How is your retirement plan going? Are you frustrated with the way your mutual funds, stocks and other traditional investments have gone / are going? If the answer is YES then you need to consider the alternatives.
Financial Planners will always tell you to diversify. That’s a good idea except that diversification is usually exercised by most people solely through the purchase of many different mutual funds. It is still investing in mutual funds or the stock market. There are ways to obtain wealth (and financial security) that you may not currently be exploring, ways that go beyond buying mutual funds.
Instead of planning for retirement, plan to reach Financial Independence instead. True Financial Independence is an easily measurable known target, and is a goal that can actually be reached within a short period of time. How? Through passive income. Generate positive cash flow from hard assets such as real estate income property. Rental income is passive income for the most part, especially if you have a solid property manager taking care of the details.
The principles of creating a long-term, on-going cash flow can be applied to most kinds of real estate investments. Mobile home lots, apartments, garage/storage units, and houses all make excellent income producing assets. Houses, in particular, low-end houses, make an excellent vehicle for creating long-term cash flow for a multitude of reasons.
While appreciation is often the most significant form of profit for real estate investors, investing for cash flow is easier to determine and with lower risk. So how do you achieve positive cash flow ethically in the real world? You need to buy in the rare market where high capitalization rates (15%+) are the norm. Such markets are usually depressed like Rochester or Memphis and have a large pool of renters. The reason tenants are willing to pay more to rent than they would have to pay to own in such markets is that they believe property values are falling or level in which case not owning is a good idea in spite of the high rent. Positive cash flow is so rare and so desirable that it eventually attracts out-of-town investors. Their coming into Rochester or Memphis or wherever causes property values to climb so that high cap rates are no longer available.
There are the three primary ways that an investor makes money in real estate: 1. from cash flow, 2. property appreciation and 3. paying down of the mortgage thereby increasing your cash flow and equity. Only if you buy on a bargain basis can you get positive cash flow from a rental property.
Why low-end houses make the ideal Cash-Flow vehicle
First, houses are abundant. Every city, town, and neighborhood has houses. Houses are probably the easiest to buy because they are the most common. Houses are also probably the easiest to buy at a discount, since there are so many sellers who own them in some sort of crisis ownership position: Vacancy, disrepairs, judgments/liens, back taxes, etc.
Houses are the easiest to manage, with the possible exception of storage/garage unit rentals, since these are occupied with stuff and not people, thereby making evictions easy. Well-maintained houses will often keep tenants for a 3-5 year cycle, sometimes longer. Most of the other vehicles have shorter-term occupancy.
Houses are by far the easiest to sell because of the naturally large demand for places for people to live. In most cases the property will sell without holding paper, but many smart investors will sell their houses on some sort of payment contract and be able to charge a 10-15% price premium to the buyer without using a Realtor!
The so-called low-end house can be very desirable from an investor's standpoint. First, lower-end housing doesn't mean becoming a slum lord. It means basic, starter homes that are located in good, but not necessarily great locations. These marginal areas typically are more of a buyer's market, thereby, tilting the negotiation in favor of a hard-cash buyer or a buyer seeking owner financing. Actually, owner financing is easier, much easier in these slightly marginal areas.
Next, these lower level houses can frequently be purchased at various distress auction (tax, foreclosure, estate) sales. In many areas of the US, these houses are bought for prices anywhere from as low as $5,000 to $25,000, without a lot of difficulty (after you know the many inside strategies and secrets).
These homes can typically generate rents of $600 - $900 per month, which based on the low purchase price makes an outstanding return on investment. Returns of 25% - 35% per year are common. It's not uncommon for smart investors to receive income for 20 years or better from their houses. After this period of ownership many owners will find a stable buyer and sell the house with a vendor take back mortgage (payment contract) and receive another 10 to 15 years of "mortgage" payments.
Here’s an example:
Purchase price $ 20,000
Rehab $ 15,000
Cash Investment: $ 35,000
Gross annual Income: $ 9,600 $800 month
Ordinary Expenses: $ 4,320 45%
Positive Cash Flow: $ 5,280 yr. $440 month
After Repaired Market Value $50,000
Equity Created $15,000 30%
Cash on Cash Gross Return 26%
Cash on Cash Net Return 15%
To put things into a little more perspective, if you were a risk averse investor, how much money would you need to invest in order to earn $5,280 per year in interest income, not accounting for taxes? Assuming the current 5 year GIC rate of 3.5%, you would have to invest $150,857. Based on the example above, you could buy 4 houses with that money and have an income of $21,120 a year. In addition, you would not have to worry about interest rates on renewal, or stock market fluctuations, or running out of capital if you were withdrawing an income from your portfolio.
