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The tiniest entrepreneur

September 28, 2014 admin Investing Comments Off

Most people are aware that they may be able to make more money by active investing to compound their money, but they immediately reject the idea. Excuses include, “I don’t have the money,” “I’m raising kids,” “I don’t have the time,“ “I don’t know anything about business,” etc. However, there are many opportunities for micro-entrepreneurship that only require the smallest amount of time, effort, money, and commitment.

So I am going to provide a tiny business model that anyone can perform. I learned this model from someone who had been making a few hundred dollars a month for at least 7 years. After his prompting, I even did this a few times myself. This business model is about buying a sheet of stamps directly from the post office, which is in high demand, and then re-selling that sheet at a higher price on eBay. It really is that simple and can be started for less than $15.

The U.S. Post office is continually issuing limited runs of collectible stamps and there are common shortages for the designs that are most desirable to stamp enthusiasts. You’ll need a quick education about which design is rare right now. Sometimes you can find this out online or you could call your local post office to see which designs are selling out the fastest. Now that you have a high-demand design that you want to target, call nearby post offices, or online, to buy as many of these rare sheets as you can afford.

Once you have your stamp sheets, place them for sale on eBay for 20% more than your cost, or whatever markup that similar stamps that are difficult to find are selling at right now; plus shipping costs. After paying auction fees and shipping your sheets out, you should be able to net a minimum of a 10% profit within a week or two.

Granted, earning $1 on a $9.80 sheet of stamps isn’t a lot – but you have a tiny and sustainable business model that you can ramp up to become as big as you want. There are many sellers on eBay doing this right now because the market is so big.

Maybe you have no interest in stamps – that is fine. I know people who do this same tiny business plan with laptops & cellphones, used generators, motorcycle parts, ammo, LED headlights, chainsaws, watches, movie DVDs, and many others. They sell items on Craigslist, flea markets, specialized auction websites, or spend time generating a list of commercial repeat buyers. Whether this is for side-money or a primary source of income, your interests or hobbies likely have some kind of market where you can start earning money as the tiniest entrepreneur.

Buy & hold strategy of stock market investing

September 20, 2014 admin Investing Comments Off

The stock-investing concept of buying and holding stocks for the long-term is the most well-known strategy. Amateur investors and people with no stocks have heard this strategy and many people starting out want to use this one promoted by financial advisers.

There is a single key component to this strategy that is so important that it makes everything else about this strategy irrelevant in terms of leading to a successful investment. This component is the concept of value. When you are purchasing stocks, are stock values relatively cheap or relatively expensive?

Whether you are investing in stocks, real estate, rare collectibles, or other investments, your investments results will be poorer if you are investing at relatively high prices or better if you are investing at relatively low prices. Although this appears to be self-evident, the difficulty is determining which metrics to use in evaluating whether stocks are relatively high or low.

Some metrics that investors use are ratios that they visually examine for their historical ranges. For example, stock price-to-earnings chart, stock price-to-sales chart, stocks-to-gold, stocks-to-oil, and stock price-to-book value. Reviewing these types of charts will highlight whether your potential purchase or sale of stocks is occurring at a relative bad time or relatively better time.

To emphasize how important it is to understand underlying stock values, and to only purchase when they are relatively low, below are some recent stock market realities that you should know:

The Japanese stock market is still lower today than it was 27 years ago in 1987.
The Russian stock market is lower today than it was 8 years ago in 2006.
The Italian stock market fell in 2008 by 71% and has yet to recover, 6 years later.
The U.S. had a flash-crash of 9% during a single day in 2010.
The U.S. stock market fell by 55% during 3 months in 2008.
The U.S. stock market only recently made a new high from 14 years ago in 2000.

In order for Buy & Hold stock market investing to be a viable strategy for your portfolio, an effort toward evaluating whether the stock market is relatively cheap or expensive must be an ongoing evaluation.

Avoiding 5 store credit traps

September 14, 2014 admin Personal Finance Comments Off

Consumer items purchased with debt is forbidden for the financially literate. However, for most people there is a gap between wants and needs that is foolishly bridged with store credit to make purchases. Items like furniture, electronics, appliances, and clothing are routinely bought with store credit with payments over time. Some lures for store credit include: zero-percent down, “we’ll pay the taxes,” no interest for the first year, and others that entice buyers into poor financial choices.

Once you have made the purchase and signed the contract, only then do buyers notice several items in the fine print that were not trumpeted by the store salesperson as you were making the purchase.

