Financial Samurai

Imagine two similar investors, Leslie and Bob.

• They each retire with a $500,000 portfolio.
• They each withdraw 4% of their portfolio in the first year of retirement, then adjust that amount upward each year to account for inflation (as measured by the Consumer Price Index).
• Their portfolios are identical: 60% in Vanguard Total Stock Market Index Fund and 40% in Vanguard Total Bond Market Index Fund, rebalanced at the end of each year.
• The only difference is that Leslie retired at the end of 1994, and Bob retired at the end of 1999.

The Result? Read more…

Charles Farrell

As I wrote in my review of “Your Money Ratios”, Charles’ book sings to me. Charles has the ability to simplify complicated financial topics for the average reader to understand. His book is seriously one of the best books I’ve read on personal finance in a long while.

One of the keys to progress is learning from experts in their various fields.  Charles is gracious enough to answer some follow up questions I’ve been burning to ask after reading his book.  This will be a two part post due to the 2,800 word length of the interview.  In part I, we discover Charles’ motivation for writing his book, strategies for early retirement, and his conservative and debatable 50%/50% investment split between stocks and bonds.  In part II, we discuss the much maligned 401K, personal income taxes, why Social Security will survive, and why the flat tax is the right way to go!  Please enjoy!

WRITING “YOUR MONEY RATIOS”

Question: Was there a particular lightning bolt reason why you decided to write this book? For aspiring authors, what suggestions do you have to get your worked published in this ultra competitive field of business?

Answer: I wanted to write a book that would help average readers understand the most fundamental and critical relationships among one’s income, capital and debt, and how those things must be managed throughout your working career to build financial independence. So I took what are often quite complicated topics and figured out a way to present them in a very simple format that anyone can follow. I would like more people to enjoy the benefits of financial independence, and I hope this book does that.

As far as writing, all I can say is write about what you believe in. Hopefully, if you believe in it strongly enough, you’ll develop some expertise and then seek out ways to spread your ideas. Try to develop some niche that is reflective of your expertise. So I developed the ratios and they came out of my background in tax, finance and also working with individuals.

Think about what you do that is a little different and try to focus on that unique nature of what you do. It is a tough slog because the field is very crowded and often the least valuable information gets the most press. But you have to accept that reality and still push ahead. And then you need a little luck. Your message has to somehow get into the hands of people who appreciate and understand it. And that is hard to predict, which means you need a little luck to get it out there. So if you are going to pursue that path, I think you need to accept those realities of the marketplace.

EARLY RETIREMENT Read more…

Dr. Troy from Nip/Tuck

I had the pleasure of speaking with Flexo & Tom from Consumerism Commentary the other day about the genesis of this site, The Samurai Fund, as well as various Codes of Honor.  To go soon after one of my favorite authors, David Bach of the Automatic Millionaire series is a treat!

Why is it always so funny to hear yourself speak?  For a couple minutes before the interview I tested out my native Australian accent.  Realizing the audience would hail mostly from the US, I decided to scratch my bush tongue and speak in a more conventional “American” accent.  Hope the enunciation was clear.  Thanks to my mates Julian McMahon who plays Dr. Christian Troy from Nip/Tuck and John Noble aka Dr. Walter Bishop on Fringe for the inspiration!

To listen to podcast #43 on Consumerism Commentary click here.  When the Plutus Awards come out, they’ve got my vote for “Best Podcast” for sure!

Three main points of contention in the interview:

1) How much do you think luck plays in investment success?

2) Do you believe people can truly retire after 20 years of work, no matter what job they do?

3) Why are some people against the code of “get in first, leave last” during the initial phase of one’s career?

Readers, feel free to share your opinions on any of the above points and provide feedback from the podcast!

Regards,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

Follow on Twitter @FinancialSamura and subscribe to our RSS or E-mail feed.

So far over $7 million has been raised to help Haiti by just texting the word “HAITI” to 90999.  You’ll get a confirm receipt from your mobile carrier once sent.  Please consider donating!

This week on Financial Samurai, we’ll share our thoughts on the latest government rhetoric, highlight a guest post by Flexo, introduce a new fun challenge, and perhaps discuss one of the key things to consider for job seekers.

THE SAMURAI FUND UPDATE: +3.85% vs. S&P 500 +1.88% as of Friday, Jan 15th. 203 basis points of outperform puts us in the Top Tier of all funds.

Stars: Lenar +25%, Toyota +8%, GE 9%, Harmon +7.4%,, Calgon +7%, Big Lots +7%.