Finally, when investing in rental properties you need to keep your eye on the long-term goals rather than shortsighted goals. Property rental is a marathon rather than a sprint with the greatest profits coming at the end. You will want to pay the property off as quickly as possible in order to realize the maximum profit potential and acquire new properties. The real money when renting properties as a real estate investment isn't in renting out one or two units but twenty or thirty. The more rental properties you own the more money you stand to make from owning them.
In summary, investing in real estate is always a good idea, no matter the economic environment. Investing in income producing property is even better as positive cash flow properties provide inflation protected real cash for your retirement.
For more information on Positive Cash Flow investments click here.
Friday, May 28, 2010
Sunday, May 2, 2010
WHAT IS MONEY?
Everyone uses money. We all want it, work for it and think about it. If you don't know what money is, you are not like most humans. However, the task of defining what money is, where it comes from and what it's worth is belongs to those who dedicate themselves to the discipline of economics. While the creation and growth of money seems somewhat intangible, money is the way we get the things we need and want.
So what is this thing that means so much to everyone? Normally when people think of money, they do not focus on the raw concept of money but on how to acquire it, how to spend it and how to hang on to it. Most people spend a great deal of time thinking about money without ever contemplating what it is.
Most people go through life believing that money is nothing more than paper and coin. They are mistaken. These objects are merely symbols that denote an arbitrary value. Paper and coin are inanimate objects that have no power of their own, other than the power we assign to them. What makes them special is the agreement we have with others. What gives the paper and coin value is what they stand for.
Do not confuse money with Yen, Pounds, Deutschmarks, Euros or Federal Reserve Notes. Items of currency have no intrinsic value as food, shelter or clothing. At best, items of currency can be exchanged for things of value, provided you are in the right country.
If you see money only as currency, you miss a critical point. Money is not matter. Money is an idea, a concept, a communication. The paper notes and the metal coins are not money. They represent money, but they are not, themselves, money. Money is that which lies beneath these material objects. That remarkable mystery, whatever it is, is the true identity of money.
WHAT IS MONEY?
Most people think they know me.
They don’t.
I am not what most people think I am.
I am not the paper in your wallet, or the coins that jingle in your purse.
I am not quietly sitting in your bank account, hoping to be used to one day.
You cannot see me, feel me or touch me.
I am an idea, and I am energy. I’m neither good nor evil.
I am only what you decide that I am, and I fulfill the role that you create for me.
I don’t care how smart you are, where you live, what you do, or where you come from.
All I care about is your energy.
Your energy decides what thoughts you have, and therefore your thoughts will determine the relationship you have with me.
I have very simple needs, and simple rules.
I am infinite.
I have no limits, except for those you place on me with your mind. There is no limit to the energy in the world, and because I am simply energy, I cannot be restricted or controlled.
I crave abundance.
I am attracted to whose who think without restrictions, who like to think big. When you believe there is enough of me to go around, I am naturally magnetized by that thinking.
I despise scarcity.
Because there is no limit to me, I avoid those who think from a win/lose or scarcity perspective. Those who believe I am in short supply, or difficult to receive, will find that very reality, because I choose to avoid those who think small.
I love value.
What magnetizes me most is the creation of value in the universe. I move to places where value is created, because creation is energy. If you wish to attract me into your life, focus on creating value for others, and I will appear.
I avoid entitlement and complacency.
No one ‘deserves’ to have me, and I am always moving to the place I am most respected and where value is created. It has nothing to do with ‘fair’. Those who take me for granted or become complacent with my energy will find me gone.
I only have one job, and that is to serve you.
It is a matter of energy and value creation. My purpose is simply to move to where I am attracted most, and where I can grow.
My one goal is to replicate myself.
Because there is no limit to energy, my purpose is to reproduce and grow, in order to bring more energy to the universe. I am created and replicated through value creation. I am an energy of evolution.
The message for you should be clear. Those who create value for others in the world will find me in their lives.
I am whatever you believe me to be.
So what you believe about me can make you miserable, or what you believe can enable you to perform miracles.
I'm neither positive, nor negative. I am what you decide I am.
If you fear me in any way, I can crush your ability to survive. If you get to know me, I can make your life flourish and your dreams come alive.
I can be your master, or I can be your servant.
