Friday, December 25, 2015

Top Ten Tips for Buying a House

In my previous post, Top Ten Tips to Building Wealth, I wrote that one should buy a house, preferably paying cash, i.e. without incurring debt. This suggestion generated much discussion.

Yesterday I was having dinner with a friend and we had a brief discussion about purchasing cash vs. taking out a low-interest 30-year mortgage, and briefly the merits (or otherwise) of doing so.

As a follow-up, I thought to post my Top Ten Tips for Buying a House:
  1. DO NOT buy a residential home in the absence of Triple D. If you are patient AND plan to purchase a home based on needs rather than wants, you may be able to scoop a cash bargain!
  2. If you do your homework, you might even be able to purchase a home for an amount equal to what you have already saved and/or have available as a down payment on a residential property. Meaning, you may be able to buy it outright in a cash deal.
  3. Looking to purchase a rental property for investment? You can still buy a house today using a credit card, because there are still thousands of ‘underwater’ properties available after the financial meltdown that was caused by the housing bubble of 2008/9.
  4. Accountants will tell you that your home is a (fixed) asset. Albeit correct in accounting terms, it is however, incorrect in investment terms:
    • Assets generate active or passive income. If you earn money on a regular basis from residential property (e.g. by renting out a home that you own), that property is an asset.
    • Liabilities cost money on a regular basis. If you own a home (whether paid for entirely or not) and you live in it, that home is likely to be a recurring liability, i.e. costing you money e.g. every month.
  5. A realtor’s Competitive Market Analysis (CMA) might be interesting, but it has little value beyond “being interesting.” Any house is worth only what a willing buyer is prepared to pay a willing seller... nothing more, nothing less.
  6. A realtor is not a financial advisor. In fact, most realtors care very little about your financial health. Realtors are salespeople who care mostly about sales commission (often their only source of income), earned by representing you in a realty deal that closes at the highest price they are able to achieve, period.
  7. Any amount of cash required as a down payment represents consideration of ‘opportunity cost’ in relation to other investment/uses that you may have been able to consider for that same amount of cash (awaiting investment)... often better invested elsewhere for a higher return.
  8. According to CBS News, for the period 1890-2005, inflation-adjusted home prices rose just 103 percent, or less than 1 percent a year. Comparatively, the historical average performance of the Dow for the period 1899-2012 (a similar period) was approximately 9.4% per year (including reinvested dividends).
  9. Many people will disregard costs when discussing their return on investment realized when selling a house. If you purchased a home e.g. 30 years ago for $10,000 and sold it today for e.g. $200,000 your profit does not equal $190,000.
    • On the positive side, you can factor tax savings (e.g. mortgage interest deductions), and the fact that you sold the house for more than what you may have paid for it.
    • On the negative side, you have to factor in 30 years of costs; like property tax; ongoing repairs and maintenance; realtor’s commission at the time of a sale, opportunity cost of not investing the down payment in 'the market;' adjusting the sales price for inflation over the period of ownership; money spent on unique and/or custom fittings like window coverings; etc.
  10. You have to live somewhere, so the cost of a home will always be a liability. This is true in terms of property tax, utilities, maintenance, etc. If unexpected costs (repairs, tax increases, etc.) cause discomfort, then you should rather rent for an amount similar to what it may cost you to make regular payments, for a residential home.

One of the most significant drawbacks to home ownership - especially with debt - is a potential loss of personal mobility. As an entrepreneur, I want to be able to ‘lock up and go’ to wherever business opportunities and/or adventure may present, without worrying too much about the ongoing running costs of owning a residential home.

The suggestions above may help readers to think a little beyond the propaganda that politicians, educators and your parents may have shared in the past: work hard at school, borrow to go to college, get a job, borrow to buy a car, borrow to buy a house… and live happily ever after with a lifetime of debt. This is also affectionately referred to as "The American Dream."

Or... you could simply decide to build personal wealth instead.

Wednesday, December 23, 2015

Top 10 Tips To Building Wealth

Although people sometimes get lucky (e.g. winning a lottery), most people don’t. That is just a fact of life. So, if we ignore luck, how can anyone ever have an opportunity to get rich?

‘Rich’ is of course relative. Relative to where you live, your consumption habits, basic requirements, how you manage your time (especially free time), and more. I prefer ‘building personal wealth’ to ‘getting rich.’

