Tag Archives: school

Are Commodities A Good Investment?

When it comes to discussing investment options, commodities often pop up as something that is seen as a gamble. But are commodities actually a viable investment?

Commodities

There are a few basic kinds of commodities. There are metals like gold and silver. There are gas-type resources like oil and gasoline. There are animals like cattle and pigs. And then there’s also grown commodities like wheat and corn.

Commodities as an Investment

Not only are there many forms of commodities, there are also different ways of investing in them, take gold for example. If you were interested in investing in gold, you would have a few options to consider. The simplest route would to buy a gold bullion ETF, but you could also purchase gold bars and physically store them, or you could even buy gold jewelry and other gold-based products.

Generally as a whole, commodities are simply a resource used in the means of production, that is valued based on simple supply and demand. By very nature, the price of various commodities aren’t specifically predicable because of the way in which commodities are traded. Just like stock prices can’t be determined on a short-term basis, commodities are very volatile even in long periods of time.

However, this brings us back to our original question, should one invest in commodities? First off, I wouldn’t consider commodities a real investment because resources, just by themselves, aren’t growing enterprises that produce cashflow or even profit. So if one is going to discuss “investing” in these, let’s call it what it is: speculating.

My option speculation is that speculation as a whole is generally a bad idea for long-term investing. However if one considers the prices of certain commodities there are predicable supply-demand patterns that arise. Gold for example, has done considerably well in times of economic panic.

Overall, commodities aren’t a wise “investment” choice for the majority of investors. However as part of a broad portfolio, it might not be bad to put a 5% or 10% stake in gold as a hedge against economic disaster. Ultimately the choice depends on the individual.

Different Stock Investing Strategies

I am going to briefly cover the top most widely used “investment” strategies for stocks. Technically not all of these methods are investing because a few of them involve short term trading.

1. Stock Index Mutual Funds

There are many types of indexes. Indexes are essentially a predetermined basket of stocks that are formulated using a set of rules. For example the most widely used index, the S&P 500, is an index that incorporates the 500 largest companies in the US and weighs them in the index accordingly. There are other indexes such as small-cap indexes or tech stock indexes. The bottom line is that with an index you are purchasing a tiny portion of a large basket of US stocks that is going to reflect your sector of choice.

2. Actively Managed Mutual Funds

Actively managed indexed funds are very similar to indexes except for 1 key difference: They aren’t bound by a predetermined set of guidelines. For example an active mutual fund might have a focus on large-cap stocks or international stocks, yet there aren’t any rules on how much of each of these have to be purchased. This is different from an index where the predetermined weight of each stock is set in stone. Out of this difference comes an increase in management fees because of the funds active, and therefore more costly management structure.

3. Value Investing

This is the method used by the smartest and most successful investors (in my opinion). Warren Buffet is the most famous example of this. Value investing involves determining a company’s value (regardless of current perceived value) by looking at a balance sheet and income statements using fundamental analysis. As the investor sees a price drop well below it’s determined real value the value investor can seize up good deals and hold on for the long-term.

4. Day Trading

This is a common strategy by short-term investors who use primarily technical analysis (looking at charts and trends) to make “investing” decisions about which stocks to buy and then sell quickly for a profit. The risky thing about this is that if you accidentally buy a stock or ETF that suddenly drops in price, you could get stuck with a plummeting investment that was truly overvalued.

5. Random Strategy

This strategy is specifically for people who don’t know what they’re doing and don’t even pretend to try to act like it. They randomly purchase stocks that “sound cool” and then hope that they rise in price. By far this is the stupidest strategy just behind day trading. You can lose your shirt much easier with mindless/random investing or day trading than you can with the other strategies I outlined above.

Conclusion:

Whatever you do, please don’t choose route 5, and preferably strategy 4 as well. Not only is day trading risky and the fees expensive, it has also be statistically been proven to outperform traditional investing methods over the long-term.