I am only what you make me.
So, the relationship we have together will be determined by you.
So what is money? I leave it to you to answer that question yourself. Pondering the mystery of money is like meditating on a unsolvable paradox: You may never answer the question, but you will learn something in trying.
Till the next time,
Bruce
P.S. If you want to learn how to create a positive flow of money in your life visit http://www.flowofmoney.com/index.htm
Monday, April 5, 2010
Secrets from the Universe
At some point, we probably all reach a stage in our lives where we ask the questions: What is "My Destiny" and am I following "God’s Plan"?. Well, one day while flying to Dallas Texas I started reading a book called “The Five Secrets You Must Discover Before You Die” by John Izzo. It was about interviews the author had with over 200 people between the ages of 60 -106 in an attempt to discover why some people find meaning to life and die happy.
The five secrets he discovered are:
• To thine own self be true
• Have no regrets
• Give back more than you take
• Live in the moment/present
• Be a loving person and spend time with people who lift your spirit
I know that many of us may have heard of these “secrets” before, but I was so intrigued by what I read that when I got back from my trip I started researching and trying to read everything I could on the subject. I discovered that they were called the Universal Laws. These are common truths that lay at the core of the most powerful philosophies, teachings and religions in the world. Without exception, every human being has the ability to transform any weakness or suffering into strength, power, perfect peace, health, and abundance. By applying the knowledge of these laws, you can change every aspect of your life. This is the secret to prosperity, health, relationships and happiness. This is what life is all about.
One of the best books that explains the Universal Laws and how to apply them is by James Arthur Ray called The Science of Success. Below is a synopsis of some of the key principles I learned from that book.
1. Success is a science governed by specific, unchangeable laws of the universe. You can put that science to work for you, if you are willing to:
• Change your thoughts and attitudes
• Realize that the past is not the future
• Think and act wisely
• Open yourself to your own worthiness
2. You don’t need to understand all the details of the laws and principles. You just need to put them into action, much like flipping on a light switch without understanding, the details of electricity.
3. In order to succeed, you must be clear on what you want in life - not what you don’t want — and connect that worthy ideal to a higher purpose.
4. Your mindset is the sum of all your beliefs, values, identity, expectations, attitudes, habits, decisions, opinions and thought patterns about yourself, others and how life works. Many of our mindsets, are handed down from our families, society, religious authorities and teachers, but we can change our thoughts and mindsets to attract more of whatever it is we want.
5. The mind is composed of body, conscious mind and subconscious mind. The conscious mind gives the order and the sub-conscious mind carries it out through the body. To choose your new path create a clear mental picture of your new mindset and give all your attention and energy to those new thoughts, attitudes and beliefs. The old thoughts will wither and die.
6. If you have faith and belief in your ability to succeed, you will be grateful in advance. Your subconscious mind begins creating exactly what you ask and expect. We always manifest our greatest desire through gratitude or our worst fear through the lack of it. Your controlling idea will always manifest into physical reality.
7. Challenges are our greatest teachers and make us stronger. We find our greatest strengths when we really commit to a certain course of action and stick to it. We will discover new courage in overcoming challenges and learning the lessons that they offer us.
I am no expert, but I have written a booklet that summarizes a small portion of many of the different “secrets” that I have learnt to date. Surprisingly many of these were taught to me by my mother when I was growing up, and who today in her seventies still shares with me words of wisdom and encouragement.
I hope that you will use this booklet to draw inspiration and to be reminded of things you may have forgotten as you go through your Journey of Life.
Regards
Bruce
Click here to download the booklet.
P.S. I would love to hear your feedback on what you think of the booklet
The five secrets he discovered are:
• To thine own self be true
• Have no regrets
• Give back more than you take
• Live in the moment/present
• Be a loving person and spend time with people who lift your spirit
I know that many of us may have heard of these “secrets” before, but I was so intrigued by what I read that when I got back from my trip I started researching and trying to read everything I could on the subject. I discovered that they were called the Universal Laws. These are common truths that lay at the core of the most powerful philosophies, teachings and religions in the world. Without exception, every human being has the ability to transform any weakness or suffering into strength, power, perfect peace, health, and abundance. By applying the knowledge of these laws, you can change every aspect of your life. This is the secret to prosperity, health, relationships and happiness. This is what life is all about.
One of the best books that explains the Universal Laws and how to apply them is by James Arthur Ray called The Science of Success. Below is a synopsis of some of the key principles I learned from that book.
