all the time can hurt your investment return. Find the right balance between cash holdings and index fund investments.

Side gigs are really micro businesses. The same opportunities fall in the laps of side gig purveyors.

The type of business determines the amount of cash needed. In my tax practice I generally keep $50,000 liquid with a $100,000 line of credit. Small opportunities do not require the risk of waiting to sell an asset or borrowing money; I can write a check. As strange as it sounds, there are times when they sell dollar bills for 82 cents a piece. (Well, it seems that way. I use multiple bank offers with this working capital, snagging thousands of dollars annually in bonus interest. I also can buy assets or invest in a new business venture connected to this blog or my practice without funding concerns.)

As you approach retirement you also need to consider more liquid funds because there will be a need in a few years or less. (Index fund investing should have a 5 year time horizon minimum.)

Short-term funds must always remain liquid to prevent a market decline forcing you to sell at a loss! As I stated, money needed within 5 years should be in a bank product or money market account. This applies to everyone at all net worth levels. Nothing guarantees a market decline better than dropping short-term funds in the market you’ll need in six month or a year. It’s almost like God is punishing you for being stupid (or greedy). (Yes, I’m speaking from experience.)




Retirement

Retirement changes everything. As you are growing your nest egg you are also bringing in outside cash from work and/or income properties, et cetera. When you are in retirement you are earning less (or nothing) so you need the income stream from investments to cover daily expenses.

You annual spending habits and investment values determine how much you will need to keep liquid.

If your net worth is really high and spending level low you can keep all your money invested in index funds and live off the dividend stream.

For everyone else it is a good idea to keep around 2 years of living expenses in cash (money market accounts). If the market keeps climbing you can sell enough of your index fund to pay bills. When the market declines you can live off the money market funds. If the market decline is steep you can divert dividends to the money market account rather than reinvesting dividends.

The goal is to a void a cash crunch when the market is down significantly. Small declines ( a correction, defined as a 10% decline from a recent market top) are no problem as you’ll still sell part of the index fund for living expenses (if dividends don’t cover the bills). What I’m worried about is the 2008 type decline of 50%. I don’t want to sell in that environment no matter what. It’s a buying opportunity if anything.




Market Timing

As my net worth grew over the decades I noticed I keep more and more money in cash when valuations become stretched. While this isn’t technically market timing (buying and selling to capture small market movements), it is done with the expectation of investing at a later date at a better price.

Currently I’m at a high cash position. Money pouring in over this year I’ve kept in money market accounts (I still invest automatically in my Vanguard index fund, but the money coming in is always more than the baseline I automatically invest). For a while I invested in Peer Street and made a few other modest investments. I tried to get out of investing in individual stocks, but I had to invest more in Altria when the world was coming to an end and the dividend yield jumped over 6%. I also added to my Facebook and Apple holdings modestly when their stocks declined significantly.

Another reason I keep more money liquid now is that I want a ready pile of cash for an emergency investment. The economy is humming right now, but the day always comes when a piece of real estate shows up 30% below market value for a fast sale. And I’m just the guy to make a fast sale to because I don’t need a loan; I can close this afternoon.

Liquid funds have a low rate of return until you can pull the trigger on a deal like no other in zero time! Businesses and individuals frequently have fire (or should I say FIRE) sales for a variety of reasons. I enjoy getting first dibs because the seller knows I can close the deal fast.




Bonds

Interest rates also play a key role in how  much you should have in equity index funds. When interest rates are high it’s easier to keep more liquid funds as your money market pays stock market returns.

We haven’t seen high interest rates in well over a decade. That doesn’t mean those days will never return. In the early 1980s you could buy a 30-year Treasury with a 14% coupon (the bond paid 14% interest annually for 30 years) and the interest was state tax free. Regardless of what the stock market did, I would not have had hurt feelings if I had money in Treasuries for 30 years at 14%. That is about the best risk-free investment there ever was.

If Treasury bonds climb to 7% or higher I will probably keep some money in bonds. If you are starting out you still need to ride out the stock market storm as you need the compounding effect of growing businesses to build your nest egg. If your stash is a bit bigger risk-free bonds might be at home in your portfolio. (For the record I currently hold one, that is 1, Treasury Inflation Protection Security (TIPS) of $1,000; my entire bond portfolio.)

If interest rates ever climbed to double digits there is nothing wrong with dumping a large portion into Treasuries, especially if you are retired. You can throw the 4% rule out the window when the U.S. government is paying more than 10%.




Wrap Up

Reading personal finance blogs might lead you to think holding cash is a sin. It Isn’t! Having plenty of cash ready to jump at a moment’s notice is a powerful wealth building tool. Warren Buffett keeps large amounts of cash at his firm, Berkshire Hathaway. He keeps the cash handy for potential claims from his insurance business and for opportunities to buy good businesses at a good price. You and I should be no different.

If you buy and sell the market hoping for a quick gain you are market timing and you will eventually get you head handed to you (if you already haven’t). Every client I ever had who *traded* the market had sub-par results and most took a bloodletting.

It might seem like a fine line between market timing and what I’m suggesting here. It isn’t. Money I keep to the side for potential investment can stay in money market accounts for years for all I care. If I don’t find a super deal for the money is plods along earning 2.3% (the rate as I write). It may never get invested. If, however, the market declines I’ll allocate more of these liquid funds to the index.

And if Apple decline more or Facebook drops (or gets better management) or Altria stays at these levels (or buys Juul, I think it’s a god fit) I’ll be exchanging more of that cash burning a whole in my pocket for pieces of those businesses.



More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

The History of Polarized Politics in the U.S. and Money

How much is polarized politics affecting your financial situation and wealth. Don’t let the politics of others destroy your dreams. Learn how you can take control and excel.

How much is polarized politics affecting your financial situation and wealth. Don’t let the politics of others destroy your dreams. Learn how you can take control and excel.

The polarized political environment in America is not unusual. What makes the current situation so incredible is the comparison to what came before.

After World War II the United States experienced a prolonged period of relative political calm. While disagreement was rife, there was a sense of compatibility between the opposing political parties. A few Republicans were more liberal than some Democrats and a few Democrats were more conservative than a few Republicans. It was a world where liberal Republicans and conservative Democrats existed.

That started to change in the 1970s and blew full force as the 1980s arrived. The reasons are varied, but not the topic of today’s discussion. We are interested in the history of polarized politics and how it affected wealth. The goal is to learn from the past so we can better position ourselves for success in the toxic environment we find ourselves.

Politics is always a dangerous topic to cover. And it might not have an immediate connection with money or wealth. But experience (with heavy doses of research) reveals politics indeed has plenty to do with wealth and wealth creation or destruction. Polarized politics has visited America before and in much worse circumstances.

We will address politics first, then personal finances.




History of Polarized Politics

 

Founding Fathers

There is no exact count as to how many Founding Fathers the U.S. had. Some say there were 7, others 10. The Constitutional Convention had 55 delegates.

Regardless the number of Founding Fathers, there are several points worth noting about their behavior. First, they were all men of the landed class. In other words, the Founding Fathers were men with at least a modest amount of wealth in real estate. This isn’t the most politically correct situation by today’s standards. But we can (or at least should) agree this group of men did a pretty good job at nation-building.

Many Founding Fathers owned slaves. Benjamin Franklin had to dance around the subject when he was the American agent in London for the colonies. The British found it ironic Americans wanted freedom while holding tight to slavery.

Storing crops was more difficult in those days so it was common to store the excess corn crop as whisky. Consumption of alcohol was high in the 18th century. Bad water also encourage more alcohol consumption. It is no exaggeration to say the men who brought America to life were inebriated much of the time. While not drunkards by the standard of the time, some might be surprised how much work these men accomplished with the blood alcohol level they regularly had.

Benjamin Franklin

We only have time to discuss one Founding Father at length; we will touch on several others for reference. Since Ben Franklin is a leading Founding Father he will make a prime example for our discussion.

Much of the polarization of modern politics revolves around the identity politics of the left and the conservative ideas of the alt-right. There isn’t a single Founding Father who wouldn’t be nauseous over the current national dialog. Or would there?

Conservative Franklin: To the chagrin of the left, most Founding Fathers were decidedly conservative. Before President Reagan, Benjamin Franklin had his own version of trickle-down economics. Franklin believed the more money the rich had the more it percolated down to the poor. Franklin stated the”rich do not work for one another…” The rich, according to Franklin, spent their money on the poor buying the goods and services they produced. (Benjamin Franklin: An American Life  by: Walter Isaacson; Simon & Schuster; 2003; pages 267-8.)

Welfare and Social Security: Franklin also warned against the welfare state. He wrote welfare had unintended consequences and promoted laziness. Modern ears may find this palatable, but Franklin went further. “I fear the giving mankind a dependence on anything for support in age or sickness, besides industry and frugality during his youth and health, tends to flatter our natural indolence, to encourage idleness and prodigality, and thereby to promote and increase poverty, the very evil it was intended to cure.” (Italics mine.)

What Franklin was saying is you either work or deserve to starve, even in old age or during illness. Social Security is something Franklin would probably not approve of. If you lacked the necessary frugality and industriousness during the vigor of youth, you serve as a living example to those who consider such sloth.

Minimum Wage: Franklin also disagreed with the minimum wage. By artificially raising wages Franklin felt it would overprice goods destined for foreign markets.

All these positions place Franklin decidedly to the right of center. But was he really cold-hearted? Did Franklin believe people should be allowed to suffer?

While conservative readers might be licking their lips by now, the liberal folks will have something to cheer shortly.