Combining Your Passion and Values With Income

Often when students or even middle-aged employees are considering which career path to choose they run into a dilemma. “Should I choose a greater income or sacrifice money to do the things I love?” many ask themselves. Even as a college student I have met and spoken with many older folks who find themselves still in a situation of questions.

Countless people go through their life without truly finding something that is both enjoyable and lucrative (or at least enough to pay the bills). Most people have heard of the classic situation of an artist or writer who lives in their parents basement. But what about the countless others out there who are in similar, yet less extreme situations?

Teachers a good example of this. Many of them make just enough to pay the bills, yet work long hours and stressful lives. Assuming they are doing something they enjoy (which I believe many of them are), how do teachers continue to do what they love while keeping the financial strain at a minimum?

There’s no easy answer to this question. I’m going to simplify a process I have used in my own life (before even exiting college) that has allowed me to understand myself better going into my “working years”. If your financial situation isn’t stable, you may have to work a J-O-B while you get these questions figured out.

1. What do you value?

Ask yourself, if you had only 24 hours to live, what people, places and activities would you care about? What would make your last 24 hours feel “full”? The answer to this can be revealing. As soon as you have grasped the things that matter most to you, begin looking at the things you want to pursue that match those values….

2. What do you love to do?

Everyone likes to do something. Maybe you love math. Or maybe writing or reading are your favorite. Or maybe science has always been a blast. There are numbers things you could find enjoyable. Find some of the top things and list them.

3. What are you good at?

This can be hard to know just looking at yourself. It may take honest questions with people who know you well to pinpoint what you’re good at. Maybe you are a eloquent or articulate writer. Or maybe you can organize things efficiently and effectively. Or maybe you are a natural leader. Or maybe you always have found analyzing numbers and facts easy. Whatever thing(s) you find stand out, those are some things you should double down on.

With these three questions answered you now have set the parameters. Your values dictate where you will never work. For example if you value family, your probably won’t work for a drug gang that breaks up families. Or if you value moral integrity, you probably won’t become a jail robber, even if your greatest skill is stealth and deception.

With values as your parameter, your passions are the arrow, pointing you towards a career field. Lastly your abilities and talents are the final part of the puzzle in determining what position best suites you.

For example what if you value family. You’re also highly interested in personal finance. As you become interested in the subject, you realize that you’re best at analyzing data and making good decisions. Upon looking at these three angles you will determine that becoming a personal financial planner suites you best!

I used the example of myself but you can use these questions for any situation or interest. Overall, these questions are simple, but they may take time to answer completely. And as if often the case, they may lead somewhere that doesn’t pay well. In that case you can either work somewhere on the side, take a pay cut or continue looking for that thing that is both fulfilling and pays the bills. Good luck in your journey!

3 Forces Standing Between You and Your Financial Goals

Time

Often all the things we want to accomplish aren’t feasibly achievable in a set period of time. When this is true, we have to make the often difficult decision of determining which path matches with our values. In other words, we probably can’t achieve every goal we have so we have to prioritize.

This is very true with short term goals like making it to your kid’s basketball game verses watching the football game live. But it can also be true with long term goals. For example I certainly would enjoy the process of being a masterful accountant who has both technical skills and people skills. However I have come to realize that I might never become the world’s greatest accountant if I have other goals more worthwhile (for example like becoming a great financial advisor).

Goals

You might think a strange thing to add to this list is goals. After all, aren’t goals things that empower us and keep us on track? Yes and no. In one sense goals are essential to producing the results we want in life. In another sense, goals by themselves, without effective plans to get there and way to streamline actions towards them, are meaningless.

As Warren Buffet and Bill Gates agreed in an interview: one of the greatest factors to success is focus. Putting all your energy on one task, both with your mind and body, is a powerful thing.

Having too many goals, I have found, can get in the way of this powerful focus. That’s why it’s so important to recognize the things that are worthwhile and the things that can wait.

