Your Net Worth According To Wealth Managers And Socialists

Your primary residence and net worth according to a wealth manager and socialistOne of the common beliefs I’d like to overturn is the idea that one shouldn’t count their primary residence as part of their net worth. This belief is propagated by the wealth management industry because wealth managers only earn fees based on your liquid net worth. Ideally, wealth managers would also like you to believe that your 401k, IRA, and any tax advantageous retirement account are not part of your net worth either.

Interestingly, the other group of people that believes a primary residence shouldn’t be included in one’s net worth is the socialist who looks to protect the feelings of renters who don’t own any property. Their logic is: if renters can’t include their place as part of their net worth, neither should anyone who perhaps saved for years to come up with a down payment and took some risk to buy. In the socialist’s mind, it’s OK to discount completely a $200,000 down payment or a 100% increase in home equity.

Let’s analyze a simple example to illustrate my contention that all savings and equity you’ve accumulated in your lifetime should count towards your net worth.

Your Primary Residence As Part Of Your Net Worth

Let’s say you own three, paid off properties worth $200,000, $500,000, and $1,000,000. You also have $300,000 worth of stock. You have no liabilities, no savings and no other assets to keep things simple. Your net worth is clearly $2,000,000. According to the wealth manager and  the socialist, however, it is not.

Wealth Manager’s Point Of View

If you live in the $1,000,000 property, the wealth manager will say your net worth is only $1,000,000 ($200,000 property + $500,000 property + $300,000 stocks). But practically speaking from the wealth manager’s point of view, your net worth is really only $300,000 because that’s the figure used to calculate fees. Even if you decide to rent out your $1,000,000 property and live humbly in your $200,000 property, the wealth manager’s business eyes still only sees you as being worth $300,000.

From the wealth manager’s perspective, one way to increase your net worth is to sell one of your properties and decide to keep the proceeds in cash or buy liquid investments such as publicly traded stocks or bonds.

Although I eliminated property taxes, insurance fees, maintenance fees, and freed up time by selling my rental house in mid-2017, I exposed myself to venture debt, real estate crowdfunding, and transaction fees through my reinvestments. Alas, there is no escaping investment fees. At least my reinvestments are 100% passive now.

Robo-advisors like Wealthfront have drastically lowered management fees from 1% – 2% to 0.25% or less. However, the problem with robo-advisors is that unless you tell them what percentage of your net worth they are managing, they will automatically assume they are managing your entire net worth. Therefore, it’s up to you to make sure their asset allocation corresponds with your risk tolerance.

Socialist’s Point Of View

If you decide to live in your $1,000,000 property, the socialist will also say that your net worth is only $1,000,000. But if instead you decide to move into your $200,000 property, it’s unclear whether the socialist will agree that your net worth is now $1,800,000. After all, the wealthier you are, the more concerned the socialist is.

In the spirit of equality, if socialists assign no value to the equity in your primary residence, then they should also assign a negative value to your net worth for renting. After all, the return on rent is always -100%. Therefore, the negative value assigned can simply equate to the cumulative cost of rent over time. The longer a person rents, the higher the negative value assigned to the renter’s net worth e.g. -$240,000 value to net worth after 10 years of spending $2,000 a month on rent.

In other words, renting will always be a drag on your net worth if the socialist is fair, no matter how much you use your disposable income to invest in other risk assets like stocks. At some point, the cost of renting might even outstrip your investment returns as you reduce risk in retirement and receive lower returns.

Now That’s Not Fair!

Renters and Homeownership rates over timeSince most of you are not wealth managers, most of you will agree how inaccurate the wealth manager’s assessment of net worth is. But given that roughly 37% of the US population rents, I can already hear a huge cacophony of complaints that it’s wrong to assign a negative value to rent, but okay for the socialist to completely negate all the home equity built up in your primary residence. After all, it is human nature to be completely inconsistent in thought.

One of the common arguments socialists make is, “You’ve got to live somewhere!” True, but after living somewhere for 30 years, who has the ability to live rent free, earn rental income, sell their property tax free up to $250,000 / $500,000, or pass on their property to their children at market value to avoid paying any capital gains tax? Only the homeowner.

Another argument socialists make is, “The return on rent is not negative! I get a place to live!” So does the homeowner, but with the added optionality of making a potential profit in the future.

It’s a tough pill to swallow that each rent check paid is never coming back, but acceptance is important for moving forward.

Think Clearly With Minimal Bias

In order to build wealth, you must be rational in your thinking. Liquidating your entire retirement portfolio because you find Donald Trump to be a vile man is not rational since he is pro-business. Expecting to go straight to the corner office because you’ve been working a couple years is not rational since you have colleagues who’ve worked for decades and are still not there yet.

I know none of you are socialists reading Financial Samurai, so please don’t think like one. It’s understandable to be biased towards stocks and against homeownership as a renter. The same goes for the 30% of homeowners in America who have no wealth besides their primary residence. Just realize that in 30 years you will kick yourself for not owning a primary residence just like you will kick yourself in 30 years if you don’t own stocks. Think about your children’s point of view when it comes time for them to invest in order to recognize the power of inflation and compounded returns.

If you would like to include your primary residence as part of your net worth, feel free to do so. Being able to rent out my old home a month after buying a fixer upper in 2014 was a fantastic way of monetizing the value of my primary residence. So was selling.

If you don’t want to include your primary residence as part of your net worth, that’s fine as well. Conservatively valuing your net worth might lead to greater wealth as you spend more time hustling. Just know that when you die, the government will include your primary residence in their estate tax calculations.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Readers, why do people not include their primary residence as part of their net worth when it so obviously is? If a primary residence isn’t to be include in a homeowner’s net worth, should a renter with no property get assigned a growing negative net worth value for renting? Why are people inconsistent in thought?

Related:

The Average Net Worth For The Above Average Person

Recommended Net Worth Allocation By Age Or Work Experience


The post Your Net Worth According To Wealth Managers And Socialists appeared first on Financial Samurai.

The Percentage Of People With No Wealth Outside Their Home Is Sad

I recently stumbled across a fascinating chart by Deutsche Bank highlighting that more families than ever before have ZERO or NEGATIVE non-home wealth. In other words, roughly 30% of households have no 401k, no IRA, no after-tax investment account, no private equity investments, no venture debt investments, no nothing beyond the value of their primary residence!

Check out the chart below.

Percentage of wealth outside your primary residence

If you have no investments outside of your primary residence, I’m not sure how you are ever going to be able to retire or reach Budget Financial Independence because Social Security alone is not enough to cover expenses after the age of 62.

I’m not even sure the average Social Security check of ~$1,200 a month is able to cover all your healthcare costs. In many cases, I suspect it isn’t. Let’s say you were”fortunate” enough to have worked 40 years and paid maximum FICA tax each year. You’d still only be getting a maximum Social Security check of ~$2,700 a month in today’s dollars.

The reason why the 2008-2009 financial crisis was so severe was because the vast majority of Americans (80%+) had the majority of their net worth locked up in their primary residence, and the chart above excludes the primary residence as part of one’s net worth. When the housing market crashed, so did the fortunes of the ~64% of Americans who owned their homes. Americans didn’t have enough cash or defensive bonds or even commodities to protect them from selling at fire sale prices.

What’s Going On With The Lack Of Outside Wealth?

Since breaching previous stock market highs at the end of 2012, the S&P 500 and the Dow Jones Industrial Average have marched to new highs each year. Further, real estate around the country has also improved dramatically. With so many asset classes doing well, why do a record number of Americans have no wealth outside their primary residence?

Here are some reasons I can think of.

* Runaway trains. After the economy started settling down in 2010, the typical American began thanking their lucky stars they were still solvent after the worst financial crisis in modern times. I cannot stress enough how shell shocked people were after experiencing so much wealth destruction in such a short time.

When you’re catching your breath, you’re not looking to aggressively invest in new assets. But starting in 2012, the stock market and real estate market really began to really take off. Meanwhile, the pace of appreciation for new assets like cryptocurrency rose faster than any asset class in history.

By the time Americans finally felt comfortable taking on more risk, all the investments we wanted to buy started giving us post traumatic stress because they’re at the same sky high valuations before the crisis. As a result, we couldn’t part with our cash. The trauma was just too recent.

The percentage of Americans that own stock has steadily declined over time

2) Spend before you lose all your money again. After the financial crisis, a lot of people questioned the wisdom of saving and investing all those years given it was so easy to lose so much money. Distrust in the stock market grew to new heights as people decided to spend their money on things and experiences rather than invest for tomorrow.

Here’s a millennial survey done by Goldman Sachs in 2015 about their thoughts on the stock market. GS should have asked millennials whether they trusted GS! I’ve come across many 35 and under people in my time who are cashed up and all about YOLO.

Distrust in stocks

3) Don’t know what to invest in. Despite TV, podcasts, books, and personal finance blogs, there is still a huge knowledge hole for how and where to invest one’s hard-earned savings. As a personal finance blogger, this makes me kind of sad because anybody who got on the “saving until it hurts” and investing train since I started this site in July 2009 would be much wealthier today. But as an online business owner who has two mouths to feed, this knowledge hole makes me extremely bullish about Financial Samurai’s future!