Liberal Franklin: Benjamin Franklin had a balanced political stance. In some ways he could be called a liberal Republican by today’s measures. Franklin had no problem with taxes as long as they were coupled with representation. His lack of debate against the Stamp Act of 1765 is indicative of his political position. Only when there was a serious backlash back home did Franklin give us our first political spin campaign to right his reputation.

Policies should encourage hard work, according to Franklin. He felt hard-working people lucky enough to achieve wealth (became rich) had an obligation to serve the community. These duties should improve the lot of the community, providing for a prosperous middle class. Those in genuine need (people suffering illness before they had time to work for their keep, children and widows, et cetera) were the responsibility of the wealthy. Today we might consider many welfare programs as serving this need in a much larger population than existed in 18th century America.

There are also a few things we might find appalling in Franklin’s behavior even in the Age of President Trump.

The Un-family Man: Franklin left his wife and children to serve as colonial agent in London for the Thirteen American Colonies. Even when opportunity arose, he chose to stay in London or travel to Scotland and Paris, even as his wife’s health failed. Ask John Edwards how that helped his political career. Even the King found this behavior strange when he inquired as to why Franklin remained in England in 1774 when Franklin had no more duties there.

Womanizer: We can forgive Franklin for many of his political positions due to the age he lived in. His position on slavery softened over the years, but as Isaacson reports, Franklin used the qualifier “in time” in letters he wrote. He knew slavery wasn’t a workable prospect, buy also kicked the can down the road.

Modern eyes are ears will be most disturbed by Franklin’s behavior towards women. The list of affairs and potential affairs is long. Need I remind you Franklin was married with children during many of these flirtations.

History records Benjamin Franklin enjoyed the company of women more than men when it came to social gatherings. The flirtations weren’t always innocent and the women not always unattached. There is a crude sketch by Charles Willson Peale of a scene he walked in on of Franklin kissing Polly Stevenson, the daughter of Margaret Stevenson (Franklin’s landlady). It is possible Franklin befriended Polly’s mother for the purpose of spending time with Polly. Mary “Polly” Stevenson was 18 years old at the time Peale accidentally walked in on the kissing scene. But there is also a story of Franklin in a flirtatious conversation with Polly when she was 11 years old discussing her desire to be with an older man Franklin’s age.

Final Notes on Franklin: I spent a fair bit of time on Benjamin Franklin for a few reasons. Franklin is a Founding Father and certainly one of the most important and influential of the Founding Fathers.

He was a man with all the failings and shortcomings of men. His humor was crude at times, as we see when he recommended to the Royal Academy of Brussels that they should study the causes and cures for farts. It is unlikely Franklin was faithful to his wife and was distant to his family often. He even missed his only daughters wedding.

Franklin had strong political beliefs that would have toppled normal men. He didn’t suffer such a fate because he never held a high office. He was more a grandfather and guiding hand in the creation process of the United States. His role was certainly instrumental, but he managed to avoid the polarization politics brings once high office is held. Even Washington faced real criticism for the first time as president.

Another benefit of reviewing Benjamin Franklin is he shows us the world and human nature when the United States was just a dream and there were only American colonies as part of the British Crown.

If we fault Franklin for his short-comings that many current political leaders share, then we espouse the notion that Franklin should not have been allowed to do his work of nation-building. Such opinions at minimum presuppose the right of the United States to exist or at least ever to come into existence.

It is a truism of the ages: The worst of human nature can lead us to greatness.

Maybe we should be more open to human failings if we aspire towards a better tomorrow.




Thomas Jefferson

We will cover the next actors with less detail as they all share similar traits we find so disqualifying.

Thomas Jefferson is also a Founding Father of the United States. He wasn’t the biggest fan of slavery and history assumes he treated with slaves with dignity and respect. (How else could we remember a man as great as Jefferson and his contribution to our morals, values and standards.)

Jefferson also served as the third president of the U.S. That said, Jefferson did own slaves regardless his dialog on the subject. Over 100 years after the abolition of slavery in this country we still feel the scar it has left. The black community more than any other.

To make matter worse, Jefferson had a child with at least one of his slaves. In a modern era where people in authority are criminally liable for sexual activity with someone under their authority, this seems like a serious offense. Yet it happened and we seem unmoved by the act. Maybe time does heal every wound. Or not!

For all Thomas Jefferson gave this nation, he was still a man with failings. Failings we would consider criminal in the current environment. If modern rules were applied Jefferson would never have been president and his work may never have been created. How a man with such concerning behavior gave us rules to live by is hard to understand. But once again, the greatest of us tend to have the greatest failings, too.

President Andrew Jackson

President Andrew Jackson did more to define and solidify federalism than any other president. But could a man of such accomplishment be endowed with faults?

Polarized politics were at their worst in Jackson’s day. Jackson won the popular vote three times and the presidency twice. He also gave Native Americans the Trail of Tears.

Instead of focusing on Jackson’s flaws, I want to refocus on our topic: political polarization.

People today think the things said and done are the worst ever. Wrong! People had no problem Jackson killed a man in a duel, he was also hated enough to be the first president to have an assignation attempt on his life.

He married his wife before she was legally divorced from her husband. As you can imagine, adversaries made hay of this knowledge. They hounded Jackson and his family to the point of murder.

The political campaign of 1828 was brutal. The fight contained numerous ad hominem attacks. This isn’t so different from modern times. The difference was how the attacks also dragged Jackson’s wife, Rachel, into the fight.

Rachel Jackson started to suffer from what we would call today anxiety and depression. The stress became so acute it lead to a heart attack that killed her. Jackson never forgave his enemies for murdering Rachel. We have no way of knowing if the stress caused her death, but Jackson didn’t care. He blamed his enemies and hated them to then end for what they had done.

If you think politics are polarized today, you might want to read up on President Jackson. Few political leaders in the U.S. experienced such an assault in attaining office.




President Abraham Lincoln

Most Americans hold President Lincoln in high regard. They hold views of Lincoln as a moral and honest man. He freed the slaves so he must be good, right? He also preserved a nation rent in two by political division. Never before or since has our nation been so politically divided. There is nothing in the current dialog we can compare to the division our nation faced and underwent in those days of the early 1860s.

These are not the worst of times. Our nation weathered far more serious problems than a misogynist Trump. Need I remind you the great Abraham Lincoln consorted with prostitutes while married. Yeah, great leaders are riddled with flaws. Perhaps the flaws are what make them great.

Yes, I digress. It is political division that most concerns us. Except, all the discourse on said divisions seem to revolve around moralistic behavior.

FDR

Before we finish with the Supreme Court and discussing the personal finance implications, we turn to FDR, the hero of the left.

FDR also had serious flaws when it came to women. He also had an affair. (It starts to sound like a nervous tick after a while.)

The Great Depression was the issue of the age when Roosevelt took office. You would think after the economic crisis the Republicans presided over, the Democrats would have unchallenged rule. You should think again.

Before World War II became an issue, FDR had a New Deal. There was only one problem. Republicans packed the Supreme Court for years and the Court kept knocking down his programs.

Roosevelt had an idea. If the Justices wouldn’t retire so he could nominate his own choices friendly to his programs, he would expand the Supreme Court so he would have vacancies to fill.

This struck Republicans a very wrong. And what do you know, even Democrats felt it was a power grab by FDR. FDR’s own party denied him the ability to expand the number of justices on the Supreme Court for political reasons. Talk about political polarization! Yes, it happens even within parties. Even worse than we see today.

Supreme Court

There is always the temptation to think this is the worst time EVER! Rarely are such thoughts true.

Brett Kavanaugh’s nomination to the Supreme Court by President Trump signals the worst ever injustice in the history of the U.S. But is it?

There is already talk of impeaching Justice Kavanaugh. Some have warned this would set a bad precedent and has never happened before. And that is a lie!

Here is a quick rundown of notable Supreme Court dramas.

Removed from Office: Supreme Court justice John Rutledge was removed from the court by the Senate in 1795. Yes, 1795! Rutledge’s wife died in 1792 and he didn’t take it well. His mind deteriorated to the point where there was no other choice.

The same year Justice John Blair suffered from such severe headaches he was unable to continue. Rather than have the Senate remove him, he resigned.

Assassination: Justice Stephen Johnson Field was nearly assassinated in 1889 by a California State Supreme Court justice in a confusing story of divorce, alimony and a lost case.

Antisemitism: The Supreme Court had a justice so hated not a single member of the court attended his funeral. Justice James Clark McReynolds was a very vocal anti-Semite. In 1916 the Jewish justice, Louis Brandeis, joined the Court. McReynolds left the room every time Brandeis started to speak.

Racism: Justice Hugo Black  belonged to the Ku Klux Klan prior to taking the bench.

There are stories of bribes and other nefarious behavior by Supreme Court justices. Justice Kavanaugh may still resign or face impeachment by the Senate at some point in the future. Regardless, we sometimes wrongly assume the Supreme Court, the final arbiter of law, rule and justice in our nation, is free from political polarization. Unfortunately, the Supreme Court is just as liable to the shortcomings of human nature as any group.

 

With the groundwork on political polarization in place, we now turn to the impact polarization has on personal finances, wealth and money.




Personal Finance in the World of Political Polarization

 

The lesson above clearly outlines a history of political polarization in the United States from before its inception until today. The luxury of self-pity falls on deaf ears when history is called into action. Things have been marching higher for a long time, as Steven Pinker notes in his landmark works: Enlightenment Now: The Case for Reason, Science, Humanism, and Progress and The Better Angels of Our Nature: Why Violence has Declined

Stop burning money! Learn the secrets the wealthy have used from the beginning of time to build their financial fortune.

Stop burning money! Learn the secrets the wealthy have used from the beginning of time to build their financial fortune.

