Uncommon Financial Wisdom

Yep, you guessed it, I get this question a lot.  In fact, sitting on my porch with some neighbors espousing the philosophy of the Shafer Wealth Academy, I got it asked in a much nicer way.  So I thought I would answer it directly for the readers.

There are three reasons:

1.  Diversification sucks.  There I have said it.  There is an open secret in the investment world that diversification is for suckers or at least for folks that will never capture wealth.  You see, mutual funds were invented as a marketing strategy.  After academic finance disclosed you could reduce risk (variance) by diversification, astute Wall Street companies knew they could market this to average folks.  Previous to mutual funds and the idea of diversification the average person felt that investing in the stock market was akin to gambling and shied away from it.  But those folks in Wall Street knew a good marketing opportunity when they see one and ran with it.  Diversification reduces the variance to a point where the likely outcome is single digit returns.  Single digit returns are fine if all you want to do is beat inflation, but it will never create wealth.  What started as propaganda aimed at getting average folks to own stock has turned into common advice that is demonstrably wrong.  Every wealthy person from Warren Buffett to Donald Trump when being honest tell us that concentration is the way to go.  Diversification before we obtain wealth is a fear based strategy.  People think by diversifying, when things go badly, they can hang on to some of their wealth.  Unfortunately, diversification is a block to building wealth, so they are protecting themselves from a loss that means nothing.  Since fear keeps most folks from building wealth, when they hear diversification can protect them, they jump at it.  Its a perfect fit for a fear based environment. Not that fear is a totally wrong emotion to have for the middle class.  After all this is a group that is experiencing the economic changes most acutely.

2.  Mutual funds are retail products so there is an extra hand (middlemen) between you and your investments.  Even the lowest cost mutual fund company has employees that must be paid, buildings that must be leased or bought and profit that is made.  Where does all this money come from?  Yes, your returns.  See how this all blends together.  In order to get diversification you need to buy mutual funds, which not only creates a profit center between you and your investment but also implicitly requires you to look toward others for financial advice.

3. The army of mutual fund sales people have no idea how to get wealthy because they aren’t.  Their participation in this propaganda machine, no matter what the initials after their name are, tells you they don’t.  The data is clear how people acquire wealth and/or financial independence and it is not by owning mutual funds.  Anyone that gives you that advice is wrong and ignoring the evidence.

A few words on why mutual funds are so popular.  I’m sure the denizens of Wall Street never imagined the success of mutual funds when they first designed them.  As it turns out they were ideally suited for the psychology of the middle class.  The middle class, especially during the last two decades of the 20th century, were looking for security.  Remember, previous to 1980, layoffs were non-existent, defined benefit pensions were what most people had, and retirement for most was usually less than 10 years before death.  Security for the middle class was the name of the game.  The economic insecurity of the early part of the century eventually got turned on its head, but this was just a temporary reprieve.  Education beget a good job, which brought economic security.  Enter an investment strategy called mutual funds, which offered as its main selling point security (even though this was false, it matters only what people perceptions were).  In other words, mutual funds fit right in to the way people thought about and approached their financial life.

Then the stability of the middle class was turned on its head in short order.  Layoffs became common place not only for industrial workers, but for middle management and technical workers.  Aerospace engineers became perhaps the first middle class victims of this change in the 1980’s.  The government along with Wall Street stepped in and created IRAs and 401Ks ostensibly to encourage retirement savings, but also to pump up their respective cash flows.   We are just now starting to see the results of this unholy trilogy (Wall Street, Government, Security Seeking Workers).  The noise has reached a crescendo about the lack of retirement funds for the current generation of retirees.  Yet, few question the strategy that brought us to this point??? And of course, the latest dependency;  home equity.  If you were depending on your home equity to fund your retirement, the bubble has now burst. 

So there in a nutshell is why I rail against mutual funds.  It is an outdated investment strategy for the world we live in now.  Never was honestly sold.  And absent financial education as to the realities of the current economic climate, causes and will cause much financial pain at the exact time (retirement) that folks can least afford it.