1. Success is a science governed by specific, unchangeable laws of the universe. You can put that science to work for you, if you are willing to:
• Change your thoughts and attitudes
• Realize that the past is not the future
• Think and act wisely
• Open yourself to your own worthiness
2. You don’t need to understand all the details of the laws and principles. You just need to put them into action, much like flipping on a light switch without understanding, the details of electricity.
3. In order to succeed, you must be clear on what you want in life - not what you don’t want — and connect that worthy ideal to a higher purpose.
4. Your mindset is the sum of all your beliefs, values, identity, expectations, attitudes, habits, decisions, opinions and thought patterns about yourself, others and how life works. Many of our mindsets, are handed down from our families, society, religious authorities and teachers, but we can change our thoughts and mindsets to attract more of whatever it is we want.
5. The mind is composed of body, conscious mind and subconscious mind. The conscious mind gives the order and the sub-conscious mind carries it out through the body. To choose your new path create a clear mental picture of your new mindset and give all your attention and energy to those new thoughts, attitudes and beliefs. The old thoughts will wither and die.
6. If you have faith and belief in your ability to succeed, you will be grateful in advance. Your subconscious mind begins creating exactly what you ask and expect. We always manifest our greatest desire through gratitude or our worst fear through the lack of it. Your controlling idea will always manifest into physical reality.
7. Challenges are our greatest teachers and make us stronger. We find our greatest strengths when we really commit to a certain course of action and stick to it. We will discover new courage in overcoming challenges and learning the lessons that they offer us.
I am no expert, but I have written a booklet that summarizes a small portion of many of the different “secrets” that I have learnt to date. Surprisingly many of these were taught to me by my mother when I was growing up, and who today in her seventies still shares with me words of wisdom and encouragement.
I hope that you will use this booklet to draw inspiration and to be reminded of things you may have forgotten as you go through your Journey of Life.
Regards
Bruce
Click here to download the booklet.
P.S. I would love to hear your feedback on what you think of the booklet
Tuesday, February 16, 2010
Investing in Uncertain Times - Part 2
“Divide your fortune into four equal parts: stocks, real estate, bonds and gold. Be prepared to lose on one of them most of the time. During inflation, you will lose on bonds and win on gold and real estate, during deflation, you lose on real estate and win on bonds, while your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, rebalance your fortunes back to the four equal parts.”
In this post I will discuss the other part of Jacob Fugger’s investment approach, i.e. investing in real assets (gold and real estate).
In 1981 I read a book called “When your Money Fails” (I still have it in my library) which talked about, the move to a cashless society (credit cards, debit cards, bar coding etc) but more importantly, the US government printing of lots of money and the high inflation it would cause. As we all know the inflation rate rose to about 12% and interest rates skyrocketed to a high of 21 percent and many people lost their jobs and homes as a result.
Fast forward to August 2007, the global debt bubble burst and in order to prevent deflation, which is more serious than inflation, the US government started printing more money, lots of it, since the primary tool for fighting deflation is inflation. This ultimately means higher taxes, higher interest rates and of course higher inflation.
Today it’s February 2010 and I have just finished reading the book “Conspiracy of the Rich – the 8 new rules of money” by Robert Kiyosaki. The whole world is in a financial crisis, the US government is printing even more money and could pretty soon quite possibly be “technically bankrupt”. The difference between 1981 and 2009/10 is that we now live in a global economy, where the economies of the world are interlinked and therefore many countries around the world are in financial crisis today.
In order to try and make sense of this current economic crisis we need to go back in time and learn of some of changes in the financial rules that led us to this current economic situation.
In 1913 the creation of the Federal Reserve System granted the world’s ultra rich the power to control the money supply of the United States. Once the Fed was in place, there were two sets of rules when it came to money: One set of rules for people who work for money, and another set of rules for the rich who print money. Many people don’t know that the Federal Reserve is not federal, it is not a government institution and has no reserves. It is a banking cartel the same way OPEC is an oil cartel. The creation of the Federal Reserve was basically a license to print money. The other reason why the Fed was created was to protect the biggest banks from failing by providing liquidity to those banks when they are in financial trouble, which essentially protected the wealth of the rich, not the taxpayers. We have seen this just recently with the bailout of some of the biggest U.S. banks and insurance companies using taxpayer money.
