Are Your Short-Term Actions Ruining Your Long-Term Wealth?

Long Term Gain

Long Dhosas Taste Better

I must be the biggest donkey on Earth because I just spent an egregious amount on a handyman to fix some things. I’ve had a funky bathroom window that would not close properly for years in my main San Francisco rental. I tried to fix it, but couldn’t. My tenants never complained over the years, so I let it be. The window is in a small bathroom without a vent, so having the window slightly cracked open helps relieve moisture.

Then one fine summer day my tenant’s neighbor below decided to start grilling on their little deck. Smoke would waft into the bathroom and through the rest of the apartment. So when my tenant texted me to fix the window, I said “no problem” and found a handyman on Craigslist immediately. He is actually a licensed contractor on Craigslist with “no job too big or too small.” In retrospect, I used a sledge hammer to push in a thumbtack.

He stopped over to visit my tenant directly and gave an estimate for $225. I told my tenant to tell the handyman everything else she’d like fixing while he was there besides the window. She mentioned a broken dimmer switch, and a faucet cap that needed replacing. Perfect. Fixing three things in one visit every year or two isn’t that bad.

Although $225 sounded steep at the time, I agreed to the estimate because I figured he would take at least an hour to do all the work, buy the parts, and commute back and forth for two visits. I was also happy to not have to physically go out there and meet the handyman for either visit. I asked the handyman whether I could get a discount if the work took less than a couple hours, and he said it was flat fee. Fine.

I told my tenant to tell me how long he took to fix everything so I could see whether I was getting my money’s worth. She texted back, “Maybe 15 minutes, no more.”

Damn! What a moron I am!

What Is A Good Short-Term Investment? A $280,000 Windfall Needs A New Home

Searching for a new home. Canoe on the lakeGreetings fellow Financial Samurai. Bruce here. I recently dropped a note to Sam about a financial conundrum that I was working through as I appreciate the analytical approach on this blog. Sam suggested that I write it up and engage the Samurai community to help with the alternatives analysis.


My wife and I are in our early 30s, are currently child-free, and live in the suburbs of Atlanta, Georgia. About three years ago we sold the condo we had purchased as our first marital home and bought a suburban house northeast of Atlanta in an area with the best public schools in the city called Marietta.

The house was the cheapest house in the best school district and definitely on the low end of the neighborhood as well. We paid 167K and there were only one or two other homes less than 200K in the high school district at that time. As luck would have it, we just happened to be buying within 30 days of the market bottom in January 2012 for the suburban Atlanta area.

We invested a decent chunk of change (~50K) in renovating the finishes of the home to give in a semblance of the style we like from watching exorbitant hours of “Property Brothers” and other similar shows on HGTV.

After living in this area for the last two and half years, my wife came to me with a proposal that we look into moving further south from the suburbs of Marietta closer to the urban center of Atlanta. She laid out the logic including the following:

  • She works closer to downtown Atlanta and her commute would go from 45 mins to an hour each way to around 20 minutes each way
  • The neighborhood/area we currently live in is dominated by families and children with very few single couples. This affects making friendships and means we will always be driving somewhere else if we are going out with our fellow child-free friends. Basically, why don’t we live in the city of Atlanta and enjoy the more active community while we have the opportunity? We can always move back to the suburbs if and when we do have a kid and they don’t start into public schools until they are six or so years old anyway.
  • The restaurants and bars in the suburbs are typically chain restaurants and sports bars. All the music venues, hip restaurants and bars are in Atlanta

I heard my wife’s impassioned appeal and decided to get on board with her plan to move to the City of Atlanta. I think the part that excites me the most is the opportunity to live in a walkable community. Everything in the suburbs involves getting in a car, but the area we are moving to allows for a ten minute walk to one of the most popular bar and restaurant districts in the city.

When we purchased our suburban house, we had pictured being there for the long haul (probably ten years or so), but with the renovations adding value and the market appreciation we felt confident with the numbers and changing our plans to move in-town.

However, we both agreed that because we have never lived in-town before, we would rent for the first year as opposed to buying a home in the city. The houses in the area we are going to be renting are almost twice as expensive as the suburbs we currently live in, and we want to make sure we are buying in the right area where we will want to settle in for at least 4-5 years so that we don’t repeat the same mistake of moving to an area that doesn’t end up being our cup of tea. By renting a home in the city, I think we will be able to figure out what makes the most sense to buy when we are ready after our 12 month lease is up.

Focus On Building Net Worth Even More Than Growing Income

Grow Your Net WorthIncome and net worth amounts are intricately linked. However, I’m going to argue that building a sizable net worth is more vital for early retirement/financial independence than generating a high income. Creating passive income is definitely a very good endeavor as well. Unfortunately, there’s a lot of uncertainty involved in the viability of your passive income. For example, my 4.2% CDs eventually came due, but nothing matches such a risk-free return any longer.

There’s even more uncertainty involved with your day job income. We all think our income will continue to grow to the sky for decades, but one day it’ll likely stop growing. We might get a new boss who doesn’t like us. Our company might get sold or go bankrupt. Departments might shutdown. We might absolutely burn out. All sorts of things could happen that will assail our income growth.