Setting a goal for building personal wealth is a necessary first step:

- An investment goal should be an amount of money that will allow you to maintain existing standards of living when paychecks stop, offering a return commensurate with spending requirements.
- Retirement is not a goal in itself. Retirement is a more likely a figurative concept of not wanting to work for a boss, rather than a desired end state. Ask anyone what he or she plans to do once they retire. A common response may be, “I plan to travel.” If someone says that, ask what he or she plans to do when they return from their travels… and you will notice how quickly their well thought-out retirement dreams dissipate.

Here are my Top 10 Tips To Building Wealth:

1. Never carry debt on a credit card. If possible, never carry debt at all, unless debt generates an income. Wealthy people use borrowed money to create new stuff, expand their businesses, buy machinery, etc. Poor people borrow money to buy stuff (made by rich people) that they don’t need, can’t afford, to impress their imaginary friends… stuff like big-screen TVs, fancy cars, etc.
(a) Rich people call their business debt ‘leverage.’ Because leverage is what they acquire by borrowing, and usually to achieve a projected future return on investment.
(b) Poor people use words like ‘mortgage, credit card balances, car loans, student loans,’ etc. to describe debt.

2. Earn as much money as possible, while you have the ability to work.

3. Never rely on a single paycheck; rather create 3 or more sources of income.

4. Start your own business.
(a) If you cannot figure out how to make yourself rich, others will hire you at the lowest rate possible to work for them, to make them rich.
(b) You cannot get rich by earning a salary from a single source of income (see 3 above).
(c) A business earns money, spends to pay employees, purchase goods, etc. and then pays tax on what’s ‘left over.’ Employed people earn money, pay taxes, and keep whatever is ‘left over’ after deductions. Spot the difference… it’s easy!

5. When you earn money you can buy a house to live in, preferably paying cash. Yes, this is possible. I have personally done it, more than once.
(a) A house needs to fit your requirements, not your emotions.
(b) As soon as you say, “I love this house” while shopping for a home, consider leaving that ‘open house’ immediately. Emotion disrupts logic, common sense and good investment decisions.
(c) Your house may be an asset in accounting terms, but it is actually an ongoing liability. If someone says, ‘My house is my biggest asset,’ ask him or her how much income they generate from their house on a monthly basis. If they look confused, it’s because they misunderstand the relationship between assets (that make you money) and liabilities (that cost you money). Help them!

6. As soon as you are able to do so - e.g. when your kids leave home - sell your house and downsize to something that fits with your needs (see 5a above).

7. Get rid of stuff. And then… stop buying stuff. If you need a new shirt, buy one. When you get home, throw out an old shirt, or preferably two. Stop hoarding trash; it prevents you from breathing clean air. If you buy stuff that you don’t need, with money that you don’t have… soon you will have to sell stuff that you would like to keep, to pay for the things you bought!

8. Open an investment account as soon as possible and invest in diverse (ideally dividend-paying) stocks across multiple industry sectors. Financial, biotech, energy, etc.
(a) Buy ‘cheap stocks’ and keep them. You will ONLY lose money if you sell underperforming stocks at a loss. Don’t do that!
(b) Right now, most energy stocks are ‘on sale.’ Rich people are buying, while poor people are selling energy stocks.
(c) For example, consider Exxon or Chevron: both offer a dividend yield of around 4%. You will therefore earn a 4% return on investment… regardless of the stock price day to day. Try earning 4% interest in a bank savings account!

9. When you have a stock that is performing very well, consider plugging in a trailing stop. For example:
(a) A trailing stop will allow you to sell out of a position if a stock price were to decline, say by 3%.
(b) If an equity that you own has gained e.g. 40% over a few years, you can use this modern technology to instruct your ‘online broker’ to automatically sell that stock, if it drops by e.g. 3%.
(c) Protect hard-earned gains by only selling stocks that offer a positive return on investment (see 8a above). Understand the difference between realized and unrealized gains/losses.
(d) If your online brokerage platform does not support trailing stops, open a new account with one that does, e.g. TD Ameritrade.