The Long March of Growing Wealth: Humans have lived on the Earth for a few hundred thousand years. We lived short lives back then and progress was slow. Life was dangerous. Basic shelter might have been a cave, tree or outcropping.

Then man (it might have been a women for all we know) discovered how to create and control fire. Cooking soon followed which improved life immensely. Cooked food was easier to digest and it killed pathogens. Life was still hard, but lives were made a bit easier with the discovery of fire.

Shelter improved slowly over the eons. Fire made the home warmer in cold climates. Still, disease and subsistence meant most lives were brutal and short.

The pace of human progress was painfully slow for the first several hundred thousand years. Rape, murder, war, disease and starvation were constant threats. Men died from injury and women in childbirth. When God informed Adam and Eve of their curse as they were kicked out of the Garden of Eden, he meant it. But curses have a shelf life.

Civilization: Somewhere back there, over 10,000 years ago, humans became civilized; congregating in cities, that is. This was another improvement. War was a constant threat, but now a larger group was needed to harm the community.

Health issues were the age old problem.

Fast Forward: The pace of improvement in the human condition keeps accelerating. First rudimentary shelters, then fire, now cities. A few lucky souls avoided disease and injury, living to an old age, even by modern standards.

Cities grew and slowly man discovered ways to alleviate medical afflictions. Many remedies were more harmful than helpful. Such is the nature of progress.

Money was invented and the ancient Greeks debated what money really was and how it worked. (Sapiens: A Brief History of Humankind) Over half of Jesus’ parables dealt with money or wealth. Life was improving at the fastest pace ever in history and it was slowly picking up steam.

China flourished in isolation from the West; Europe enjoyed the Pax Romana. It would be nearly the thirteen hundred years before mankind experienced the Pax Americana.

From the scientific advancements of Greek and Roman culture, mankind dropped into a Dark Ages. The path of progress is steady and up, but there are plenty of detours along the way. The line is not straight, but it leans ever more so upward every day.

1870: Something happened around 1870. The Dark Ages had long passed, the Renaissance morphed into an Age of Reason and science and discovery flourished. And most important, enough humans finally existed to hit a critical mass, causing an explosion of economic growth the world has never seen before.

 

Gross World Product

 

As the graph above illustrates, economic growth was painfully slow until 1800 where we see a slight tilt north. In 1850 the Gross World Product turns decidedly higher and goes parabolic in the 20th Century.

The pace of wealth creation accelerated like never before. Things got better. A lot better! Really fast.

Pockets of suffering still exists. The 20th Century experienced two world wars, Stalin’s Russia and Mao’s famine. Many people suffered and died. But many more lived better and longer, too.

Inequality: The buzzword of the day is inequality. The rich seem to get richer while the poor get poorer. But is this really true?

Inequality still exists and surely always will as long as more than one human is alive. There has been an uptick in income and wealth inequality recently. Compared to historical norms we live is really good times.

The wealthiest people alive in 1930 rarely, if ever, had indoor plumbing. Today, with rare exception, we all enjoy indoor plumbing.

Medicine is even more widespread. Polio is a rare disease; small pox eradicated. While indoor plumbing eludes many in third-world (I hate that term) countries, modern medicine is brought in on a regular basis. Fewer women are dying in childbirth. Men have fewer dangerous jobs shortening their lives. Children live beyond infancy at a very high rate. These numbers have never been so generous ever in history. Things are as good as they’ve ever been, and believe it or not, it’s still getting better and better every day.

Walter Scheidel in his book, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty -First Century outlines how inequality is on the decline and has been for a long time. Periodic catastrophes level the playing field immensely, but there seems to be a natural level of inequality. The good news is that everyone can have a significantly high standard of living even on the lower ends of the income distribution scale.

Optimism is the Best Financial Choice: If you have to make the call, always bet things will get better. For thousands of years things have been doing just that and at a rapid clip for over 100 years.

Warren Buffett has a reputation as a master stock investor. People spend a lot of time dicing his decisions looking for the secret sauce. I can save you the time. Buffett is the most optimistic guy you’ll ever meet. Even his good friend Bill Gates acknowledges surprise by how upbeat Warren always is.

Buffett came out in support of Hilary Clinton in her bid for the presidency. When Donald Trump won many called it the end of America and probably the world. A bit dramatic, I think. Buffett made it clear America has the “secret sauce” when it comes to economic growth and that America will do just fine even with Trump as president. I personally think the human race has a bottle of that patented sauce.

Yes, some people have it bad. Cancer might not feel like a time to be optimistic. But this isn’t about the individual level. We are talking humanity here. As a whole things are chugging higher all the time with only periodic setbacks.

The stock market reflects these facts. In the U.S. the stock market has powered higher decade after decade. Even the Great Depression is a minor speed bump when the charts are viewed over large time periods. It looked scary up close and personal. Then, a few decades later it looks like a minor dimple on the chart.

The 1987 stock market crash is the same story. The Dow dropped 22.6% in one day. The decline requires you squint your eyes to make it out now.

To the Future and Beyond: Life is good and getting better! Calls for the “end of the world” have been with us from the beginning of time. It’s a story that sells, but never delivers.

The future is bright. Today isn’t so bad either!

America and the world will have challenges ahead. That doesn’t mean optimism is wrong or dead! It is only an acknowledgement of reality. Every challenge will be confronted and re-challenged as we boldly go where no species has gone before.

Don't miss out on the progress happening all around you. Don't let polarized politics harm you financially. Use the "secret sauce" the wealth have used forever to build wealth.

Don’t miss out on the progress happening all around you. Don’t let polarized politics harm you financially. Use the “secret sauce” the wealth have used forever to build wealth.

Back to Politics: I know, I know. We never had a president like Trump. True.

We never had a Founding Father like Franklin either. How could such a womanizer, a masher, be allowed to engage in nation-building after the things he did.

And a president who fathered a child with his slave! How will the nation survive?

And don’t forget the evil of the Trail of Tears, a duel and murder and the death of a president’s wife.

A Civil War didn’t slow us down. A great president with massive flaws sewed the nation back together.

FDR tried to manipulate the Supreme Court to no avail. Talking of the Supreme Court, these are the people who gave us Dred Scott! These flawed men (most of them were men) did something wonderful as a whole. As bad as they were, their flaws made us stronger, more vibrant.

Politics is NOT more polarized than ever before. The First Lady is miffed, but not dead or even scuffed.

Things are not going to hell in a hand basket. The economy may falter from tariffs, but before long we’ll scale even higher heights. It’s almost unbelievable and then it happens again!

Never lose faith. Optimism is always the best choice. Things are good and getting better. We live longer and better lives. Economic and personal wealth is at sky high levels and rocketing higher! And any decline in the markets is a correction soon to be followed by greater heights!




It’s not a Dream; Success is Real: I’ve been around long enough to personally hear many of the doomsayers. They fall by the wayside every time. Yes, much of the Western world in more polarized than it has been for many decades. Let me remind you of the above chart. From 1850 to 1900 the U.S. exploded higher economically. During this time we experienced the Civil War and what many in the south thought was the end of the world, the freeing of the slaves.

Not only didn’t the world end when we took the moral high ground, we excelled. But we had to experience the debauchery and evil of slavery to propel us from the ignorance. We certainly don’t want to go back. It will require vigilance to retain our hard fought gains.

This is not the End: In recent times we were told the U.S. was caput because  a womanizer like Clinton was president. Did anyone take the time to research Franklin and Jefferson? Caput! I think not!

Then Bush was a sign of the End Days. Nope! President George W. Bush proved to have human failings, but we did fine.

President Obama was the worst. I had clients who came into my office saying their life’s mission was to prevent Obama from getting a second term. What a waste of time! The economy grew, the stock market was up and America and the world did great after a serious economic debacle.

And now we have the hated President Trump. Many tears have been shed. The Supreme Court is forever tainted (unless you read few history books where you’ll discover it was always tainted). I’m not a fan of Trump. I disagree with many of his policies. But not all! An honest person will find issues where agreement exists. Who doesn’t like lower taxes? We can debate who gets how much and the fairness of taxes, but com’on! I also agree with more infrastructure spending. I’m against tariffs which are nothing more than a tax on consumers. Call it a quasi value added tax, if you will.

The Beginning: In the darkest hours of World War II, Winston Churchill gave encouragement to the British people as Nazi bombs decimated London. His immortal words are as vital today as they were then as we worry ourselves sick over geopolitical events. His words are a reminder things always get better and setbacks are only temporary.

Now this is not the end.

It is not even the beginning of the end.

But it is, perhaps, the end of the beginning.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 



Paying Off the Mortgage vs Investing the Difference

You don't own your home until the mortgage is paid off; the bank does. Mortgage payoff tips you can use to become debt-free. Dave Ramsey #wealthyaccountant #daveramsey #mortgagetips #debtfree #mortgagefree #mortgagepayofftipsOne of the most difficult decisions you can make as you struggle toward financial independence is deciding between paying off the mortgage quickly or investing the excess funds instead. The water is more muddy when we see a roaring stock market for as far back as the eye can see coupled with low interest rates. The answer seems simple and obvious: pay off the mortgage as slowly as possible and invest the difference in broad market-based index funds.

You might also think people well past the mile-marker of financial independence would have an even easier choice. Once the risk of a market decline passes due to your excessive net worth, it is tempting to automatically choose the course with the greatest opportunity for maximum gain.

Your favorite accountant has struggles with the same decision: pay it off  or invest. It all came to a head recently when the topic came up on Facebook. I gave my opinion and the fur flew. Before long my inbox was stuffed with requests for a fully fleshed out explanation of my position.