Of course, I can see a scenario where people finally gain the confidence and knowledge to invest only to see the stock market and real estate market start declining once again.The key is to at least have index exposure to various risk asset classes based on your risk tolerance.

Related: The Proper Asset Allocation of Stocks And Bonds By Age

4) Real wages haven’t kept up. We can’t assign blame for lack of saving and investing solely to fear and ignorance. Despite nominal income increasing over time, real median household income has gone nowhere since the financial crisis. As such, real wages haven’t kept up, while everything has gotten more expensive in real terms. Thus, it’s much harder to accumulate disposable income for investment.

Median household income over time

There’s An Even Worse Scenario To Consider

Yes, it stinks if your entire net worth is made up of your primary residence. But can you imagine not only not owning any investments outside your primary residence, but also renting all these years? What a disaster! Renting is equivalent to shorting the housing market. For some reason people find shorting the housing market more palatable than shorting the stock market. But the end result is quite similar – negative returns.

American and Canadian City Housing Prices

By now, there should be no debate between owning versus renting. If you know where you plan to live for the long term, it’s best to stay neutral inflation by owning your primary residence. People who invest in stocks and rent realize this. However,  they just don’t want to acknowledge the truth that like with stocks, the long term trend for real estate is up and to the right.

For some reason, stock only investors trick themselves into believing they can’t simultaneously invest in both asset classes for the long term. It’s the weirdest thing! But this thinking just goes to prove point #3 above – there’s a lot more financial education that needs spreading.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Readers, do you own any investments outside your primary residence? Why do you think the percentage of people who own no wealth outside their primary residence has reached all-time highs? Why do you think people still believe renting their entire lives is the better way to build wealth?


The post The Percentage Of People With No Wealth Outside Their Home Is Sad appeared first on Financial Samurai.

The Three Levels Of Financial Independence: Because Money Is Only Part Of The Equation

The Three Levels Of Financial Independence by Financial SamuraiReaching financial independence is the holy grail of personal finance. But what does financial independence really mean? In this post I’d like to determine the various levels of financial independence. That’s right. Even in financial independence there is no one size fits all since everybody has a different desired standard of living.

Contrary to what you may think, financial independence is not all about having enough money to cover all your expenses and then some. Financial independence also means being able to overcome your psychological fears to truly live free.

For example, I have peers who have millions in net worth, yet still make their respective spouses work because they do not feel 100% financially secure. Common reasons include the need for health care coverage or their spouse’s “love” for their job even though they’d rather be doing something else.

Here are the three levels of financial independence I’ve come up with. All three levels of financial independence should meet the following basic criteria:

1) No need to work for a living because investment income or non-work income covers all living expenses

or

2) Net worth is equal to or greater than the number of years left in your life X living expenses e.g. $3 million with 30 years left to live is FI if your living expenses are no more than $100,000 a year

Budget Financial Independence

If your household income is less than ~$40,000 a year, you are considered lower middle class. Don’t be offended. It’s just a definition based on millions of datapoints. The current official poverty threshold is an income of $25,000 per year for a family of four and $19,000 for a family of three.

If you are happy with living a lower middle class lifestyle, then you would need between $800,000 – $1,600,000 in investable assets returning 2.5% – 5% a year. Of course if you’ve been investing in the bull market for the past 10 years, you’ve likely seen a higher return than 5%. But over the long run, it’s best to stay conservative since downturns do happen.

Given the 10-year bond yield is at ~2.5%, everybody should make at least 2.5% a year on their investable assets risk free. If you’re losing money during your financial independence years, you haven’t been investing properly.

This category of financial independence is interesting because there’s a lot of tradeoffs the individual or couple still make, such as:

  • Making one spouse work in order for one spouse to live the FI life.
  • Moving to a lower cost area of the world instead of living where most of your family and friends are
  • Downsizing to a small rental, small house, or even an RV or van.
  • Delaying or not having children, which can really hurt the FI budget.
  • Taking on a part-time job.
  • Aggressively working on your side hustle / passion project.

The question many people have in this stage is therefore: Are you really FI if you’ve got to do one or many of these things? Many who work a day job argue no, but it doesn’t matter because nobody can tell you how to live your FI life. If you don’t have to work a full time job and can cover your expenses, you are Budget FI as far as I’m concerned.

Budget Financial Independence (BFI) is where I found myself between 2012 – 2014. I was earning about $80,000 in passive income, which was more like $40,000 since I lived in San Francisco, and had negotiated a large enough severance to last for 5-6 years of living expenses. Even with these numbers, I was still afraid that I had made the wrong choice leaving a job at 34. As a result, I tried to sell my house and downsize by 70%, but nobody wanted to buy my house in 2012 thank goodness. Further, my wife and I agreed that she work for three years until she turned 34 (hooray for equality) to give us enough time to figure out whether we could both leave the workforce. At the end of 2014, she negotiated her severance as well before her 34th birthday.

Basic Financial Independence

The median household income in the United States is roughly $60,000. $60,000 is therefore considered a comfortable middle class income for most Americans. If you didn’t have to work for your $60,000 a year income, then life should be better, maybe even fantastic.

Based on a conservative 2.5% – 5% annual return, a household would need investments of between $1,200,000 – $2,400,000 to be considered financially independent. Once you’ve got at least $1,200,000 in investable assets and no longer want to work again, I don’t recommend shooting for an overall return much greater than 5%. You can carve out 10% of your investable assets to go swing for the fences if you wish, but not more. There is no need since you have already won the game.

Remember, once you’ve reached financial independence, you no longer have to save. Everybody striving for financial independence tends to save anywhere from 20% – 80% of their after tax income each year on top of maxing out their pre-tax retirement accounts. Therefore, if you’re able to 100% replicate your gross annual household income through your investments, you’re actually getting a raise based on the amount you were saving each year.

If you have 20 years left to live and only require $60,000 a year, having $1,200,000 can also be considered enough even if you make zero return. The only problem is that your purchasing power will decline by ~2% a year due to inflation. The other problem is that you don’t know exactly how many years you have left to live. Therefore, it’s always better to have more rather than less.

My blogging buddy Joe from Retire by 40 is a good example of having enough money, but finding it difficult to overcome the fear of not working. Every year, he questions whether his wife can join him in retirement, even though he’s been retired for over five years, has close to a $3 million net worth, and has online income and passive income to cover more than their annual living expenses. Every year I tell him she could have retired years ago, but he’s adeptly convinced her to keep on working.

Related: Achieving A Two Spouse Financial Independence Lifestyle

Blockbuster Financial Independence

This is a level of FI that I’ve been trying to achieve since I was 30 years old. I decided back then that an individual income of ~$200,000 – $250,000 and a household income of ~$300,000 was the ideal income for maximum happiness. With such income, you can live a comfortable life raising a family of up to four anywhere in the world. Given I’ve spent my post college life living in Manhattan and San Francisco, it was only natural to arrive at much higher income levels than the US household median.

These figures are partially due to a highly progressive tax code that was implemented in the mid 2000’s that really went after income levels above these thresholds. Further, I carefully observed my happiness level from making much less to making much more. Any dollar earned above $250,000 – $300,000 didn’t make a lick of difference. In fact, I often noticed a decline in happiness due to the increased stress from work.

Using the same 2.5% – 5% return figures, one would therefore need $5,000,000 – $10,000,000 per individual and $6,000,000 – $12,000,000 per couple in investable assets to reach Blockbuster Financial Independence. In addition, it is preferable if your home is also paid off.

If you are generating $250,000 – $300,000 in passive income without having to work, life is good, really good. At my peak in 1H2017, I got to about ~$220,000 in annualized passive income, but then ended up slashing ~$60,000 from the top after selling my rental house to simplify life. Therefore, I’ve still got a long ways to go, especially now that I have a son to raise.

The way many people reach Blockbuster Financial Independence with income of $250,000 – $300,000 is through a combination of investment income and passion project cash flow. Since FI allows you to do whatever you want, here’s your chance to follow the cliché, “follow your passions and the money will follow” without worry that there will be no money. My passion so happens to be this site.

But due to fear of not being able to comfortably provide for my wife and newborn, I worked too much in 2017 on Financial Samurai to my health’s detriment. Therefore, until I can reach $300,000 a year in passive income or never let Financial Samurai stress or tire me out again, I won’t be reaching Blockbuster FI any time soon.

All Levels Of Financial Independence Are Good

The Three Levels Of Financial Independence by Financial Samurai

The Pyramid Of Financial Independence

Even if you find yourself in the Budget FI category, it’s still better than having to work at a soulless day job with a long commute and a terrible boss. Most people who find themselves in Budget FI are either on the younger side (<40), don’t have kids, or are forced to live frugally. I’ve found that in many cases, folks in Budget FI long to lead a more comfortable life so they either get back to work, do some consulting, or try to build a business within three years to move up the pyramid.

The only way I’ve found to successfully overcome the fear of not working is by either negotiating a severance, building enough passive income to cover all your living expenses for at least 12 consecutive months, or trying out FI living first while your partner still works.

There is this natural urge to still make financial progress by continuing the good financial habits that got you there in the first place. And wonderfully, the progress you make is like finding loose diamonds after you’ve already found a pot of goal.

