“I’m always told when to buy, but I’m never told when to sell.” – Anonymous mutual fund manager.
What’s the point of investing money? To pay for a better life. I think many of us forget that investing is just a means to an end. We set up our automatic bi-weekly investment contributions, come up with a better dollar cost averaging framework, and never touch our money because we want to grow our nest egg as large as possible. But eventually, we must spend, or else there’s really no point.
My #1 reason for saving and investing money is so that I never have to work for someone out of necessity ever again. Can you imagine being in an arranged marriage? That’s kind of what work is like because there are always new people coming in where you had no say in their hiring. You put up with people you don’t like because you need the money. Eventually, you’ll have enough where you will make a change.
During my first two years of early retirement I was only about 75% sure I had made the right move. Therefore, I continued to live frugally and stayed disciplined with my saving and investing habits. I invested 100% of my severance check in a couple principal protected structured notes so I wouldn’t be tempted to spend any of it.
It’s been almost five years since I last worked for someone else. During this time, I’ve come to realize the fear of running out of money in retirement is completely overblown. We are adaptable and stronger than we know. If necessary, there are so many ways to make extra money.
With the bull market in its eighth year, I’m starting to take profits and use these funds to purchase real assets and experiences. I encourage you to consider doing the same.
Taking Profits To Pay For A Better Life
On May 30, 2012, I invested part of my severance in a 100% principal protected DJIA structured note paying a 0.5% annual yield. Today, this note is worth $202,335, a 35% increase. I didn’t invest naked long because I just left my job and the economic environment was still very uncertain after the housing bust. If I did, I’d probably be up closer to 45%.
As a retiree, my annual investment goal is to earn a 4% – 6% return, or 3X the 10-year bond yield. Given this structured note has yielded closer to an 8% annual return since inception, I’m taking profits on 100% of the profits, i.e., selling $52,335 worth of notes and letting the original principal balance of $150,000 ride.
What will I be spending this funny money on? Perhaps on a new mid-life crisis ride I’ve been writing so much about? Nah. I’ll be spending it on building a new retaining wall to solidify the foundation of my home, a new 275 sqft deck off the master bedroom, and replacing two, 50 year old cracked aluminum windows with a new 12 foot wide sliding door which will connect the master bedroom onto the deck!
When I bought my fixer upper in early 2014, I imagined all the expansion potential possibilities. But expanding costs money, and it’s always a good idea to take your time when making permanent changes. Further, to reduce the pain, it sometimes feels better if spending is spread out over a longer period of time.
In Phase I, I spent roughly $130,000 to redo the entire interior of my house. You get the best bang for your buck expanding bathrooms, remodeling kitchens and doing the necessities, such as updating the electrical. Now it’s on to Phase II.
Phase II consists of some superfluous stuff that has a lower return on investment, e.g.,landscaping. For the longest time, I’ve wanted sliding glass doors off my master bedroom that connected to a nice deck that overlooked the ocean. I imagined stepping outside for a morning stretch after a good night’s rest. On a warm afternoon, I’d relax in a lounge chair, drinking a Moscow Mule from a chilled copper cup before the sun set.
Having always lived on the eastern side of the city, I never imagined there were homes with ocean views in San Francisco which I could afford. Every other major city in the world with panoramic ocean views trade at unaffordable premiums, so it wasn’t until early 2014, when a sizable CD came due, that I ever bothered to look.
Sensing an opportunity, I made the move to on the one hand increase passive income by renting out my old house and on the other purchase my ideal San Francisco home for the second half of my life.
Spending The Profits By Building A Deck
Step 1: Clear The Room
It’s a foggy August morning. I spent about 30 minutes covering all my furniture with plastic wrap to prepare for the demolition. You’ve really got to take your time remodeling because I spent hours painting the wall and the window trims a couple years ago. If I had planned my remodeling perfectly, I would have installed these doors and built a deck first, and then painted the interior.
Step 2: Remove Windows And Trim
Step 3: Remove Sheetrock
It’s always fascinating to open up the walls and see what lies beneath. One time I found some old coins from the 1920s and a newspaper article in my old house. The big issue with installing a sliding glass door was figuring out how to install it without the upper floor collapsing due to the removal of the center support column.
Step 4: Install Temporary Wall To Support Upstairs
Before removing the center support column between the two windows, my contractor had to build this temporary support wall. He also installed two new support columns to the left and right of the sliding door frame. Temporary problem solved!