Here are a few of them:

Credit Life Insurance – this is an expensive add-on charge that will pay off your loan if you pass away. You may already have an estate plan that takes care of this, but even if you don’t, this is the most expensive life insurance and should be avoided.
Retroactive Interest – if you are late on a payment, then all of the low or zero percent interest that you were so pleased about launches to a high rate and is due immediately. This is also called deferred interest. Some contracts charge 25%-30% interest on the loan balance if you don’t pay the full balance off by a certain date.
Due Date Change – you’ve been paying your bill on-time and it becomes a habit. But once principal payments are due, the credit company moves the date up 10 days, you don’t notice, and now your routine payment is late and you are forced into a much higher interest rate plus late fees.
Mixing Credit Charges – you make a purchase with special low terms but also buy other items with the card periodically. The low-term purchase will get mixed with the high-term items and you end up with no financial benefit at all.
Amount Due is Misleading – some bills include interest or a late fee, as if it were already late, and put this false number as the “amount due.” If you don’t notice that it is incorrect then you are over-paying your bill each month.

If you pay your credit card or store credit line in full when you receive the bill, then you cannot get hurt. This way, you gain all of the points, credits, discounts, and membership benefits that come along with the card. If you pay credit minimums you open yourself to all kinds of problems like reducing your net worth from excessively-high interest rate charges and potentially a poor credit rating.

Beware of currency risk with foreign stock ownership

September 7, 2014 admin Investing Comments Off

As poor-performing economies of Europe continue to contract, the European Central Bank (ECB) just announced that it will use all available means to increase inflation and stimulate the economy. This means the ECB will initiate programs that will lower interest rates, which makes the Euro currency less attractive to investors. So this latest ECB announcement caused the Euro to fall to its lowest level in a year against the U.S. dollar.

Economies and central bankers around the world move interest rates and currency values that you must consider when purchasing foreign stocks. If a great company in Japan performs well but the Japanese Yen is falling in value, then that currency drop may offset any stock gain that you may have had.

There are two cases when currency valuations are not as important for foreign stock ownership, global commodities and global companies. In the case of commodities, for example, a company in Asia that refines oil, it is the single, global price of oil that will affect the company’s earnings more than the local currency. Since the company is selling an item at a global price, the ups and downs of the local currency have much less net impact to you as an investor. The second situation, global companies that operate on several continents and countries, they normally hedge the currency of sales to their domestic currency. So currency fluctuations happen slower over time as they roll their hedges over a year or more.

Anytime you find an attractive stock outside your home currency, you need to be aware of the potential risk of currency moves that could hurt your investment return.

Job landmine: getting attached to management fads

August 30, 2014 admin Career Comments Off

While moving through your career there are landmines to avoid and one of them is what I label, “The Swinging Pendulums and Treadmills.” There are two types of corporate management initiatives, one is structural pendulums while the other is managerial treadmills, and I will explain them along with their danger.

Structural pendulums are corporate tactics that continually swing from one extreme to the other. For example, a company will have a more decentralized hierarchy and then to “improve” the company it will begin moving to a more centralized hierarchy. Then to “improve” upon the centralized hierarchy it will begin moving back to a more decentralized hierarchy. Back and forth, changing with each new management team that arrives, this is one of the many pendulums in business structures that occur over many years. Some other structural pendulums include: functional department silos vs. department cross-training, internal promotions vs. external promotions, conglomerate vs. single industry focus, outsourcing vs. in-house, acquisitions vs. build your own, open floor plans vs. offices with doors, team tasks vs. individual autonomy, and many others.

Managerial treadmills are fads created by consultants that are sold as ways to improve a company but mostly end up a distraction that consumes time and resources from normal operations. You can recognize them from several attributes: one size fits all, promises of happy and motivated employees, can only be implemented by expensive consultants and company-wide training. There are rare occasions where these temporarily help a company but most of the time fads are abandoned within a couple years. You’ve likely heard many of these management fads: quality circles, six sigma, vision statements, core competency, management by consensus/objectives/walking around, benchmarking and best practices, yet another new type of “matrix”, process re-engineering, continuous quality improvement, performance ranking, customer satisfaction data mining, and endless others that appear every year.

In your career you will be involved in both structural pendulums and managerial treadmills. Don’t be upset when they show up, you know that more of them will be coming in the future. The best way to handle a structural pendulum is to go with the flow because these may last for many years. If the company is centralizing you need to be willing to help or your job will be in jeopardy. Contrarily, avoid becoming too attached to management fads, just be positive, do the paperwork or whatever you are required to do, and then get back to your primary job. A potential career killer is to become too engulfed with a management fad or volunteering to “head up a task force” on these fads. This is because fads are short term, lasting only 6 months to a few years before they are abandoned for a newer and shinier management object. If you align yourself too closely to these fads, then when it is abandoned, so is your skill or even your job.