10. Reinvest all dividends while you are able to do so. For example, while you are earning a salary.
(a) Create an automatic DRIP (dividend reinvestment plan).
(b) This means, that e.g. when Chevron pays out a quarterly dividend, the cash is automatically used to buy more Chevron stock.
(c) A DRIP allows you to adjust your cost basis (your average stock price), ongoing. It offers some protection against market volatility.

11. Don’t be greedy, and invest for the longer term. The market will go up and down. Over the medium to longer term, the market will go up. There are many reasons why the market will always go up, longer term.

The Dow has averaged almost 7% annually, for more than 100 years, despite the Great Depression of the 30’s, dotcom bubble of the 2000’s, 9/11, the 2008/9 financial crisis, and more.

If you don’t know which stocks to invest in, buy any of the 30 stocks that make up the Dow Jones Industrial Index. These great companies are ‘solid’ corporations that offer good dividend yields, have a strong track record of ongoing success, and offer products portfolios and management teams that are reasonably bulletproof in managing adversity, and more.

If you invest in Dow stocks, be sure to diversify. $10,000 invested in equal weighting across 5 or even 10 stocks, is better than $10,000 invested in any one stock. Think Enron, in case you were wondering.

Here’s the math: At 15% compounded growth, an investment will double every 5 years. So, start investing early, as soon as possible. At the rate above, $10,000 invested at age 25 would be worth over $1 million, at age 60.

Rudi presents investment workshops to groups of investors for a nominal fee. He does not sell any investment products, and he will not offer to invest or manage your personal savings. He teaches self-empowerment and financial sustainability to foundations, families, corporations, and individual investors.

If you are interested in learning about ‘the market,’ your best investment choices, and building personal wealth, contact Rudi for a customized workshop in your area.

Wednesday, July 15, 2015

Name Your #Startup

What is in a name?

Names are arbitrary labels. For example, whether you know Christina as Chrissy, Chris or Tina, she is still the same person.

My business career spans about three decades. During this time, my employees quite often bemoaned the fact that our respective business names did not adequately reflect/imply our products or services.

You have probably heard this before: “No-one knows who we are, or what we do.” Explained another way, one could suggest that a software business should be called “Software.”

This topic also arises when I consult, fund and/or advise startups. Often, entrepreneurs might delay a decision on a business name until they are able to dream up a really cool, profound and/or obvious one (i.e. a name that matches what they do).

Now, ironically, this exercise is nearly futile and mostly a waste of time. Generally speaking: you do want a startup name that is catchy, not too difficult to say, perhaps easy to remember, etc.

Think a little about successful companies that have been around for many years.

Occasionally a company’s name might tell you what business vertical they are in, e.g. Airbus (vs. Boeing). But the largest publicly traded corporation on the planet does not sell apples! The most iconic coffee chain may be Starbucks, and the largest hamburger chain, McDonald’s.

Now, think of more recent IPOs and successful startups. The names, Airbnb and Uber, probably do not tell you much about their type of business, products or services? But Fitbit, on the other hand, likely indicates a company whose business may relate to keeping fit/active?

My advice is not to fret over this too much.

Now, this last sentence above does not imply that you do not need to protect your intellectual property (“IP”). Nor does it imply that you can simply copy someone else’s IP in order to help your startup achieve ‘instant traction.’

You should familiarize yourself at a high level with trademarks and patents

Trademarks are relatively simple to register. You can start by checking to see if a trademark already exists. If no records can be found matching your proposed name, you should undertake the relatively simple task of filing a trademark application. It costs about $250 in the U.S., and filing a mark will afford you exclusive use of the word(s).

I am not going to discuss patents. But do some research to ensure that you understand relevant laws where you live, and whether you need to apply for patent protection.

Beware of patent and trademark trolls!

These are unscrupulous people who look for successful web properties (websites, blogs), product names, business names, etc. that are not protected. They make a living by filing patent or trademark applications for other people’s business/product names, most often without the originator’s upfront knowledge.

Then, as a next step, once the patent or trademark has been registered (which may take several months), these delightfully useless clowns will send a ‘cease and desist’ order, because they will now own the legal rights to your (business or product) name.

Or, they may try to sell ‘their new trademark’ to you at an exorbitant fee. If you decide not to pay a negotiated price acceptable to the seller, you will need to change your startup and/or product name. Think of this as perfectly legal extortion! You could oppose their application/claim but this will suck up your time, distract you from your business, and cost you money.

