Investments | Financial Samurai

Increasing Passive Income Through Leverage And Arbitrage

Sunset in San Francisco, Golden Gate Heights

Priceless View Of The Sunset In Golden Gate Heights, San Francisco

Earlier in the year, I had a nice conversation with a well-known San Francisco angel investor about risk and reward. I had a chunk of money coming due from an expiring 5-year CD and I wanted to get some advice on what to do with it. I asked him whether he would be leveraging up or paying down debt in this bull market. He responded, “Sam, I always like leveraging up. It’s how I made my fortune.” This angel investor is worth between $50 – $100 million dollars.

Of course you can’t just leverage up into any old investment. The investment has to be something you know fairly well and has a good risk/reward profile. The only thing I have confidence leveraging up on is property. Everything else seems a little bit like funny money.

Although I quit my job a couple years ago to try my hand at entrepreneurship, I’m a relatively risk-averse person because I’ve seen so many fortunes made and lost over the past 15 years. If I was risk-loving, I would have done what so many brave folks do nowadays and quit as soon as I had a business idea, instead of methodically moonlight before and after work for three years before negotiating a severance. The breakfast sandwich guy I used to go to for 10 years while I was working told me he was worth $3 million dollars during the dot com boom in 2000. I went back for old times sake last month and he is still there!

Despite my risk-aversion, I do believe money should be used to increase the quality of your life and the people you care about. As a result, I did something recently that might seem financially risky, but I think the move actually lowers my financial risk profile now that I’ve had a chance to fully process the situation.

I finally found my panoramic ocean view Golden Gate Heights home! A room with a view has been on my bucket list forever. But it never occurred to me to look in San Francisco, despite being so close to the ocean because I thought such homes would be unaffordable. San Francisco already has the highest median single family home price in the nation at $1 million. To add on a panoramic ocean view would make prices outrageous, or so I thought.

It’s the same curmudgeon as never asking out a super model because you think she or he will say no. You’ve just got to ask and I’m sure you’ll be delightfully surprised once you try.

After spending months aggressively looking for my next ideal property within my budget, I found a view home for less than half the cost of my existing home on a price/square foot basis. How is this possible you might ask? The farther west you go from downtown and the established neighborhoods, the cheaper prices are in general (see the graphic I created in The Best Place To Buy Property In San Francisco Today). But the farthest away you’ll ever be is 7 miles because San Francisco is 7 X 7 miles large. Given I’m only going into a downtown office two times a week, I don’t mind the extra 15 commute. To be able to watch the sun go into the ocean every day for the rest of my life is priceless.

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Ways To Add More Income To A Retirement Portfolio

Posted by Financial Samurai 13 Comments

More Income In Retirement Like chasing the fountain of youth, nearly every retiree seems to be searching for the answer to one question:

“How do I add more income to my portfolio?”

We all want the perfect income-popping strategy, don’t we? Maybe in this case we’re looking for that fabled money tree, or the fountain of cash my kids tell me must be attached to my wallet.

Here’s the wrong approach. I call it “Single Product-Based Strategies”

When people talk about adding income to their portfolio (especially with brokers), salespeople naturally turn toward products, bringing you a dog and pony show about “THIS product that would boost your income stream the most!”

This discussion ends nowhere good, and could easily wreak havoc on your portfolio. Take a look:

Here’s the problem: the “which single product is best” approach most often leads to a single asset-heavy portfolio. Under the wrong conditions (like a bad year for the market or for your budget) this mistake sinks your retirement income strategy. If you buy stocks, you don’t want to have to touch them when the market tumbles (and it will).

If you buy real estate you don’t want to be stuck waiting for your property to sell. If you buy bonds you don’t want to harvest them three days before the ex-dividend day to make a house payment.

If you’re worried about income, you want a machine that’ll weather storms, not one that’s built on a single investment type. Let’s get building.

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The Best Way To Get Rich: Turn Funny Money Into Real Assets

Posted by Financial Samurai 53 Comments

POOF! Funny Money Be Gone

The US stock market is on fire right now and everybody is getting rich – well, everybody who decides to save, invest their savings, and take some risks. For everyone else, this bull market is a disaster because everything gets much more expensive when everybody gets rich.

