Understanding Structured Derivative Products As An Investment

Structured Note With Carrot Apple JuiceThe best CD interest rate I can find is 2.3% for a 7-year CD offered by Bank of America at the time of this post (5/7/12).  2.3% is pretty weak, but the next best rate I’ve seen from a known institution is around 1.85% for the same duration.

I’m seeking yield to further enhance my passive income streams for financial freedom (highlights the various income streams). My current CD monthly interest income is around $2,800 a month and I’ve got roughly $225,000 in liquid cash that’s sitting in a money market account earning 0.2% interest.

Having $225,000 in a money market earning 0.2% interest is a lousy $400 a YEAR, which means I can’t even buy an overpriced iPad like millions of crazy rich folks are buying nowadays! The amount of money people have to spend on material things makes me so bullish about the economy. People don’t spend money they don’t have, just like I can’t drive a Ferrari Italia that I don’t own.

Everyday I keep my money in a pathetic money market is another day I’m missing out on free money. As such, I have been focused for the past couple of weeks on searching for ideal products to invest my money.

Narrowing the investment choices down to the following:

1) 2.3% 7-year CD with Bank of America.  Guaranteed estimated return $5,175 a year / $431 a month and bringing my CD passive income to $3,243 a month.

2) 6-10% potential returns via peer to peer / social lending. Non guaranteed $13,500-$22,500 a year / $1,125-$1,875 a month.  Have $50K ear-marked to this stream if and when the partnership comes through.  But, could invest more if things work out well.

3) Structured CDs, with a guaranteed rate of 2% for the first two years and LIBOR + 1.45%.  $4,500+ a year / $375+ a month.

4) Online trading via E-Trade or ScottTrade.  No guarantees.  + or – $40,000 a year.

5) Private equity investments.  I’ve received a couple offers to invest in some start-ups in the Bay Area.  70% chance for a -100%, up to a 5-10% chance for a 500% return.

6) Rental property.  Borrow at 3%, earn a rental yield of 8%.  Estimated cash on cash return is 5% therefore $10,000 a year / $833 a month.  Return on principal based on potential appreciation is different.  Problem with rental property is that it is a PITA compared to online income or CDs.

7) Structured Notes.  Similar to Structured CDs, but not FDIC guaranteed, and different return profile.

Not too narrow a list huh?  The goal is to raise the $6,500 gross a month passive income to around $15,000 a month in order to have a comfortable lifestyle enough to take care of a family of four.  The other goal is to have money work for me so I can focus on my business.  The strictly passive income goal (excludes online and all other income) may change over time, but for now, $15,000 a month is what I’m shooting for.

If possible, please don’t get distracted by the capital amount discussed and if it helps, use whatever capital amount that makes you feel comfortable.  The discussion focus should be on understanding structured products and feedback on a couple choices below.

THE FOCUS ON STRUCTURED PRODUCTS AS AN INVESTMENT OPTION

Achieving Financial Freedom One Income Slice At A Time

Experiencing Financial Freedom Dream House In Kahala, Oahu, Hawaii

Experiencing Financial Freedom

If you ever want to be absolutely free, you need to develop multiple income streams so that when the inevitable change happens, you’ll be covered.  I first recommend you start with the end in mind. What makes you happy?  From this question, now you can derive how much money you honestly think will make you happy.

Once you’ve digged deep to answer these two important questions, you can then start building your income goals.

What makes me happy?

Family, friends, experiences, travel, freedom to say and do what I want, sports, relationships, the online community, hot tubbing with drinks, food and enough money to not have to worry. Good old nostalgia really makes me happy too.

What makes me unhappy?

Racists, bigots, haters, lying politicians, bad bosses, cronyism, inequality, people who say one thing and do another, thieves, and zealots who impose their will on others.

How much money do I need to achieve what makes me happy?

Anywhere from $3,000 to $15,000 a month after taxes to account for a single life to one that provides for a family of four.

I really don’t need much to be happy if I’m supporting only myself and have no debt.  I was super happy living on nothing while in school, so $3,000 a month after tax would be fine.