My Struggle

For someone working his entire life in finance this shouldn’t be a problem, you’d think. But it isn’t that simple.

Any first year accounting student knows leverage (debt) can spike returns. Less understood—for reasons I can’t understand—is the effect leverage has when the investment goes down or even treads water. Leverage does enhance profits nicely in a climbing market. When the market goes sideways the interest expense of leverage starts to hurt. In a down market is turns brutal with losses magnified and interest accruing to rub salt in the wound.

When it come to real estate a false sense of security sets in. Unlike securities, real estate doesn’t face a margin call if prices decline. The bank will not borrow you more in such cases, but you don’t have to come up with more money over the regular payment. As long as things eventually turn around you are fine. At least that is the theory.

Should you pay off your mortgage early or invest the difference? Here are mortgage payoff tips to help you decide between investing and paying the mortgage off faster. #wealthyaccountant #mortgage #mortgagetips #mortgagepayofftips #creditscore #DaveRamseyArmed with this information I begin my journey. I bought the farm (No, really! A beautiful 10 acre farm with hiking trails and a pond. What did you think? I died?) in the mid 1990s for $120,000. Five or so years later the mortgage was down to ~$40,000.

My old farmhouse needed serious work. We jacked up the house to secure the foundation, remodeled the original home and made serious additions. The Accountant household went from 950 square feet of living space to over 3,000. (No, I’m not proud of my extravagance.)

The remodeling and additions cost more than $200,000, all put on the credit card, aka, the new mortgage. The Accountant household had a serious debt now.

The good news is that I had no other debt and a net worth approaching eight figures. Our home appraised at $400,000 and change. Borrowing was relatively cheap and there was no real risk to such indebtedness in my situation. I did make payments well beyond the minimum to pay the house off sooner. (Some habits are hard to kill.)

By the time the world ended in 2008 – 09 I had the mortgage down to ~ $100,000, maybe a bit lower. The stock market tanked and I had plenty of room to borrow more against my home.

With my credit the bank was willing to give me pretty much anything I wanted. They needed to lend to low risk people and businesses and I was the lowest of risks. Since I have a farm I qualify for special loans only available to farmers. As luck would have it, I snagged a 2.125% loan fixed for 30 years!

Not being one for half measures I borrowed nearly $300,000, reducing my home equity to the lowest level in my life. I dropped the cash in the market.

It wasn’t a long wait. The market stopped declining and then started rising in fits and starts. For almost 10 years now my gambit has worked well. I made extra payments once again, but not as much as in past times.

Five years ago the mortgage was ~ $300,000. The market turned the borrowed funds into a bigger number. I refused selling the investments. But I increased my payments to reduce the large number on my loan statement. (It bothered me!)

Income from my practice now started going into loan reduction over more market investments. Yes, the market kept climbing, but I wanted that mortgage much lower. I found it disturbing to have the highest debt level in my life when I enjoyed the highest net worth of the same life. Even my business lived debt-free. This house thing, while a good move according to first-year accounting students, occupied my thoughts better used on other projects.

I also turned up the frugal. I learned to cut costs like a crazy man! Coupled with a nice business income I was able to shave $50,000 or more from the mortgage each year. My goal was to reduce the interest expense. Yes, the rate was low, but $300,000 at 2% is still $6,000!

Last year the mortgage collapsed to under $200,000. The race was on. Without resorting to asset sales I refocused my efforts to reduce the mortgage. By the end of last year the mortgage stood a hair into the six figures.




The Final Assault

There are several dry-erase boards around my office. Many are filled with cryptic messages on my personal and business finances. I use a type of shorthand known only to me. Sometimes employees ask what all the gibberish means. I tell them if it’s pertinent to their job.

Here is why you must start paying extra on your mortgage today. Investing the extra mortgage payments instead does not work. Pay off your mortgage in 5 years or less. #wealthyaccountant #savingmoney #personalfinance #moneyA dry-erase board outside my office door has a series of numbers. The cryptic numbers were my madness to retire the farm mortgage. The original goal was to pay $56,800 on the mortgage this year, including interest. (Don’t ask why $56,800; it’s along story.)

As I entered summer it looked as if I could meet my goal. By late summer I met the goal for the entire year. Something snapped in my head when the mortgage hit $58,000 and change. I wanted it gone and now!

In the last two months I drove the mortgage from $58,000 to under $16,000. After I return home from FinCon in Orlando I will move money from a side business to retire the mortgage.

For the first time in my adult life I will be debt free before Halloween. That sounds so insane to me. I can scream “I’m debt-free!” to Dave Ramsey for the first time since the early 1980s while my net worth is well into the eight figures. I kept the mortgage to pad my net worth when the advantages would do absolutely nothing for my lifestyle.

And once again I was forced to reconsider my choice as the course of financially savvy individuals raked me over the coals on Facebook.




Why I Took the Course I Did

When I gave my opinion in a finance group on why I felt paying off the mortgage was better than investing the difference I was mobbed. In a matter of moments there was nothing left but a grease spot  on the pavement.

My argument was simple. Paying off all debt not only reduces risk of default, but frees all the time spent thinking about managing the debt. That was my come to Jesus moment. I discovered I was spending more time thinking about my $300,000 mortgage than the millions I had in investments!

The mortgage was always planned. Payments were on automatic, but extra payments had to be considered. I also kept thinking about how long I wanted to keep this darn thing. Am I willing to keep a mortgage until I’m 70 just to kite the difference I could make in the market? The answer, once I seriously thought about it, was NO!!! And the more I thought about it the more I realized I was wasting quality time on a debt I don’t even need.

The only argument against my solution was that the market does a heck of a lot better than the 2 1/8% I pay on the mortgage. Once I thought about that I realized it was a stupid argument. Yes, it worked well for me since the market has been climbing with barely a hiccup for a decade. What they were really saying is that the ends justify the means. I disagree.

Investing versus extra mortgage payments? It isn't an easy choice. Learn the best choice for you. #wealthyaccountant #mortgage #money #mortgagetips #payments #investments #invest #timeI won because the market was up a lot. How would I look if the market pulled a 1968 to 1982 when the market went nowhere for 14 years? Not nearly as smart, I would gather.

After careful consideration I came to the conclusion (took me long enough considering my age) that paying off the mortgage as fast as possible, regardless of tax deductions or the interest rate, is the only correct course. Here is why: The mortgage is guaranteed while the market is not. The market may climb or it could sink or stagnate. It’s happened for long periods of time. We sometimes forget our history. The mortgage is always there until paid, plus all the interest. No reprieve.

The other expense a mortgage has is time. Even with payments on automatic you still need to manage funds to make the payment. You either earn money or transfer from an investment into the account funds will be drawn from. Don’t forget or there will be penalties!

Time, more than interest or money, were the deciding factor. You might think debt doesn’t take time and allows you to spike your investment returns. Well, it does take time and thought and planning. That time comes from personal time. And debt is a harsh mistress when investments turn south.

I was a Dave Ramsey Endorsed Local Provider (ELP) for years. I have no problem putting every expense I can on the credit card. I pay it in full each month with auto-pay. I also make room for modest mortgage debt. I’ve changed my tune.

I think debt-free is the only way to go. Even if you have massive wealth outside the debt with zero risk to your FI (financial independence) status, it is still better to retire the mortgage on the primary residence, second home and rental properties. (Income properties do very well without mortgages, even in terrible economic times. Hard to lose when there are no monthly payments.)

There is one last thing I noticed as I approach the final payment on my home. Mrs. Accountant and I are giddy as school girls. (I don’t look good in a dress so no ugly comments.) Breaking the million dollar net worth marker didn’t get so much as a “Yippie!” out of Mrs. A. Every time I go to Farm Credit and drop another 10 grand or so she walks on air.

So do I. I must confess I feel a heavy weight lifted off my shoulders. I can’t believe paying off a debt that didn’t even register in the household budget affected my subconscious so much. But it did! It is impossible to understand how much debt affects you until you remove it. How much weight bares down on you until it is removed.

I always thought it was about how much I was worth. No more. I think you are a helluva lot richer without debt than with a massive net worth. I feel better about myself financially now than ever before. I always knew I owed somebody. Now that is gone and I can yell:

“I’M DEBT FREE!!!”

I hope you will join me. You can’t believe the colors on this side of the fence.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!



Where to Invest Your Money When the Stock Market is Overpriced

How do you tell if the stock market is too high? When do you sell? Or buy for that matter? Read this article to learn the right time to sell a stock. #wealthyaccountant #stocks #stockmarket #investing #investingtips #bonds #moneymarket Investing for beginners. Investing for wealth in your 20s or 30s. In or near retirement.The stock market is in nose bleed territory and doesn’t seem to want to stop climbing. Economic risks are everywhere. Debt levels are high, interest rates are climbing, a trade war is breaking out and the market valuations are at near record high levels.  In times like these investors get scared. The bull market is long in the tooth and “due” for a serious correction. But then again, using a gambling term might not be the best choice when investing your money.

It is rare when a client doesn’t ask me where to invest their excess funds. Virtually every client wants to pull money from the market but doesn’t know where to put the proceeds. Lump-sum payments and accumulated cash in money market accounts cause concern when the stock market would have been a much better choice.

At these level we might ask, How much higher can this go? How much longer before disaster strikes? And then the market indexes keep marching higher.

Retirement makes it even worse. If your nest egg is enough for a comfortable retirement, but lacks excess, the market climb causes concerns. Nobody ever lost money taking a profit, goes the old Wall Street adage. But is it a smart idea to sell when the market is high considering it is almost always considered high? And if selling is the right choice, where do you put the money? We will explore those important questions today, before catastrophe strikes.




