Asset Allocation Review – How Much Richer Do You Feel In This Bull Market?

Hammock in HawaiiI’ve argued in the past why some of you may not feel wealthier with stock markets at record highs, but that was 15% lower ago! The S&P 500 is poised to have one of its best risk adjusted returns in history if it closes above 1,800 (+27%) in 2013. Besides stocks, housing prices are up double digits for the nation. If you own stocks and real estate, you should be feeling richer right? Maybe, maybe not.

Everything is relative when it comes to our finances. In a bull market, the wealthy get way more wealthy than the average person. Even if your $300,000 portfolio is up 30% to $390,000 this year, that’s nothing when Warren Buffet is up $10 billion! Who cares if your $800,000 house appreciated to $1 million when some 23 year old rejected a $3 billion cash dollar offer for his photo messenger app. Ah, the unfortunate curse of financial comparisons.

I’d like us to do some financial reflecting as the year winds down. It’s important we review our asset allocation every year and figure out how we feel about where we are to make future allocation decisions. It’s very hard to ascertain our risk tolerance without getting a little personal.

TWO PARTS OFFENSE, ONE PART DEFENSE TO MAKE MONEY

An Alternative To Peer-To-Peer Lending For A 5% Return On Investment

Growth Of P2P Lending Chart To $1 BillionSince first writing about my plans to invest more in P2P through Prosper.com, I’ve been having a difficult time mobilizing a sizable amount of assets to make a difference in my passive income stream portfolio. When I say sizable, I mean more than $50,000. The main reason is that I’m just not absolutely comfortable making loans to strangers, no matter how good their credit ratings.

I realize if I invest in over 100 of the highest rated loans, the chances are high that I will be able to earn at least 5% vs. the 7-8% advertised through P2P. But there’s something about my desire to invest my money to help someone I personally know that keeps most of my money away from P2P.

The best reason to borrow via P2P is to consolidate your debt into a lower interest rate P2P loan. I also have a soft spot for lending people money over Prosper to pay off medical bills. Accidents happen all the time, and they are usually not the victim’s fault. Every single other reason to borrow money over Prosper does not gel with my lending standards, even if the interest rate is higher. (Read: The Main Reasons To Borrow Through Peer-To-Peer Lending)

So I’m faced with the dilemma of continuously lending money to strangers at a 5-10% interest rate to consolidate their debts or lend money to a friend who started a hedge fund and is looking to build his assets under management. I’d like for you to weigh in on this decision because $150,000 is at stake.

LENDING MONEY DIRECTLY TO A CREDIT WORTHY FRIEND

Personal Capital Review – New Investment Features And A Meeting With The CEO

Bill Harris, CEO of Personal Capital

Bill Harris, CEO of Personal Capital

After two years of usage it’s finally time I do a unique review of Personal Capital from the perspective of an entrepreneur, an affiliate blogger, an equity shareholder and a fellow San Francisco resident. I’ve already highlighted in previous posts how I use Personal Capital to reduce portfolio fees and how to run various growth scenarios to better manage your 401(k) for retirement. Now I’d like to share with you some thoughts about the company after a two hour meeting I had with senior management.

If there’s one habit I’ve picked up working in finance since 1999, it’s the process of being as thorough as possible with every single financial related matter. One wrong move can be the difference between retiring comfortably on the beach before you’re 60, or working your tail off until the bitter end!

The main difference between Wall St. institutional investors and retail investors is access. If you’ve ever wondered where your higher fees for active fund management is going, part of it goes towards business trips to attend conferences, funding flights around the world to kick tires, and allowing analysts to meet with management wherever they may be. Index fund managers don’t have to do hardly any research except for how much to buy or sell to replicate an index to minimize tracking error.

I’ve literally sat in over 3000 one-one-one meetings with senior management of pre-IPO and publicly traded companies during my time on Wall St. Due to all the hours spent listening to some of the most critical minds asking questions, I cannot help but be critical in my analysis of my own personal investments and financial recommendations I make on Financial Samurai as well.

Why you should meet management one-on-one:

1) To observe the competence of management through the communication eloquence of their vision.

2) To observe body language that would indicate strength or weakness in the upcoming quarter or year.

3) To understand whether the CEO’s philosophies are consistent with the company’s stated philosophies and your own.

4) To see if the CEO, CFO, or COO are people you can trust with your grandmother’s hard earned savings.

5) To corroborate financial assumptions and things you hear on the street.

I’m very fortunate to live in San Francisco, the tech/internet hub of the world. So when Personal Capital invited me to drive down to Redwood City to have a chat with their CEO Bill Harris at HQ, I jumped at the chance.

MEETING WITH SENIOR MANAGEMENT OF PERSONAL CAPITAL

A Way To Reduce Poor Financial Decisions And Build More Wealth

Sleeping man next to water fountainThings sure felt great at the top of the market in 2007. Stocks were on fire. Real estate could do no wrong. Turning 30 was only slightly depressing for several days. I even remember being surprised at how little then President George Bush was making vs. a third year VP in finance. Then the bottom fell out of in 2008 as Bear Sterns and Lehman Brothers went buh-bye. Friends were getting fired left and right and all of a sudden nobody wanted to spend money anymore.

Things got so bad that I finally stopped feeling sorry for myself as my net worth took a plunge and started Financial Samurai in the summer of 2009. I had been putting it off for a couple years since work was so busy. Writing was a cathartic way of easing the financial pain. Reaching out to others online helped me put things in perspective that the world was still turning despite what the media constantly reported. Eventually the worst passed and we began to recover.

The events of 2008-2009 serve to remind me how incredibly naive and stupid I was to think the good times would last forever. Up until 2008, nothing noticeably bad had happened to me. I got into a decent college, miraculously passed seven rounds of 55 interviews to land my first job, was able to get a promotion to a new firm in SF two years later, made VP in 2005, and finished up my MBA the very next year. What could go wrong but everything.

Remembering poor financial decisions is a great way to counteract frivolous spending as well as minimize greed when it comes to investing. The method I use is called “Financial Mean Reversion,” which states that in order to justify spending unnecessary money, I’ve got to first make up for my spending errors.

SOME DUMB FINANCIAL MISTAKES OVER THE PAST 10 YEARS

How To Know When To Take Profits In Growth Stocks?

Sina stock on fireFor those of you who bought SINA, BIDU, and RENN in May 2013 when I wrote “Should I Invest In Chinese Equities?” there are some great steak restaurants we can go to next time you’re in San Francisco. The stocks are up 35-65% in three months as the herd finally latches on to their potential!

The number one question we should ask ourselves when our unicorn stocks are going ballistic is: When is it time to take profits? Clearly such performance cannot continue indefinitely and at some point there will be a painful correction. The worst thing one can do is go from making big bucks on a stock to losing money.

One of the other mistakes I’ve consistently made in my 15+ years of investing is selling too soon. Anybody who invested in the mid-90s until now has seen the Asian crisis of 1997, the dotcom bubble of 2000, bird flu pandemic in 2003, and the mortgage market collapse of 2008 destroy a lot of wealth. We have been conditioned with fear to temper our greed, unlike those who just started during or after the latest crisis.

In this post I provide some psychology behind growth investing and when to lock in profits for maximum risk adjusted returns. Please note that executing on such insights is much harder than just providing a framework due to fear and emotion. I make suboptimal trades all the time.

KNOWING WHEN TO TAKE THE MONEY AND RUN