Dog Poops: Lumber Liquidators -7%, Berkshire -1.6%, Steris -1.25%, ABM -1%, Monsanto -1%.

Looks like there’s some good demand from new entrants, and investors who want to give us several hundred million more to build new positions!  Contributors, please provide an update on your name in the TSF page above, especially if your name is sucking wind.  Will be making room for new names in February.

SAMURAI WEEK IN REVIEW

* People now realize that converting to a ROTH IRA is pretty ridiculous as Kevin M reminds us that the first $18,700 (equivalent to $470,000 in pre-tax funds at 4%) you withdraw from your retirement funds is tax free.  Meanwhile, JoeTaxPayer highlights that if you retire with $2.17 million in today’s dollars, you only have to pay 15% tax!  You’ll have to retire with more than $5 million dollars to average a 25% tax rate, based off a 4% income return.  $5 million is only 50X your $100,000 “average” income.  Always good to dream big for those of you who’ve justified your ROTH IRA contributions.  Joe, you made my day!

* Family seems to be the number one reason why people choose to freeze during the winter, and melt during the summer.  FYI, it is possible to make friends in paradise folks.  It’s also possible for your family to fly out and visit you on the beach.  If you’re miserable, don’t limit yourself!  Just think about how much easier it is to travel now vs. 300 years ago.

* The “Get Financially Naked” book giveaway ends on Saturday, January 23rd.  It’s a great little book for couples who feel they need some help in improving their communication as it relates to finance.  With all our book giveaways, we’d like to share them with those who’d like and need them the most.

* Americans really shouldn’t complain about our finances since we’re wealthier than 99% of the rest of the world.  That said, it’s all relative, and if everybody is wealthy, then it’s really hard to feel special.  The key seems to be to amass your wealth, and move elsewhere!

Keigu,

Sam Samurai – “Slicing Through Money’s Mysteries”

Follow on Twitter @FinancialSamurai and subscribe to our RSS Feed.

The following is a guest post by long time reader and entrepreneur, Investor Junkie!  IJ writes about how we should stop our complaining, and realize we are wealthier than the large majority of the world.

If you live in the United States, you are wealthy beyond what most others dream of. Your salary is 99% higher than of the world population.  Visit areas like India, and Africa, and you’ll see what real poverty looks like. If you moved there, you could live like a king! Don’t believe me?  Visit Global Rich List and plug in your yearly salary.

So what exactly does it mean to be wealthy anyways?  It’s all relative to the environment you live in. What might be considered below the poverty level in the USA ($22,050 for a family of four), might be considered well off when living in say Uganda.  According to the Global Rich List even at the US poverty level, you still make more money than 89% of the world.

If you look at the Wikipedia chart, you will see the USA has the most wealth compared to any other country (including Japan). No other country comes close to the USA.  So while you may not feel wealthy comparative to what you see in the media, you still are better off than 99% of the world population.  In terms of average income,  the USA is only 13^th in the world, but we still have more stored wealth than any other country.

Stop complaining that you can’t afford that new Lexus you lust for. Many people around the world don’t even own a car! They get from place to place by bicycle. It’s true you may not live like a rock star, famous actor, or business titan, but you live better than most.

Most people in the United States have: Read more…

If I read one more biased article pushing people to convert to a ROTH IRA I’m going to lose it!  Not to be melodramatic or anything, but the lack of unbiased analysis is like seeing a sea of zombies instructed to walk off a cliff. Wake up zombies, wake up!  Don’t make a decision without seeing what lies down below.

The ROTH IRA conversion idea is that those who have pre-tax funded retirement accounts such as a 401K or Traditional IRA pay taxes UPFRONT in 2010, so as to not pay taxes when you retire.  This is just absolute hogwash donkey dumb for a large majority of people out there.

Proponents of the ROTH IRA conversion argue:

1) Tax rates are low and are just going to go up in the future.

2) You will likely make more money in your retirement years, and hence pay more taxes.

3) Paying taxes now improves performance in the long run all else being equal.

THE SAMURAI REBUTTAL: Read more…

Publisher: The Penguin Group.  Hard cover. 257-pages. Price: $26.

Author: Charles Farrell, JD., LL.M., investment adviser with Northstar Investment Advisors, in Denver.  He writes the “Retirement Roadmap” column for CBS Moneywatch.

