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Patience; The Ultimate Virtue November 19, 2015

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We live in a society that keeps moving faster and faster. We want instant success and make instant judgements, labeling people/strategies a failure in short time. I read a Florida State University football blog on a regular basis, and posters are constantly writing off these athletes as a bust if they don’t play like All-Americans in their first couple years on the team.

I see the same in youth sports. If the kids aren’t instant stars, dominating at an early age, then the adults in their lives push them to move on to other sports/activities or consider it just recreation and lower their expectations to “its a lifetime sport.” In school, if they aren’t immediately making great grades, reading at college level at age 10, or doing Algebra in 5th grade, then we need to get them tutoring.

But read the biography of successful people and you see a different line to their success. Failure after failure until finally success. I am reading a biography of the Wright Brothers that is demonstrating this.

And of course the opposite happens. Early success is assumed to mean that elite status will follow. In youth sports, we see that all the time. The kid that is 6 ft. at 13, is assumed to be on his way to being an elite athlete because he can dominate his smaller competition. The person who gets great returns on a stock pick is assumed to have some better technique for picking stocks that will last forever.

But reality is something different. US swimming has been looking at how many top youth swimmers become elite senior swimmers. It is pretty easy to document in swimming because the competition is about the stop watch [or electronic timing now a days]. So US Swimming looks at the top 10 times of 12-13-14 year olds and compares that to participants in senior nationals, junior nationals, NCAA, world competitions, etc. over the following years. So how many of those top youth swimmers end up as top senior swimmers? 10% for men and 19% for women.

What does that tell us? 1. We can’t determine who will go on to become elite athletes until after puberty. 2. You can’t tell who will become great by just looking at them. There is something there that can’t be predicted. Same with good investors. Can you name great investors over the long term? There is probably a couple of handful of folks you could name.

So what is the most important personality trait in all this? Patience. That’s right, those 90% of boys that were not considered elite swimmers during their formative years kept on going to swim practice. They kept on working. They didn’t allow someone else to tell them they weren’t good enough. And they had coaches that did the same thing. They didn’t rush their development, didn’t move these athletes to the bench, didn’t spend all their resources on the few who were looking great at age 12.

If you come to our retirement income seminar, you will hear the same thing. We have folks from different parts of life, some with incredible success already, some just starting out. But, the one thing we preach is put a plan in place and show patience.

And we try to eliminate the noise that might cause a lack of patience or a panic for our clients.
Like a good coach, we nurture folks through the process, giving them all our time no matter how successful they are when they come to us, because we know some of the most meager beginnings become our greatest successes; like the Wright Brothers.

Health Care REIT [HCN] September 18, 2013

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I have owned this stock for well over 12 years.  And I have been gradually concerned with the dividend. Not that there is concern of it’s ability to make the dividend payment, only that it has not increased its dividend at a high enough rate.  Given that background here are the last quarters particulars.

2Q13 normalized FFO of $0.93 per share, a 4% increase versus 2Q12

2Q13 normalized FAD of $0.82 per share, a 4% increase versus 2Q12

2Q13 same-store cash NOI by 3.8%, including 8.4% growth in the seniors housing operating portfolio

Increased private pay mix to 82% in 2Q13 from 74% in 2Q12

Issued 23 million shares of common stock, generating $1.7 billion of proceeds in May

Received $366 million in proceeds on dispositions in the first half of 2013, generating $52 million in gains

Completed gross new investments of $1.5 billion in 2Q13 and $959 million in 3Q13 to-date

Expanded international portfolio with $1.3 billion investment in Canada with Revera in May and $213 million

investment in the U.K. with Avery Healthcare in July

Completed final tranche of $4.3 billion investment with Sunrise Senior Living in July

As you can see, they are steadily increasing their income from operations and funds available for distribution at a 4% rate. It increased the dividend to $.765 an increase of 3.8% over last year.

In essence during this time of low interest rates, and high acquisitions they are able to increase their dividend at a rate lower than 4%.  

For me, this is not good enough.  I would want to see a 6-8% increase going forward.  Simply put the company is  positioning itself well for the future, de-leveraging over the last 5 years, and making high quality acquisitions; but not increasing its dividend at a rate it should.  It is a conundrum for me and my portfolio.

The other thing happening it is highly valued.  So I decided to sell 25% of my holdings.  I will probably sell another 25% as we go forward unless the value dips significantly.

The question for me is not how it has done in the past [my yield on cost is over 15%], but where to put my money for the future.

Next post will describe what I did with the proceeds.  Let’s just say I more than doubled my dividends! 

