Tag Archives: writing

Are Markets Efficient?

When investing your money you’ll hear many different forms of opinion. Experts like Dave Ramsey will tell you to invest in growth stock mutual funds, others will say that index funds are the way to go. Then there is a group of investors that says you can beat the market by buying “undervalued” stocks.

The question that arises is, is there such a thing as an undervalued stock, and if so, is there a reliable way to take advantage of this “market inefficiency”.

Your investment philosophy in stocks is largely dependent on your opinion on what’s called the Efficient Market Theory (EMT). This theory states that markets are fully efficient. In other words any given price in the markets reflects the cumulative “wisdom” of all investors actings logically on fundamental data regarding value.

Essentially the market, according to this theory, is always acting completely logically based on the current information. So at any given point the market isn’t overvalued or undervalued – it’s priced at the fair equilibrium price given the current information available.

Some practitioners and theorists have brought up concerns with the theory stating that it doesn’t accurately reflect the actual results we see in the real world. For example, in the tech “bubble” of 2000, were investors acting completely logically on the market’s information or was there inefficiency?

Ultimately you’ll have to make your own determination. At the moment there isn’t unanimous agreement by the community.

3 Finance Habits to Improve Your Bank Account and Your Sanity

In James Clear’s book, Atomic Habits, he concisely illustrates a very important point. Often we think that we need to design the most optimal habits in our lives. For example we need to have a plan to exercise two ours each morning with the proper amount of cardio, aerobic and strength exercises. While doing this can certainly be a great boost of confidence and personal fitness, Clear points out that most of the time we don’t need complex habits – we need two minute habits.

Creating habits is hard enough. For anyone who has tried to change their daily routine for the better, they know how much of a challenge shifting behavior can be. Yet nearly all of us fail. The reason? Our habits aren’t simple enough.

Clear tells us not only to start with two minute habits but to make the cues and catalysts for those habits almost automatic. After all, “You can’t improve a habit that doesn’t exist.”

An area that I have personally been working on is the area of personal finance. I have thought about this topic a great deal in my personal life and have come to the conclusion that there are three key habits for anyone serious about controlling their money:

1) Pay Attention

Tracking your fitness has been shown to produced fitter people. Watching your personal growth has been shown to produce successful people. And measuring your finances has been shown to make richer people. Many studies illustrate this point. Simply staying on top of your bank balances, credit card balances, credit score and retirement accounts will leave you in a much stronger position. The reason is that we tend to improve things we pay attention to.

2) Plan Ahead

Creating a written plan and sticking to it is actually what separates us from animals. We have the ability to plan ahead and participate in what Ray Dalio calls “higher level thinking”. The plan doesn’t have to be complex. You can sit down with your advisor or do it yourself.

3) Learn

This blog isn’t intended to be the sole source of your financial information. But if you combine regular blog and book reading with input from your financial advisor you can improve your knowledge exponentially over time.

Conclusion: 

Do you want to bolster yourself to the top 1% of Americans? Do you want to experience less financial stress and uncertainty? Follow my three-pronged approach to 1) pay attention 2) plan ahead and 3) learn.

Maximizing Your Tax- Advantaged Money: How Much You Need to Make The Most of Tax-Free Money

Some of the best tax-advantages are provided by the government for retirement. For example just the 401K alone lets you put aside $19K per year into your employer-sponsored retirement plan. In addition you are allowed to contribute $6K (as of 2019) into an IRA. You can also open these accounts as a Roth account.

A Roth account, whether 401K or IRA allows your contributions to grow tax-free after you pay taxes upfront. This is in contrast to the traditional 401K and IRA which each are contributed to pre-tax but only grow tax-differed. Meaning, you aren’t taxed until you decide to take your money out.

But in addition to these two massive tax-advantaged accounts, you are also able to set aside an additional $3.5K into an HSA(Health Savings Account) account. The account is for the purposes of health expenses. However if you decide, say, when you’re 65 that your HSA is large enough and that you won’t need all of it, you can take out as much as you’d like for non-health purposes. The only catch is that the withdrawal is taxed.

So in essence your HSA can become a glorified IRA if you decide you don’t need it for medical expenses!

Each of these three options together amount to $28,500 a year. In order to take advantage of the full benefit you will need to earn about $85K to $95K in most states so that you can still pay your living expenses.

The bottom line: there are many options for tax-advanced money. It just comes down to making enough and budgeting wisely. So what do you think, is it possible for the average personal to maximize their contributions?

What I learned from Malcolm Gladwell’s book Outliers

Have you ever wondered why nearly all the top hockey players were born in January, February or March? Ever wonder why the smartest people in the world aren’t the most successful? Malcolm Gladwell’s book contains these exact answers and more.