I thought my income was going to keep on growing to “make it rain” status by the year 2017 (age 40), but my income was slashed in half during the 2008-2009 downturn. It recovered in 2010 and 2011 before getting completely cut in 2012 after I left the finance industry. Only after two and a half years of working online has my income finally got back to my day job income days. Needless to say, my income is highly volatile and should not to be counted on at all! The only thing I have counted on is my consistent discipline to put away at least 50% of my after tax income every year, no matter what.

At the end of this post, let me know if you agree or disagree that focusing on building net worth is more important than growing income.

How To Pick A Robo-Advisor In The Digital Wealth Management Era

Old Coins by Financial SamuraiOne of the reasons why I’m an Apple user is because I appreciate good service. When I dropped my Macbook one evening and my hard drive stopped working, it was incredibly easy to schedule an appointment with the Genius Bar at my local Apple store. They fixed my hard drive and recovered my data within 30 minutes and away I went. Peace of mind is worth the premium, which is why I’m a fan of technology-assisted financial advisory firms with human financial advisors.

But what if you have time and know how to upgrade your RAM, swap out your hard drive, and do your own diagnostics? (I remember doing all that as a teenager.) Then going the robo-advisor route may very well be a good option because their fees are even lower. There’s just no person to guide you through life’s myriad changes.

Robo-advisors, aka algorithmic advisors deploy sophisticated investment algorithms to help invest your money in the best risk-adjusted way possible. You essentially fill out a profile about yourself and the algorithm will go to work to recommend and implement their recommendations for you.

I used to have a hard time trusting computers to do anything for me. But after spending 13 years covering some of the largest mutual funds and hedge funds in America, it’s clear that algorithmic investing, or more commonly known as quantitative investing or scientific investing have done extremely well. For example, Bridgewater Associates run by Ray Dalio is the largest hedge fund in the world with over $120 billion dollars and it’s a macro quantitative fund with tremendous performance. Famous hedge funds run by George Soros, David Tepper, and Steve A. Cohen can’t even compare.

A good quant fund or algorithmic advisor is all about having good people. At the end of the day, the investment variables are created by people and continuously tested for maximum returns. Spending time understanding people’s backgrounds and then trusting them to do the right thing is a huge part of letting other people run your money. After all, the reason why you want someone else investing your money is because your expertise lies elsewhere, and you’ve got more interesting things to do with your time.

In this article, I’d like to provide a brief primer on the three main robo-advisors that exist today: FutureAdvisor, Betterment, and Wealthfront. Because I’ve personally met Bo Lu, Founder of FutureAdvisor, I’m going to compare and contrast FutureAdvisor to the other two. They are all based here in San Francisco.

Financial Samurai Passive Income Update 2014-2015

Financial Freedom Through Passive Income

Earning passive income in Santorini, Greece 2015

Welcome to my annual passive income update. I don’t do these updates more often because nothing changes too much on a month-to-month or quarter-to-quarter basis. Do you really want to see that I increased or decreased my passive income by $1,000 from the month before? I think not.

Here are some immediate reasons I can think of for why building passive income is a good idea:

1) You likely won’t want to work forever, no matter how much of an eager beaver you now are.

2) Unfortunately bad things happen all the time e.g. layoffs, financial meltdowns, theft, etc.

3) It’s nice to provide as solid a financial foundation as possible for your family and loved ones.

4) You broaden your knowledge and expertise across various topics so you can seem erudite but remain a little dumb.

5) You’ll reduce financial stress and feel happier that not all your income is tied to one main source.

6) You will decrease your chances, your spouse’s chances, and your children’s chances of ever having to depend on the government to survive.

7) You will have more freedom to do things you truly want to do. This feeling becomes more intense as you grow older given you become more aware of the finality of life.

8) You can push yourself financially beyond what you think could ever be possible. Who doesn’t love a good challenge except for the people who have everything handed to them?

This is my third annual passive income report where I have a goal of making $200,000 in relatively passive income by mid-2015 after leaving my job in early 2012. I started off with roughly $78,000 a year and I’m currently up to a projected ~$150,000 a year if all goes well after renting out my old primary residence. Life is uncertain, and I’m sure things will change.

To clarify the meaning of passive income, I do not include income from consulting, freelancing, asset sales (stocks, bonds, real estate, baseball cards etc), and business income. I’ve got other targets for these revenue streams that I might discuss in a future post, but probably not. The goal of passive income is to have the income largely come in without doing much work at all. But in order to not do much work for money, we’ve first got to work very hard for our money!

One thing to note is that I started my passive income journey before writing about Stealth Wealth. $78,000 a year is roughly the median income in SF, so it wasn’t a big deal. But I promise that if I ever breach $200,000, I will go dark and never write any specific figures again. If I do, you’ll know that I’m lying to blend in because that’s what Stealth Wealth is all about. 

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.

Ways To Add More Income To A Retirement Portfolio

More Income In RetirementLike 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:

Income Portfolio Styles Chart

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.

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

Funny Money

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. 

Get A Free Financial Consultation With Personal Capital

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. 

Different Investment Strategies For Different Life Stages

Different investment strategiesA 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!