Changes for my portfolio. Lesson learned. August 28, 2013

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All summer long it bothered me.  While I was on the Oregon Trail, I kept thinking that I had broken my investing rules for stocks.  Last May I purchased stock in a company called Dassault Systems [DASTY].  It wasn’t a huge buy for me, but was significant enough to bother me.  You see I broke my rules.  For the last few years I practice a value investor strategy that buys for the dividend stream.  This stock  had a P/E ratio of 38 and a measly .88% dividend yield when I purchased it.   

I loved the story though.  There is a new technology coming on called 3-D printing that is revolutionizing manufacturing.  I wanted a way to get involved.  And Dessault Systems is a leading software company that writes the software underpinning 3-D printing.  So the story was good for me.

Out on the trail though it bothered me.  So, when I got back I sold.  Fortunately, in the 3 months it went up and I booked a 11% profit.  Not bad for a mistake!   

Lesson learned.  Don’t forget your own rules!  Don’t be afraid to shed mistakes.

The next stock on my list was bought.  I always have a list of stocks I am looking at.

This company is called Sea Drill [SDRL].  Sea Drill is the brainchild of Norwegian billionaire Frederik Halvorson.  By its name you can tell it is a deep sea oil drilling company.   It currently operates a fleet of 64 various drilling operations.  But the real exciting point is that they have in process $8B in new drilling units.  So not only is its fleet the newest of all the drillers, it has a major expansion coming on board.  It has an order backlog of over $19B.  And currently is very profitable.  The only negatives on the books is a high level of debt and the dividend coverage ratio is 135%.  But, I think that is really an accounting issue more than anything else.  I am accepting that dividend risk over the long term positives of this stock. [While I was writing this they announced a dividend increase from $.88 to $.91].  

More detailed on this stock will come at the next quarter numbers, but for now:

My purchase price $43.35.

Dividend Yield at time of purchase 8.3%

P/E at time of purchase 18. 

How Theories can help or hinder your investing. October 18, 2012

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I have been a big critic of efficient market theory, still am. Here is a link to a book review that you might find interesting.

But the most recent theory of human behavior that has caught my eye is chaos theory.
First described by a meteorologist, it is simply the idea that small, seemingly inconsequential variables, can create huge differences in outcome. Often the idea is explained by the thought that butterfly’s in a meadow in Asia can cause weather patterns over North America to deviate. In science “chaos” is described as underlying interconnectedness that exists in apparently unrelated events.

Moving from a rational theory like efficient market theory to a theory that states you can never totally record the variables that create change is a difficult one for investors. That is why EMT is held on so tightly by many. This scientistic culture that sees the world in terms of analysis, quantification, symmetry and mechanics has really created a prison of the mind or an allusion that we can control outcomes.

Embracing chaos theory is really embracing what we experience of the world. The first allusion that must be dealt a death blow is control. This is where the EMT has really led folks down a wrong path. The thought that by rational explanation one can create an investment strategy that will control risk is a faulty assumption as we got recently reminded. If we give up the thought of controlling all risk with a single investment strategy, then we can open ourselves up to a more creative and ultimately satisfying investment life.

As we see the devastation brought on to individuals retirements by adherence to these rational investment theories that didn’t account for the real risk [it was known] and certainly didn’t see the 2008 melt-down in all asset classes some folks have stepped away from the common strategies in surprising ways.

Unfortunately, many folks are simply ignoring the reality or so emotionally tied to the old ways of thinking that they can’t change. Worse, is the new generation of folks that are being pitched the same old tired ideas like buy term and invest the difference [in mutual funds] or asset allocation theories or buy and hold stocks that have failed. I am shocked when I talk to people who either don’t remember or have pushed 2008 out of their memory. Especially coming on the heels of 2000 tech break down. Did you know that in 2000 the Nasdaq was over 5000 and now resides at 3100+? People forget that in the 1990s tech stocks where all the rage and investing in the Nasdaq considered a no-brainer for indexers.

Truth is that the government and Wall Street have created a perfect storm convincing people to invest in stocks for their retirement. And small seemingly inconsequential variables will to continue to crop up and destroy those folks happiness.

Recently, I had someone tell me about a particular strategy where a relative had received double digit returns for 3 years. He also seem to indicate that double digit returns were a logical expectation. I didn’t ask him if that was 10-12-15 or 20%!

Expect the unexpected is the only rule to investing today. Don’t try to control it, just adjust your strategy assuming it will happen. Look for creative investing strategies even if that means taking on old ideas that were thrown on the dust bin of history by the experts pushing mutual funds, asset allocation, etc.

In the near future I will explore what this all means to me and why I have done the things I have done for my finances.