I found his book extremely revealing. I came into the book thinking that success was almost completely determined by intelligence, hard work and intentionality. While these traits are significant parts of making the most with what you have, Gladwell illustrates that much of what determines success is due to completely unpredictable and random factors.

While much of our success is determined by luck – where we were born, who are parents are and their respective network and culture – a lot of these advantages can be recognized and limited. But we can’t just assume luck isn’t impacting these things – it always is.

Recently I’ve been reflecting on my current reads and taking notes to summarize what I’ve been getting out of the books. I did this for Outliers and took away a few key points. Here they are below:

  1. If you see a pattern, don’t assume it’s random, examine the history behind it
  2. Understand your own history and the apparent consequences/indications of what that means for you

I hope these two points are helpful. A key takeaway was to look at the contributing factors and history behind success. This, of course, is consistent with the title of the book!

Getting from Guam to Indonesia – Why Investment Philosophy Matters

There is clearly no one investment strategy that works for everyone. Some buy index funds, others pick their own stocks. Still others buy investment property and a few buy bitcoin. There are many ways to get from point A to point B in the investment world.

Recently I’ve been exploring with the idea of creating an investment model that can predict for stock market bear markets. This investment model would tell me when to buy stocks and when to sell them.

Creating a portfolio model seems daunting. There are many factors that go into developing your thoughts, strategies and relationships between variables. Without properly grounding yourself one might begin to think that there are simple or easy ways to create a model that beats the market while reducing volatility and drawdown.

Believe me, if this were the case I would be reaping the benefits of the hundreds of hours I put into my own model over the last couple months. Even now I’m beginning to realize that it might not be that easy. For those who have experienced success like Ray Dalio, I’ve always wondered what kind of indicators, and inputs they use in their models.

What are your thoughts? Is creating an investment model too difficult or should I give it a try?

Becoming the Squirrel of Personal Finance: 4 Places to Stash Your Cash

Most folks around the world understand the concept of saving more; you can only increase savings when you either increase income or decrease spending. However if instead of investing, what if one were to put the money into savings? Where should they put it? That’s what I’d like to explore.

When considering where to put your savings there are two main factors: Risk of Inflation, and Risk of the Need for Capital.

Risk of Inflation:

When you put money into savings there’s not really a real risk of losing your money to a drop in the stock market. That’s a good thing. But the risky part is that with slower interest and growth on your money, you’ll have a harder time keeping up with inflation. Often the savings interest won’t even be enough to cover the different.

Therefore with saving there is always a risk your purchasing power can do down.

Risk of the Need for Capital:

What if you put money in a CD (Certificate of Deposit) and find out a few days later that you need the money for an emergency?

First, at least some of your money should have been in a liquid asset for emergencies. But secondly, if you have to take the money out, a CD will usually penalize you. So you should always be aware of the chance you’ll need the money and what you’ll do if you do.

With those to risks in mind, the need for capital and inflation, let’s explore the options for saving:

Conventional Saving Accounts

These usually command the lowest interest rates because of the relative liquidity of funds.

Online Savings Accounts

These are online accounts that you set up in which you usually receive higher rates of interest because there isn’t any brick and mortar building to maintain.

Certificates of Deposit

These are the best for funds you’re sure you won’t need for a short period of time. For example if you know you’re going to purchase a car in 3.5 months, then maybe taking out a 3 month certificate of deposit isn’t a bad idea if it gives you are larger return of interest.

Conclusion:

Decide your reason for saving and how much liquidity you’ll need. If you can stomach tying up your money for months or even a year at a time, maybe a T-Bill or CD is worth it. Otherwise, consider a regular bank account or Money Market.

6 Types of Financial Institutions and Which are Important

The following is a list of institutions that are useful to understand when dealing with money on a regular basis.

1. Conventional Bank (Retail, Commercial and Online Banks)

These are financial institutions that take up the task of performing regular financial functions for both businesses and individuals. The provide services like setting up savings and credit accounts, issuing credit cards, certificates of deposit, mortgages and taking deposits.

2. Credit Unions

These do practically the same thing as conventional banks yet are geared towards a specific group of people. For example a military credit union would be geared towards veterans or active members of the armed services.

3. Insurance Institutions

These companies provide wide rages of insurance intended to decrease the chance of loss. When you go to get car insurance this is where you go.

4. Brokerage Firms

These companies administrate the investing process. Whether someone is investing in bonds, stocks, mutual funds or ETF’s this subset of financial groups likes to help the individual or business execute their purchase of securities.

5. Investment Firms

These Banks or Companies are funded by issuing shares. These funds are mutually owned (thus the name mutual fund) and are usually invested in stocks, bonds and other securities.

6. Mortgage Firms

Generally these companies are geared towards individual mortgage seekers but there are some that specialize in commercial properties. These companies either fund or originate loans and mortgages.

Each of these institutions has their place in the financial world. See where you can recognize them in your daily or monthly financial activities.

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!