In closing: The business name is not overly important. A good idea, supported by some sweat equity, a great team, good timing, a little working cash, and some good luck… are all more critical success factors. Together, these are the proverbial startup gold.

Also read #Startup Science

But do remember that vampires and parasites will be circling as soon as you achieve any traction, start generating cash, and are seemingly enjoying some startup success. In a strange, counterintuitive manner, this unwanted attention could be viewed as a compliment for all your hard work, ingenuity and success achieved!

Thursday, July 2, 2015

#Startup Science

Recently, I watched a Bill Gross (founder, Idealab) TED Talk on the factors that help make a startup successful, or otherwise. He shared some great insight on some of their many successes and failures. And he added references to companies that he had not ever been associated with.

I thought to share some of his thoughts, supported by own portfolio experience, in the hope that this will be useful to other entrepreneurs and self-employed business professionals.


Many startups seemingly fail because they could not secure a financing round. Actually, although often offered as a primary reason, funding is highly unlikely to be the primary reason for business failure.

This concept may seem somewhat counterintuitive: Startups may struggle to secure funding, but this is not the primary reason why they may not succeed. For example, many investors ignored Airbnb originally, when they embarked on a quest for funding.

Business Idea

Which brings us to the idea. Some founders think because they have a great idea, it will be easier to get funding.

However, sourcing an idea investor is rather difficult since most Venture Capitalists (VCs) and many Angel Investors may be looking for revenue, traction, run rate, revenue, scalability, etc., instead.

Many great startup ideas have failed, and several successful startups were not even really that great an idea. Not at the start anyway. Ideas, like the people who generate them, constantly evolve.

Your final product may not even have the slightest resemblance to your original idea. And that’s okay.

Business Model

No, a business model is not a requirement for success. Many successes, like YouTube, did not even have a business model at the start.

And anyway, your business model, much like your original startup idea, will also need to continuously evolve in order to accommodate shifting consumer preferences, fads, waves.

You can create the greatest business for compact disk distribution, but if no one is buying CDs, you will surely fail.


This one crops up often. Most of the time, institutional investors (VCs) will want to consider past results and successes, the track records of the management team, etc.

They will want to assure themselves - before investing - that the exec team is a powerhouse that has done it before, and will be able to do it again! However, since most startups begin with one or two people, a great team may not be a recipe for success.


This seems to be most critical to startup success. Now, it would be remiss of me to claim that timing is everything, and the other factors above are of less importance. However, timing is critical, and good timing, essential.

But, you cannot control timing. And there are many factors entirely beyond your control.

Apple crushed Blackberry with impeccable timing. Consumers were ready for new smartphone technologies. At the time, Jim Balsillie, co-founder of Blackberry had famously said, “you don’t need an app for the Web.” While Blackberry was betting on a browser as the only app one would need, more than 300,000 apps were already available for the iPhone and iPad.

Sometimes, you cannot even control time to market timing. Development may take longer than anticipated; vendors in a supply chain may delay product launch; etc.

I briefly mentioned traction above. This can refer to a growing number of regular users (e.g. Facebook), regularity of existing client reorders (e.g. when selling a product to retailers), annual SaaS user license renewals (e.g. SalesForce).

For your startup to be successful, you need all of the above, hard work, luck, and really good timing!

For regular #startup tweets, follow me @rudibest on Twitter.

Tuesday, January 20, 2015

You Are Dead Wrong About Charity

About a year ago I left a well-paying, executive, salaried, corporate job to focus on my personal businesses instead.

My interests are quite diversified: I am a self-directed equity investor. I co-founded a tech startup. I own/manage a professional services consulting company. This company guides C-suite executives, small business owners and startup founders with good business strategy; we help them organize for growth, securing financing, create exit strategies, and more. My family and I also manage a 501(c)(3) non-profit, inspiring healthier kids, in healthier communities.

My focus today is all about charity. How we think of charitable organizations, charitable giving, and the nonprofit business sector as a whole. My nonprofit has only been my life for the past four months. Fortunately, I ramp up quite quickly in terms of identifying barriers and obstacles to success.