One management professor called these management initiatives, ‘painting the garbage cans.’ “Every once in a while management paints them a different color, thinking it will solve all their problems, and when it doesn’t, they then move on to a different color.” So be careful about identifying yourself with one of the colors because it will certainly change and you don’t want to be left behind when it does.

College and income mobility

August 25, 2014 admin Career Comments Off

You may have heard that the difference between having a college degree adds a million dollars to your lifetime income, over just having a high school diploma. But there are many aspects to statistics around this, including elements such as which kind of degree and where you live that can increase or decrease this million-dollar number.

U.S. census data released last month adds some further weight to the value of a college education. For example, high school dropouts have very low odds of a median or high-paying job. Specifically, a high-school dropout only has a 1% probability of ever earning a salary in the top 20% of all incomes; and only a 19% chance of earning an average-or-above level income. Conversely, even someone raised among the poorest American families, as a college graduate he or she has a 20% probability of having salary in the top 20% and a 67% chance of earning an average-or-above level of income.

Although there are numerous influences over income mobility up the income ladder, the most significant influence for anyone is completing a college degree. Plus, it also has a great impact on their children’s level of income if one or both parents have a college degree as well. The good news is that while most of the other income mobility factors are something you cannot control, your level of education is something you have total control over.

Beware of car loans with “add-on” interest

August 18, 2014 admin Personal Finance Comments Off

The vast majority of car buyers take out loans to buy them, many lease, and few pay cash. (Guess which of these three funding methods is the only correct answer for the Financially Literate.) What many car loan contracts include is something called, “add-on interest.” You should never sign a contract that uses this term because you are charged interest twice and have no ability to save money by paying the loan off early.

A normal loan charges interest on the remaining balance of the loan. So the longer that you have had the loan and have been making payments, the more the outstanding balance decreases and your interest charges correspondingly decline as well. This is also called an amortizing mortgage where the outstanding balance declines as principal payments you make reduce the remaining balance on the loan. In contrast, an “add-on interest” loan adds the interest expense over the life of the loan onto the principal balance first and then spreads payments out over the term of the loan. The result of add-on interest is higher interest charges plus you cannot pay it off early because the loan balance includes interest charges.

When there are any unusual loan covenants or payoff schedules, you can be certain these benefit the lender and not the borrower. I know someone who tried to payoff one of these add-on loans early, and because of complications, she ended up with a lower credit rating because of add-on interest payment confusion with a regular loan. If you must use a loan to buy a car, when you shop around don’t forget to compare loan terms as well as the loan rate.

Savings = your future lifestyle

August 8, 2014 admin Personal Finance Comments Off

A hundred dollars in your hand is a physical object but it represents your future spending and your potential lifestyle. Whether you spend it later today or 20 years from now, it is available for spending which increases your lifestyle. When there is no extra money then your future spending is zero and lifestyle will be falling. This is a concept that many people avoid until it is too late to save for an event, an emergency, or retirement.

The U.S. Federal Reserve Board just released the results of a poll that indicates 31% of Americans have no retirement savings at all and 52% of Americans could not come up with $400 for an emergency. Since the 2008 financial crisis, over 2 million Americans over age 55 could not find work and were forced into an “early retirement” of financial struggle.

Any savings that you set aside creates the possibility for a future with a: large purchase, vacation, education, new vehicle, or the possibility of a comfortable retirement. In order for your savings goals to be met, your money that is set aside must be earmarked, scheduled out, and defended from being spent on something else.

When you place your savings or investment money with a person or institution, you must be certain that it will be professionally managed in a conservative manner. This money will become your physical future and if it is mismanaged then so is your future lifestyle. A month does not pass by in the news without some kind of Ponzi scheme or fraud where many victims had placed much or all of their money with a smooth-talking criminal. All of the victims believed they were dealing with someone trustworthy so they did no homework on the person or the investment. The victims did not perform an audit, due diligence, review, or background check to be certain of its legitimacy. Instead, they just handed over their life savings only to have it all stolen.

Determine financial goals that are important to you and support each of them individually with savings rates and targets to make them happen. Then you will need to defend this money from unscrupulous operators and even yourself from spending it on something else when it is convenient.

Stock investing requires a safety plan

August 3, 2014 admin Investing Comments Off

The U.S. stock market frequently falls by 10%. While this drop is not a big problem for a long-term investor, the stock market also periodically falls by 25-50% or more, which is a huge problem. When the U.S. stock market drops by a large amount, the stock markets in other countries can fall even further like Britain, France, Russia, and Brazil. Instead of riding these stock market declines to the bottom, side-stepping these large drops over +15% will substantially boost the value of your investment accounts over time. Riding down a severe stock market drop of 25-50% can make the difference between being able or unable to retire as planned.

