The stock markets are tanking right now thanks to Europe and you’re loving it! Why? Because you and I are sitting pretty on our 12% gains since we took profits around March 15, 2012 when the S&P 500 was hovering at 1,405. We are disciplined, and realized that a 6X return over the 10-year government bond yield of 2% in just two and a half months was outsized and unsustainable.
Furthermore, we know that plowing our proceeds in a stable value fund that yields just 2.5% guarantees ourselves a total return of roughly 13.5%. Anything above a 10% return in this shaky environment is a glorious return because everything is relative.
But, what if you aren’t satisfied with just a 13.5% in your mothership fund? What if you don’t want to take the rest of the year off and go to Aruba with all your new lady friends and still crush 95% of the competition when the results are tallied on December 31? Not a problem, because who wants to kick back and live the good life? Greed is an elixir!
HOW TO OUTPERFORM ALL DAY AND ALL NIGHT, BABY!
If you want to outperform, all you’ve got to do is jump right back in the markets. The S&P 500 at 1,350 is down about 4% since you decided to take profits. As a result, all you’ve got to do is invest all of our proceeds in the S&P 500 by buying the cheap and easy ETF fund, SPY. Now that you’re fully invested in the S&P 500 again, no matter what the market does through year-end, we will outperform by 4%.
If the S&P 500 claws its way back to 1,405, your total return will be 16%. And if the S&P 500 continues to correct down to 1,300, you’re down to +8% but still better than the index at only +4%. Whatever happens, you’ve locked in your outperformance for the year, and if you ran a mutual fund, you’ll immediately rocket to the top of every fund analysis review from Morningstar to Fortune Magazine. With the accolades comes tremendous fund flows, and therefore more fees, and bigger paychecks.
With your picture in Morningstar winning Fund Manager of The Year, you will start receiving tons of e-mails and phone calls from seemingly innocent women (and men) who want to jump your pants. You will be shallow and respond to only the attractive ones who will immediately accept your invite to Aruba. With the extra money you have at your disposal, there is nothing too expensive for you and your friends to indulge in. Life is good!
MORE GOODIES TO CHOOSE FROM NOW THAT YOU’RE RICH
Now that you’ve got the capital, bankers come flocking to you for more sexy investment products that aren’t available to the general product. Structured Notes they pitch, with a minimum total investment of $100,000. “$100,000? Psssha. How about 1 meeeleon dollars as I’m big time now!“, you retort.
“As you wish sir!” responds the banker, as he gleefully calculates his $20,000 commission while you check the time on your IWC Big Pilot watch. You sadistically wish the markets IMPLODE before the IPO date. You put a million bucks into the S&P500 Buffer PLUS structure note because it provides you 10% downside protection and 2X upside gains up to 22% over a 2-year time period. Holy crap. Not only are you up 12% YTD for 2012, you get to put all your proceeds into such a product which gives you double the upside, and keeps you up even if the markets go down 12%? Thank you heavens!
You start feeling guilty because the game seems rigged. Why do you get to invest in these products while other people can’t and have to suffer market losses? Then you look back at your IWC and remind yourself of all the hours you spent reading books, going to school, studying the markets, and putting your balls on the line. “Screw the guilt! This is America, damn it!”, you shout as you transfer funds.
WHAT ABOUT THE LADIES ALREADY?
Well shoot, we’ve already talked about this! There is a high correlation with how attractive your girlfriends are, and how ostentatiously wealthy you are.
When you’re outperforming, by definition you are doing better than your peers. With more money, you aren’t counting pennies when you buy that $10 Cosmopolitan for the lady along with the $400 dinner. Afterward, you won’t be worried about taking her home to a one bedroom rental in the ghetto because you’ve got a swank pad at the St. Regis!
Women like to say that money doesn’t matter, but that’s probably because they aren’t with a man with money. If you have man #1 who is: handsome, kind, funny, fit, and smart vs. man #2 who is: handsome, kind, funny, fit, smart and rich, man #1 will get shut out!
If you are a broke ass foolio who hasn’t been saving, hasn’t been studying, and hasn’t been investing, you will not have a sexy girlfriend. Furthermore, if for some odd reason a hot woman is with you, you should bet your bottom dollar that she won’t stay with you for very long.
When the juice runs low, they’ll know it’s time to go!
RESETTING THE CLOCK
Come the New Year, you’re back to being a nobody, because your clients and the markets only care about what you’ve done for them lately. You only care about what you’ve done lately as well. No matter, you’re a grizzly veteran now and have Financial Samurai on your side to kick your nuts or squeeze your nipples, reminding you that you can never lose if you lock in a gain.
Investing takes discipline. You understand your risk-adjusted metrics because you really aren’t investing for yourself. You’re investing for your family, or your future family that you care so deeply about. The more you have, the more you have to lose. It might take 10 years for you to build your investment nut, and just one year to lose half of it. You don’t want that. You are not a donkey, but a savvy investor with an even-keeled mind.
Sometimes you win, sometimes you lose. But, for as long as you live, you know a new year will come again.
Recommended Action For Increasing Your Wealth
Manage Your Finances In One Place: Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances.
Now I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing and when my CDs are expiring. I can also see how much I’m spending every month to make sure I’m within budget. If you are interested, they can even provide tailored financial advice for much cheaper than traditional wealth managers. Personal Capital is the best free online tool I’ve found to manage your money. It only takes a minute to sign up.
Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.
You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.
Invest With A Low Cost Algorithmic Advisor: Wealthfront is an excellent algorithmic advisory choice for those who want the lowest fees and can’t be bothered with actively managing their money themselves once they’ve gone through the discovery process. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Wealthfront charges $0 in fees for the first $10,000 and only 0.25% for any money over $10,000. Their minimum is only $500 to get started. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.
About the Author: Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.