Donors have two primary objectives: (1) they give because they care, are inspired to support a worthy cause, can afford to give, etc.; and/or (2) they donate to charity to reduce their tax liability to the Federal Government, electing to 'do good' instead of feeding a seemingly bottomless, bureaucratic pit. People, who donate for tax purposes, are also people who can obviously afford to give.

I recently presented a startup workshop for nonprofit founders. They share the same challenges as for-profit founders: finding a good partner(s), struggling with positioning statements, achieving product/market fit, gaining traction, securing funding, and more. Surprise?!

Nonprofit founders start their business with an idea that will move the social needle on whatever their cause is. For-profit startups usually create a solution to an existing problem, primarily for the purpose of selling a product/service... for net, new, profitable revenue.

Both typically invest their heart and soul into the business. And they are equally passionate about their concept and/or idea. Absent the aforesaid, none will survive, let alone flourish. Both usually face considerable challenges trying to secure financing for their ideas, product, program, etc. That is understandable, because financing represents other people’s money.

Financing rounds usually start somewhat informally, e.g. via family and friends. As a startup burns cash, it moves up a proverbial ladder as costs (and successes) escalate, perhaps striving to secure angel or institutional investor funding next.

An angel investor is usually a person, investing his or her own cash, like one sees on the TV show the Shark Tank. Venture Capitalists are institutional investors, and typically best suited for securing larger financing rounds.

Foundations are institutional investors that fund charities. Well-managed charitable foundations are often fabulously wealthy. In my local community, just one, smaller, regional foundation has almost $200 million in Assets Under Management (“AUM”).

During the last financial year, they awarded nearly $9 million in grants and scholarships to deserving recipients. Great job! But, they had also received more than $5 million in gifts. Their charitable giving outflow was therefore only around $4 million, or about 2% of total AUM. Underwhelming?

Foundations invest AUM in much the same manner as other investors. In my example above, the Foundation’s 2014 gains would therefore have been about $20 million because the market returned about 10% to investors last year. Meaning, they only shared about 20% of their total gains.

Now, when nonprofits apply to a foundation for grant funding, they are rightfully, very diligently reviewed and investigated. This entails making sure that they are properly registered and in good standing with the IRS; that they have ongoing engagement in community projects with good social impact, measurable outputs and outcomes; that the nonprofit’s founders/managers/employees/board have the capability to deliver, etc.

Then, assuming all hurdles had been traversed successfully, small grant amounts may be awarded… sometimes $25,000, usually much less.

But, here is the rub: people expect nonprofits to be small. We also expect them to spend all their revenue on projects, rather than any on ongoing operational expenses, like salaries. In fact, some people get upset when charities spend too much of their revenue on their operational expenses.

But, a registered charity is a corporation with an independent board of directors (required), an executive management team, employees and volunteers. And corporations have to generate income to pay expenses, because otherwise it will go out of business. A nonprofit is also at a disadvantage in terms of attracting talented employees, because they cannot be seen paying market-related salaries.

If a nonprofit is very successful, like Wounded Warrior Project, people may not object to $300 million in revenue, but may well object to $220 million in annual expenses. Not to mention $60 million spent annually on media (TV advertising).

You may even think your local school’s bake sale represents a better charitable cause than Wounded Warrior Project. If this were true, it is because you have been programmed to believe that 100% of contributions earmarked for any charitable cause is better than having a charity spend 20% of its income on operational costs.

This, you need to unlearn because it is simply dead wrong! The bake sale may generate $300, while Wounded Warrior Project generates $300 million. The charity can then spend tens of millions of dollars supporting wounded Veterans in many different ways. In addition, they generate enough revenue to support other local, smaller charities in the work they do, e.g. helping Veterans with job placement, housing requirements, family services, etc.

We should applaud Mothers Against Drunk Driving (MADD), annual revenue around $33 million. But, you may proclaim, "They spend so much on building awareness for their cause!" How else should they go about sharing a great message that helps to prevent stupid people from drinking and driving? Oh yeah, and the fact that they supported more than 51,000 victims of drunk/drugged driving crashes in 2013… is a cherry on top of the awesome work they do.

Strong, well-organized, financially sustainable, and well-managed charities step into often thankless roles as the protectors of people in need, where governmental agencies often cannot deliver with similar efficiency, speed and efficacy. If you understand what I am sharing… then find your preferred cause… and donate!