Related:

Ranking The Best Passive Income Streams

The Average Net Worth For The Above Average Person

Readers, what is your definition of financial independence? Will you be satisfied if you only get to Budget FI? What stage of your financial independence journey are you currently in?


The post The Three Levels Of Financial Independence: Because Money Is Only Part Of The Equation appeared first on Financial Samurai.

2018 Investment Outlook For Stocks, Bonds, And Real Estate: The Last Easy Year

Financial Samurai Investment Outlook For 2018Before you read my investment outlook for 2018, you must first understand my financial situation and my biases. Our biases often warp our reality by anchoring us to past situations.

  • Permanently left work in 2012 at the age of 34
  • Net worth got crushed by ~35% in 2008-2009
  • Small business owner who will benefit from the new tax plan
  • New father with a spouse who is a full-time mom
  • Favorite asset class is real estate with three physical properties in CA, one in HI
  • Worked in equities for 13 years at a couple large investment banks
  • Have significant investment positions in stocks, bonds, and real estate

With this background information, I believe 2018 will be the last year of “easy money,” where assets remain relatively stable as they track historical returns. Let’s discuss each asset class in a little more detail.

Stock Market Outlook: One Last Hurrah

According to the U.S. Small Business Administration, small businesses account for 48% of national employment. In number, they represent 99.7% of all businesses in the country. In other words, it is the guy with the plumbing store or the gal with the digital online marketing agency who make up a massive part of the American economy.

Based on my interactions with other small business owners, everyone I’ve talked to is extremely excited about lower taxes and potentially less red tape. It’s really “less red tape” that most owners are looking forward to, and not so much the 20% deduction of qualified small business income.

As business owners, we hardly EVER feel the government is on our side because we’ve got to: 1) pay license fees, 2) pay special small business taxes, 3) pay both sides of the FICA tax, 4) pay an accountant to figure out our more complicated taxes, 5) wonder why we can’t collect unemployment after our business goes under, and much more.

With the passage of the new tax plan, there is finally hope the government is now on our side. Having a tailwind feels so much nicer than facing a headwind while climbing a hill – which is often what running a business feels like. As a result, I believe there will be a natural inclination to reinvest in our respective businesses and ultimately grow revenue. Higher revenue growth equals higher profits and higher company valuations.

Publicly traded companies are just a larger reflection of privately owned small businesses. And I think the mood in the boardroom is as bullish as ever with a 21% permanent corporate tax rate.

Stock market's history of bad things

When there is business euphoria, as there is now, valuations matter less. The chart below is the S&P 500 Case Shiller P/E ratio as of January 2018. Instead of investors now thinking 33.27X is too high, investors are now thinking there’s another 10X multiple higher to go until we reach 2000 peak bubble levels.

Investors aren’t really thinking we’re going to get to 44X, but it’s nice to know we still have this historical valuation buffer before everything blows up. After all, corporate cash balance sheets are massive compared to 2000, rates are accommodative, taxes are lower, and earnings are still growing.

Given we’re now in the final stages of a blow off where it’s liquidity, excitement, and FOMO driving the markets, I expect to see the S&P 500 breach 3,000 in 2018. If we get back to 2000 peak level valuations, we’re talking ~3,600 on the S&P 500, which ain’t going to happen. I expect downside risk of 10% for an even risk / reward ratio. I’m buying the dips.

Related: The Proper Asset Allocation of Stocks And Bonds By Age

Bond Outlook: Lower Interest Rates Forever

I’ve said this before, and I’ll say it again: we are in a permanently low interest rate environment. The 10-year bond yield has been going down since the late 1980s due to information efficiency, globalization, and policy efficacy. I expect interest rates to remain accommodative for the rest of our investing lives.

For 2018, I’m looking for another sub-3% level for the 10-year bond yield, and more likely an average of 2.6%, despite a couple more Fed Funds rate hikes expected this year. In other words, I expect bonds of all types to at least provide a total return equal to their coupon return as principal values hold rock steady. 

With the Fed raising the short end, and longer term rates staying steady, the yield curve is flattening. Historically, a flat or inverted yield curve portents an imminent recession as higher rates on the short-end choke off credit growth, make existing credit more expensive and curb excess reserves, thereby slowing the economy.

Flattening Yield Curve

But if the Fed is really going to cement itself as an inflation fighter, then this belief gives confidence for bond traders to invest in longer duration Treasuries at lower yields because no accelerated inflation is expected. Hence, I’m confident investing in 20-year municipal bonds that pay a 3.5% – 4% tax free yield for the low risk portion of my net worth.

We will know the end is near if the Fed raises the Fed funds by 1% and the long end remains flat. That’s when inversion occurs and should have enough time to reduce our risk exposure by then. I expect downside risk of half the coupon bond yield. I’m buying muni bonds whenever the 10-year bond yield goes above 2.6%.

Related: The Case For Bonds

Real Estate: A Tale Of Two Cities

Remember how I said in June 2017 that the rental market was soft in San Francisco due to a large supply of new condominiums and nose-bleed level rents that far outpaced wage growth? From 2H2015 to May 2017, I rented out my house for $8,800 – $9,000/month.  When I tried to get prospective new tenants to pay the same rent in May 2017, I got zero takers, despite aggressively marketing the house for 45 days. The best two offers I got were for $7,500 from a divorcee with an unstable startup and from a family of six with a dog. So, instead of going through the pain of continuing to be a landlord, I sold the house for a little over 30X annual gross rent.

The numbers are finally showing up in the data. Check out the rent prices for one bedroom and two bedrooms in December 2017 according to Zumper. If there was a three bedroom segment, I’m sure the numbers would look even weaker. Like stocks, real estate prices should trade on earnings fundamentals. With a decline in rent in so many of the most expensive cities and new negative tax laws in effect, real estate prices should remain weak in the most expensive markets.

Major City rental market price changes from peak

Take a look at NYC housing market data from Douglas Elliman. Sales volume and prices headed down in 4Q2017 as buyers took a wait-and-see approach regarding the tax plan. Now that the tax plan has passed, it is worse than most people expected due to the $10,000 SALT cap and the $750,000 mortgage cap for interest deduction.

NYC real estate market

Real estate investors should view NYC and SF as “leading indicators” of what should be expected for other expensive real estate markets. Now that prices are softening, you should be in no rush to buy. Be picky about what’s likely going to be the largest purchase of your life. Focus on location and expandability, the #1 way to increase your chances of making money in real estate. If you can build for $200/sqft and sell for $400/sqft, you win. And most of all, run the numbers to see if valuations make sense.

With the slowing of coastal city real estate, it’s only a matter of time before non-coastal real estate slows as well. But figuring out the timing of when the slowdown will occur and by how much is the biggest conundrum. Three to five years tends to be a good lag, so we can make an educated guess that between 2019 – 2021 is when the data will appear. Let’s just say 2H2020 to be more precise.

I don’t think there will be more than a 5% – 10% correction in coastal city or non-coastal city markets over the next couple of years because the economic engine is still quite strong. Further lending standards have tightened since the last financial crisis. Therefore, if you’re buying a home to live in for the long term, you should be fine.

Some folks have questioned the wisdom of my $810,000 investment in real estate crowdfunding outside of San Francisco. Understandable, given the absolute dollar amount sounds large. But I had a $2,740,000 position in a single SF property with a $815,000 mortgage where rents are declining. Therefore, I’ve reduced risk exposure while diversifying into 12 different non-SF properties where rents are stronger. Further, I keep my alternative investments to no more than 10% of my overall net worth and still have three California-based properties to manage.

Enjoying One Last Year Of Great Times

As a business owner, I haven’t been this bullish since 2007, when I got promoted to Vice President at my banking job. Of course a year later, shit hit the fan and I saw a 35% destruction to my net worth in a matter of months. If a downturn happens again, I’m better prepared because I’ve got far more passive income streams, a variety of defensive investments, and a much lower debt to equity ratio.

If one can get a 10% return in stocks, a 4% return in bonds, and an un-levered 5% return in real estate without much volatility, I say that’s pretty easy money. If I can get these types of returns, perhaps I’ll finally be satisfied with a blended 2% – 3% guaranteed rate of return in retirement.

If you haven’t done so already, run your investment portfolio through an investment analyzer to see what your latest exposure is to the market. Then carefully analyze your net worth composition and make sure you are comfortable with its construction. I wasn’t entirely comfortable about my net worth composition in 2017, but now I am for 2018.

Personal Capital Investment analyzer

Sample Investment Analyzer by Personal Capital

Readers, what are your thoughts about the stock market, bond market, and real estate market? How are you positioned for 2018? Please also share your background and biases. As always, do your own research and invest based on your own risk tolerance.


The post 2018 Investment Outlook For Stocks, Bonds, And Real Estate: The Last Easy Year appeared first on Financial Samurai.

Financial Samurai Goals 2018: Back To Early Retirement Life!

Financial Samurai 2018 Goals

My biggest disappointment in 2017 was pushing my mind and my body past their limits. At the age of 40, I no longer have the energy to do what I’ve been used to doing all my life, yet I worked more than I ever had before. I was a stubborn mule who couldn’t accept the fact that I had aged. As a result, I injured my ankle, back, elbow and quads.