I have spent much of the last two weeks talking about the technical analysis of investing and why some products are better than others.  But the reality of wealth creation is that folks can understand the technical side, however, fail to achieve their wealth goals. Why is this?  Well, the largely unnoticed part of the wealth riddle is one’s mental structure.  Scientist call this a paradigm, or a “an entire constellation of beliefs, values and techniques, and so on, shared by the members of a given community” (Thomas Kuhn, 1969).  In short, every group has a set of mental structures that frame the way it thinks.

The poor has a set of mental structures that make it very difficult for them to successfully navigate the middle class. Of course it can be done, but this is why each socio-economic strata is sticky or retains most of its participants.  The middle class has its own paradigm.  And of course the wealthy their own way of thinking.  The “Rich Dad, Poor Dad” series of books and education does a credible job in outlining the differences and it is well worth it to read Rich Dad’s Cash Flow Quadrant for example.  

After reading and educating yourself, the wealth riddle gets toughest to solve.  Technical analysis does not take a huge IQ or even advanced math, as Warren Buffett likes to point out, but to change your mental structure takes much more than reading a few books or attending a weekend seminar.  It takes consistent and purposeful effort.  And most people, even if they acknowledge the need to reform their mental structure, are incapable of doing it alone. 

That is one reason so many people who are willing to pay thousands of dollars, to attend a seminar or buy a course, fail.  Because the end of the seminar or course is just the beginning of the change.  The light bulb might have gone off, but it takes much more than that to attune ones mental structure to creating wealth.

Sometimes, I get so caught up with this blog in critiquing the middle class financial paradigm, that I forget that people can’t just move from one mental structure to another with a snap of a finger or a series of blog  posts.  Of course, the Shafer Wealth Academy (www.shaferwealthacademy.com), is designed to get people from one mental structure to another, so I know how to do it, but I am sometimes oblivious to the nature of my audience.  This can make me seem to be arrogant, or even worse, clueless.  If you read my blog and get that feeling, I only ask you to understand that I am coming from a place that is very different than where you reside!

However, if you are like many of the people who do contact me, and either consciously or unconsciously, recognize the underlying truth in my posts, remember that it takes time to change our mental structures.  I am more than willing to help you in that process either passively through my writing or more efficiently by membership in the Shafer Wealth Academy.

The hardest thing for some folks to understand is why taking advice from or turning your money over to experts doesn’t work.  After all, that is what we have been trained to do, listen to experts! There are two problems with this strategy.

First, is the problem of our own emotional/mental structures.  Taking advice from experts doesn’t change our own mental structures.  If we don’t change the way we think about money, if we don’t change our understanding about money, if we don’t create a wealth creating environment in our lives, then we will fail to create wealth.  It is as simple as that.  By going to a “financial expert” we are demonstrating an unwillingness to take control of our own lives and that is what needs to be done in order to create wealth.  Study after study demonstrates this. We can not outsource control and expect to have above average results.

Secondly, the masses of “financial experts” out there are mostly folks just like you, that haven’t taken control of their own finances, or turn themselves into active participants in their own financial lives.  What, you say?  Yes, that’s right how many folks in the financial expert category are actually wealthy?  How many have made their wealth through investing?  Most, if they have acquired any wealth, do it by having superior sales abilities that turns into superior income.  But as a class, they are wealth underachievers, meaning they have less wealth given their income, than the average.  I read that the average “financial expert” has an income of $80,000, in which they aren’t very good, at least below average, at turning into wealth.

If you want to create wealth you have to create the mental environment in which wealth creation can prosper.  If you want to create wealth you need to learn to do it yourself.  If you want to create wealth you can do it faster, more efficiently with a wealth coach from the Shafer Wealth Academy www.shaferwealthacademy.com.  The alternative is to make no changes, which will get you where? 

Thought I would take a break from the intensity of the last couple weeks of posts to talk in general about building your own life.  Just like I won’t tell you how to invest your own money, I also can’t tell you what is important to you in your life or how you would want your life to go.  For me, I enjoy the summers and ski season here in New Hampshire, while enjoying the fall through spring in Florida.  Just a few minutes ago I had a conversation with my son on something that was important to him and then had a conversation with a business partner about a deal that is going down with us.  This ability to be active in my son’s life as well as being an active investor is also important to me.  So I have designed my life to be able to accomplish all this. 