Follow Rudi on Twitter @rudibest for useful #startup informational tweets.

Sunday, January 18, 2015

Global Warming In A Climate Of Change

Most scientists agree on climate change. Initially, many scientists agreed on global warming, which evolved into climate change.

Some skeptics and naysayers counter the widely accepted science. For example, offering that the earth cools and warms cyclically anyway, regardless of human interaction. Of course, historical evidence exists for this hypothesis. A salient point worth exploring is human impact, vis-à-vis our actual contribution to changing the temperature/climate of our temporary home, this little planet.

This post is not intended to support arguments for or against climate change. Rather, it is intended to encourage thought, debate and education… and perhaps even amuse.

There are about 1 billion cars on the planet today. Did you know? Or, you could ask, “What does that matter?” And then, most people know that there are about 7+ billion people on the planet.

So, as a result of my being the self-appointed president of Isaac Newton’s Florida Fan Club, or simply a Newtonian wannabe, or at least a fan of all things Newton other than his hairstyle… I thought to dig a little deeper.

My first ‘discovery’ is actually a reminder of how stupid I would be without Google. Now, some people who know me may offer that I possess stupidity regardless of Google, but at the very least I am capable of investigative search.

Oh yeah, 1 billion cars. I was distracted for a minute. And 7 billion people. Maybe it would be okay to just use rounding for illustrative purposes? As in, there are about seven people for every one car on the planet.

Now, according to my Google research efforts and analysis, I discovered that the ratio of people to cars in the USA is about 1.3:1, and in China, 6.75:1.

These ratios above probably make sense of human wealth and population distribution, and would elevate US car owners right to the top of the list of people most accused and/or presumed guilty of contributing to climate change.

Or global warming. Or whatever you would prefer. I do not really care about the naming convention. As long as we can just discuss it, become informed, and better educated about important matters.

I thought that I should avoid Mickey Mouse opinions and only focus on Mouse instead. So, I went to the US Environmental Protection Agency’s website and found this calculation:
It would be okay to ignore the formula but not the result.

The average vehicle emits 4.7 metric tons of CO2 annually. Sounds like plenty huh? Well it is. And because there are more than 1 billion vehicles globally emitting almost 5 metric tons per vehicle, I thought I would continue rounding the numbers… and just call it 5 billion tons of CO2 emitted by vehicles.

5 Billion tons can also be called 5 gigatons. You are welcome.

As a next step in my scientific discovery, I thought to explore other things that emit CO2. I chose not to pick on your pets or livestock. People get upset when you criticize their cats, dogs or cows. I specifically excluded cow emissions from my superficial research. Some people consider a cow to be a sacred animal. Others consider a cow to be source of dairy, steak, leather, etc.

So, I decided to pick a fight with us instead. As in, people. You know… the billions of little soft-celled, carbon machines that breathe in oxygen, and emit CO2. Also, we do this 24/7, unlike cars that spend most of their lives idle, parked, and not running. When your car’s engine is not running, I would assume your human engine is still ticking, and that you are still living, breathing? At least, I hope so, for everyone’s sake!

So, how about the 7 billion humans roaming planet earth? The website "Information Is Beautiful" (and several others) calculates total human emissions to be about 37 gigatons. I know, right?!

I was going to use human CO2 emissions data from SkepticalScience, but that would have been inappropriate because I am neither a Science skeptic, nor a climate change naysayer or denier. In fact, quite the contrary. When presented evidence that contradicts my current beliefs, I can pivot in seconds! In fact, people should prefer evidence to pseudoscience.

So, I am not arguing for or against climate change, but simply providing facts.

There are too many people on earth. I have done the math. More people than whatever relevance you could possibly attach to owning a Prius, or Tesla. Never mind solar panels! Although, I am confident that you meant well when you made those socially respectable, caring, CAPEX investments. And, presumably, any/all good deeds still matter.

I have yet to arrive at a solution for the problem that I have unfortunately identified. This will trouble me endlessly. My DNA compels me to find simple solutions to complex problems. So, if you are able to assist, please share your thoughts.

In the meantime, maybe you can plan a visit to your parents? I am sure they miss you. When you make the road trip, take the V8 roadster. Because, you now know that your parents helped cause this climate change problem... by having you!

Thursday, January 8, 2015

Cash Is King?