In 1944, the Bretton Woods Agreement created the World Bank and the International Monetary Fund. This agreement replicated the Federal Reserve system globally and in effect installed the US dollar as the reserve currency of the world. This meant that all currencies worldwide were now essentially backed by the US dollar, which was pegged to gold. As long as the US dollar was pegged to gold, the world economy would be stable.
In 1971, President Richard Nixon changed the rules of money: Without the approval of Congress, he severed the U.S. dollar's relationship with gold by taking it off the gold standard. He made this unilateral decision during a quietly held two-day meeting on Minot Island in Maine, without consulting his State Department or the international monetary system.
President Nixon changed the rules because foreign countries being paid in U.S. dollars grew skeptical because the U.S. Treasury was printing more and more money to cover its debts and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. Before this rule change one could exchange a $5 dollar bill for a $5 piece of gold. When a currency is backed by a hard currency, there is a built in discipline and the government cannot manipulate the currency. Since 1971 the US government has been using deficit budgets/spending to stimulate their economy however: Deficit spending = Inflation = Currency debasement.
Deficit spending requires governments to print additional dollars to finance the deficits. Think of it in this way: If a family had an income of $50,000 but they spent $55,000 so they borrowed the $5,000 and paid the interest. The following year their income was $54,000 but they spent $60,000, so they borrowed $6,000 and paid the interest on the old deficit of $5,000. If they continued to do this for a prolonged period of time they would get to a point where they can’t service their debt and they would go bankrupt.
In order to further understand the effects of today’s financial crisis, it is also important to understand the relationship between the U.S. government, the Federal Reserve System.
It took 84 years from 1913 to 2007 to put $827 billion into circulation. Since 2007, the year the subprime mess rocked the world, the Fed has essentially doubled the previous eighty four years worth of currency supply, by increasing the base money in circulation to roughly $1.7 trillion – and they are still printing money. What this means is that there will be inflation in essential items such as food and energy and there will also be inflation in every country that trades with the United States because the central banks of those countries will be forced to print more money to keep their currency competitive with the US dollar.
In addition, there will be an increase in government controls and taxes to cover the increase in debt. We have already seen this in President Obama’s recent budget which calls for $1 trillion in tax increases and a cut to domestic spending programs. The U.S government’s budget calls for a cumulative deficit from the fiscal year 2011 to 2020 that would add a whopping $8.5 trillion to the federal deficit, pushing the debt as a percentage of GDP up to 77%. Let us just hope that the economy does not go into hyper inflation.
So how do we apply Jacob Fugger’s advice to our modern day financial environment?
“…During inflation, you will lose on bonds and win on gold and real estate…”
Based on what I explained above and the current economic state that most countries around the world are in, we going to enter into a period of high inflation and investors should be positioning their portfolios in assets that will benefit from this.
In the past 2 years we have seen the value of real estate in the United States fall to a point where today houses are selling for far below their replacement value. There are many cities in the US where the majority of the homes are rented and not owned by the people living in them. For example, Rochester NY and Memphis TN. This combination of cheap houses and a large pool of renters is good news for cash flow seeking real estate investors.
Investors should therefore focus on purchasing and holding rental real estate with positive cash flow which will provide a two fold benefit . Appreciation in value and an increase in rental income due to rising inflation.
In addition, you should consider adding Gold and silver investments as a hedge against a devaluing currency. Gold and Silver Exchange Traded funds are a good way to do so.
I believe that Jacob Fugger would be proud to know that his common sense approach to investing still makes sense today 485 years after his passing.
In this post I will discuss the other part of Jacob Fugger’s investment approach, i.e. investing in real assets (gold and real estate).
In 1981 I read a book called “When your Money Fails” (I still have it in my library) which talked about, the move to a cashless society (credit cards, debit cards, bar coding etc) but more importantly, the US government printing of lots of money and the high inflation it would cause. As we all know the inflation rate rose to about 12% and interest rates skyrocketed to a high of 21 percent and many people lost their jobs and homes as a result.
Fast forward to August 2007, the global debt bubble burst and in order to prevent deflation, which is more serious than inflation, the US government started printing more money, lots of it, since the primary tool for fighting deflation is inflation. This ultimately means higher taxes, higher interest rates and of course higher inflation.
Today it’s February 2010 and I have just finished reading the book “Conspiracy of the Rich – the 8 new rules of money” by Robert Kiyosaki. The whole world is in a financial crisis, the US government is printing even more money and could pretty soon quite possibly be “technically bankrupt”. The difference between 1981 and 2009/10 is that we now live in a global economy, where the economies of the world are interlinked and therefore many countries around the world are in financial crisis today.