I also had a breakdown one evening when I couldn’t put my son to bed after the third try at around midnight. Hearing my baby cry is a heart-stinging experience. After an hour and a half of singing and cradling, I gave up on giving my wife the rest she needed and texted her to relieve me.

I felt like such a failure. I had spent years building a lifestyle business in order to be able to be a good father. Yet I lost it because I was working way too much on the business instead of storing up energy reserves for the late night shift.

It was at this moment I realized that going down the path of full-time caretaker with my wife while also keeping Financial Samurai going at a fervent pace wasn’t going to work out. I was no longer my happy go lucky pleasant self. Here are some goals that will make life better in 2018!

Goals For 2018

1) Return to early retirement life. As this site has grown more people are reaching out for help or contacting me with business opportunities. It’s become overwhelming. No longer is Financial Samurai a casual, unknown site where I can say and do what I please.

I want to respond to everybody but I can’t. Therefore, I created a massive out of office e-mail with answers to my most frequent requests. But it was ineffective. One business partner e-mailed me on Dec 22, then again on Dec 26, then again on Jan 2. It’s good he’s hustling, but what happened to boundaries, especially during the holidays?

In 2018 two of my goals are to publish only 100 articles (from 175) and to start having more fun with the topics without stressing about the quality of the content. While the business component of this site is exciting, it has become too much. Just like with day job income, after you make a certain amount of business income, there is no more additional happiness. Instead, misery often ensues due to increased demands for your time.

Early retirement life is all about being carefree and only doing what I enjoy.

2) For six days a week, provide an average six hours of JOYFUL assistance to my wife. For the seventh day, provide four hours of joyful assistance for a total of 40 hours a week.

As a stay at home dad, I provided around eight hours of support a day to my wife in 2017. For example, I would always relieve her for 2-3 hours in the morning, depending on how difficult the night was so she could shower, go to the bathroom, catch up on reading, and do her own thing. Then I’d provide care for 2-3 hours in the afternoon, and another 3-4 hours in the evening.

After a while, I realized that a lot of my assistance was not 100% done with a smile because I was always tired and sometimes frustrated after having already worked so many hours that same day on the business. As a result, tension sometimes ensued. Thankfully, she started doing the entire night after the third month and things got better. And now that my publishing goal is 35% less, things should get even better.

Providing six hours a day of happy care is better than eight hours a day of grumpy care. I know I’m not alone with regards to relationship tension during the first year of a baby’s life. More than 80% of couples experience a huge drop (40% – 90%) in marital quality during the transition to parenthood. Research also says folks who are sleep deprived typically suffer a 91% loss in their ability to regulate strong emotions, while the decline in general cognitive skill is equally dramatic. Just think about how dangerous it is to drive drowsy.

3) Increase business productivity. In other words, find a way to do less and maximize my existing content to boost traffic and revenue. I will never spend more than four hours a day on the business in 2018. Further, I will cease responding to comment and e-mail questions whose answers are obviously discernible in the post and encourage readers to use the search box on my website for answers.

Financial Samurai on Quora

Not bad for 10 days of work over the holidays

With time freed up from not responding to obvious questions, I plan on building new readership by answering questions on Quora, a Q&A social platform. I’ve always known about the benefits of Quora, but never bothered to try until the Christmas holiday when a reader asked whether I was sleep deprived in my 2017 review post even though that’s what I wrote I was in my intro. Instead of answering his question, I responded to a question on Quora that ended up bringing in a lot of new traffic.

I plan on building up my authority on everything San Francisco, Real Estate, and Investing related. Even though I’ve lived in San Francisco for 17 years, own SF real estate, worked in finance, consulted for startups, and have this site, very few people in the SF media have reached out. If I can become a go-to resource, then productivity should increase.

After 10 days of trying, Quora has ranked me as a “Most Viewed Writer” in Real Estate and San Francisco. The ranking only lasts for 30 days, but I’m sure with consistency, the results will grow.

4) Spend more time doing work in the hot tubThrough voice dictation, I’m actually writing this post in my hot tub right now. Yeah baby! Not only am I utilizing my hot tub investment more, but I’m getting some stress relief while also producing work. Of course I’ll still have to do all the editing on the laptop, but this is a good way to really focus on living the early retirement lifestyle. Whenever I can knock out two or three things in one activity, I get very happy.

5) Aggressively spend more money on help. Until recently, we’ve always done all the lawn work, housecleaning, and childcare. There’s something therapeutic about gardening and cleaning. But now that we are tired parents, we need to prioritize! I really need help at this stage because my lower back is still tender. It’s kind of torturous to crawl around and chase a baby for a couple hours with a bad back.

Finally, I’m looking to hire someone who has a disability do some freelance work online. Roughly 15% of the world’s population, or one billion people experience some form of disability. Not only will this person get paid a fair hourly wage, this person will also gain some valuable insights about the online business world. Leave a comment with a brief intro about yourself with your e-mail address if interested.

6) Continue to help people of all types in different ways. This means publish two times a week, produce at least 30 podcasts, see my foster child mentee at least 24 times, coach high school tennis, and participate in more fundraising events. Actively helping others by getting involved in their lives is one of the best benefits of early retirement.

7) Stop feeling so damn guilty for not doing more. I have a tortured soul. Since I was 13, I’ve always had the belief that if I can, I must because a friend of mine died in a car accident and was never given the chance. But with this attitude, I feel a tremendous weight on my shoulders to be the financial provider and a caregiver for my son, even though my wife is a stay-at-home parent and we should have enough money.

I sought some advice about getting rid of guilt from a father who told me, “Raising a child is pretty easy if you can go away for 12 hours a day. Out of sight, out of mind.” In other words, he was suggesting that I find a day job like many fathers. But I don’t want to go that route.

Whenever I feel bad for not doing enough, I will remind myself that being able to provide my wife and me the freedom to take care of our son during his crucial first five years of life should count for a lot. There are many parents who reluctantly have to go back to work after 1-3 months.

8) Get regular physical checkups. One in three people will get cancer. And one in four people will die from cancer. The closest thing to curing cancer is early detection. However, most cancer is detected only after a patient feels symptoms. By stage three, only 8% of cancer patients live past five years. I bring up cancer because an old colleague of mine died of breast cancer at age 44. She leaves behind two children and a husband. I cannot imagine the pain of leaving Earth before I see my son grow up to be a strong and independent man who finds someone who loves him as much as we do.

As much as I hate full physicals, I will get one. And I will ask my doctor to do more blood work tests to see if they can find any anomalies. If I feel pain, I won’t be afraid to see the doctor. After all, I’m paying close to $700 a month for healthcare! Good thing I did some blood work in mid-2017 for my life insurance policy. After checking for 22 variables, the only anomaly was a slightly elevated cholesterol reading.

9) Find a way to grow net worth by $2 million. What’s a personal finance site without a concrete financial goal. With the estate tax threshold doubling to $22 million for couples, why not shoot for more wealth while taking things down a notch. The more you have, the more time and money you have to help other people. I assign only a 30% chance my investment returns plus savings will achieve this goal. Therefore, the only way to get a $2 million boost is if I invent something that takes off, get some kind of huge JV offer for my company, build a new revenue channel, or get really lucky with an investment. As always, I’ll be tracking my net worth closely to make sure my risk exposure is appropriate.

Excited About Early Retirement

One benefit about returning to the kick back early retirement lifestyle is that I’ll be writing more about early retirement. It’s really a wonderful stage that I think everybody should shoot for. It just didn’t last longer than a year for me due to my strong desire to maximize Financial Samurai’s potential.

2018 is the year I’ve been waiting for. To finally relax and be a present dad after spending so much time growing passive income and building a lifestyle business. Our little one is growing up so fast. We’ve got to cherish every moment. It’s highly likely he’ll be our only child given our advanced ages.

Here’s to letting go in 2018! May your money work hard for you so you don’t have to.

Readers, share with me some of your goals for 2018. How do you know when enough is enough regarding money and building a business? How are you able to let go and not maximize your potential? If you are a stay at home parent, how many hours of help do you get from your partner a day on average? 


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Financial Samurai 2017 Year In Review: The Most Difficult Best Year Ever

Financial Samurai 2017 Year In ReviewHappy 2018 Everyone!

Since the year doesn’t really start until the second week of January, I’ve decided to spend more time reflecting. Hopefully you will too on a tropical island somewhere.

Before 2017, the best year of my life was when I got married on a cozy beach in Oahu. It was a simple wedding with only 16 family members in attendance. There was a gentle breeze that rustled the palm leaves while a ukulele player played Somewhere Over The Rainbow. The ceremony was simple, yet so beautiful.

No moment ever topped that day until our son was born last Spring. The birth went smoothly and I could finally breathe a sigh of relief both mama and baby were safe and healthy. We feel so blessed to have him in our lives.

Despite all my preparation, I still underestimated how difficult it would be to work 15 hours every day for months on end. I worked in banking where 15 hour days were the norm. But even in banking, we got at least one day off a week. Further, nobody works every single minute they’re at work. With parenthood, one look away could spell disaster.

Constant sleep deprivation killed my mood. No longer did I have the desire or creativity to spend several hours writing a post. No longer did I have the patience to deal with annoying people. Yet we had to forge on like all newborn parents do to make sure our baby was properly cared for.