$15,000 a month after tax is a large nut that equates to about $235,000 in gross income a year, the income level where I think maximum happiness is attained. With $15,000 a month, I can afford private school tuition for two if necessary, go travel 8 weeks a year, get huge and eat whatever I want, have a paid off car, live in a comfortable home practically anywhere in the world, and continuously save for a rainy day. Furthermore, $15,000 a month after tax can be used to help my parents in case they need financial help for whatever reason.

Think about an after tax monthly income number you’d like to achieve and let me know. For now, it’s time to open up the kimono and see what can be produced after over a decade of saving and investing. This is a long post, so make sure you go to the bathroom first!

CONSTRUCTING THE FINANCIAL FREEDOM PORTFOLIO

Should I Take Profits And Sell Stocks? You Can Never Lose If You Lock In A Gain

The overall equities portion of my net worth (roughly ~35%) is up about 12% as of March 15, 2012. At the beginning of the year, I predicted the S&P 500 to hit 1,400, a roughly 11% gain for the entire year.  Now the S&P 500 is at almost 2,100, an all time high as of 12/1/2014. I’m rebalancing!

You might think I’m crazy for selling into this rally.  You might think I’m stupid to try to time the market.  I don’t care because I’m satisfied with current returns.

I laid out in pretty good detail why 2012 was going going to be a beautiful year with unemployment breaching 8%, rates staying low, valuations in the markets still attractive, increased lending in real estate, and tons of empty political promises supporting the markets.  All of this is coming true and them some as investors see true economic improvement.

Furthermore, BenGenie is being fully accommodative, promising to keep rates low until end of 2013 and revisitng then!  This is unprecedented guidance!  Let’s just not carried away.

SHOULD I TAKE PROFITS? LET’S LOOK AT PRIOR PREDICTIONS

The Economy Is Back, Baby!

MansionBack in July of 2010, I wrote a post entitled, “Am I Living In A Parallel Universe?” discussing the disconnect between the robustness on the ground in San Francisco and the incredibly negative mood by the mass media.  Even my online friends were making fun of my bullishness.  You guys know who you are!

Hopefully you guys not only increased your asset allocation towards equities, you also took advantage of the amazingly bubbliscious bond market and refinanced your debt.

At the end of 2010, Twitter was valued at some $3 billion bucks.  Prince Alwaleed’s 3% stake for $300 million in December of 2011 now values the company at some $9-10 billion!  The same thing has happened for Facebook, now valued at some $100 billion.  There is so much liquidity out there it’s absolutely ridiculous how much new wealth is being created.  Look at more representative companies of the economy, such as McDonald’s and IBM.  Both stocks are near record highs.

Let’s discuss some reasons why people continuously are slow to recognize change.  We’ll also discuss how you can improve your sense of reality by being more honest with yourself.

WHAT’S WRONG WITH PEOPLE

How Much Should People Have Saved In Their 401Ks At Different Ages

Saving Jar Colleen Kong

Art by Colleen Kong at KongSavage.com

The 401k is one of the most woefully light retirement instruments ever invented. The worst is the IRA which limits you to contributing only $5,500 only for individuals making under $60,000 a year and married couples making under $116,000 a year. Meanwhile, you have to make less than $114,000 a year as a single or $181,000 as a married couple for the privilege of contributing after tax dollars to a Roth IRA, which I do not recommend before maxing out your 401k.

Give me a pension that pays 70% of my last year’s salary for the rest of my life over a 401(k) any time! With the government only allowing individuals to contribute $17,500 a year in pre-tax income into their 401ks in 2014, once again, our politicians fail us with their regulations.

The average 401k balance as of January 2014 is around $99,000 thanks to an incredible 30% rise in the S&P 500 in 2013. Even so, $99,000 is incredibly low given the median age of an American is 36.5. As an educated reader who is logical and believes saving for retirement is a must, I’ve proposed a table that shows how much each person should have saved in their 401ks at age 25, 30, 35, 40, 45, 50, 55, 60, and 65.

We stop at 65 because you are allowed to start withdrawing penalty free from your 401k at age 59 1/2. Meanwhile, I pray to goodness you don’t have to work much past 65 because you’ve had 40 years to save and investment already!