In order to try and make sense of this current economic crisis we need to go back in time and learn of some of changes in the financial rules that led us to this current economic situation.
In 1913 the creation of the Federal Reserve System granted the world’s ultra rich the power to control the money supply of the United States. Once the Fed was in place, there were two sets of rules when it came to money: One set of rules for people who work for money, and another set of rules for the rich who print money. Many people don’t know that the Federal Reserve is not federal, it is not a government institution and has no reserves. It is a banking cartel the same way OPEC is an oil cartel. The creation of the Federal Reserve was basically a license to print money. The other reason why the Fed was created was to protect the biggest banks from failing by providing liquidity to those banks when they are in financial trouble, which essentially protected the wealth of the rich, not the taxpayers. We have seen this just recently with the bailout of some of the biggest U.S. banks and insurance companies using taxpayer money.
In 1944, the Bretton Woods Agreement created the World Bank and the International Monetary Fund. This agreement replicated the Federal Reserve system globally and in effect installed the US dollar as the reserve currency of the world. This meant that all currencies worldwide were now essentially backed by the US dollar, which was pegged to gold. As long as the US dollar was pegged to gold, the world economy would be stable.
In 1971, President Richard Nixon changed the rules of money: Without the approval of Congress, he severed the U.S. dollar's relationship with gold by taking it off the gold standard. He made this unilateral decision during a quietly held two-day meeting on Minot Island in Maine, without consulting his State Department or the international monetary system.
President Nixon changed the rules because foreign countries being paid in U.S. dollars grew skeptical because the U.S. Treasury was printing more and more money to cover its debts and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. Before this rule change one could exchange a $5 dollar bill for a $5 piece of gold. When a currency is backed by a hard currency, there is a built in discipline and the government cannot manipulate the currency. Since 1971 the US government has been using deficit budgets/spending to stimulate their economy however: Deficit spending = Inflation = Currency debasement.
Deficit spending requires governments to print additional dollars to finance the deficits. Think of it in this way: If a family had an income of $50,000 but they spent $55,000 so they borrowed the $5,000 and paid the interest. The following year their income was $54,000 but they spent $60,000, so they borrowed $6,000 and paid the interest on the old deficit of $5,000. If they continued to do this for a prolonged period of time they would get to a point where they can’t service their debt and they would go bankrupt.
In order to further understand the effects of today’s financial crisis, it is also important to understand the relationship between the U.S. government, the Federal Reserve System.
It took 84 years from 1913 to 2007 to put $827 billion into circulation. Since 2007, the year the subprime mess rocked the world, the Fed has essentially doubled the previous eighty four years worth of currency supply, by increasing the base money in circulation to roughly $1.7 trillion – and they are still printing money. What this means is that there will be inflation in essential items such as food and energy and there will also be inflation in every country that trades with the United States because the central banks of those countries will be forced to print more money to keep their currency competitive with the US dollar.
In addition, there will be an increase in government controls and taxes to cover the increase in debt. We have already seen this in President Obama’s recent budget which calls for $1 trillion in tax increases and a cut to domestic spending programs. The U.S government’s budget calls for a cumulative deficit from the fiscal year 2011 to 2020 that would add a whopping $8.5 trillion to the federal deficit, pushing the debt as a percentage of GDP up to 77%. Let us just hope that the economy does not go into hyper inflation.
So how do we apply Jacob Fugger’s advice to our modern day financial environment?
“…During inflation, you will lose on bonds and win on gold and real estate…”
Based on what I explained above and the current economic state that most countries around the world are in, we going to enter into a period of high inflation and investors should be positioning their portfolios in assets that will benefit from this.
In the past 2 years we have seen the value of real estate in the United States fall to a point where today houses are selling for far below their replacement value. There are many cities in the US where the majority of the homes are rented and not owned by the people living in them. For example, Rochester NY and Memphis TN. This combination of cheap houses and a large pool of renters is good news for cash flow seeking real estate investors.
Investors should therefore focus on purchasing and holding rental real estate with positive cash flow which will provide a two fold benefit . Appreciation in value and an increase in rental income due to rising inflation.
In addition, you should consider adding Gold and silver investments as a hedge against a devaluing currency. Gold and Silver Exchange Traded funds are a good way to do so.
I believe that Jacob Fugger would be proud to know that his common sense approach to investing still makes sense today 485 years after his passing.