The second thing I have folks do in the Shafer Wealth Academy is to build a vision board that encompasses how they want to live their life.  You would be surprised how hard this is for most folks.  Do you want to continue to work in your field?  For the same company?  Own your own business? Live in the same place?  Live in multiple places?  Travel? etc.?  The truth is most people never assume any of this is possible.  Well, it is.  One job the media accomplishes is to fill people with fear.  Whether it is having your kid kidnapped, being the victim of fraud, losing your home, losing your money, the media tells you to be concerned/aware of the risks.  The truth is all this fear sells, if demands of folks to watch, to be aware of the risks.

The media tries to tell us that it is in the business of a public service to warn folks about risks.  The underlying assumption is that you can protect yourself against all risk.  The truth is the opposite.  You can’t protect yourself against bad things happening to you.  All you can really do is to look at the evidence of what works and what doesn’t and move on from there.

What I am saying is that since there is always risk in living, why shouldn’t you design your life the way you want to live it?  Why should you live how your boss, your teachers, Wall Street, Big Business, the media, tell you to?  I know there is comfort in the herd, but think about what is lost by adhering to the herd’s standards. 

When I was in graduate school, I had a professor tell me that I would not become a college professor, because “it was to hard” and “not worth it anymore.”  I was mad at him for a time being.  But even then I realized he was the wisest of my professors.  He was very good at sizing up people and also a stickler for adhering to reality.  I was among his last student before retirement.  He turned out to be right.  And even more important was that he instilled in me the importance of discerning what reality is really like, and using that as a basis for making decisions.  He was a mathematician by trade (PhD U Cal Berkeley) and a sociologist by inclination.  I often think about what I gained from my graduate school experience, and often I realize it was his perspective that has served me the best.

This is what I try to bring to my students at the Shafer Wealth Academy; to discern what the reality of their lives really is.  Then to look at what they really want their lives to be like.  We then bridge that gap as best as we can, as fast as we can.  But we always use evidence as our guide.  I believe as human beings, that is all we can do.

Gotta go, my son is melting down as 6 year old’s do sometimes! Sometimes I gotta remember I asked for this life :-).

I have made some comments around the net about wealth creation (go figure!).  On a fairly regular basis I get a comment that calls into question the need to put wealth creation on the front burner.  Now I understand this, many people are ambivalent about money and have long-term issues with it.  But, what I find really interesting is that there seems to be a high correlation between the Dave Ramsey/Suze Orman debt is evil crowd and this antipathy to wealth.  I wonder why that is?

On one hand these folks are, dare I say it, religious, in their belief that debt is bad, yet are unwilling to take the next step to independence which is becoming a wealth creator.  They become active about getting rid of debt, yet remain passive about the other side of the equation cash flow.  One blogger even told me that a contented life is one that is debt free, where he can spend his money as he wants.  That of course makes little sense, because you always spend your money on things you want even if you go into debt to do it.  And homeless people are debt free, yet are they contented?

Then it struck me.  Ramsey and Orman ask little of their audience.  No, they only reinforce commonly held beliefs about money.  I mean who really thinks having a large amount of credit card debt is good?  Who really likes the pressure of having to make that mortgage payment every month?  When I was a young man I had a sales manager that encouraged all his young salespeople to go out and buy an expensive car.  Why?  Because then they would work that much harder, in order to make that car payment! Yes, we all like to own nice things, but hate to pay for them. 

What is the other commonly held belief Ramsey/Orman reinforces?  That finance is for the experts, not you.  You should turn your money over to someone else that knows more than you about money.  Usually, that is a combination of experts like themselves and mutual fund companies.

So it is easy to believe in what they are saying, because those thoughts already exist in our heads.  No one wants to live with the constant threat of debt collectors and the self-image destroying threat of foreclosure and bankruptcy. So we blame ourselves for our wants, falsely thinking that is the problem.  And the majority of people don’t understand how money works, so it is easy to think relying on the “experts” is the way to fix that.