On the difference between speculation and investing! December 4, 2008

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*Note.  I have offered an e-book, “The Best of Uncommon Financial Wisdom,” a compilation of my most popular posts to readers as a Christmas gift.  Just click on the contact tab and mention you would like the e-book sent to you. I will be sending it out before Christmas.*

I have given the idea of investing versus speculation much thought lately because I have done some reading on speculative bubbles.  It seems to me that the difference is pretty clear.  Investing requires analysis.  It requires thought and use of metrics.   I have posted on stock and real estate investing over the last couple of months.  It seems to me that if you are passive in your approach, allowing others to make the buy and sell decisions on your investments, then you are speculating whether you realize it or not.  One of the key ideas on speculative bubbles is that people bid up the price of assets beyond what the intrinsic value of the cash flow is, hoping that “a greater fool” will show up to purchase the asset at an even greater price.  In Japan in the 1980s for example the p/e ratio of their stock market went above 80 and the value of their real estate went so high as to be higher than the collective value of all US real estate, a country that dwarves Japan’s size!  Using this criteria we see that the real estate valuations of 2003-2006 were definitely a bubble, while the stock valuations of last year weren’t.  What we have in the stock market now is a loss of confidence going forward built on the sub-prime/credit/derivatives fiasco.  I have no crystal ball, but what that means to me is that real estate probably will not return to those double digit appreciation days anytime in my life time (they don’t need to in order to be a strong investment) and likely will languish at current valuations for a few years while the foreclosures and oversupply are worked through.  While the stock market will bounce back relatively soon and dramatically to represent the true value of the cash flow they produce.  With the last reported earning per share p/e ratio in the area of 12 (S & P 500) and estimates that it will fall below 10 this quarter I think it is fair to assume a generally undervalued stock market.  Now when this turns and why I have no idea but an investor really doesn’t care.

If you do your fundamental analysis, using the proper metrics, then you are an investor and can invest with confidence.  If you rely on Wall Street or the mass media to tell you, then you are speculating.  Eventually, speculators’ luck runs out and they get burned bad.  While investors might take a hit every once and a while, but keep on ticking as they build wealth.



Choose to become an educated investor and you will find yourself in much better position than those who think Wall Street will do it for them!

Buffett Week! October 20, 2008

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This week we will talk about Warren Buffett and his thoughts on investing.  Since he is the greatest stock investor ever, what he says should be important to all investors, no matter what you choose to invest in.

Warren always chooses simplicity over complexity.  He insists you need to understand how the business makes its profit and if you can’t explain it in a few short sentences, then pass on to a company that is more easily understood.  This goes along with his insistence that anyone can learn to be a great investor. 

But first you need to turn off the noise emanating from Wall Street.  Buffet suggests you ignore brokers, analysts and pundits (turn off that TV!).  All those people and their investment noise, Buffett feels you can do better doing it yourself. 

Here’s are suggestions from Shafer Financial. 

1. Read Berkshire Hathaway’s annual reports.  Start with 2007 and move back.  By the time you have read 20 of them, you will have more knowledge that the majority of financial planners, stock brokers, TV pundits, etc. 

2. Then read the owners manual for BRK stockholders.

3. Finally, read the financials for each company Warren Buffett owns and buys.

If you do these three things, you will have an excellent investment education to which proceed from.

Double Edge Sword September 9, 2008

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Today we have Jeff Brown giving us another great guest post.  Jeff is as experienced in investment real estate as you will ever find.  Hope you enjoy!

A Makhaira (ma – ki – rah) is the name used, in Koine Greek, (Created, in part by Alexander the Great as the “common language” for his huge military), a dead language, for sword. It was often used, (to the confusion of many) when talking about the sword used by Roman soldiers. They actually used, for 2-3 centuries, a sword referred to as gladius. Keep the faith — slowly but surely, this will dovetail into real estate investing for retirement. The gladius was different. It’s design aided the Roman legionary’s battlefield tactics. First, it was much shorter than what we’ve come to know as a sword. The blade was usually only 19-20″ long. Second, it was double edged, able to cut savagely both ways — a huge improvement. Third, its design went away from the oft used leaf shape, to a simple, straight blade. These changes were a result of Rome’s enemies modifying their defenses. I won’t bore you with the details here, but here’s a description of what a legionary was now able to do in battle. While holding his shield with one hand, he held the gladius in the other, like most soldiers of the time. However, his sword sported a much shorter blade, which helped him get inside his opponent. Also, if his first downward slanting-cutting motion missed his target, it wasn’t necessary to raise his sword arm to try again. He simply reversed the motion, essentially a backhand, and saved precious time, (if not his life) by wounding or killing his opponent that much more quickly. Also, because he was working with the relatively shorter blade, and was therefore more easily able to get inside his enemy’s kill zone, it was far easier for him to thrust into the abdomen, an almost guaranteed kill shot. It was a truly effective (read: nasty) weapon, made possible by it’s planning, vision, knowledge of the enemy, and ultimately, design. Where’s the Roman legionary’s flexibility? His javelin, known as a pilum. It was roughly seven feet long. He used it for both throwing, and thrusting. He had a weapon for close, savage, infighting in the gladius. His javelin gave him the option of dealing with his enemy from a longer distance. The goal was, however, the same for both weapons — victory on the battlefield. And yet… Most military historians agree — the gladius wasn’t really the primary reason for Rome’s military dominance. It was their vision, forward planning, objectivity, but most of all — their massively superior training — which produced brutally reliable discipline. Their vision, planning (Purposeful?), and objectively focused discipline, not only carried out that superior training — but created the ability to be flexible when confronted with (sometimes rapidly) changing circumstances.