Review: “Your Money Ratios” sings to me!  For someone who loves using ratios such as the 1/10th rule for car buying, and 30/30/3 rule for home buying, I absolutely adore this book.  Charles’ writing style is very balanced and easy to understand.  When it comes to math, many people, including myself fall asleep.  But, if you can just do simple division and multiplcation, this book will keep you on the right path towards financial security.

Charles’ “Unifying Theory of Personal Finance” is his core philosophy that all decisions you make should help move you from being a laborer to being a capitalist.  In other words, make money work for you, and not the other way around.  It’s important that with every single monetary decision you make, you ask yourself will this help you become a capitalist or not.

Capital To Income Ratio Read more…

Searching For Fortune On The Fund's Yacht

With great pleasure, I announce the launch of The Samurai Fund!

Thesis: Through random selection based solely off permutations of reader’s names (personal or site title), we are able to create a long-only mutual fund that will outperform the S&P 500 index!

Fund Details: $1,672,003 billion launch, $100/share NAV, with 17 positions equally weighted.  Concentrated multi-strategy portfolio with defensive names in the alcohol and utility space, as well as higher beta names in technology and health sciences.  Small caps and large cap names included.  S&P 500 start value 1,115 benchmark.

Investment Outlook 2010: The stock market continues to rebound, but at a slower pace.  Inflation and interest rates remain benign, leading to a re-emergence of consumer spending.  Housing stabilizes with 30-year mortgage rates staying below 6.5%.  The government maintains record spending to stimulate the economy and the unemployment rate begins to fall in the second half of the year.  The S&P 500 increases by 10-15% with a blue-sky target of 1,322.

Duration & Rules: One year.  The bottom 3 performers will be up for review every quarter. To stay in the fund, one must write a convincing argument as to why we should not cut our losses.  Picks down more than 20% also will be re-evaluated.

Goals: To have fun, learn something about the stock markets, prove a theory that luck plays a big part in performance, and to build better relationships with the community.

Contributors: Please retweet and spread the word to any of the social media sharing sites below.  We need all the support we can get to outperform the professionals!  Contributors are encouraged to provide updates and commentary as the months progress.  If anybody wants to do a portfolio analysis below, please feel free to do so!

*** STOCK PICKS SUMMARY WITH CONTRIBUTORS *** Read more…

It’s amazing how quickly time goes by.  Usually, I get nostalgic this time of year, reminiscing about all the memories over the last 12 months.  Not this year.  Let us remember that we went through an economic blitzkrieg in 2009, and I am so glad it’s over!

The one thing I am really hopeful for is a rebound in employment. Over the past 3 months, I’ve encountered so many positive job data points in my industry from friends and acquaintances on the job front, I’m absolutely hopeful those who are seeking jobs, or better opportunities will find them in 2010.  Companies always over fire during downturns, and therefore have to scramble to rehire in this upturn. Below are five more predictions you don’t even have to think won’t come true!

FIVE PREDICTIONS THAT MOST CERTAINLY WILL COME TRUE Read more…

The S&P 500 is up about 22% year-to-date, and up 69% since bottoming at lucky 666 in early March.  Being up 22% after being down 40% in 2008, still means the average portfolio is down 27% from the 2007 peak.  You may fool yourself into thinking the average 401K balance of $50,000 has recuperated most of its losses, but you’re confusing contribution with performance i.e. going from $50,000 down to $30,000 (40% loss), but contributing $16,500 + a 22% rebound ($6,600 on $30K) = $52,000 does NOT mean you’re back to even!

The tipping point in your 401K, where performance starts outweighing a maximum $16,500 annual contribution is roughly $200,000. Once you have $200,000, the real juice comes from performance where an 8% return equals roughly the maximum contribution you can make every year.

There are two lessons to be learned in 401K land: 1) Contribute the max to your 401K every year, and in 10 years, you will likely have $200,000 given company matches, and performance (even in this past decade) and 2) Once you reach $200,000, you’re going to hurt like no other if you lose 40%, or $80,000 of your portfolio, so diversify!  The sword cuts both ways.

IN SEARCH OF LUCK WITH FORESIGHT

I’ve only had a couple big stock hits in my life, and I attribute it all to LUCK.  Of course, I also attribute all my loss making ideas to BAD LUCK, and not to poor timing, bad fundamental analysis, and generally not understanding what the hell I’m investing in!

Essentially, I believe with a lot of luck and a little bit of effort we can outperform the markets.  Hence, let’s see if the PF community can outperform the S&P 500 with our own randomly unscientific stock picks based on permutations of our own names and blog titles!

THE SAMURAI FUND – CONTRIBUTION GUIDELINES: Read more…