This passive/aggressive act has got to go.  Passive/Aggressive behavior lets you dodge unpleasant chores while avoiding confrontation.  You see, by emotionally concentrating on getting rid of debt, you can avoid the real cause of your pain, which is lack of financial independence.  Gaining financial independence requires hard work, both emotionally and intellectually.  And a large part of that hard work is learning how money works and developing the willingness to accept the responsibility for your financial life.

So to all the followers of Ramsey/Orman, I will answer the question, Why Wealth?  Because true independence and contentment means having enough wealth to create the exact life you want to live.  It means being able to tell your boss to shove it, if you want.  It means being able to build healthy relationships with others, not based on financial need or wants.  It means taking control of your life away from anyone or anything that doesn’t value it.  All that insecurity you feel about having debt, I feel about having to depend on the whims of a boss or a company.  In a short period of time, I have developed enough wealth that if I wanted to live frugally, as you suggest, I never have to work another day in my life.  And guess what, I accomplished this through the judicious use of debt.  Is there pressure on me to make my payments every month?  Yes, but only because I want to increase the size of my investments.  If I wanted to shut it down today, I could. And that is where peace resides! The road is mine to go where I want to.   

So here is the challenge.  If you get what I am saying.  If you want to build real peace through financial independence, then go to www.shaferwealthacademy.com and fill out the contact form.  Or just pick up the phone and call me @ 727.822.8379!  Make the road yours to take you where you want to go.

Ok, so the mass media is pummeling real estate every day with more bad news.  All you need to know about real estate is that it is in trouble, right?  Well, no!  Today I will go over real estate as an investment.  Regular readers know that wealthy people have their largest chunk of their net worth in real estate.  They also know I love real estate as an investment for the middle class because of the leverage one can use.  Suffice it to say that the data is conclusive when it comes to investing in real estate.  It is a great investment as long as it is done correctly.

First let talk about types of real estate investment.

1. Your Primary Residence.  There is debate as to whether this should be considered, but I think since the data indicates that most people have significant savings in the form of home equity it should be included.  First let me say this, if your home is the only form of savings you have, you are in big trouble.  You should be considering equity management practices, which I have posted about before.  Now owning your primary residence is a good idea is most cases, although there are some exceptions.  My advice is buy close to your work, within walking distance if possible, buy small, use equity management strategies, and realize real estate is a long term investment.  The point is to minimize your cost of living so you have more money to invest.  If you spend all you have for housing, then you have created a situation where you are house poor and investment poor.  With the cost of gas, living  close to work can save you hundreds of dollars a month, which can be put to use acquiring assets.

2. Real Estate Investment Trusts.   There are three types of REIT’s.

 
• Equity REITS, the most common type of REIT, invest in or own real estate and make money for investors from the rents they collect; 
• Mortgage REITS lend money to owners and developers or invest in financial instruments secured by mortgages on real estate; and 
• Hybrid REITS are a combination of equity and mortgage REITS.

Some REITS use leverage and some do not.  I only invest in leveraged REITS.  REITS are traded on various stock markets making them easy to buy and sell or liquid.  They have their own accounting regulations that require them to pay out the rent they collect.  Speak to an accountant for an in-depth discussion of REIT accounting.  You have dividends paid out each year, which can be reinvested.  The value of the underlying real estate backs up the investment and the rents along with the real estate value determine what the market prices their shares in the long run.  Because they are so liquid, they are subject to the whims of investors on a daily basis.  The REIT I own currently pays a dividend of 6%.  Over the last 10 years REITs have outperformed all other classes of stocks.  Positives include liquidity, someone else managing the properties, some leverage applied, access to larger properties than one would normally have, and potential for double digit returns.  Negatives include daily price fluctuations, limited leverage, and the passive nature of the investment.  Since I am a big believer in long term real estate investing, I keep a good percentage of my assets in REITs.