Below are a couple ways to protect your portfolio:

1. Most 401(k)s have no hedging options and so selling your stock funds to avoid larger losses is the only tactic to protect your investments. When a broad stock market index like the S&P 500 falls from a price high by 14%, you could, for example, sell half of your stocks or stock funds. When the index continues to fall and is down by 20%, sell your remaining stocks or stock funds so that you do not suffer a 25-50% loss or more in a protracted stock market decline. Then, slowly buying back into stocks at much lower prices.

2. Instead of selling your stocks or stock funds, maintain some cash on standby to purchase an inverse ETF to hedge your stocks or stock funds. ETFs are funds that trade like stocks and there are dozens that move in the opposite direction of the general stock market. For example, if you are concerned about a market drop, you can purchase an UltraShort S&P 500 with ticker symbol “SDS” to hedge your stocks and stocks funds. When the S&P 500 moves down by 1%, the SDS will move up by twice that amount or 2%. So if you have $10,000 in stocks you only need to purchase $5,000 of this hedge to neutralize a large down move in the stock market.

3. Using stock option strategies is another method to hedge your portfolio as well. This is beyond the scope of a short blog post but they are not difficult to discover and learn before the next stock market decline. Just be aware that it is routine for portfolio managers to purchase put options to hedge their portfolio for potentially negative news events or price drops and pay for these puts by selling call options (a hedging strategy called an option collar).

What I have mentioned are ideas that you need to fully understand before you consider using them. You need to understand how they trade, how much you need, and exactly why & when to enter them and exit them – a full plan before you actually employ them.

The stock market is at all-time highs from Federal Reserve money printing but this money printing is scheduled to stop before the end of 2014. This fundamental shift in the financial markets may trigger the beginning of a stock market decline. Everyone that owns stocks or stock funds needs to have some kind of plan to sidestep large losses to their portfolio at all times. I highly recommend you that you have some kind of plan, or you’ll be left riding the stock market all the way down on its next +25% drop that will certainly happen sooner or later. Losing this much of your hard-earned money will impair your net worth and dramatically lengthen the time-horizon for your investments to meet your financial goals.

How can I retire early?

July 27, 2014 admin Personal Finance Comments Off

In my experience, once someone is over age 50 it is a common desire to consider the possibility of an early retirement. I have gone through the math and mechanics with many people and it is rare for someone to have the financial capability retire early, in comfort, when including potential health care expenses.

Most people have little free time beyond their job, family, home maintenance, hobbies, and social events. Unfortunately, early retirement is only for those who carve out time and effort to go well beyond having an average income and setting aside 5-10% of their income in a retirement account.

Early retirement is at the end of 3 paths. You can choose any one of the three paths or combine them to make it happen even sooner. The three paths are:

An extraordinarily high income.
An extraordinarily high rate of savings.
An extraordinarily high return on investments.

Let’s go through each of these. An extraordinarily high income would be either from a career with a high-income trajectory (3 or more times the average income) or a normal career with a side-income or business. By definition, not many people are on track for an extraordinarily high income. I won’t go over career planning in this post, but this path is usually a professional career with a lot of education or sales ability. However, what most anyone can do is start a part-time side income with some examples being tutoring, window washing, painting, or anything else that you can work around your schedule.

The second path is having an extraordinarily high rate of savings. This refers to how much money from your income do you set aside for retirement each month, is it 5%, 10%, 25%, or 50%? You can use any retirement calculator, and even when starting from zero, you can retire in 10 years if you are a hyper-saver setting aside +70% of your income. There are many websites for hyper-savers for ideas and support in reaching a very-fast retirement. Although hyper-saving isn’t appealing to most people, the math that it highlights is the same for every potential retiree; whether you are saving 3% or 30% for retirement.

The third path is an extraordinarily high investment return rate. This refers to the profitability of your retirement accounts, how hard they working for your retirement. The average mutual fund investor earns 4%, or less, over long periods of time (according to Vanguard research), and that is simply not high enough for an early retirement – based on an average income with an average rate of savings. Extraordinary returns normally come from being an active real estate investor, active stock trader, active direct business owner, or other active investing areas.

How many of these three paths to early retirement are you currently doing? Sooner or later, you may want to have the option of an early retirement when your career stalls, health issues arise, difficulty finding work, family issues, or other reasons. The sooner you actively move forward on these three paths, the sooner you’ll have more financial options in your future, including an early retirement.

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