The first stock market meltdown I ever experienced was the 1997 Asian Financial Crisis. International college students from countries like Korea and Indonesia had to drop out because the Won and Rupiah depreciated so much, making tuition unaffordable. Construction cranes stopped moving in Bangkok and the IMF had to bail out the entire region. Of course some people made a killing in the downturn when they swooped up assets for pennies on the dollar. But most people lost their shirts.

Then when things really started getting good again in 1999, the NASDAQ collapsed in the Spring of 2000. I only experienced one brilliant year of mega exuberance after college before the floor fell out in March 2000. Many people in finance lost their jobs and then 9/11 happened. I remember seeing my stock portfolio go from $3,000 to an absurd $200,000 in six months, and then lose about $40,000 in a couple weeks when B2B stocks started imploding.

Where does all the money go? It’s all funny money! I remember thinking. Paper millionaires who exercised their stock options early and didn’t sell not only lost everything, they also owed huge tax bills as well. The government always wins.

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Get A Free Financial Consultation With Personal Capital

Posted by Financial Samurai 28 Comments

Personal Capital Financial Advisor Over the years, a number of you have asked me to write a review about what exactly goes on with a free financial consultation with Personal Capital. Common questions include: Is the consultation really free? Is the consultation a high pressured sales call in disguise? Will I get something out of it even if I don’t sign up? Is it worth it?

The short answers to the questions are: Yes, the consultation really is free. There’s no high pressured sales tactics, just an understanding they’d like to work with you if you’ve found them helpful. You can continue to use their free Financial Dashboard if you don’t hire them. Yes, you will definitely get some good tailored advice and the opportunity to pick someone’s brain who sees and advises on multiple different types of financial situations for multiple different types of people. And yes, spending time getting a review of your finances for free is worth it since it gets you to review your financial situation at the very least.

I sat down with Patrick Dinan CFP®, a Personal Capital Financial Advisor over the course of 1.5 hours and two sessions, which I’ll now share with you in this post I spent about four hours putting together. The post shall provide transparency on the advisory service process as an insider.

My goals for the meeting were three fold: 1) To understand what a prospective client goes through during the call to advise on a better experience, 2) to understand Personal Capital’s value proposition for the 75-95 bps under management a year they charge and 3) learn what specific advice they could give me, a personal finance enthusiast who has been in the business for 15 years.

I’m sitting in a unique position given I’m very familiar with Personal Capital’s free financial tools as a DIY user for two years before I joined as a consultant to help build out their online content six months ago. I’ve gotten to know some of Personal Capital’s financial advisors and I’ve also sat in on various important meetings with the CEO, CPO, COO, and CMO to get a better understanding of the products and their desired messaging.

An important takeaway I’ve gotten from working more intimately with Personal Capital is that Personal Capital is a Registered Investment Advisor (RIA) who has a fiduciary duty to do what’s in your best interest. They are registered with the SEC, and are not a broker dealer. Broker deals only have a “suitability standard” for their clients, not a fiduciary standard, whereas RIAs have a much stricter fiduciary standard. For example, if you want to invest your entire $500,000 retirement portfolio in Apple after you dreamt Steve Jobs reincarnates, Personal Capital won’t let you because that violates your risk parameters and is not in your best interest.

A broker dealer, on the other hand, would probably also advise against such an aggressive move, but if push comes to shove, they could execute the transaction. The more a broker churns your portfolio and puts you into higher fee mutual funds, the more s/he gets paid so long as you don’t leave. But no matter how much your portfolio turns over with an RIA, the firm gets paid a fixed percentage of assets under management. The main way a RIA gets paid more is if you’re happy and your assets continue to grow. Interests are better aligned.

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Different Investment Strategies For Different Life Stages

Posted by Financial Samurai 44 Comments

A number of people have asked me to share some different investment strategies for different life stages. What I’ll do is highlight the various investment strategies I think make sense for most people, discuss a couple more alternative investment strategies, and round up what strategy I think is most appropriate by life stage.

We all know that step one to building financial wealth starts with saving. What really widens the wealth gap over the years is HOW one invests. Before investing in anything, I encourage everyone to tell themselves five things out loud.

1) I will lose money.

2) I will feel like a complete idiot when I lose money.

3) Nothing goes up forever.

4) There are plenty of exogenous variables outside of my control.

5) No risk, no reward.

Now that you’re mentally set to invest your hard-earned savings in the stock market where one change in government law, a corrupt CEO, a terrorist attack, a natural disaster, or a declaration of war could instantly wipe out half your gains, let’s begin!

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