Friday, January 15, 2010
Investing in Uncertain Times - Part 1
On December 31 1999 the Dow Jones Industrial Average closed at 11,476 points and then progressed steadily upwards till October 2007 where it peaked at an all time high of 14,164. From that point it fell to a low of 6,594 (-53%) in March 2009 before recovering to end 2009 at 10,428 points. Still 26% below where it was ten years prior.
If you were a buy and hold investor you would have watched a healthy capital gain evaporate after seven years of growth followed by 3 years of decline. For the average investor this decline has been gut wrenching, to the point where their investment portfolio is now valued at less than what is was 10 years prior. What is even worse is that if you were planning to retire in the next 2 to 3 years you would be now looking at either postponing your retirement or being resigned to the fact of retiring on a much lower income than previously planned.
So the magic question is….. Given these uncertain and turbulent economic times, what should an investor invest in? I will try to answer this question is several parts.
First, we have to recognize that times have changed and the speed at which information travels and can be accessed, has changed the dynamics of investing in general. The internet has now given the average investor access to information that was once the domain of investment advisors and brokerage firms. Get financially educated, do your research and take action.
Secondly, history is a great teacher, so I will refer a 500 year old quote by Jacob Fugger the Rich (1459-1525), one of the wealthiest men in the world at that time.
As the above quote illustrates, Jacob Fugger could also be considered the father of modern asset allocation. He clearly recognized the uncertainty of economic trends and the importance of diversification as a means of building and preserving wealth. To our knowledge, he was also the earliest to articulate the importance of strategic asset allocation and periodic portfolio rebalancing as bedrock principles of wealth management. Jacob Fugger’s strategic allocation was the essence of simplicity: He divided his fortune into four equal parts, with two of the four parts being in financial assets (stocks and bonds) and two being in real assets (gold and real estate).
Can modern investors learn anything from Jacob Fugger?
To be sure, his approach of dividing his assets into different categories would appear to be nothing more than common sense. And the old saying “don’t put all your eggs in one basket” must surely predate Jacob the Rich.
But if his approach was rooted in common sense, it also required uncommon discipline to implement. His advice to “be prepared to lose on one of them most of the time” indicated a rather steely emotional makeup that many investors would be hard pressed to imitate. And his advice to rebalance the portfolio “whenever performance differences cause a major imbalance” is obviously much easier said than done. That’s because it involves selling the asset class that has done well recently and putting money back into the asset class that has underperformed. Most financial advisors will testify that it is emotionally very difficult for investors to follow that approach.
In other words, instead of taking money away from the top-performing asset and adding money to the lagging asset, investors as a group have tended to do the exact opposite. That is why Jacob the Rich’s rebalancing approach requires uncommon discipline – because it requires going against the crowd and resisting the very natural impulse to chase performance.
Here is one way to make rebalancing easy, it’s called Value Averaging (VA). Value Averaging is a combination of its better-known cousin - "dollar-cost averaging" and "portfolio rebalancing". When a portfolio is underperforming, share prices are likely to be low. And that’s when you’ll be investing more to make up for the underperformance. When the portfolio is outperforming your target rate return, share prices are likely to be high. That means it is not a good time to buy and you could even sell for a profit, provided you maintain your predetermined average growth rate.
Value Averaging is a simple strategy but it is not easy to implement. It is a formula-based method and requires calculating what your investment should be at each period, and it is going to be different every time. Research has shown that value averaging has statistically been proven to outperform other investment methods. A VA fund or investment program will inherently reduce an investor’s risk level and enhance their investment returns.
Value Averaging is an easy way to ensure you follow one of the most well known investment mandates: Buy low and sell high. The method is particularly valuable during times of high volatility and it helps ensure that investors maintain discipline in their investing.
Let us look at some data. Assuming that using the VA strategy, you invested on October 1 2007 just before the market peaked into the Vanguard Total Stock Market ETF (VTI - provides returns similar to the DOW and S&P500). You would have earned a total return of 12.05 percent compared to 9.62 percent using Dollar Cost Averaging and minus 26 percent for the Dow Jones Index, as of Dec 31, 2009.
If compared to the S&P Small Cap 600 ETF (IJR) which is a more volatile index, the results are even better. You would have earned a total return of 15.90 percent compared to 11.26 percent using Dollar Cost Averaging and minus 26 percent for the Dow Jones.
Value Averaging helps investors to tide over market volatility without worrying too much about market timing.
In my next blog I will discuss the other part of Jacob Fugger’s investment approach, that is, investing in real assets.