3. Owning investment real estate outright.  Perhaps the best way to take advantage of the various tax and leverage pluses of real estate is to buy real estate and rent it out.  This can range from single family homes to duplexes to apartment complexes to commercial property.  I can think of no better way to have a comfortable retirement than this strategy.  Beware, this is not the place for amateurs going it alone after attending some seminar.  You need an experienced hand to help you. I suggest talking to Bawld Guy first, if this is your intention.  Just click on the Brown & Brown link to the right!

The matrix for investment real estate is very different than the one for buying a personal residence. Here are some basic considerations:

CAP Rate: Net Operating Income/ Purchase Price.  This is a great tool for comparing properties.  Net Operating Income is the total of all rents received minus maintenance expenses, vacancy expense, taxes, insurance, repairs, management fees.  Cap rates are usually in the single digits.  The higher the better.  But this is only one metric to look at.

Cash Flow:  Add up the total of all expenses plus the mortgage cost for the year and divide by 12.  Compare this number to the total monthly rents collected X .8 to account for vacancies.  If this number is positive it is said to cash flow.  Never get in a situation where there is a negative cash flow.

Leverage:  How much money do you have to put down in order to have the property cash flow.  Generally the less you have to put down the better it is because you are using leverage.

Return on Investment:  Cash Flow + Appreciation/Down Payment.  If you put down $20,000 on a property that cash flows $2000/year and appreciated $4000 then you have a return on investment of 30%.

Market Demand:  First, what is the market demand for rental properties in the specific area you are thinking about buying?  Does this area of a net inflow of population?  Can they afford the rents you are asking?  How does the rent you are asking compare to other rental properties?  Are you trying to rent a one-bedroom apt. in an area dominated by families who are looking for multiple bedrooms?  What is your target renter? etc.    Now, how about appreciation in the area.  Is this an area where there was an extreme bubble.  Net inflow of population?  Area trends?  Affordability factor?  Jobs in the area? This is where an experienced hand really comes in handy!

Management:  Are you going to manage it yourself?  This is not recommended because it limits your investment to areas close to where you live now.  How much will it cost you?  6% seems to be a good number to aim for.

Location:  Can be anywhere the analysis leads you to.  Most likely not going to be in your backyard!

Once again don’t let this intimidate you, hire an experienced investment real estate person to guide you.  Remember, only a small minority of real estate folks specialize in investment RE!  Use only them.

Positives: Tax deductions, Leverage, Accessible to most of the middle class.  Negatives: not liquid, requires active participation, high learning curve (can be offset by using Bawld Guy!).

4.  Private placement investments.  Many groups form LLCs to invest in real estate.  Also land developers are always looking for capital.  If you can hook up with good experienced people, then you can get outsized returns.  Usually, this only happens after you have been an active investor for a while and meet people in the industry. This is not a place to start investing.  But to experienced real estate investors it is a place that can be very fruitful.  Positives: Outsized returns, limited time required (half way between active and passive investing), leverage.  Negative:  Higher risk, high level associations needed.

5. Second Homes.  Generally not a great investment, but if leveraged can get double digit returns if price appreciates 4%/year.  If you rent it out part of the year, you can get some cash flow, but generally they are cash flow negative.  Being totally dependent on price appreciation is not the best place to be, but can work out in the long run.  I put this under life style investing.  Instead of driving that Lexus, which will depreciate, own a Toyota and buy a second home.  You will get more pleasure out of it and will make money in the long run with it.

6. Raw Land.  Extremely speculative and long term.  Think in terms of your children and grandchildren.  Don’t expect to ever see the money in your life time.  If you do, then lucky you! 

Hope this helps folks.

****This is only the ramblings of the village idiot, who does not have a license to sell real estate or securities.  Go to a professional for real estate advice.  Go to an accountant for accounting advice with regards to real estate ownership.  Go to a stock broker/financial planner if you want to hear what Wall Street thinks about any individual security.  Once again this blog and this post are for amusement purposes only and does not represent any offer to sale or buy real estate or securities or offer any advice as to what the reader should do.  Do your own independent research as I have done before making any financial decisions.*****