Inflation

Lastly on this simple list of 3 is inflation. This is more of a technical obstacle than a mental one. However the force can be equally important. If you were to buy a house in a stable neighborhood today, do you think the same house would be worth more in 30 years? Yes, I would hope so. This fact that we can all bet on, the fact that prices will overall rise year after year, is called inflation.

Inflation is powerful because it covers both the consumption side (for example like purchasing gum) and the investment side like stocks or investment real estate. Inflation is such an important force that I will be covering a brief history and action steps around it tomorrow in my blog. Tune in!

The Most Advantaged Retirement Account

When it comes to picking a place to keep your retirement savings, there are two basic types of accounts to be aware of. The first is what is called a taxable account. This simply means the growth is taxed like most other investments. The second type of account is what is called tax-advantaged. In other words, this account has tax advantages like either  tax free or tax deferred growth.

In the category of tax advantaged accounts, there are a few popular names. Names like 401K and IRA are often used. When setting up a retirement account you can either set one up through your employer, or independently through a broker.

The types of accounts usually provided through an employer are 401K’s and 403B’s. Essentially these accounts are the same, but talk to your tax advisor about the differences and what applies to your specific situation.

If you decide to take the route of setting up a retirement account on your own, you can set up what’s called an IRA  (individual retirement account). IRA rules, for this current year, allow you to put up to $5500 of income away, tax deferred. In other words, you can avoid paying taxes on $5500 of income this year.

So the major employer-sponsored plans are 401K’s and 403B’s. The major independently funded retirement accounts are IRA’s. Within these options there is what’s know as a Roth. Whether it is a Roth 401K or a Roth IRA, the Roth has a few characteristics:

  1. Instead of deferring taxes upfront (and deducting the contribution from your taxable income) you pay taxes from the start.
  2. Instead of paying taxes on the growth, you avoid paying taxes in the future if it is taken out after 59.5.

In other words, Roth accounts are different in the fact that you pay taxes up front, but avoid paying it in the future if all the requirements are met. In recent years, the Roth has become more popular for these reasons.

Generally speaking, the Roth is better than the conventional account because of the power of “tax free” withdraws”. There are a few other types of accounts, but for most people, some form of IRA or 401K is the best option. I hope this helps on your retirement journey, whether you’re starting out, or in the midst of major changes.

3 Factors to Look at When Determining Where to Live

As a financial blog, I have dealt a lot with individual personal finance issues, like what to invest in, how to budget, and what to do in different areas financially. Here I want to step back and cover 3 financial factors that you should think about when considering a city to live in. While these three aren’t the only things to think about, they certainly will cover the broad range of financial determining factors:

Job and Career Potential

Here you’re just trying to get an idea as to how easy or hard it will be to have employment, and sustain employment in your chosen career field. Two of the things to consider are the unemployment rate, which is a good indicator of how many people who want jobs have them, and job growth. With job growth you want to look at the number of new jobs being created, specifically in your career field, over the last decade.

Cost of Living

Housing costs will be broken down into to two big areas: housing and everything else. When looking at housing, there are usually two broad options available. You can either rent or you can buy. You are going to want to compare the costs of rent vs the rest of the country. Pay special attention to the rent increases. For example maybe your area currently has slightly higher rents than the national average, but over the last couple years the rents have been skyrocketing. You want to be mindful of areas in which the costs of living, including rents are rising quickly.

The second housing option to look at is homeownership. What is the average costs of a home in the area. This can vary greatly from one neighborhood to another. For example one neighborhood might costs $300,000 but just across the road might be $250,000 for a similar house. Find the area you’re thinking about and start comparing prices.

After paying for housing there are the rest of the general costs associated with living and breathing. These costs can include food, insurance, transportation, recreation, and especially taxes. Taxes are a huge part of your yearly expenses. There are income taxes (both federal, state and sometimes city), as well as sales tax and property tax. Look at these rates for you area.

Long-Term Stability

The last thing you want to look at after job potential and cost of living is the general stability in the area. The stability of the area is both the economic factors and the political factors.