For investors, determining the cash percentage of their overall investment portfolios is always a tough question.

We should be able to agree that any cash that you have on hand is (1) either necessary to cover ongoing expenses (monthly bills, gas, etc.), or (2) represents cash awaiting investment. I do not think that “nice to have” qualifies as a valid reason for hoarding and/or managing your cash!

It may be useful to first address how much one would need in ‘savings’ to cover monthly expenses. This is critical, especially in the event of unforeseen situations like illness or a job loss. Most people would likely agree that one should hold enough liquid cash to comfortably cover 6-12 month’s worth of living expenses, thereby creating a near-term safety net.

Any cash on hand in excess to the safety-net amount above, which would also be subject to individual circumstances, should be viewed as cash awaiting investment.

Now, here is the tricky part. You may have an investment portfolio made up of various financial instruments, like cash, equity/stocks, bonds, mutual funds, etc. The question always begs… what percentage of my investments should be in cash?

Advisors will offer many different opinions. A good answer may even be, “It depends.”

A professional wealth manager will typically be able to review your investment portfolio, determine your risk profile, ask about your desired rate of return on investment (also subject to individual circumstances), and more.

Typically, you may arrive at a ‘cash awaiting investment’ percentage of around 10-20% of your total investment portfolio value.

If you hold too much cash, you will miss out on gains when the market is bullish (or going up) because the cash value would be static. And, if you hold too little cash, the balance of your portfolio would be subject to larger losses in market downturns, albeit that the reverse would be true in market upswings (lots of cash; smaller equity gains).

See… it is not that simple a question!

But, math can provide the answer to all of mankind’s questions, so here are some examples:

Investor No. 1: Assume $100,000 portfolio
90% basket of Dow equities + 10% cash
Opening positions:      $90,000 + $10,000 = $100,000
Dow goes up 1%:       $90,900 + $10,000 = $100,900
Dow goes down 1%:  $89,100 + $10,000 = $99,100

Investor No. 2: Assume $100,000 portfolio
50% basket of Dow Equities + 50% cash
Opening positions:      $50,000 + $50,000 = $100,000
Dow up 1%:                $50,500 + $50,000 = $100,500
Dow down 1%:           $49,500 + $50,000 = $99,500

In the example above, investor no. 1 achieved nearly double the gain achieved by no. 2 when the market went up by 1%. And the reverse is true for a downturn of 1%. This is why knowing your risk tolerance is critical.

The human element of emotion is not covered in this post. The market will go up, and the market will go down. Unskilled investors buy high, and sell low. Skilled investors do the opposite, either by managing their investment emotion, or by using tools like stop limits, trailing stop orders, etc.

What if the market declined by 5% and Investor No. 1 lost $4,500 in a day or two? Does the shock and disappointment of losing so much of his/her investment in such a short period of time spook No. 1 enough to hit the sell button and get out? That would be a terrible investment “strategy,” likely to cause investors great personal financial loss.

Over the long term the market goes up. This is not rocket science, but a combination of inflation causing prices of finished goods and services to go up over time, increased corporate sales revenue, globalization (more consumers in more markets), and more.

By way of an example, if you were to invest in Boeing ($BA), you would expect the stock price to go up over time as the corporation gains efficiency through automation; increases sales revenue by selling airplanes for more money, to more customers; cuts costs by outsourcing non-core services; eliminates waste by becoming more ‘lean’, or agile in procurement, inventory control; etc.

As a result of the aforesaid and inflationary pressure in general, the stock price will edge up over time, and - if the corporation continues to be managed professionally - so will your dividends.

By way of a practical example, Boeing's stock price gain over five years is about 114% and over ten years, about 162%. That means $10,000 invested in Boeing in 2005 would be worth over $16,000 today. And if your mother had bought some Boeing stock in 1978 for about $2/share, her gain over this period would equal about 7,500%.

Now we're talking!

And, had it not been for the financial market downturn of 08/09 when Boeing’s stock crashed from about $100/share to about $30/share, the 162% 10-year gain example above, would likely have been much greater.

Over the last century, the Dow has returned about 7% annually. If you also reinvest your quarterly dividends, you can average about a 10% annual return on investment. Such a rate of return would allow you to double the value of your investment portfolio every 7-10 years.

Happy investing!