Today we have a guest post from none other that the Bawld Guy!  As regular readers know, we think much the same when it comes to investing and retirement.  Enjoy and don’t forget to check out his website at

http://www.bawldguy.com/

In my opinion, the all time political football in America has been the middle class. They either don’t make enough at work, taxed too much or too little (too little?), or have disappeared altogether. None of those arguments are what continually keeps my attention. Not even close. Taxes? Middle class families figure things out and manage to survive the idiots in D.C. and their ‘help’ one way or the other. How ’bout college for the kids? Again, they figure it out. The #1 concern I’ve always had when it comes to the American middle class is what’s waiting for them at retirement.  In my view, the debates over middle class job income, or even their net worth to a certain extent, misses the target for which they should be primarily aiming. What I’m not saying very well is that saving and investing in and of itself is the very reason the vast majority of our middle class is gonna be living out a life sentence instead of enjoying a wonderfully planned retirement. How so? They’re listening to folks who apparently gotten the memo on what’s workin’ and what’s not. What are middle class folks being told these days? Slam as much money into the government’s qualified plans for retirement as possible. They sell this easily by hawking the annual tax savings allowed contributors for each dollar they invest in their qualified plans. The only retirement being enhanced in a major way by most qualified retirement plans is Uncle Sam.  

Here’s how. 

Take a middle class couple contributing to their 401(k)’s from 30-65 years old. Each year they they save anywhere from $3,000-10,000 in state/federal income taxes. In 35 years let’s say they’ve saved a total of $250,000 in taxes. If after 35 years they’re combined plans have reached $2 Million, and they figure a way to obtain a 6% annual return for their retirement income, they’re potentially in trouble. Their house is no doubt free and clear. They have no tax shelter of any consequence. In reality, they arrive at retirement with at best, $120,000 a year in income. They’ll most likely be liable for the highest income taxes possible. Let’s say they pay about $35,000 in combined state/federal taxes. This means by the time they’ve been retired 14 years, they’ll have paid just short of twice what they ’saved’ in the previous 35 years. And that’s it ’till death. Please tell me in what scenario does saving $250,000 in taxes for the privilege of paying out twice that amount in less than half the time, make sense. Why not investigate alternatives allowing you to not only create a far more abundant retirement income, but also keep more of that larger income? Why not also do this while building tax sheltered and tax free income? Indeed, why not? Here’s what I’d be pleased for you to take away. Don’t keep your eye on a few tax dollars saved each year. Keep your eye on the real ball — your retirement income, and it’s after tax safety. Stop allowing Uncle Sam to play ‘hide the pea’ with your retirement plans. That pea is your gold.

*****Remember the following is only the ramblings of the town fool who does not have a license to sell securities or give advice on what securities to purchase.  This post as well as this blog is for entertainment purposes only and represents the collective foolishness of the the writer only.  Do not follow his advice unless you perform your own independent research and come to the same conclusions.  Listen to the licensed experts as well as cable TV if you want the collective wisdom of Wall Street.******

I am going to show you how I analyze investments starting with stocks.  Here is a comparison between the S & P 500 Stock Index and Berkshire Hathaway for the last 10 years.  Remember you can invest in BRKbs for only a small one time ($12 fee), while even the cheapest index fund will cost you .5% a year.

There is a fact in stock ownership that gets overlooked.  That is profitable companies tend to stay profitable as long as some fundamental change in the environment doesn’t happen.  This is Warren Buffett’s key point.  So anytime you are looking at making an investment, then you need to create a chart like this that goes back at least 10 years.  If you are in mutual funds then substitute your actual mutual fund with the stock index I picked.  Key is this is how I start out.  Since I think that Berkshire Hathaway is the gold standard, I always compare to it as to well as the S & P 500 stock index.

Now remember this is not how financial planners work, so if you have a financial planner you can direct him/her to do the charting in this manner for you.

This is the chart for a real estate investment trust that invests in health care facilities.  About five years ago I did a chart and found it outperformed the S&P 500 by a wide margin as it does now.

Remember this is the first step I go through.  If it hasn’t outperformed the S & P 500 for the last 10 years I drop the idea.  If it doesn’t perform as well as Berkshire Hathaway and is a equity stock, then I don’t buy it unless I put it in the highly speculative category and decide I can afford to throw money at it to lose.  If it passes the ten year performance test, then I move on to step two.