Regards
Bruce
P.S. Have you rebalanced your portfolio lately?
To learn more about how the Value Averaging investment strategy works visit: www.valueaveraging.ca
To learn more about Jacob Fugger visit http://en.wikipedia.org/wiki/Jacob_Fugger
If you were a buy and hold investor you would have watched a healthy capital gain evaporate after seven years of growth followed by 3 years of decline. For the average investor this decline has been gut wrenching, to the point where their investment portfolio is now valued at less than what is was 10 years prior. What is even worse is that if you were planning to retire in the next 2 to 3 years you would be now looking at either postponing your retirement or being resigned to the fact of retiring on a much lower income than previously planned.
So the magic question is….. Given these uncertain and turbulent economic times, what should an investor invest in? I will try to answer this question is several parts.
First, we have to recognize that times have changed and the speed at which information travels and can be accessed, has changed the dynamics of investing in general. The internet has now given the average investor access to information that was once the domain of investment advisors and brokerage firms. Get financially educated, do your research and take action.
Secondly, history is a great teacher, so I will refer a 500 year old quote by Jacob Fugger the Rich (1459-1525), one of the wealthiest men in the world at that time.
“Divide your fortune into four equal parts: stocks, real estate, bonds and gold. Be prepared to lose on one of them most of the time. During inflation, you will lose on bonds and win on gold and real estate, during deflation, you lose on real estate and win on bonds, while your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, rebalance your fortunes back to the four equal parts.”
Can modern investors learn anything from Jacob Fugger?
To be sure, his approach of dividing his assets into different categories would appear to be nothing more than common sense. And the old saying “don’t put all your eggs in one basket” must surely predate Jacob the Rich.
But if his approach was rooted in common sense, it also required uncommon discipline to implement. His advice to “be prepared to lose on one of them most of the time” indicated a rather steely emotional makeup that many investors would be hard pressed to imitate. And his advice to rebalance the portfolio “whenever performance differences cause a major imbalance” is obviously much easier said than done. That’s because it involves selling the asset class that has done well recently and putting money back into the asset class that has underperformed. Most financial advisors will testify that it is emotionally very difficult for investors to follow that approach.
In other words, instead of taking money away from the top-performing asset and adding money to the lagging asset, investors as a group have tended to do the exact opposite. That is why Jacob the Rich’s rebalancing approach requires uncommon discipline – because it requires going against the crowd and resisting the very natural impulse to chase performance.
Here is one way to make rebalancing easy, it’s called Value Averaging (VA). Value Averaging is a combination of its better-known cousin - "dollar-cost averaging" and "portfolio rebalancing". When a portfolio is underperforming, share prices are likely to be low. And that’s when you’ll be investing more to make up for the underperformance. When the portfolio is outperforming your target rate return, share prices are likely to be high. That means it is not a good time to buy and you could even sell for a profit, provided you maintain your predetermined average growth rate.
Value Averaging is a simple strategy but it is not easy to implement. It is a formula-based method and requires calculating what your investment should be at each period, and it is going to be different every time. Research has shown that value averaging has statistically been proven to outperform other investment methods. A VA fund or investment program will inherently reduce an investor’s risk level and enhance their investment returns.
Value Averaging is an easy way to ensure you follow one of the most well known investment mandates: Buy low and sell high. The method is particularly valuable during times of high volatility and it helps ensure that investors maintain discipline in their investing.
Let us look at some data. Assuming that using the VA strategy, you invested on October 1 2007 just before the market peaked into the Vanguard Total Stock Market ETF (VTI - provides returns similar to the DOW and S&P500). You would have earned a total return of 12.05 percent compared to 9.62 percent using Dollar Cost Averaging and minus 26 percent for the Dow Jones Index, as of Dec 31, 2009.
If compared to the S&P Small Cap 600 ETF (IJR) which is a more volatile index, the results are even better. You would have earned a total return of 15.90 percent compared to 11.26 percent using Dollar Cost Averaging and minus 26 percent for the Dow Jones.
Value Averaging helps investors to tide over market volatility without worrying too much about market timing.
In my next blog I will discuss the other part of Jacob Fugger’s investment approach, that is, investing in real assets.
Regards
Bruce
P.S. Have you rebalanced your portfolio lately?
To learn more about how the Value Averaging investment strategy works visit: www.valueaveraging.ca
To learn more about Jacob Fugger visit http://en.wikipedia.org/wiki/Jacob_Fugger
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