If it wasn’t for my wife, we wouldn’t have a precious son. And if it wasn’t for my wife, there would be no Financial Samurai because she started taking over the entire night after he was three months old. Therefore, I thank my wife for everything she has done and apologize for all the times I was unpleasant. She is the sweetest, loveliest, kindest person I know who deserves a partner who always treats her well. I will do better. I promise!

Financial Samurai 2017 Year In Review

When I re-read my goals for 2017 post with the theme, “Always Be Grinding,” I was surprised to read how enthusiastic I was, yet I didn’t take any outsized investment risk. In fact, I took risk exposure down by 17.5% after selling a rental house. It was the classic believing in one thing, but taking no corresponding action.

Here’s what I wrote in the beginning of 2017:

I haven’t been this excited since I first got a job out of college when the sky was the limit. For the past 10 years or so, I’ve been questioning what’s the point of working so hard if the government is just going to take more from us than what we’re able to keep. To finally get some potential tax relief is thrilling!

Despite my excitement, I didn’t pile into stocks because I’m always skeptical of what politicians can accomplish. Instead, I invested $250,000 in a real estate crowdsourcing because I believed the Red States would benefit from a Trump presidency and invested just $41,000 in stocks for 1Q2017 out of $611,000 total.

But what I did do right was focus on my largest asset, which is now my online business. I upped production in the first quarter and saw a 48% rise in revenue and an even larger increase in operating profits due to the beauty of fixed costs. Operational leverage truly is one of the best reasons for running an online business.

Despite only seeing a 15.87% return on my public investments for 2017, my online business more than made up for the slack. If you can consistently grow your most valuable asset at a faster pace than every other asset class over the long term, I dare say you will one day do your family proud.

Here’s a review of the specific goals I made in 2017.

Business Goals

1) Focus on growth by broadening the audience. I’ve received plenty of feedback that I need to write more for the mass market. Even though my advice holds true whether you have $1,000,000 to invest or $10,000 to invest, readers have told me they can’t get their heads around larger numbers.

Failed. I tried my best to write more about budgeting and savings, but I only ended up writing five new posts on this topic out of 175. Two of the posts probably don’t even count: Stop Frugality From Leading To Lifestyle Deflation and Millennial Avocado Toast Analysis. The only post I feel can help the mass market is: Housing Expense Guideline For Financial Independence. I doubt my audience broadened very much, but at least traffic grew by 20%.

2) Publish a new ebook by July 18, 2017. Despite the rise in interest rates, it still takes a gargantuan amount of money to generate $1,000 a month in passive income – we’re talking $300,000 in capital at a 4% gross yield.

Failed. I worked with several folks to put together a Financial Samurai real estate book in the first half of the year, but lost steam once my baby was born. It’s still a no-brainer to produce online products once you’ve developed a brand and a following, but time is at a premium. 

Related: Ranking The Best Passive Income Investments

3) Focus on three business partnerships. I’ve got about 10 business partnerships with Financial Samurai right now. As the main writer and business development guy, it’s very easy to get spread too thin. So I need to focus.

Failed. I worked on developing a better relationship with two business partners, but not three. I’m not sure what the right business partnership is for my new category: family finances. If there are any business out there who want to make me a pitch, I’m all ears. My goal is for each product to provide maximum value at minimal to no cost, just like this site. 

4) Send two to four e-mails a month. I’ve been paying $150 a month to send out only one newsletter a month for the past couple of years. What an underutilization of resources. I plan to write shorter, punchier e-mails to connect with all my newsletter subscribers.

Passed. I averaged sending 2.5 newsletters a month for the year. I’ve done a poor job growing my e-mail subscriber list compared to the amount of traffic I get for this site. It’s probably because I just don’t care for selling anything to anybody.

Personal Financial Goals

5) Create a million bucks of wealth. My goal in 2016 was to grow my net worth by $500,000 because I had a neutral outlook. Given I’m now bullish on my business, it’s only logical to shoot higher.

Passed. With the way most asset classes have performed this year, it wasn’t hard to generate a lot of wealth, especially if you’ve spent 20 years accumulating a financial nut large enough to retire on back in 2012. I received some interesting offers for this site for multiple millions of dollar, but I turned them all down. You should only buy, never sell a high margin, cash flow positive business that can be done anywhere in the world with minimal maintenance. 

Related: The First Million Might Be The Easiest

6) Invest at least $20,000 a month without fail. The $20,000 a month doesn’t have to be in the stock market. It can be in bonds, real estate crowdsourcing, private equity, private debt, or paying down a mortgage.

Passed. I ended up investing $39,609 of new money on average a month for a total of $475,319. At the same time, I was able to strengthen my balance sheet by adding around $450,000 in cash and paying off $916,000 in mortgage debt due to the sale of my rental home. 

Related: Investment Lessons From A Surreal 2017

7) Start earning $20,000 a month in passive/semi-passive income by year end. My passive income is currently averaging about $17,600 a month over the past six months. To increase my passive income by $2,400 a month, I’ve got to publish my real estate book by year end, market it well and update my severance negotiation book for 2017.

Financial Samurai Passive Income Streams

Failed. Since I didn’t publish a new book, I didn’t receive new passive income. In fact, my passive income dropped because I sold my rental home that was generating over $60,000 a year net (rental property #3) and one of my CDs came due. With $800,000 invested in equity real estate crowdfunded projects, there is the potential to earn a 8% – 15% IRR in 4-5 years. With $600,000 invested in municipal bonds, I should earn $15,000 – $20,000 in after tax income a year. I’ll be updating my passive income numbers for 2018.

8) Spend like I’ll be dead within 10 years. I’ve been frugal my whole life. It’s one of the main reasons why I was able to hit the eject button at 34. But, I’ll be 40 in 2017 so it’s time to live it up for the second half of my life. You don’t have to be as stealth in middle age because people are more accepting of those who’ve spent 20+ years working.

Pass. I bought two big ticket items in 2017: 1) a $16,000 hot tub, and 2) a $58,000 vehicle in cash to keep the family safe with zero regrets. I don’t miss my Honda Fit, especially since it began having starter problems towards the end. Further, there is no way I would feel safe driving Baby Samurai in a hatchback. The hot tub is the best lifestyle investment ever. I average five hours a week soaking after tennis and softball. I can’t wait for the entire family to have fun talking story in the hot tub one day. 

Related: When Is It OK To Forsake Stealth Wealth And Spend Up?

9) Don’t chase the stock market. Although I’m bullish on my business, I’m lukewarm on the stock market and the economy due to valuations, political uncertainty, and the prospect of higher interest rates squeezing consumption.

Failed. I chased the stock market because I didn’t invest enough during the first half of the year. This was the first time in history the S&P 500 didn’t have a down month. At the end of the day, my public investments returned 15.78%, so the chasing wasn’t that bad. If I didn’t have a huge influx of cash during the summer after the home sale, my investments would look more balanced. 

Related: The Proper Asset Allocation Of Stocks And Bonds By Age

Personal Goals

10) Scare myself out of my comfort zone. I haven’t been personally challenged in a long time. With a portfolio of over 1,300 posts on Financial Samurai, I know with decent confidence that if I write 152 new posts a year, I should be able to grow traffic and revenue by ~10% a year if I do nothing else. But writing 2-4X a week is an easy goal to achieve.

Passed. I finally started the Financial Samurai iTunes channel, whoo hoo! Too bad it only works on mobile and tablets, and not on the desk top for some reason. In the future, I hope to have my wife join me on the podcast and interview other people as well. It’s hard for me to speak eloquently, but I know after one year of practice I will get better. 

11) Really make a difference in 12 people’s lives. At the end of the day, the best feeling in the world is when a reader sends a private e-mail or writes a comment that says how much a particular article or the site in general has helped them achieve their dreams.

Pass. I’ve received over 70 e-mails and comments from readers this year who said something nice about how a particular FS article helped them get their finances in order or improve their lives for the better. These are truly the most gratifying and motivating reasons why I continue to write so much. 

I also spent three months coaching high school kids tennis, which was awesome. We got to the district finals and achieved the best record in the school’s long history! The best moment was when a senior, who had never won a big match before, won a huge rubber match in front of his mom and he ran to give me a hug afterward. 

Finally, I finally became a foster kid mentor. It took about eight hours of training and testing, which is probably one of the reasons why more people don’t do it. But the training is important given how precarious and important the situation is to take care of innocent kids who find themselves in a suboptimal situation. I’ve seen my foster kid five times now, and taught him how to ride his bike with no hands. So priceless! I can’t share details, but he’s a wonderful boy who wants to be a YouTube Gamer. It’s awesome that he already knows that creating content is much better than consuming content! 

Financial Samurai Foster Care

Giving shakas after learning how to ride a bike with no hands – December 28, 2017 at 12:35pm

12) Start a family. My wife and I feel we’ve done everything we’ve wanted to do as adults. We’ve both engineered our layoffs. We don’t have the itch to travel much anymore. We have no desire to climb anybody else’s corporate ladder. After two years, our house is finally remodeled to the way we want. We have a digital business that allows us to be present for our child. Finally, we’ve developed a steady stream of passive income that should support a family of up to four.