Here’s how we can look at this from a real estate investment viewpoint. Leverage, the right financing, solid location, quality construction, tax shelter, tax deferred (1031) exchanges, are all examples of the investor’s gladius and pilum. But they’re not what makes an investor victorious. What provides ultimate victory, defined as a magnificently abundant retirement, is vision, Purposeful Planning, objectively executed, while seasoned with flexibility. BawldGuy Axiom: Don’t mistake the weapons in your arsenal as the way to victory.  What will, in the end, provide you with your dream retirement: vision — plus Purposeful Planning — combined with objective execution and flexibility.  Create your own empire. First though, you have to ask yourself what you want it to look like. What does your retirement look like? Or rather — what does it look like if you keep doing what you’ve been doing?

Thanks Jeff.  You have a way with words!

Analyzing Real Estate; The Basics July 31, 2008

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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.*****

Keeping it simple; Keeping it Real July 3, 2008

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This quote from uber investor guru and index proponent William Bernstein says it all:

“So, one more eternal verity: investing has always been, and will remain, an operation in which wealth is transferred from those without a working knowledge of financial history to those who have one. No matter how elegant the theory, no matter how rigorous the analysis, from time to time things will go totally off the rails. Further, most of the time this will happen in a novel way. Those who take history seriously will need no fancy models to survive; those who rely instead on black boxes should at least factor in a very, very fat tail.”

What does this mean to the average investor?  Perhaps that investing at its core is basic.  It requires no more fancy “black boxes” than the ability to perform basic financial analysis.  As Warren Buffet says, “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

When evaluating any investment, whether it is stocks, real estate, viaticals, or something else look at the basics.  Is it a product that is needed?  Will the competition drive down the value?  What is the expected cash flow?  What are the tax ramifications?  What is its history?  Can it be made obsolete by a new invention? Do you trust management?  Basic questions that lead to good decisions.

As to that working knowledge of history.  Folks that bought real estate at the peak didn’t.  Folks that bought technology stocks in 1998-2000 didn’t.  Because if they did they would have figured out that a business without profits isn’t worth much, and investment real estate with large negative cash flows can only crash. And of course readers will recognize this one; investors that primarily invest in mutual funds rarely produce wealth enough for an abundant retirement.

Now for the last couple of weeks I have been very hard on mutual fund investing.  My reasoning is two-fold.  First, people are fooling themselves if they think they can fuel an abundant retirement by investing in mutual funds and secondly, I have a sincere belief that I can help them to that abundant retirement at the Shafer Wealth Academy.  I run into only a few rare folks that have figured out the first and done something about it.  Most folks I run into are hiding their heads in the sand about their future retirement.   And here is the one piece of history that should scare us all; 90% of folks are dependent on either the government or family for the majority of their retirement needs.  That means social security can never go away.  That means taxes must be raised to cover social security.  That means, in a better retirement environment than we currently have, 90% of  people failed.

As we celebrate America’s birthday, let us remember this country was founded on the philosophy of individualism, the right to self determination, life, liberty and the pursuit of happiness.  Make the decision today to live up to that philosophy and take control of your financial life!


Need to ask what the problem is, before you can solve it! July 1, 2008

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Often, people like to discuss and advocate financial strategies with me on the blog as well as face-to-face. Although interesting, it rarely gets to a point of agreement. The reason is pretty simple. Folks don’t usually understand the problem they are trying to solve. Take the bogleheads, for example. Totally, zeroed in on reducing mutual fund costs, they forget to ask the real question. Does mutual fund investing lead to wealth? After all, isn’t that the point of investing? Or perhaps this question, does index mutual fund investing lead to its proponents learning how to invest and gain higher rates of returns? Once again, if I was going to do any endeavor, especially one that has such big repercussions, I would want to learn enough to improve my performance.

I teach my students at the Shafer Wealth Academy to ask the right questions first, then figure out how to solve the problems. Call me 727.804.9271 or email me dave@shaferwealthacademy.com so we can discuss what the right questions are for your financial life.