Now Hiring: CEO For Your Life
This blog gives us the opportunity to share investment wisdom, post comments about stocks and comment on the market in general. This post may be a little different, but I wanted to touch on how your portfolio in general is a tool that is used to help build wealth in your life. Hopefully you have more than one tool in your toolbox and I wanted to touch briefly on other tools at your disposal. No one invests in a vacuum—often real world issues play out that affect our investment decisions.
In the business of life, you are the Chief Executive Officer (CEO). Here are some “real world†issues that investors should consider.
Risk vs. Return: One of the biggest investment mistakes that you can make is to have a bad ratio of risk vs. return. What I mean by this is that for every additional unit of risk that you are taking on, you should be expecting a higher return. Imagine, for example, an average married couple earning $80,000 a year as a family, with two kids, a dog and a $200,000 mortgage on their house. Their entire investing portfolio consists of $30,000 in a stock trading account the investing family decides to risk it all on one or two stocks in the biotech industry. Some of us might scream “no!†while others think it’s no big deal. Is the risk of losing 80% of your capital overnight worth it, even though you could double your money?
Debt: There is no sense in investing $100 a month into a mutual fund while carrying thousands of dollars in credit card debt, and yet thousands of people do exactly that. It’s much more fun to put a regular amount into your exciting stock portfolio than it is to pay off debt. However, credit card debt is usually set at a very high rate, like 15% or more, and there’s no way the average mutual fund is going to beat that on a regular basis (especially after taxes). There is good debt (like buying a house as it offsets the debt with an appreciable asset) and there is bad debt (not paying your credit card bill in full each month). Bad debt is like sailing a boat into the wind—don’t make it harder to accumulate wealth than necessary.
Buy Property: It may sound strange to talk about a house in a stock blog, but the real goal here is to make you wealthy as soon as possible. One of the best ways to do that is to have a diversified portfolio of stock. Another way to truly diversify yourself is to own a house. Over a thirty year period, chances are very, very good that your house will appreciate in value. If you are renting, the chances are 100 per cent that you will never make any money, but you will have a very appreciative landlord.
Frugality: Many investors pour over their portfolio and stress when their shares rise or fall by a penny. But then they ring up a $250 cell phone bill during the month chatting with their friends, or eat out at restaurants or fast food outlets and spend hundreds of dollars on conveniences. Does this sound like a contradiction? The best investors in the world have a gold rule: live within your means.
Save Regularly: If frugality is the golden rule, then saving should be the silver rule. Most people in the free world don’t save very much money—in fact, in the 1980s it was estimated that around 8% of household income was saved, and these days it stands at around 1%. Many people spend their entire lives hounded by debt. If you can contribute 5 per cent of your net pay into a savings account while having no debt, you will easily put yourself near the front of the pack in terms of accumulating wealth.
Taxes: Many wealthy people set up their lives as “home businesses†that allow them tax breaks on items in their lives. For example, if you purchase a vacation property and rent it out, you have to claim the revenue on your taxes as business income, but you can also claim your yearly family holiday expenses on your taxes as well. Your personal computer, your vehicle, a digital camera, and even part of your housing expenses can be claimed if you consult from your home-based business (depending on the business of course).
Remember, you are the CEO of your life. If you treat your life like you would a business, you may find that you can trim some expenses here and there, increase your household revenue (either by getting a promotion, finding a new job or adding on a fun part-time job or business), and can truly diversify your life to protect against risk and build real wealth.
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great article
Yea definitely a great write-up Karl!
Very interesting article. I found this particularly interesting for the time of the year as well. Great time to reassess your 2007 goals and refocus on 2008.
Excellent article! Consistently good trading habits lead to good trading (and nice profits) and the same holds true for life as well.