Passed. I already knew my wife was pregnant when I wrote my 2017 goals, but you just never know until the baby is delivered. Based on research, speaking to hundreds of other couples, and personal experience, there are often complications that occur during pregnancy. If you’ve decided you want to start a family and have your finances in order, do not wait another day. 

Related: What’s The Best Age To Have A Baby? A Biological And Economical Analysis

Thanks Again For A Great 2017!

Despite all the craziness that went on in 2017, the one thing I will always clearly remember is the birth of our son just like how all I remember during the financial crisis was our quaint wedding.

It was hard to not only keep up the posting frequency on Financial Samurai, but to actually double production in order to buy more time in the future. This is where I really messed up because I didn’t maximize the purpose of our lifestyle business: to provide for a better life.

Instead of being so focused about protecting my family’s future by working so much, I should have spent more time enjoying the present. Life speed accelerates. Some changes will be made! Stay tuned for my 2018 goals and outlook post.

Readers, how was your 2017? What were your hits and misses?


The post Financial Samurai 2017 Year In Review: The Most Difficult Best Year Ever appeared first on Financial Samurai.

Investing Lessons From A Surreal 2017

Financial Samurai investment tracker full yearAt the beginning of the year, I decided to track my investments with a detailed spreadsheet because my cash flow was increasing and I wanted to make sure the money was being properly deployed based on my risk tolerance. If I force myself to think for hours about how to invest my money, hopefully I won’t rashly spend it on completely wasteful things such as a sports car that can’t fit a baby seat or a vacation property I’ll hardly ever use.

On the flip side, ever since the housing crash I’ve had a heightened fear of losing money, especially since I haven’t had a job since 2012. It takes around three years as an entrepreneur to feel confident you won’t starve on the streets, especially if you become a parent during the process. As a result, I tended to hoard cash, which is suboptimal in a bull market.

This post will go over my investment thought process by category for 4Q2017 and conclude with some investing lessons learned about the year. The goal of tracking our investments is to try and take full advantage of a bull market in a risk appropriate way. 

Financial Samurai 4Q2017 Investment Review

In summary, I mobilized a total of $2,263,319 into various investments in 2017. $750,000 of the $2,263,319 was invested in conservative investments (bonds, mortgage pay down, and home improvement) that should return 4% or more gross a year. The remaining $1,510,000 was invested in riskier assets with a target return of between 8% – 18%. My goal is to achieve a 10% total annual return, but will gladly settle for 8%.

The $2,263,319 invested was largely helped by a rental home sale in June 2017, which gave me ~$1,788,000 in proceeds ($2,740,000 sale price). Due to declining rents, expensive valuations, potentially rising mortgage rates, higher property taxes, potentially negative tax policy changes, PITA tenants, better investment opportunities, and less time due to a newborn, I thought it best to sell one of three properties in CA.

Overall, I reduced my risk exposure by $476,681 and increased my cash position by $450,000. Despite the decrease in exposure and increased balance sheet, I still have synthetic full exposure to risk assets due to $1,092,000 of remaining mortgage debt from my primary residence and vacation property rental.

Financial Samurai investment tracker

Real Estate

Because I wanted to see if I could find a winter property deal, I held onto a lot of cash. I found two homes that I liked, but the sellers wouldn’t entertain my low ball offers. I wasn’t even sure I’d be happy with the purchase even if they did accept my offer because of all the maintenance and tenant issues I’d have to deal with again. For example, one home had a serious leak in the garage that kind of gave me a little PTSD from all the leaks I experienced at my old rental house.

By Dec 1, I realized I was never going to buy another property in San Francisco again, so I decided to invest another $300,000 in the RealtyShares domestic equity fund after meeting up with the team again for dinner. Since the summer, the fund invested in a flex-industrial deal in Chicago MSA, a multi-family in Phoenix, a strip mall in Orlando MSA, and a multi-family in Canyon Lake, TX.

Although a total of $800,000 in real estate crowdfunding sounds like a lot, I view it as buying a $800,000 portfolio of 12+ different properties across the country at much lower valuations and much higher net rental yields compared to having $2,740,000 in one very expensive rental property in San Francisco that is now at risk of depreciating due to declining rents and new tax legislation that limits mortgage interest deduction and SALT deduction.

The next physical property I will buy will be a primary residence in Oahu. The plan is to move back to Oahu within the next five years before my son starts kindergarten. I really like the idea of buying physical property to personally enjoy, and then renting it out years down the road if you have the funds and the desire to move. If the rental experience goes well, I’ll keep the property. If not, I’ll sell it and follow my BURL real estate investing strategy.

Stocks: Bought The Dips

In October, I started getting excited about the potential passage of a tax plan that would lower taxes for large corporations and businesses like mine with pass-through income.

As a result, I invested more aggressively into stocks because I felt the market would respond favorably if the plan passed. Further, my desire to buy another property kept going down. Corporate earnings are estimated to get a 8% – 10% boost and small business with pass-through income might see an even larger gain.

The timing of this tax plan is fortuitous given I’ve spent 8.5 years building a lifestyle business that has now reached a level where it will benefit from tax changes. Nothing has made me more bullish than business tax reform, which is why I need to keep my emotions in check through this investment review process.

Finally, I superfunded my son’s 529 plan with $70,000 while his mom and grandma contributed $14,000 each. We figured this would be a good method to diversify contributions since once you superfund, you can’t contribute for four years. It’s good 529 plan owners have the flexibility to use the proceeds for grade school education now.

See: How The New Tax Plan Will Ruin Your Life If You’re Not Careful 

Bonds: A Positive Surprise

Bonds performed well in 2017 with the the long-bond index fund TLT up ~10%. My California muni bond positions are up ~3.5% + ~4.5% gross adjusted yield for a total gross gain of about 9%. Not bad given I was just looking for around a 4% gross gain.

US Long bond performance 2017

Once the 10-year bond yield gets back to its 12-month high of 2.6%, I’ll be looking to buy more bonds again. I see a 3% cap on the 10-year bond yield for 2018.

Related: The Case For Bonds: Living For Free And Other Great Benefits

Mortgage Pay Down

If you add on the $815,000 of mortgage debt I paid off by selling my rental house, I’ll have paid off a total of $921,000 of mortgage debt in 2017. It feels fantastic to have almost a million dollars less in debt, even if the interest rate was low. By consistently paying off random chunks of extra principal throughout the year, it was easy to pay down an additional $106,646 in principal.

I’ve still got about $1,092,000 in mortgage debt to pay down between my vacation property and my primary residence. I certainly don’t need so much cash, but I want to continue legging into risk assets just in case there’s some type of downturn or a change in my lifestyle.

My plan is to pay off my vacation property mortgage by 2023. I probably won’t pay off my primary residence within five years because I need as much cash as possible to buy our future dream residence in Hawaii.

Related: Pay Down Debt Or Invest? Follow The FS-DAIR Framework

Everything Else

I’ve committed $200,000 to my friend’s second venture debt fund. They’ve called $96,219 within one year. I expect them to call the remaining $103,781 by the end of 2018. The fund’s objective is to earn a 15% – 20% IRR. Based on the performance of his first fund, a more likely return of 10% – 13% should be expected.

It felt great not having to do any home improvement projects since 1Q because we now have a baby who requires precious sleep. Any disruption of sleep would have been infuriating for all of us since my wife and I were like zombies for the first three months.

Finally, out of the $611,000 in stock investments, $50,000 of that was in highly speculative investments that have surprisingly done well.

Related: How To Make Speculative Investments Without Losing Your Shirt

Main Lessons Learned From Investing in 2017

My biggest mistake was not being more aggressive investing in the stock market at the beginning of the year. I didn’t have as much liquid cash because I hadn’t sold my rental house yet, but it was the Trump presidency and high valuations that gave me hesitation. I wasn’t too hopeful about tax reform either.

My best move was selling a rental house for 30X gross annual rent before the SALT deduction got limited to only $10,000 and redeploying the capital in properties around the country trading at just 10-14X gross annual rent. Life feels so much better not having to deal with housing issues anymore. It’s also nice to worry less about natural disasters.

Here are several lessons from 2017 that may help you become a better investor.

1) Try to look beyond the politics and focus on fundamentals. Given I live in San Francisco, I know plenty of people who decided to pull much of their money out of the stock market at the end of 2016. They were so blinded by their hatred of Donald Trump that they missed out on huge gains.Generally speaking, deregulation and lower taxes are good for business, which is good for business investors. Further, in my mind employment was already on the upswing and interest rates would remain accommodative.

Unless our politicians actually reform laws, there is often a disconnect between how much investors believe our politicians can do and how much they can actually do. Reduce risk if you wish. But don’t get out of risk assets completely.

Kurt Eichenwald sold all his stock announcement on twitter

2) Real estate is an easier investment over stocks. How can this be when stocks just went up ~19%? Having to reinvest my home sale proceeds was exhausting. If I didn’t have weekly reminders to invest, I wouldn’t have because of the uncertainty of what to invest in, the timing of the investment, and the actual act of deploying capital. Every investment I make gives me a little bit of anxiety due to my fear of losing money and looking like a buffoon.