Step 5: Install Header And Sliding Doors
Notice the massive new support header above the door. For bigger jobs, I highly recommend everyone pay up for a licensed contractor who will get a permit. Safety is paramount. My contractor will not cover up the walls until the inspector gives the OK.
I’m pretty pumped with this project because I’ve gone from a 9 foot wide viewing area to a 12 foot wide viewing area. The new sliding door has double pane glass for better sound and temperature insulation. The view is what makes this project a home run, and I can’t wait to take some pictures on a clear day!
Installing this door and replacing the header took four guys one day to complete: 8am – 6pm. After the inspection, my guys will come back to sheetrock, mud, sand, and paint the inside and outside of the house. They’ll also install an electrical outlet for the deck and two LED lamps. Finally, they will install three more support beams below the bedroom. The total cost for the door, labor and permits is about $15,000.
Spending $15,000 on this home improvement project feels so much better than keeping the $15,000 invested in a stock market that provides zero utility. If the stock market goes up another 5% this year, that’s an extra $750 return. Whoopdeedoo. If the market declines, then I’m happy I took some profits to enjoy something much more permanent.
Identify what you value and spend your profits accordingly.
Step #6: Enjoy The Sun!
Now looking for deck furniture and a hot tub for three.
It Feels Like Free Money
After a long enough time passes, the investments you made will start feeling like undeserved, free money. This is especially true if you get a nice severance check for leaving a job you wanted to leave anyway. It’s surreal that you can lock up money and then potentially have a lot more money years later while doing nothing. But that’s the power of investing in asset classes that historically go up. It just takes time to play out.
Just be aware that bull markets make us feel invincible. We start thinking we are smarter than we really are. In reality, all we’re doing is riding a tram into the sky. We don’t know when the tram will stop or break. Nor do we know whether we’ll be forced to get off at an inopportune time.
During good times, it’s important to tell and ask yourself two things:
1) You are not an investing genius, so stop thinking you are one.
2) How do I make the good times last longer?
Telling yourself you are not an investing genius forces you to have a hard look at your net worth composition and investment asset allocation. The goal is to know your actual risk tolerance and not take outsized risk. When times are good, we tend to overestimate how much risk we can take.
Asking yourself “How do I make the good times last longer?” makes you consider future goals. For example, if your investment proceeds will help put your kid through college for an easier life, you will have made one of the most generous and profitable investments ever!
Contemplate a world where your children have no huge student debt and can pursue their interests instead of a paycheck. Would that make them happy? If your children are happy, would they not love and appreciate what you’ve done for them? If this were so, as a parent would you not be content?
I’m still waiting for my daughter to be born, so besides writing posts about what I’ll teach my daughter in the meantime, I’m going to get the house done up so that mom and dad will have gotten all their projects out of the way so they can focus 100% on being good parents. Besides, this new sliding door and deck has a 20+ year warranty. That’s a nice way to make the good times last longer.
Never Forget The Reasons Why You Invest
Unless I was constantly taking profits to spend on necessities and the joys of living, I’ll never rank stocks as my favorite asset class to build wealth. For frugal people who tend to live way below their means taking profits to spend is hard to do. The same goes for people who fear missing out on more gains due to greed.
For those of you who are older, have your financial ducks in order, and are getting a little demotivated by the constant investing mantra, I encourage you to utilize some of your paper profits for something more tangible.
Go through an exercise of saying, “My investment in X paid for Y.” Here are some examples:
My investment in Google paid for my daughter’s education.
My investment in GE paid for my compact car.
My investment in the S&P 500 index paid for my kitchen.
My investment in an Apple structured note paid for the downpayment on my house.
My investment in VNQ, a Vanguard REIT, paid for my parents’ two week cruise.
My investment in Hawaiian Airlines bought 10 round-trip San Francisco-Honolulu plane tickets.
My investment in VYM is paying monthly dividends, which pays for my gym membership.
My investment in Netflix enabled me to retire early.
If you find yourself going through the exercise and realizing your investments haven’t paid for anything, you’ve got some work to do! You’re either not investing enough or you’ve forgotten your purpose for investing. The goal is to always tether your investments to real things. As soon as you identify what your investments have bought or will buy, you’ll be much happier.
Recommendation For Building Wealth
Manage Your Finances In One Place: The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track 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 where my spending is going. You also get your net worth amount sent to your inbox weekly.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button.
They’ve also come out with their incredible Retirement Planning Calculator that uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes. Definitely check to see how your finances are shaping up as it’s free.