Are You High

There is an advantage to age. Once you’ve lived through a few market cycles you begin to realize the best choice is to stay calm. Newscasts will tell you the sky is falling. It isn’t.

In the 1970s and 80s Joseph E. Granville was the guy to listen to on stock investing. When Granville spoke the market moved. He had a system for timing the stock market and a knack for promotion. (He had books to sell.) The Pinterest placard in this post of his 1976 book is from my personal library. (I’ve been reading investing books for a very long time.)

Robert R. Prechter Jr. is another guru from a past age (my age). Prechter published The Elliott Wave Theorist in the 1980s.

When is the best time to sell the stock market? Selling an investment is just as important as how you buy the investment. And where do you put the money once you sell? #wealthyaccountant #investing #indexfunds #retirement #selling #money #cash

The only way to time the stock market. Don’t.

Both Granville and Prechter were market timers; something we know is a bad idea when it comes to investing in the market. Warren Buffett doesn’t write books; he writes annual reports for his company. People write books about Warren Buffett. This opposed to market timers who write books on their system and sell it to the masses. See the difference. One makes money and people write about them. The others make their money selling you books on how they think you should invest. Think about that for a moment.

I bring up Granville and Prechter for a reason. These and others called for a serious market declines in the 80s. I remember watching the Nightly Business Report where a guest expressed with great confidence the Dow Jones Industrial Average would soon test the 1932 lows from the Great Depression because the Elliot Wave theory predicted it. People actually paid for that kind of advice!

When the Dow was under 1,000 it was overpriced. It was overpriced in 1932 then is bounced off the low 40s. (The DJIA closed at 41.22 on July 8, 1932; its all-time low.) You see, when the Dow was that low people had real reasons to believe the world was ending, at least economically. Even with the Industrials at 40 and change the market was high because these companies were losing money. Things were bad, really bad. And getting worse.

Then the Dow reached 10,000 and it was really high, overpriced and ready for a decline. Well, before the world actually ended the Dow notched 20,000. Of course it was painfully obvious the market had to decline. Just look at the political climate. How can it possible go higher?

Unfortunately we will have to wait for the permanent decline in the market. Yesterday (September 19, 2018) the Dow closed at 26,405.76. And you guessed it. Clients still want to know if they should sell their index funds and move to cash.

I provided plenty of links above to helpful sites on the issues I discussed. I didn’t link to Amazon for any of Granville’s or Prechter’s work. Granville actually published another book in 2010. I didn’t know that until I researched this article. It sounds like more market timing advice to me. And that is why I didn’t link to their work. I think it is terrible advice.




Perspective

Let’s bring the current stock market into perspective. At the last cycle market high the DJIA was around 13,930 at the end of October, 2007. If you had the worst of all luck and invested a massive windfall (the lottery sent you a gazillion dollar check) at the exact peak you would be up just shy of 90%! (89.55% for home-gamers.) Index funds make it easy to match the market. An all-market or S&P 500 index fund would have yielded slightly different results, but still good gains all the same.

When is the best time to buy a stock or index fund? Should you buy or sell at these levels? Inside are clear answers to investing your money in your 20s, 30s or any age. Beginners and experienced investors face the same question on when to sell and what to do with the proceeds. #wealthyaccountant #beginners #investing #tips #ideas #help #money #cash

Should you buy the stock market at these levels?

The lesson is learned. Even if today is the absolute worst day to invest, a decade down the road you still have pretty good odds it will still be a good call.

I’m not calling for the market to climb high, by the way. I might be crazy, but I ain’t dumb. I have no clue where the market is headed. Looks high to me and always does. So I bite my lip and keep invested, laughing all the way to the, ah, index fund.

The long game is always higher. Jim Collins has written extensively on the stock market and why it always goes up. Notice I didn’t say the market never goes down! The market does decline from time to time, but always climbs higher after the temporary pullbacks. The only time this will not happen is if civilization fails. If that is the case you have bigger problems than a stock market decline.

Liquid Funds

The information above doesn’t mean everyone should be fully invested! Those in or near retirement may need a few years of liquid cash in money market or bank accounts regardless the level of the stock market. Businesses also need working capital that is liquid. Money that has a five-year or longer horizon probably deserves to be in equities.

I intentionally left bonds off the list. Bond yields are low. Serious losses occur with long-dated bonds as interest rates climb. If rates stay low you still only get a meager return. I see no reason to consider bonds, except for pension funds, banks and insurance companies.




Alternatives to Index Funds

The S&P 500 and DJIA are up over 300% from the lows a decade ago. It is understandable some people have the jitters. Panic selling is the worst of all choices. If a market decline causes you to lose sleep it might be time to take a few chips off the table.

If you receive a bonus or other windfall it still makes sense to drop the lump-sum into a broad-based index fund and live with the results. The evidence is clear this is the correct choice. You might be unlucky and pick the worst day of the decade. Odds are you will not. But if you do you still have an excellent chance to enjoy nice returns in a relatively short period of time.

If your temperament doesn’t handle the market well at these levels there are options. First, pay off debt. You can’t lose retiring liabilities. The car and credit cards must be paid in full. The mortgage is always a tough call. (Stay tuned for an upcoming post on paying off a low interest rate mortgage versus keeping the mortgage and investing the funds for a higher return.) I feel paying off the mortgage makes sense for most people. “Safe” investments don’t pay as much which makes them less safe than perceived.

Once all debt is eliminated you still need to invest liquid funds. There are few good choices at this time. Capital One 360 and Discover Savings offer competitive interest rates, but they are still low comparatively. Vanguard’s money market fund is another alternative worth considering.

The Best Investment

I know how hard it is, kind readers, but a broad-based index fund is the best choice for money with an investment horizon of 5 years or longer. The market is high. It’s always high. The best time to invest has always been now.

Granville and Prechter convinced a generation they could time the market. Nobody does it consistently. The surest path to financial success is to tie yourself to the economic engine of virtually the entire economy. As the economy grows, so do you.

The best and only advice is to stay fully invested all the time without leverage (using borrowed money to buy the investment). The exception is working capital for businesses and liquid funds for household expenses of a few years, a bit more if retired or nearing retirement.

Close your eyes if it helps. Bear markets tend to end quickly.

 

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 



Planning a Spending Fast

A spending fast is as vital as a food fast, rejuvenating your financial muscles. Personal finance and financial independence require a spending fast. #spendingfast #spending #personlfinance #earlyretirementFasting is a refreshing way to reset your body’s internal regulation. The benefits of fasting include weight loss and energy gain. Intermittent fasting can give you the same benefits of longer term fasting without shocking your body so hard.

Fasting is necessary for most people due to awful eating habits. Processed foods and sweeteners wear the body down, requiring a fast to cleanse the toxins out. Periodic long-term (multiple day) fasts are punctuated by several shorter fasts. Continuous intermittent fasting can train your body to burn fat while reducing cravings and increasing energy.

Bad habits are solved with a reset. You start small so success is higher. Starting with a four-day or longer fast is certain to end in failure for all but the most determined. The longer fasts also require medical supervision. Starting with intermittent fasting or a one-day fast makes a lot of sense. The timeframe is reasonable and most people can stick with it, therefore, the benefits are received.

As much as the body needs cleansing, so do your financial habits. Spending fasts have been around as long as money. Spending fasts were a natural part of money management until modern times where spending opportunities are everywhere.

Mass media and opportunities to spend at every corner (and most spots in between) encourage the growth of terrible spending habits. Left unchecked, these habits will be a cancer on your financial life. Dreams of financial independence and early retirement will burn with the bad habits. The natural cure is a spending fast and you don’t even need a doctor’s note.




Ground Rules

Like regular fasting, a spending fast has different levels of commitment. The idea is to start small, building your financial muscles before advancing to the next level. As your financial skills increase, you can engage in some truly historical spending fasts. And the good news is you get to keep all the money.

Before we begin I must point out spending fasts are not about frugality or cutting spending. The fast is designed to train you mentally and socially to live a normal life without money as part of every step. Enjoying a walk in the park with a significant other is an awesome and free experience. You can leave the wallet at home. Another lesson to learn is to walk out of a retail store without buying anything (or stealing it) if the item you were looking for wasn’t available. Shopping for the sake of finding a “good deal” is the mother of poverty.

I will outline 5 spending fasts starting with a simple financial purge all the way to the hardcore. I recommend starting small and working up. If you never manage a Level 5 Spending Fast in your life you are still a good person! Not everyone can handle a dietary fast of a week. Most will never manage it. Your health may not allow. The same applies to money. Anyone can manage the first few lower levels, but struggle as they approach the highest level. You may not want to attempt Level 5 in the same way you may never attempt to go without eating for a full week. It’s okay. Each spending fast level will help you recharge your financial muscles worn out by the constant bombardment from mass media. All fast levels are beneficial!

Also, use common sense. Turning off the heat in January in northern Minnesota is not a spending fast; it’s stupid. The idea of the fast is learn money doesn’t buy everything, even the most important things. Your geographic location will determine additional rules from those presented here. Safety first! If you require medication, you follow doctor’s orders. Don’t do anything that risks your health or that of your family or anyone else. Got it? Good.

Let’s get started.




Level 1: The Starter Fast

Breakfast (break the fast) is so named because it is the first meal of the day after not eating since dinnertime, 12 or more hours in the past. Technically you engaged in a mini-fast every day.

A spending fast doesn't have to be a lonely road. Discover all you're missing when you put your credit card down. #spendingfast #spending #creditcard #frugal livingYour starter fast should be just as simple. Brown bag lunch to work. Better yet, leave your money at home one day per week. Driving is still technically spending, but you will plan ahead and avoid the need to buy gas the day of your fast.