With real estate, despite the leverage, all you’re doing is enjoying your home or collecting rent checks (if you’re lucky). When you’re just living, you aren’t questioning every single investment you make. Therefore, for most people who are too busy to track the market, owning real estate over the long run is an easier path to wealth. Despite my terrible tenants, the $1 million of equity gain from 2012 – 2017 was the easiest investment money I’ve ever made.

If you don’t have enough money to buy real estate, then owning an S&P 500 index fund over the long term is fine too. Just know that the longer you rent, because of inflation, the longer you will regret your decision. Inflation is an unstoppable beast that will eat you alive.

3) Think in percentages over absolute dollars. Because I had never invested more than $500,000 a year in my life, having nearly $1.8M to re-invest was intimidating. But as soon as I started breaking the investment amount into percentages, deploying capital became easier.

Find out what each asset class is as a percentage of your net worth and calculate what each new invest is as a percentage of your investable assets and net worth. This exercise is particularly helpful for frugal people whose wealth has far outstripped their spending habits.

4) Stick to an investment framework no matter what. Once you’ve decided how much you can comfortably invest each month and what type of asset allocation is best for you, execute your plan without fail. It is almost always the case you will be surprised by how much you end up accumulating or how much debt you end up paying down over time.

Wrapping Things Up

Financial Samurai 2017 performance

Overall, according to the final weekly personal investment performance e-mail I get from Personal Capital, my public investments returned ~15% in 2017. I’m happy with the results because my total capital exposure is significant for how much we spend. Further, my goal after leaving work was to earn a 4% – 6% tailwind a year while I build a lifestyle business.

It’s really hard for me to take on more risk because of my fear of having either one of us go back to work during the crucial first five years of our son’s life. At the same time, I can’t help but want to take full advantage of the bull market while it lasts. The further I can run up the score, the bigger the buffer during the inevitable recession.

Finally, one positive surprise I experienced this year was that once I elongated my investment time horizon to 20+ years due to the birth of my son, I became much more at peace with my risk exposure. Surely by 2037, asset prices will be higher. To invest for someone’s future feels wonderful.


Investors, how did your public investments treat you in 2017? For those of you who have retired or reached financial independence, how have you structured your investments so that you can sleep well at night while also benefitting from the bull market? Graphic by https://ckongsavage.com

The post Investing Lessons From A Surreal 2017 appeared first on Financial Samurai.

The Top Financial Samurai Posts Of 2017

Best Financial Samurai posts for 2017Merry Christmas and Happy Holidays Everyone!

The best thing about hard work is when it’s over. Once finished, you can basically sit back and enjoy all of the rewards if you wish. And if you hustle long enough, you might positively change your life forever.

In 2017 I wrote 175 posts, averaging 3.3 posts a week. In addition I also published 173 pages, consisting of product reviews, random thoughts, and different spins on existing topics. Pages are public, they just don’t hit the homepage or got out in my feeds. Finally, I’ve got 36 pending posts in the queue waiting to be unleashed. All in, I averaged 7.3 posts a week.

My goal was to do as much as possible before our baby was born to buy time in the future to take care of him. Even though I don’t have a day job, writing a comprehensive article is easier said than done. And if you think it’s easy, I’d love for you to write me one that’s fully edited and ready to go. Further, the average stay at home parent spends 97 hours a week taking care of their little one!

Here are the most popular posts written in 2017 by traffic and some of the the most popular posts by traffic regardless of when they were written. My #1 goal is to help readers reach financial independence sooner, rather than later. Every single post was written based on first-hand experience because money is too important to be left up to pontification.

Overall, Financial Samurai received about 12 million unique visitors in 2017, which is better than a poke in the eye. 25 more years of this and I should be able to reach the entire population of America!

Most Popular Posts Written In 2017

Investing

The FS Investment Tracker Spreadsheet

Just Say No To Angel Investing

The Main Types Of Investment Risk Exposure To Be Aware Of

It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak

Real Estate

Focus On Trends: Why I’m Investing In The Heartland of America

The Real Estate Investing Rule To Follow: BURL

Why Is US Property So Cheap Compared To The Rest Of The World?

Being A Landlord Tests My Faith In Humanity

Retirement

Retirement Savings By Age Show Why We’re So Screwed

Reflections Of Early Retirement Life Five Years Later

How To Calculate The Value Of Your Pension

How To Achieve The Two Spouse Early Retirement Dream

Maximum 401k Contribution Limit Finally Increases

Financial Independence

Your Chance Of Becoming A Millionaire By Age, Race, Or Education

The One Ingredient Necessary For Achieving Financial Independence

Financial DEpendence Is The Worst: Why Each Spouse Needs Their Own Bank Account

Debt Optimization Framework For Financial Independence

Housing Expense Guideline For Financial Independence

Entrepreneurship

How Much Can You Actually Make Blogging

The 10 Best Reasons To Start An Online Business

How To Create Next Level Wealth: When A Million Won’t Cut It

Career Grind

Abolish Welfare Mentality: A Janitor Makes Over $250,000 A Year

A $500,000 Redo: How One Couple Got Their Mojo Back

What If You Go To Harvard And End Up A Nobody?

A Severance Negotiation Success Story: The Inside Scoop On How One Man Negotiated His Freedom

Lifestyle 

Don’t Let Frugality Lead To Lifestyle Deflation

For A Better Life, Be The 1% In Something, Anything

The Safest Cars To Survive A Crash

What’s The Best Age To Have A Baby? A Biological And Economical Analysis

10 Most Popular Posts In 2017 Written At Any Time

Scraping By On $500,000 A Year: Why It’s So Hard For High Income Earners To Escape The Rat Race

How Much Savings Should I Have Accumulated By Age?

How Much Should I Have In My 401k By Age?

The Average Net Worth For The Above Average Person

How Much Income Do You Consider To Be Rich?

Examples Of Good Resumes That Get Jobs

How To Earn Six Figures At Almost Any Age

The Top 1% Net Worth Amounts By Age Group

The 1/10th Rule For Car Buying Everyone Should Follow

How To Get A Rich Man To Be Your Boyfriend Or Husband

A Slingshot Into The Future

I’m proud of the quantity, quality, and variety of posts published in 2017. My goal as always is to keep things fresh and interesting. I would die of boredom if I had to focus only on one subject. Life is full of different challenges, and my goal was to address as many of them as possible.

Who knows how long my creativity will last. I’m well aware that like the body, the mind will slow down. But in the meantime, I will continue writing about meaningful topics that affect all our lives. Feel free to mention any particular topics you’d like me to address in the future and any particular posts that stood out.

Up next will be my 4Q2017 investment review and my year in review post highlighting what went well and all the areas for improvement.

Thanks for reading and sharing my work. Besides bookmarking FinancialSamurai.com, you can keep in touch by subscribing to my posts via e-mail, my private newsletter, and my iTunes channel.

The post The Top Financial Samurai Posts Of 2017 appeared first on Financial Samurai.

How The New Tax Plan May Ruin Your Life If You’re Not Careful

How the new republican tax plan will ruin your lifeI firmly believe tax policy changes behavior. The higher your taxes go, the BETTER your life becomes! Why? Because at the margin, the less money you keep, the less motivated you’ll be to work. Since money is the root of all evil, the less time you spend accumulating evil, the happier you will be.

One of my catalysts for leaving work in 2012 was because the finance industry was in a structural decline. We were working longer hours for less pay. At the same time, we faced a progressive tax system where we had to pay a 39.6% Federal tax rate plus a 3.8% Net Investment Income tax plus a 0.9% Medicare tax plus an Alternative Minimum tax plus a 13% State tax plus Social Security tax plus Sales tax plus retroactive State taxes to pay for government overspending. Instead of complaining about paying a 60%+ marginal tax rate, I just negotiated a severance to make no money as a writer.

My life since leaving work has never been better, all because I decided to focus on maximizing freedom instead of maximizing net worth. When you’re in the grind, it’s hard to fathom the benefits of giving up a steady paycheck. But the benefits truly are incredible.

For those of you who naturally like to work more when you can keep more of your money, here are some items from the new tax plan that will ruin your life or your family if you are not careful.

Surprise Items In The Tax Plan That May Ruin Your Life

1) Your 529 plan can now be used for secondary education. Before, you could only use the proceeds of your 529 plan for tuition at an accredited four-year university. Under the new tax plan, you can now use $10,000 a year towards private grade school tuition.

I’m one of many parents who is still undecided about the wisdom of spending a fortune on private school instead of just having my son go the public school route. With the internet making education and meet-ups free, the value of a private school education has declined. Therefore, it makes little sense to spend record high levels on tuition just because you can afford to.

Once you start spending $10,000 – $60,000 a year on private grade school education, expectations for your kids go way up. When your expectations go way up, a pressure cooker environment may develop that suffocates the joy out of everyone. If your kid is especially sensitive to the plight of others, by going to such an expensive institution, he or she may feel tremendous guilt or pressure to perform. As a consequence, they might logically choose to work in a soul-sucking industry that’s focused on making as much money as possible to pay you back, instead of choosing an industry that’s focused on helping those most in need.

The new usage rules for the 529 plan may tip the scale in favor of sending your child to a private grade school. It’s one of those 20% off coupons that can end up costing you a fortune. What the new tax plan should have done was provide a tax credit or a deduction if you send your child to public school. The more parents focus on the public school system, the stronger it will become given there will be more involvement and more funding.