 Step 2 is a mind game.  Does this company make things that people will use ongoing?  Are there technological inventions coming down the pike that might make these things obsolete.  Think of General Motors.  Are people going to buy SUV’s (majority of profits came from SUV’s) ongoing?  Are there technological advances that might make GM cars obsolete?  Finally, are they a forward looking  company?  In other words do they make decisions based on the right now, or how the world might look in the future?  And finally, what is the long term trajectory of its earnings.  Don’t even go there if is doesn’t have any earnings; I made this mistake once in the late 1990’s!  Remember, the only thing that matters is earnings, everything else is speculative!

Finally, Step 3.  If it passes the first two steps, then apply some patience.  All stocks go up and down.  Wait until the stock takes a dip and then buy.  This is another Buffett speciality.  He identifies stocks and companies he likes, and then waits until the price drops to his point, then he pounces!

Now I keep my stock portfolio concentrated.  This is another Buffett idea.  But having said that, since most is in Berkshire Hathaway which owns outright over 60 companies and owns stock in another 30 or so it by itself is diversified.  The only way to get double digit returns, in my opinion, is to be concentrated.  And the only way the numbers work for the middle class to build wealth is to get double digit returns.  So for me the  risk that I end up with little money in retirement is what I am worried about.  My wealth plan requires me to invest this way in order to make a comfortable retirement.

Next post on analyzing real estate.

Individual mutual funds are down significantly.  As in all down markets fear rules and folks also pull money out of the market.  Should be bad times for mutual funds companies.  But, not surprising, mutual fund companies are having banner years.  Fidelity made $478M in the 1st quarter. Janus and Black Rock also reported increased profits.  Let me put this in black and white.  It matters not how well individuals’ do with their mutual funds or stock portfolios to these folks.  They make their money whether individuals do well or poorly.  That is the system, that is the way it has been for a long time.  This is laid out in “Where are the Customers Yachts,” written in the 1940’s.  Its a pretty funny classic, unless you lost your sense of humor along with your money on Wall Street.  Warren Buffet famously quipped,  ”Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway!”  Same sentiment.  And one of my favorites, “”First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy.”

So stay away from the Wall Street Channels and magazines.  Don’t listen to Suze Orman, Dave Ramsey (unless you are in big time debt and just want to learn how to get out of debt), or any of those other “financial experts” who are getting rich giving out advice rather than getting rich investing.  Quit paying these sharks for bad advice.  Know that you can do a better job yourself and even if you do the same job, you won’t be paying the sharks, which means you are doing better. Understand that financial planners, no matter what their designations after their names, represent Wall Street or Insurance Companies interests, not your interests.  Understand that mutual funds are sucker bets sold by sharks!

Not to sound like a refugee from “The Secret,” but pessimism is an emotion that needs to be eliminated from an investor’s psychology.  Why?  Isn’t it a reaction to reality?  Well, no.  Currently, the pessimists are having a field day with the real estate market.  Indeed, the numbers look bad.  But remember the numbers are backward looking, so what they are telling us is that the real estate market in some areas was really bad.  Well, duh.  But, what those numbers don’t tell us is that real estate has always come back.  Let’s be honest, they aren’t making anymore dirt, people still need a place to live, and the emotion of home ownership is as strong as it ever was.  Bought your home in 2006, upside down?  So what?  Where you planning on moving?  Probably not. How many people buy a house with a 2-3 year time horizon?  The only thing that matters is that you take care of business so you can make those payments.  Real estate pricing will come back. 

Depending on building up home equity as your retirement plan?  Yes, I know that is the plan for the majority, but it is just dumb.  Now we see why, as you watch it disappear.

Less than a year ago I made a real estate investment.  It is about to pay off handsomely ahead of schedule.  How can this be, the real estate market is for fools?  Nope, many people are making huge profits in real estate, just not the pessimist.  My REIT went up 11% last year, plus paid out 6% in dividends.

Money is made is any market, just not by the herd!  Call me or e-mail me dave@shaferwealthacademy.com if you want to learn about building wealth the way the wealthy folks do!