The Starter Fast is short-term and in most cases less than a day. You need identification and/or driver’s license when driving or away from home, but cash, credit/debit cards and the checkbook stay at home. You can still pay regular bills as always. The light bill still gets paid. The idea is to strengthen your financial legs; learning to say no to minor spending habits. The first step is to stop spending at least a few days a month at work. No office pools, dining out or other crazy spending that takes place where you work. Work can be darn expensive and it destroys your financial goals! Your work should support your dreams and goals, not suck the financial life out of you.

Level 2: Serious Spending Fast

Level 1 is the training wheels level. Everyone should practice Level 1 fasting often, in fact, virtually every day.

From this level on we will engage in a full day or longer spending fast. At Level 2 you are allowed to plan ahead. Fill the car with gas beforehand. Stock up on staples to take you through the fast. Your habits will not change much yet at this level. The cable is still ticking away; so is the electric bill. You pay those bills timely; late fees are considered spending at this level and are punished with a stern look. Your spending fast at this level is more a shuffling of expenses. Gas is paid for before and after the fast, but the consumption is still the same. The real benefit is avoiding foolish spending. Lunch at work comes from the home fridge. No tavern detour on the way home from the office. Office coffee instead of a Starbucks detour

Level 2 can start at a full 24 hours and move up. Try one day where no spending is allowed for a full day. This is more than just a “leave your money at home when you go to work” plan. Online shopping is not allowed. Money is stripped from your daily lifestyle. Now is a good time to see what’s hidden at the bottom of the freezer. Past spending will fuel your daily needs. If you run out of something, you find a substitute or do without. The exception is safety related issues. Medicine is still purchased if necessary. If injury requires medical treatment you get said treatment. Yes, it’s spending, but this program is to teach financial skills, not harm you.

Once you start building your financial muscle, work from one day to two, then three, until you can handle an entire week spending fast, including weekends. Yes, even at Level 2 the challenge starts to make the muscles sore. That only means its working. Once you can do a week at Level 2 it’s time to move to Level 3.




Level 3: The Power Fast

Now we get serious. Once again we start at a single 24-hour period and move up to a week or longer. Pre-paying for certain items isn’t allowed. For example, driving the car is an expense regardless when you fill the tank so biking or walking to work is the only option.

Ideally, you want this fast to go for several days. The light bill and cable will still operate, but most everything else will require consuming only what you have at hand. The fridge and freezer will be your food supply. The rent or mortgage payment of course still get paid; the same with other debt. In fact, since you are spending on nothing else it might be a good idea to bury that money in debt reduction. Most people at this level will not have debt so the money will go to the First National Bank of Wallet, aka, your index fund. Saving isn’t spending; neither is paying off debt. Interest accumulating on debt is spending so I recommend taking an ax to it.

Level 3 is a lifestyle change. At this level you will start to learn how to live without money. Money becomes a tool only, instead of a means of distracting you from life. Acceptable spending is limited to minor recurring bills like utilities (phone, light, heat, Netflix).

Level 4: The Lifestyle Fast

Remember all the stuff you didn’t buy in Level 3? Well, I bet you found a way around the spending problem by shifting it to somebody else.

At Level 4 you are not allowed to accept spending from others. You might have accepted a meal from a co-worker as a work-around. If the weather was hot you might have used that as an excuse to enjoy air conditioning in a public building. Shifted spending ends now! The shifted spending mindset is the same one that tells you to steal all the soap from your hotel room, justifying the action by claiming it’s a minor thing. Unfortunately you are stealing and it is a form of shifted spending we don’t tolerate around here. Getting someone else to foot the bill is still spending! All you’ve done is shift your spend thrifty ways to somebody else’s pocketbook. Good friend you are.

Plan your spending fast the right way and start living the good life. Control your finance; control your future. #spendingfast #frugal #frugalliving #freedom #money #moneyfreedonOnly the barest of necessities are allowed at this level. If you truly emptied all food sources in the house you may consider (I said consider) buying the most basic of food. This will be the healthiest and most basic stuff. I’m talking lentil soup folks. Maybe beans, the ones you soak all night and simmer all the next day. You’ll live.

The ultimate goal is to power through a month at Level 4. I encourage multiple food fasts at the same time. This is about living life at its most basic, where the real living takes place.

Level 5: The Insanity Spending Fast

This level is so diabolical my fingers are bleeding as I type. Level 5 requires a minimum of one week and ideally a full month. And everything goes.

Cable and Netflix are gone and unless your local climate doesn’t allow, you pop the main breaker to the house. No heat, air conditioning or electricity. This is brutal! Electricity is the ultimate shifting of spending. Electricity is cheap and versatile. For this fast you will learn to live in harmony with nature rather than forcing the world to your demands on the back of energy resources.

Once again, if your climate or health doesn’t allow for such extreme fasting, then don’t do it. You still need to take and fill prescriptions. If it’s well below freezing you still need to heat the house to above freezing. Broken pipes are spending! But don’t use climate as an excuse for your minor discomfort. A cool house (or humid and warm in the summer months) is no excuse to fudge on the fast. Beginners might want to plan this spending fast around a time of year where they experience the least discomfort and where utilities are least needed.

In addition to the fasting from Level 4, you will need to adjust to nature. When the sun goes down; you go down. Artificial lighting has given us a false sense of reality. This fast will break that illusion. Without electricity, TV and the computer will no longer occupy a large part of your day. You will rediscover library books and books from your personal library. You’ll also rediscover the lost art of communicating with neighbors and friends. If you have a significant other she will buck this fasting idea you have until she discovers you pay more attention to her. Real, undivided attention. It’s not a brave new world, just the one that existed from the beginning of time until the advent of modern society a hundred or so years ago.




Recap

A final recap of each fasting level is in order.

Level 1:

  • A simple short-term fast similar to intermittent fasting
  • This is more a “leave your money at home” fast for the workday.
  • Most spending is still allowed.
  • Driving to work is allowed; the stop on the way for Starbucks coffee is out. Drink office coffee. You will not die.

Level 2:

  • The minimum is one-day for this fast and ideally a week or more is needed.
  • Fill the car and stock the fridge because when it’s gone it’s gone.
  • Medical is always allowed since we practice safety first.
  • You still have Netflix and/or cable to entertain you.
  • No stops at the tavern on the way home from work.
  • You can accept gifts that are disguised as spending (co-worker buy lunch) if you must.

Level 3:

  • Stockpiling is out except for food for home preparation.
  • Burning gas still in the tank is de facto spending so walking or biking to work is your only option.
  • You always pay the rent and mortgage because late fees and penalties are spending. You also still pay your taxes on time since interest and penalties are once again spending.
  • You are encouraged to use the extra money you’re not spending to reduce and/or eliminate debt. If no debt, then invest in your index funds. Investing isn’t spending.

Level 4:

  • Level 3 is still in effect.
  • Shifting spending is out. Someone else spending on you is shifting your consumptions habits to others. How rude!
  • Basic, simple, nutritious food only is allowed. Stock piling doesn’t help at this level. Lentil soup and other simple and healthy fare is your diet during this spending fast.
  • You are reaching Stoic levels.

Level 5:

  • Level 3 and 4 restrictions still apply.
  • Cable and Netflix are out.
  • If climate and health allow, pop the circuit breaker for the house. Electricity is still spending.
  • Ideally you want at least a week to a month for this fast.
  • Learn to live in harmony with the environment.
  • Read more.
  • Spend real, quality time with friends, family and loved ones. Spend real deep emotional time with your significant other. Without the distractions of modern life she will be the center of your world. I bet you’ll love what you find.

There is still one unmentioned level: Level 6. I’m numb just thinking about it. If you think you are ready for an even more rejuvenating spending fast you’ll have to take lessons from this guy.

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 



How Small Amounts of Money Grow Very Large

Small investments can grow into mountains of cash. Learn how a backwoods accountant grew an eight figure net worth. #investments #indexfunds #personalfinance #financialindependencePeriodically I get a message from a reader congratulating me on my financial success in life. The topic also comes up in consulting sessions more than I care to mention. The inquiry is always respectful and congratulatory. These people think I did something extraordinary when in fact it was actually a straight forward and simple process.

Part of my financial success is a direct result of living into my 50s. Time does a lot for net worth. Another huge advantage is I spent my entire adult life (except for those 14 months I played janitor at the church after I got married) self-employed. Business allowed me to control my income and taxes thereon more so than if I have a W-2 job at the local mill.

I’ve shared the story you are about to read many times in my office. By writing it down I hope it is easier to grasp the concept and how you can build a very large nest egg in short order. I get the feeling when I speak this concept it goes in one ear and out the other. I get it. However, this is too important—maybe the most important part of personal finance to reach financial independence—to just let it go as is. Once you grasp today’s message you have all the ammo you’ll ever need to control finances in your life and create a massive liquid net worth.




Awesome Results!

The discussion usually begins when a reader checks the Rockstar Finance Net Worth Tracker and notices their favorite accountant floating in the stratosphere. The good news is things aren’t as rosy. It’s been a while since I updated Rockstar (actually, I never updated after providing my original net worth) about my financial condition. A good market and increasing real estate values have my net worth several notches higher than listed.

I say “aren’t as rosy” because people tend to shoot whoever is in first place. (I have bullet wounds to prove it.) People also give me too much credit due to past success. Unfortunately, I’m not right because I have more. (Repeat that last sentence a few times until it sinks in. It will be useful when you want to give me credit when credit isn’t due and in your personal life when you think you’re right because you are so awesome.)

