Investing Your Tax Refund For A 1,000% Return

Mauna Kea, HawaiiIn the article, “How To Get Over Your Fear Of Investing” I mention how your risk tolerance decreases the more capital you accumulate. When you were rocking a $100,000 net worth as a 30-year-old, you had no problems investing 30% of your net worth in your employer’s promising stock. But now that you’re 50 and less enthusiastic about working for decades more, investing 30% of your $1 million nest egg doesn’t seem like a good idea.

The tax refund actually provides for a great opportunity to swing for the ROI fences every single year, no matter your age or net worth. Given that the average tax refund is only around $3,000, many people just blow it on material things like shoes, clothing, gadgets, and LED TVs. It’s not necessarily a bad idea to use your “bonus” money to buy something tangible: any of these things can provide solid utility until next year’s refund. Alternatively, going the traditional route of paying down debt or increasing a depleted emergency fund is also fine, just terribly unexciting.

Now if your tax refund was a whopping $100,000, I’m willing to be that your approach to spending it would be substantially different! Some would unwisely go out and spend the money instantly on a luxury automobile; most, however, would probably give considerably more thought to the question of how to deploy such a large sum. Things like paying down a mortgage, investing for retirement, buying a home, putting money away for a child’s education, or helping out a loved one all come to mind with this level of money. But most people will never receive such a large refund, so the point is moot (sorry!). The $100k refund simply provides a mental exercise that highlights how our spending habits shift when dealing with different levels of money.

Although a tax refund often feels like a nice windfall each year, it’s actually been your money all along. And how boring it is to just invest that money (now that you finally have it) in the stock market for a potential 8% historical return. Of course if you’ve got revolving credit card debt with interest rates in the teens or higher, certainly give that a whack. But as a Financial Samurai reader, I’m thinking you guys are savvier than this.

What Your Car Says About Your Investing Style And Money Making Acumen

This is a fun guest post from PK, a software engineer who writes at Don’t Quit Your Day Job…, a site which covers the intersection of personal finance, investing and economics. Follow DQYDJ if you care about the story behind the story.

Quick: what was the fastest production car that General Motors made in 1987?

The Corvette? A common answer – but the performance champion was the lesser known Buick GNX, which lives on today in the Buick Regal. (The Corvette lives on today in, of course, the Corvette)

Cars & Investing: A Universal Language!

So… why cars?

Well, first, I’ll be in fine company; this site has a history of well-reasoned articles about cars, what with the seminal 1/10th rule on car buying or its cousin, the 5% of net worth car buying rule. However, that’s not the full reason.

Like most engineers still in the workforce, I’ve spent a fair amount of time on Slashdot (tagline: “News for nerds, stuff that matters”) over the years. One of the tongue-in-cheek memes of that site (and, really, engineering-focused sites in general) is the venerable car analogy. No matter how complicated the topic, there will always be an argument as to how cars, trucks, traffic, roads, and other self-directed transportation-related items can somehow shine a (head)light on the topic. If the readers on those sites cared about investing, I’m sure you’d already have seen similar analogies put forward.

But, they don’t – and we do.

So, how would you describe the major classes of investors – passive, technical, growth and value – with car analogies? Let me take a shot first, then let’s hear your improvements in the comments!


In Ferris Bueller’s Day Off, Cameron’s Father’s ‘choice’ Ferrari 250GT California was just a replica… (Wikimedia)


How To Overcome Your Fear Of Investing In The Stock Market

S&P 500 Historical ChartThis post is relevant for the following people:

* Who distrust the stock market.
* Who know they should take more risk but don’t because they’ve been burned before.
* Who don’t know much about the markets.
* Who are falling behind financially every day the bull market rages on.
* Who have the majority of their assets in cash, CDs, money market and checking accounts. (See CD Investment Alternatives)
* Who want a potentially higher rate of growth on their net worth.
* Who have grown a sizable financial nut and absolutely hate losing money.
* Who have a gambling tendency.

I’ve been investing in the stock markets since 1995 when Charles Schwab had a nascent online brokerage company. My father showed me his account one trading day and I was immediately hooked by all the green and red from various stock movements.

19 years isn’t a particularly long investment resume, but I did spend 13 years in the equities department of two major investment banks. Instead of buying and holding, I was neck deep into the sales and analysis of public companies. I’d meet with senior management, travel overseas to conferences, and visit company factories to kick the tires and make recommendations.

I remember traveling 26 hours to Anhui Province, China one year. My client and I landed at 2am, got to the hotel at 3am, visited the production facilities of Anhui Conch Cement (914 HK) at 9am for two hours and then caught a 2pm flight to Hong Kong to meet five more companies. The whole process of trying to fully understand companies before making an investment was exhausting, but necessary when other people’s money is at stake. Now compare how much research the average stock investor does before buying. Kind of scary.

The stock markets can be absolutely brutal to your net worth if you are not properly diversified. If you planned to retire in 2008-2010 you were absolutely crushed if most of your investments were in stocks. Everything has rebounded five years later, but that means you lost five years of financial freedom with a whole bunch of worrying while you worked through the recovery. 

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. We’re now above 2,070 as of 12/1/2014 as the good times continue!

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.


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, 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.