For example look at one of the leading factors of growth for cities: population growth. Take a look at the recent trend in population. For example are massive amounts of people entering or leaving the area? This might be a sign that things are changing. With the change in demographics and population comes changes in political preferences.

Maybe these changes will lead to political leadership upheaval in the local government. Think about how these changes could potentially impact your life in terms of local taxes, regulations, social programs, and building projects in the future. Are you okay with these potential changes and the uncertainty that comes with them?

Conclusion:

Overall, these three factors can paint a pretty clear picture of the financial concerns about one area over another. After going through them, you should know whether this area is something you would want to consider moving to. Naturally though, there will be others things of concern, like climate, education, health and other issues. While these concerns might not directly impact your finances, most of them should be looked at closely for the effects they could have down the road.

3 Different Ways to Look at Your Money

Often part of the natural inclination towards money is to view it as something that just pays the bills. While this perspective is certainly valuable in certain context, I want to share 3 different ways you can look at money that will change the way you see your financial life.

The 30,000 feet approach

When you look at any area of your life, health, emotions, mental health, relationships, spiritual journey, your money, etc… it’s easy to view them up close. But when we step back and view the specific situation through the perspective of our whole life, we can see how much it really matters or doesn’t matter.

Ask yourself, “Does spending $120 on a box of extra wineglasses fit into the overall priorities of my life?” If it does great, but more often than not, the priorities don’t align.

The time perspective

When you look at your finances through this lens, you imagine how your decision will look at the end of your life. For example I am thinking of buying a new vehicle that looks and feels cooler. However this expanse will postpone some of my retirement savings.

When looking at it though the time perspective you imagine how you’ll view this decision 40 years down the road. Ask yourself, “When I’m 80, how will I view this decision?” Often our decisions are based on short-term thinking, so this view can really help us realize the consequences behind our actions.

The business perspective

Imagine your financial life is a business. If your name is John Smith, your finances are managed by John Smith, CFO(Chief Financial Officer) of John Smith Corporation. As CFO you are responsible in allocating capital (money) towards the respective goals of the business.

If your job was to manage money for yourself (which it is) would you be happy with the job you’re doing? Or would you fire yourself?

Base your actions on whether they provide appropriate return on investment (ROI) for John Smith Corporation. While the goal of John Smith Corporation isn’t necessarily to maximize profit, your decisions should be aligned with your priorities in order to fit your values. Sometimes this could mean going on vacation, but other times it could mean increasing retirement contributions.

These perspectives are meant to help improve your decision-making processes with your money. They certainly have helped me in my financial journey. In what other ways can we view our finances?

 

Reading: Things That Will Change Your Life

As simple as it sounds, reading will change your life.

As I have lived on campus I have seen many different views when it comes to reading. Most students prefer to avoid it altogether if possible. A few people enjoying reading fiction, and then there are the true readers.

As part of this “club” of true readers I have seen firsthand how the books we read can change our life. And I don’t mean just any books, I mean nonfiction. Why nonfiction? There are two reasons nonfiction is more beneficial in our life over fiction:

1. Fact-based learning

When it comes to reading in general you are uncovering stories, facts and emotions. With nonfiction specifically, the base of your reading is centered around actual facts, not something made up.

2. Nonfiction books are often more relatable to real life

Whether it’s a nonfictional story, or a self-help book, reading nonfiction has a much greater footing in reality, and therefore more relevancy in our lives, than simply another story out of someone’s head. And often, depending on if it’s a self-improvement book, you’ll receive applicable steps for your life as well.

Other benefits to reading in general:

a. Learning and experiencing human emotion

This is by far the most dynamic and variable part about reading. As soon as you dive past the writing structure and all the mechanical, necessary aspects of the text, you are left with the “meat on the bone” so to speak. This gives us exposure to real or conjured human emotion, whether you’re reading fiction or nonfiction.

b. Inspiration

When you open the pages to a book, you are often met with unanticipated emotional boosts of energy, or inspiration. It is these sparks that can make all the difference in either our professional or business lives. Mark Cuban, Billionaire and owner of the Dallas Mavericks, is quoted as saying, “I’ll read hours every day because all it takes is one little thing to propel you to the next level.”

c. Literacy

The last major benefit to reading is the learning and literacy is brings to a person’s life. Learning new words, exposure to new ideas, and learning in general all enhance the reader’s perspective and knowledge about the world. The benefits apply whether you’re reading a nonfiction book or not.