Eight figures is a worthy accomplishment, no doubt. What I did to get there isn’t as hard as you think. Let’s get to the math proving I’m a country accountant who fell into it and came out smelling roses.




Once Upon a Time There Was an Accountant. . .

Explaining how I amassed an eight figure net worth requires we use simple math. (Country accountants can’t think too hard. Hurts the head.)

First, we need to know a bit about the general equity (stock) market. The S&P 500 averages ~ 7% per year, plus inflation. Add it up and you get ~ 10% for an expected long-term return. Jeremy Siegel did the hard math proving these simple final numbers.

Annual returns are all over the map, but time smooths out the bumps and Siegel is right, the market pumps out around a 10% return over most extended period, dividends included. So nobody reaches for their calculator, we will use another simple yardstick: the Rule of 72. Simply stated, the Rule of 72 says you can divide 72 by the rate of return to determine how long it takes to double an investment. In our case things are about as simple as they get. Divide 72 by the 10% average market return to discover your S&P 500 index fund doubles every 7.2 years or so, depending on the market on the specific day.

Want to be a rich fat cat? Then follow these simple rules to build a massive liquid net worth for early retirement. #personalfinance #FIRE #earlyretirement #wealth #fatcatOkay, so we know we double our money every 7 years. Sometimes the market gets behind, other times it races fast forward. In the end we end up doubling our investment every 7 years and a bit.

Mrs. Accountant and I met in 1987, caused the stock market crash of ’87 and then got married in ’88. (Okay, we had nothing to do with the October 1987 stock market crash. It sounded impressive though, didn’t it?)

In 1988 Mrs. A and I decided investing was important for our future. Roth IRAs didn’t exist and traditional IRAs had a maximum contribution limit of $2,000 per person per year. Well, you can guess what Mrs. A and I did. Yup, we dumped $4,000 into our IRAs and got a tax deduction. Capital gains and dividend distributions were reinvested and untaxed because they lived inside a tax sheltered IRA.

Here we need to start some simple math. No need to grab your calculator; fingers and toes should suffice.

We were 24 year old whipper-snappers back then. Your favorite accountant was as sharp as a turnip green. But we did manage to engage the gray matter long enough to fully fund our IRAs and good thing we did.

Everyone, ready your fingers. We need to know how many 7 year periods passed between the ripe old age of 24 and the current age of 54. Let’s count, shall we children. Twenty-four goes to 31, to 38, to 45 to 52. STOP! That will be close enough for rural work. Also, we will double every 7 years and forget about the .2 thingy, okay?

We discovered 4 doublings of our original investment. $4,000 turned into $8,000, then $16,000, then to $32,000 and finally $64,000. For the record, there was nothing Mrs. A and I wanted when we were 24 that would make us feel $64,000 of pleasure today.

We’re not done! Remember we stopped at age 52. Add a few more 7s (52 to 59 to 66) and we discover the account will double two more times before we reach full retirement age for Social Security and nearly a third doubling by the time we reach mandatory distribution age for our IRA at 70 ½! So, $64,000 turns into $128,000 before racing to $256,000. If Mrs. A trips me before collecting income from the IRA we will be looking at north of $400,000 by the time Uncle Sam tells us we must withdraw from our IRA, or else (pay a penalty)!

The current value of that original $4,000 is now around $64,000. Not bad. It’s what we call a 16-bagger (an investment that is 16 times the original value) in the industry.




Reality Check; Isle 4

$64,000 is a far cry from an eight figure net worth. But Mrs. A and I stuffed more than $4,000 away each year. Those first years I worked out of the home (a remodeled basement). Costs were low. No driving, no office building and no additional insurance or utility expenses. We lived on ~$9,000 per year the first few years we were married. We walked all over town as love-sick birds. We had it made!

You don't need to inherit a fortune to be rich! Small amounts of money grow rather large rather fast with three simple rules anyone can follow. In fact, the lazier you are the richer you will get. #retirement #earlyretirement #investing #indexfunds #networth #nestegg #personalfinance #FIREThe first year investment in the IRA rose to the $64,000 level. Then came year two. We added more to the IRA; the maximum again. We kept doing this year after year. Mrs. A and I budgeted the IRA contributions to be made before any discretionary expenses. This was our future and we were serious about it.

More income meant more money in qualified (tax-advantaged accounts, usually retirement accounts) and non-qualified investments (non-retirement accounts with no tax deferral). I went crazy for a decade and a bit buying residential real estate. (I really mean crazy. The number of buildings we owned was obscene.) I tested investments to learn the investment and tax consequences. (Where do you think I got all my financial knowledge from? The School of Hard Knocks. I had skin in the game.)

When alternative investments ran their course the excess funds were plowed into mutual funds; actively managed early on, index funds later.

You may have noticed the top of the net worth list on Rockstar Finance contains older people, usually in their 50s or older. Slide down the list a bit and 40-somthings start making an appearance. It takes time and perseverance. The trick is simple. Invest a tidy sum and watch it double again and again and again and again and again. . .




Secrets of Secrets

Consistency is vital. Starting and adding to your portfolio on a regular basis is the secret. Keeping your paws off the stash is also mandatory! Spend less than you earn, invest in simple and easy broad-based index funds and wait. That sucker starts growing slowly right out of the gate. Then it gathers steam as it accelerates higher. Before long investment gains exceed new money invested during the year! (What an exciting moment in a young man’s (and woman’s) life!)

It doesn’t matter if the market is high or low. You need to get your money in now and swear an oath to never touch the thing until you are retired. Mrs. A and I were lucky. When we got married the stock market hadn’t fully recovered from the crash so we got in somewhere in the middle of the high and low. Still, we had plenty of years where the market was up significantly and we still added to the pile. (Man! If we had just waited until the Dow came down we could have gotten in cheaper than a DJIA of 3,000. Ah, I guess it pays to be stupid.)

To recap: You need to do only three things to have an eight figure net worth: Start early; invest consistently; and wait. Time solves all broad-based index fund problems.

And that is how you turn a small amount of money into a mountain of cash.

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 



Are Penny Stocks a Serious Investment?

One of my favorite pastimes is thumbing through the financials of public companies. Hidden gems do exist, but they are rare with the myriad analysts using serious computing power to scrub large firms daily. This is one of the reasons investing in an index fund makes so much sense.

There are good investments in the large company world. As I write, Apple Inc. has around $50 per share in cash in the checkbook. When you subtract cash the enterprise value is in the low teens. This is a good value from most perspectives. However, there are risks associated with Apple. First, it’s hard to move the needle on such a large company. Second, they manufacture a large part of their product in China. A quick glance at recent news and it becomes clear the risk involved. Third, each product launch needs to keep growing larger at a rapid pace to stay on top the pack. The one thing Apple has going for it is a large margin of safety.




The Wide Open World or the Wild West (You Decide)

Large international public corporations aren’t the only game in town. There is another world fraught with many risks and the promise of undiscovered gems worth many multiples of its listed price.

These quasi-public companies are followed by virtually no one. Worse, audited financial data is hard to find if available at all. And the biggest problem of all: insider trading.

People commonly call these unique animals penny stocks. They don’t always trade for pennies, but frequently trade under $5 per share.

These companies are listed on what is called the Pink Sheets, a throwback to the days when their quotes were printed daily on pink sheets of paper. Quotes were hard to come by in the past. Today, most of these companies can be pulled up from most online trading platforms (E*Trade, et cetera). One thing to remember, pink sheets is a quotation service only. Online brokers get their quotes for these stocks from that source.

The reasons for listing on the pink sheets are varied. A large number are outright scams. Others are companies who have fallen on hard times. Large international firms outside the U.S. sometimes opt to list on the pink sheets so they don’t have as heavy a reporting burden. Nestle is a prime example.

The world of small stocks isn’t littered with pump-and-dump scams only. Many small banks also list on the pink sheets. A small, one-branch bank in a small town in rural America has no chance of selling shares on the broader exchanges. The reporting requirements alone would be disruptive to their business model. The small bank can instead opt to list on the pink sheets. They will still report to the banking regulators and provide some financial statements on which to make an investment decision. Find a small one-branch bank near where you live and pay them a visit. Ask if they have stock you can buy. You might be surprised. They sometimes pay an attractive dividend.




A Round of Golf, Anyone?

Your favorite accountant has some experience buying stocks from the pink sheets. It doesn’t happen often because there is far more garbage then gemstone in the detritus. The smell tends to get on your hands and it doesn’t wash off worth a darn.

Outside tax season I like to waste an afternoon several times a year scouring the pink sheets based on geographical location of the listed company. The screener I linked also has OTC listings in addition to the pink sheets. I’ll let you play around with it on your own.

For our discussion we will focus on one stock I did buy in the early 2000s. I set the screen to list U.S. companies only. I started scrolling down the list looking for all listings in Wisconsin, my home state. I made a note of each Wisconsin listing.

My hopes weren’t high I would find anything of value. Even if a gemstone rose to the surface I may never recognize it. Remember, information is hard to come by on many of the companies.

One name jumped out. A golf course less than a two hour drive from my home caught my eye. I was vaguely familiar with the establishment and didn’t know they were listed.

This is where it gets risky legally. The golf course on my radar was interesting so I started a pet project of researching the company. They hadn’t published any financial information in quite a while. Intrigued, I decided to go one step further.

My first reaction to any pink sheet listing is to stand clear. Our friendly golf course just hit me right. Wanting to know more I took a day trip. I can’t golf worth a crap, but I do get more value than the average golfer because I get to swing more often than they do. The trip was all in the name of research.