Doesn’t having your child learn the same material at public school, while saving $300,000 – $500,000 in private grade school fees and avoiding the stress of high expectations, sound wonderful? Not if the new 529 plan rules can help it.

Related: What If You Go To Harvard And End Up A Nobody

2) Miserable high income earners in expensive cities become even more miserable. I know I’ve done a poor job of highlighting the plight of HENRYs (high earners, not rich yet) living in expensive cities like San Francisco or New York, but that doesn’t change the fact that so many of these well-educated, 50+ hour a week, stressed out of their mind individuals are miserable. They see no end in sight to their grind because they don’t don’t build passive income and don’t work on a side business to give them an eventual escape outlet.

By capping state income and proper tax deductions at $10,000, residents living in high state tax and high property price cities are getting an uppercut to the chin. The annual property tax bill for a $1.5M median priced home in San Francisco is ~$19,300 a year. Add on $16,000 a year in average state and local income taxes paid, and you’re at $35,300. Your tax bill could easily be $5,000 more as a result.

Meanwhile the capping of mortgage interest deduction on a new mortgage amount of $750,000 means about $10,000 less in mortgage interest deductions in the first year of amortization. You can now add on another $2,000 to your tax bill.

One of the reasons why I sold my rental house, which I’d owned since 2005, is because of its onerous $23,000 annual property tax liability. I anticipated some type of detrimental tax law to pass given San Francisco is a sanctuary city in a blue state. But I just expected some type of reduction in the mortgage interest tax deductibility. To add the $10,000 SALT cap is a huge negative surprise.

New income tax rates for 2018

This new tax law may be the tipping point that causes a consistent net migration out of expensive coastal cities and into no state tax states or states that have a much lower cost of living. Coastal cities have turned into one big grind. Traffic is horrendous. Home prices are unaffordable. The cities are turning economically homogeneous. Even moving to the western part of San Francisco has not allowed me to escape the tentacles of the tech industry. My only next step is to move to Hawaii and deploying my BURL real estate strategy of investing in the heartland.

Related: Scraping By On $500,000 A Year

3) Estate tax threshold rises to $11 million for individuals and $22 million for couples. The easiest lifetime net worth target to shoot for is the estate tax threshold because nobody in their right mind would keep anymore due to the 40% death tax. When it was $5.49M per individual, it provided a high enough goal for most people to shoot for without feeling too discouraged that it was an impossible dream. While most people never accumulate $5.49M, they do get to a level where they can comfortable leave all their assets to their heirs tax free.

Now imagine you are one of those people who believes they’ll reach that $5.49M threshold before the age of 100 thanks to inflation, investment returns, diligent savings, and good financial planning. You are on cruise control gliding towards your goal of leaving a significant tax free estate to your heirs. Now, suddenly, you’ve been incentivized to figure out a way to work longer, harder, and take more investment risk to save $2.2 million in estate taxes ($5.51M X 40%) and get to the $11M target.

Of course any reasonably motivated person can’t help but gravitate towards killing themselves for more money. Further, there’s a good chance the estate tax threshold might change again in the future, thereby wasting all your time trying to get to a $11M net worth!

What many of you will now logically do is input some figures in a compound interest calculator and see what it will take to get to $11 million. Below is a realistic assumption I’ve provided where your $100,000 grows to $11,467,826 in 50 years if you earn a 6.5% annual rate of return and save $25,000 a year. Time to get to work, forever!

Estate tax calculator

Related:

The Benefits Of A Revocable Living Trust

Net Worth Targets By Age, Income Or Work Experience

The Only People Who Won’t Be Miserable

The only people who won’t be miserable under the new tax plan are those who are already rich. These are the people who are getting the most money back for just existing, even though they need the money the least.

As a result, the tax plan will make millions of regular income earners miserable due to the envy they have for those who already have the most. Even though the tax plan provides tax savings to the middle class and lower middle class, it just doesn’t feel right when some others get so much more.

I feel sorry for those people who decide they are now going to ruin their lives to earn more money they don’t need due to lower taxes. I wish everybody does start earning over $500K per year and accumulates over $11M per person in assets just to see that money doesn’t improve happiness. Once you earn enough money to comfortably provide for your family (~$100K a year in non-coastal cities, ~$250K a year in coastal cities), happiness is dictated more by health, family, and friends.

Related:

Do You Want To Be Rich Or Do You Want To Be Free?

How To Win Under The New Tax Plan

Readers, do you forecast your behavior changing under the new tax plan? Are you more motivated than ever to chance money that doesn’t do anything for your well-being? What are some other surprises in the new tax plan that may affect behavior?


The post How The New Tax Plan May Ruin Your Life If You’re Not Careful appeared first on Financial Samurai.

The Biggest Financial Concerns Of Affluent Investors

Main concerns for affluent investorsPersonal Capital, a digital wealth advisor with over 1.5 million users of its free financial tools, released its 2017 Affluent Investor report with some interesting data. I used to consult with them between 2013 – 2015 and have been using their tools to track my net worth since 2012.

The biggest surprise from one of its surveys is that folks with more than $500,000 in investable assets are most worried about a financially secure retirement. Think about that for a minute. With the median retirement savings for 56 – 61 year olds in America at only ~$20,000, Americans with 25X that amount cite financially security as their top worry!

With $500,000+ in investable assets alone, one can presume that most survey respondents have net worths in excess of $1,000,000. After all, about ~85% of the typical American’s net worth is tied up in their primary residence. Check out the survey results.

What the mass affluent worry about the most

I bet most people in the world would consider having $500,000 in investable assets plus a paid off home to be a financial life well done. Therefore, we can conclude that affluent investors have to be one of the most paranoid demographics around, especially since 38% said they are also worried about losing their wealth.

Why Are Affluent Investors So Paranoid?

Most of the people who’ve been able to amass over $500,000 in investable assets are probably older than 37, the median age in America. Therefore, one can postulate that these investors have lived through the housing crisis and maybe even the 2000 dotcom bubble with a significant amount of assets. They’ve seen their investments get slashed by a third within 12 months a couple of times. They know dozens of people who were let go from a job they needed and remained jobless or underemployed for years.

When you amass $500,000+ in investable assets, you naturally start getting paranoid about losing all your money that took years, if not decades to accumulate. That paranoia only tends to get worse the more money you have in risk assets. After all, it takes a 100% return to get back to even if you lose 50% of your money.

Once I accumulated over $1,000,000 in investable assets, it no longer seemed prudent to allocate all my money towards stocks. Instead, I began piling most of my money into real estate to diversify away from my 401k, my company stock, and my career in equities. Little did I truly realize my “diversification,” starting in 2003, was actually a 5X leverage concentrated bet on San Francisco real estate.

The irony with having very little to invest is that you simply don’t have much financial worry. Think back to how happy you were in high school, college, or the first few years after work. All you cared about was having a good time and maybe saving a little money on the side for a vacation or a new ride. Is it any wonder why so many of use were happier before the age of 35?

It was only until after I built some passive income and started this site did my investing paranoia begin to wane. Writing about your fears is a lot like speaking to a therapist who helps put things into perspective.

My Top Three Financial Concerns

1) Poor investment returns from my rental home proceeds. Although it’s been a relief to no longer manage a rental property that comes with a $23,000 a year annual tax bill, I know I’ll be disappointed with myself in 20 years when I revisit how cheap I sold it for. The only solution to minimizing disappointment is earning at least a 5% annual return on my proceeds that cause minimal worry. My hope is that RealtyShares, the stock market, and the municipal bond market will provide such an outcome, but I’ll never know for sure.

2) A large decline in my online business. My online business is the main reason why I’m not concerned about being financially secure in retirement . The income generated from the business is a buffer to the passive income that is currently enough to provide for my family. But as I look into the future, I’m thinking of taking things down a notch to spend more time with my son and minimize happiness downturns. Less effort generally means less reward unless I can increase productivity. The creation of the FS iTunes channel is one way for me to buy time during the weeks I no longer want to write. It’s potentially a new revenue generator as I’ve already been offered two sponsorship proposals.

3) The financial well-being of my in-laws. My parents are thankfully financially secure due to their long careers in the US Foreign Service. They lead frugal lives with no debt, minimal expenses and have healthcare and pensions. My in-laws, however, are not as lucky. They are surviving fine, but I want them to be thriving at their age. I want to find a way to financially help them without offending their honor. This is a tricky subject that deserves a dedicated post.

Try Not To Let Wealth Get In The Way Of Happiness

The amount of financial worry six figure income earners and high net worth individuals have is quite a paradox. But paranoia helps investors accumulate more capital in their lifetimes than those who couldn’t give two poops about financial freedom. However, investing FOMO never allows folks to ever be satisfied with how much they have.

The key to being financially happy when you’re already doing well is to compare your current self to your past self and not to other people. If you can focus on your own progress, dare I say your happiness meter might jump up a point or two!

Related:

The Fear Of Running Out Of Money In Retirement Is Overblown

Readers, what is your number one concern as an investor today? If you are an affluent investor, are you really concerned about financial security in retirement? If so, why when you have way more money than the average person?


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