Conclusion:

Frankly I don’t dislike fiction either. I certainly have enjoyed many bestsellers over the years like Harry Potter and others, that have inspired and entertained me. However I believe while reading fiction is good, reading nonfiction is better.

Pursue a “Normal” Career or Become an Entrepreneur?

With the rise of social media marketing, the technological advancements with commerce, and the general business sentiment in the U.S. rising, many young people(as well as older people) are finding entrepreneurship as an increasingly appealing life choice. I would say as with most trends, there is both bad and good aspects.

On one hand entrepreneurship is what America is built on. From Ford Motor Co. to Apple Computers, companies that are able to provide what customers want will always succeed. However, there is a new mentality emerging that entrepreneurship is “fun” or that simply by starting a company you are instantly successful.

By very definition only 1% can become the 1%, which is why thousands of businesses fail each year. Starting a business can be exciting, rewarding, and profitable, but it probably won’t be “fun” in the conventional understanding of the word.

When starting a business ask yourself, “why am I starting this business?” This question helps you understand yourself. And then ask, “Is there need for my product or service?” This helps you understand the customer. And lastly ask, “What’s the best (most efficient, effective, and customer-centered) way of bringing my products and services to my market? This question will help you understand your action steps.

After asking those questions you’ll have an idea as to where your mind is at, where the customers’ minds are at, and where your next actions should be. While answering these questions thoroughly might not be easy, it will be highly beneficial to any rising entrepreneur.

Action steps: Ask yourself, “Why am I starting this business?”

The Purpose of Investing

The whole purpose of investing is to turn money into more money – it’s to be able to buy more things than you bought in the past. However, why not put all your money into savings? If I can lose “all” my money in the stock market, why not play it safe and keep everything in savings? There are two reasons. 1) You probably want to grow your money, not simply keep it safe. And 2) the value of money goes down over time. Wait, you might be asking, isn’t $1 always worth $1?

Yes and no. While $1 will always be the same, the amount that $1 can purchase generally goes down over time. Let’s use an example. Let’s say you have a small collection of 10 Legos. While you really love Legos, you only have these 10, so you tend to be really careful with them – you like them a lot.

One of your friends offers you an apple for one of your Legos. You refuse because you don’t want to have 9 left. However, a few months later, after Christmas and a birthday, you have received 36 more Legos. Your friend comes to you again and asks to trade one apple for two Legos. While you don’t like the idea of giving away more Legos, you don’t mind as much any more because you now have 36. So you do the deal.

What changed? Why were you willing to give more Legos up for an apple when before you wouldn’t even trade one for one? That’s because the Legos became less rare. This has to do with supply and demand. While demand for Legos stayed relatively the same, the supply increased, which decreased the value of the Legos relative to the apples.

We could get really technical with economics but for now the general principle can ring true with money as well. As the amount of money out in circulation, both physical and electronic, increases, the perceived value, and therefore the purchasing power of those dollars, decreases. In the last 100 years, inflation has gone up at about 2 to 4% per year.

The scary thing is that inflation continues even when your money isn’t growing. For example in 2008 when the whole real estate market and stock market crashed, inflation continued. Meaning, not only did stock investors lose 37% on their money, they also lost an additional 3%+ in purchasing power! Ouch!

In times of great economic panic gold often increase in price because it can act as a fear mechanism for investors when times get tough. When people in the market see inflation increasing and economic certainty decreasing, they often view gold, which has been used as money for literally thousands of years, as a safer location for their money.

The bottom line: real estate and stocks are fantastic investments for anyone looking to outpace inflation over long periods of time.