The golf course was well kept when I arrived. The parking lot was full; the golf course teaming with old guys wasting their day; and the clubhouse was doing brisk business. I was excited!

My research to his point was similar to analysts using satellite data of Wal-Mart parking lots during the Christmas shopping season. There is nothing illegal about visiting a company whose stock you are considering for purchase. Having a drink and playing a round of golf (I did) is also acceptable behavior. No security laws have been broken.

However, I had to be careful! Since financial reports were not published in a while I couldn’t jawbone with the golf course’s accountant to glean information. It would have been risky to even jawbone with bartenders or anyone connected to the club. Trading on non-public information is called insider trading a very illegal!

The stock of the golf course traded around $3. Based upon their location (close to my home) and how busy they were when I visited, I decided to buy. I bought all my shares from slightly under $3 up to $4. Because of the risk I would hear something I shouldn’t I never visited again. I bought $30,000 of their stock over several months and sat on it. There was no dividend so it was one of those things I collected on the back shelf and didn’t think about for a long time.




Surprise!

A few years later I checked on the stock to discover it started climbing at a slow and steady pace. My $30,000 was worth six figures. I was happy! I also knew if I tried to dump my shares I would probably not get the current listed price.

I tucked the stock on the back shelf again. Intrigued, I periodically checked the price. It kept slowly climbing. About six years after my purchase the stock was in the mid 20s when it disappeared. Oh-oh!

My dreams were shattered. There were still no financial reports and a quick drive to the golf course showed they were still open. Was it a scam?

Nope! A few weeks later a check came in the mail. They were bought by another golf course for cash. My reward for six years of holding the stock was a 14x gain.

Before you run out and try to replicate my experience, know lightening has only struck once in my field. I got lucky. My luck was weighted in my favor by verifying the company was really there and viable. (They had customers!) I bought with a lot of blind faith. Every other pink sheet investment (there have only been a few) produced less than respectable returns.

The golf course was my biggest venture into the pink sheets. It was also a bet (you decide if I invested or gambled) I was willing to take because it looked like a nice place. All public information legal to trade on.

My other investments from the pink sheets and OTC markets usually involved banks. Returns were less than spectacular. In some cases I even lost money. In my defense I never took a flyer buying a true penny stock.




Where is the Respect?

Penny stocks in rare cases can be a respectable investment as my experience has shown. I do NOT encourage such investments! They are very risky and only for those willing to do some extra legwork without crossing the boundary between legal and insider trading. You also must be willing to lose 100% of your investment.

For some reason a few penny stock journals follow this blog and republish articles from time to time (always with permission). I wanted to share my one positive example so these guys have an article that will resonate with their readers.

For regulars around here, I still recommend the bulk of your money finding a home in a broad-based index fund. This is the best place for most people to invest long-term. If you have an itch to scratch digging for buried treasure the pink sheets and OTC markets have possibilities.

One caveat. You will spend a lot of time digging before any morsel reveals itself. It’s just the nature of the game. The good news is that Wall Street isn’t watching. You don’t have to compete with large hedge funds and the super-wealthy. The value of all pink sheet companies combine is around $1 billion. Too small for mainstream investments bankers to waste their time on.

Now, if we’re done here, I know a clean golf course where we can knock a couple balls around.



Peer Street Review

Show me the money!

Building wealth is simple when you understand the rules. Spending less than you earn provides seed capital for investments. Index funds provide the opportunity for superior growth with reduced risk due to diversification across the broad economic spectrum.

Once you have the basics it becomes clear you need additional cash management tools to serve your financial needs. Short-term cash for emergencies or living expenses are best held as bank deposits or in high-yield accounts like Capital One 360 or Discover Savings.

With long-term investments set in index funds and short-term needs covered by liquid money market type products it’s time to fill in the remaining gap. And there are some reasonable alternatives paying a respectable rate of return.

Business owners understand the need for liquid fund to cover seasonal fluctuations. In my office tax season fills the coffers used during the slow times of the year. November and December are traditionally slow in the tax industry while expenses tend to be high. Some year-end tax planning brings in some revenue, but the cost of mailing organizers, employee training and property taxes take an ax to the budget. This is the gap I refer to above.

Individuals face the same gap. Planning for a vacation or allocating funds for property taxes are an example. Individuals may also become uncomfortable with the level of the stock market. Selling index funds to store in a money market at a percent or two doesn’t make sense and becomes painful when the market continues climbing.

I never encourage market timing. However, there are times to take some chips off the table. Example: As you approach retirement (or if you are in retirement) I always recommend keeping about two years of living expenses in cash. If the market keeps climbing you can fund living expenses with dividends or small index fund sales. When the market has a temporary setback you can use the liquid funds to live. This assures you never have to sell at a market low! If the downturn becomes prolonged you can stop reinvesting dividends and capital gains to fund expenses. The goal is to never find yourself forced to sell in a down market.




Investing Gap Funds

Money market funds and online savings accounts at Capital One and Discover are good tools to store excess funds in retirement, for future investments or to pay large one-time expenses. The interest rate is low, but better than nothing.

For several years I used Lending Club and Prosper (notice I don’t include links because I no longer recommend these options) to serve as a high-yield investment for such funds. Then we had the Lending Club fiasco I was out the door. Where there is smoke there’s fire. I could be wrong, but I’d rather be a living coward than a dead hero.

Enter Peer Street.

Another bright idea.

Lending Club and Prosper issue unsecured loans you can invest as little as $25 in. The goal is to spread your investment over as many loans as possible to avoid one bad loan destroying your portfolio. There are lots of loans that default as borrowers have no skin in the game.

Peer Street offers loans in a similar fashion to the Lending Club/Prosper model with a few notable exceptions. Peer Street loans are backed by real estate with loan to value (LTV) typically below 75%. Borrowers have skin in the game!

The minimum investment is $1,000 per loan. This is still a micro loan, but not nearly as small as the $25 minimums at Lending Club or Proper. Since there is something backing the loan (real estate) the risk is likely much smaller. (Loans backed by assets default at lower rates than unsecured loan with rare exception.) You can still—and should—spread your investment funds over several loans to mitigate risk. (More below.)

Most Peer Street loans are short term (6-24 months) and generally yield 6-12% over 12 months. Peer Street periodically has very short loans (one month) that yield a lower rate, but more than Capital One or Discover currently. This can be a powerful cash management tool.

The short-term nature of the loans makes it easy to ladder your portfolio for consistent cash flow and liquidity. A small investment can provide a steady stream of available cash while earning a higher than average yield.




How I Use Peer Street

I don’t like to over-commit to any investment. My style is to dip my toe in the waters first and then stepping slow into the shallow end until I’m comfortable.

I started investing in Peer Street a few months back. Every loan I invested in is for the minimum: $1,000. So you understand my style, I currently have $6,000 invested with intentions of reaching $100,000 over the next year or two. As long as the wheels don’t fall off (remember the Lending Club issues) I’m happy. I’ll never put everything into Peer Street, but I will invest enough to move the needle eventually.

Every week or two I’ve been adding another $1,000 or so. Peer Street reports interest income and loan maturity funds on the 15th and last day of the month. The money appears in my account a few days later. I use this opportunity to add new funds to my account to bring the cash balance back to $1,000 so I can invest in another loan.

My slow approach is for two reasons. First, I can sample how Peer Street works before committing a level of funds that would hurt if I misstep. This allows me to acclimate to the investment. Second, the slow approach means I have loans spread out over a wide range. In a few months I will have loans maturing practically every month. Coupled with the interest stream I’m in a good position to benefit from the investment.

Investing in income properties can be a lot of work with plenty of risks. Peer Street makes real estate investing easier, smoothing the income ride along the way.




Taxes

Interest income is taxable. Landlords have several tax advantages due to real estate ownership. Peer Street investments are loans and income is treated as ordinary income. If you are familiar with Lending Club or Prosper you will find reporting Peer Street income looks a lot the same. The main difference is loan losses. Lending Club/Prosper have a lot of loans that default. This can play havoc on your tax return in some instances. Peer Street has had a few loans default, but according to a conversation I had with a Peer Street consultant on the phone, investors lost no money. The LTV metric does offer a level of protection to investors. (Loan losses would be handled in a similar fashion to Lending Club should they occur.)

Recommendations

Time for a reality check. Most loans offered on Peer Street hover around 7%. Yes, the sales literature says you can pull up to 12%. Real world experience says you will have plenty of opportunity to invest with a 7% return. Some loans are lower, more are higher. Loans paying 8% or more require a strategy.

Peer Street allows for automatic investing of funds in your account. What I do is keep $1,000 in the account and set the parameters of the auto-investing feature at 8% or higher, LTV up to 75%, loan term up to 60 months (I don’t mind a longer term investment, but you may wish to tighten this parameter) and $1,000 max per loan.

Peer Street sends an email when they invest in a loan automatically. If you don’t like the look of the loan you have 24 hours to cancel from time of notification.

New loans are available most business days. The higher interest loans usually are filled with automatic funds. The 7% and 7 ½% loans are frequently available for manual investing.

 

There you have it, kind readers. No fancy stories today. This is an idea I’ve been working personally on a small scale for a bit and wanted to share it with you. As a reminder, the links in this post are affiliates. Peer Street graces your favorite accountant with $30 for every new account I send their way. I have affiliate links for Prosper and Lending Club, but do not include them because I no longer support their programs. I’d rather be safe than sorry.

I can’t make a real recommendation for you personally since I don’t know you personally, along with all the relevant facts. My only recommendation is to take it slow if you find Peer Street appropriate for your portfolio. No heroes; just another nice product to handle funds living in the gap.


Real Estate Investing Platform