It's been a pleasure to receive feedback and answer e-mails regarding one of my favorite topics to discuss: Financial literacy.
Lately, the questions have become more specific. A lot of people want to know what the best investments are and how they can get into "the game."
Unfortunately I don't know what investments will throw off the best returns 5 days to 5 years from now. In fact, the purpose of this column has always been to try to initiate discussion as I also struggle with these financial issues every day and appreciate different perspectives and points of view.
A Brief History
When I started college I was a business major. Econ 130 and 131 were pre-requisites to enter the college of business. I was able to slip by Econ 130 with a C, but got an F in Econ 131. The second time I took the class I did not fare much better (I got a D). Half of it was laziness and a lack of drive to study. The other half was that I just had no concept regarding finance and money. Supply and demand made sense, but I had no application of it in the real world.
Because I wasn't doing so well in my business classes, I switched majors to education in 1999. At the same time, I started to make a decent amount of money as an entertainer. What I could get my hands on was spent just about as fast as it came in. If my parent's hadn't stepped in and taken a good portion to hold on my behalf, it probably would have all gone by the wayside.
It was only after they sat me down and had me physically put together a budget that I started to grasp the concept of income, expense and cashflow. I had been making plans of moving out on my own and knew that continuing my current lifestyle would not be possible. It was a wake up call to show that there was not an endless supply of cash coming in and living on my own was going to be tough.
That time period lit a fire under me to read everything I could on investing, talk to as many people, and try to find the "magic bullet" that would make me rich!
Since then I've had my `okole handed to me in the tech bubble burst of the late '90's, started a small business, bought real estate, invested in some precious metals, re-entered the stock market (cautiously) and kept some funds in low-interest bearing accounts (CD's, money market funds) to make sure I didn't lose my shirt in the process.
Here's some of what I learned:
Finding a good financial advisor is difficult
The first financial advisor I sat down with was a friend of a friend. It was exciting because I had just lost a bundle in the stock market and was hoping some expert advice would help put me back on track. The conversation went well and I was given some forms to fill out regarding my goals and what my current asset allocation was.
That was the last I heard from the guy.
Turns out that some advisors will not handle your money unless you have a certain amount to invest ($100,000+). This leaves the average Joe (like you and me) to go elsewhere or not seek the advice of a professional at all. Many people end up at the bank and sit down with one of the employed "financial advisors." They'll ask you your timeframes and you'll get to choose whether or not they'll put you in the "aggressive" mutual fund or the "conservative" mutual fund based on your answers and age. After this initial consultation you'll receive a bunch of mumbo jumbo in the mail and maybe a quarterly update with a pie chart on it.
What they won't do is explain the fee structure of the fund, why the fund they're pushing is better/different from other funds out there or how they intend to adjust your strategy should your investment not perform to the target levels specified at the initial consultation. Beyond that, it's my best guess that their clients never end up seeing them again or receive financial advice on other investments that may interest them including real estate, stocks, etc.
It took me a long time to find an advisor that I could work with. By fate, a friend of mine from high school became an advisor at a large mainland company. Our relationship allows me to call him regularly to discuss issues that I feel may work for or against my goal planning. We even talk about this column.
It's a difficult task, but well worth it if you can develop a relationship with someone who knows the in's and out's of finance and is willing to share that information with you. If you're going to give your money to an advisor who's going to drop it in a mutual fund and never look at it again, you're better off doing it yourself and avoiding the fees.
Don't buy more Real Estate than you can afford early in life
My wife and I currently live in a 1-bedroom (600sf) condo. It's cramped, but we make the best of it.
We weren't married when it was purchased and the decision basically fell on my shoulders. I was trying to decide between the one I bought and another unit that was $40,000 higher in price.
My decision to forgo the cool "bachelor pad" with a view has been a good decision. The lower monthly payment allows me to put away money in other investments.
I see too many couples stretch themselves to get into a home they don't necessarily need. Whether it be a pool, or a view it's my opinion that the premium paid is not worth the long term opportunity cost.
For example, in 2005, the average annual income per household in America (U.S. Census Bureau) was roughly $46,000.
Let's double that: $92,000.
The average median price of a home in Honolulu is currently $613,000.
Our couple is looking to buy something just above the median: $650,000. They are married, with no kids, but would like the space.
They purchase the property with 10% down (remember, the average American has less than $10,000 in savings).
Between mortgage, property tax and mortgage insurance, they'll be coming up with over $4,000 a month to pay for their home ($48,000 per year). This is not counting in maintenance and upkeep of the property.
Therefore:
$92,000 - Yearly income
$48,000 - Housing costs
$26,000 - taxes (income and other)
$18,000 - spending money or ($1,500 per month)
Between electricity, water, food, housing maintenance, that will get eaten up pretty quickly. Where is the money to invest?
Add children into the picture and it gets even more difficult. Also note that $92,000 is a very good amount of money for a young couple to be making and I'm only using a little over the MEDIAN value of home prices.
What most people in this circumstance end up doing is when the property goes up in value, they keep refinancing and taking out the equity to pay for private school, home repairs, etc. The hope is that there's enough equity in the home in the end to cash out and pay for retirement.
If this couple were to purchase something functional (2-bedroom condo), but half the cost $375,000 they would have $1,500/mo. to invest into a retirement fund or into another type of equity that can grow. Between the equity gained in the property over time, the savings built, and the idea that they will be expanding their income beyond the $92,000 a year mark it's my feeling that they will have more options when a larger home is needed (kids, etc.) Not to mention that when they sell the property, the equity gained in the sale will most likely be tax free.
I can't stress enough how starting early will create a strong advantage in the long run. Most people either don't even think about this, or think about it when it's too late and the higher priced, larger home is the only option.
Diligence and Diversification is key
Like I mentioned before, Wall Street kicked my butt in 2000. I held whatever stocks were already purchased, but stopped adding stocks to my portfolio for a while as I felt I needed to learn more before continuing. It wasn't until late 2003 that I started again.
Interestingly, what got me back into the stock market was that I had noticed my portfolio had re-gained its losses and returned to the level it was prior to 2000. What helped were some of the non-tech stocks that I had picked up along the way.
If I had continued to invest and diversify my portfolio, my belief is that I'd be much farther ahead than I am now. Every market is going to have it's ups and downs, but the investors who can weather the down times are the ones that make out in the long run.
Never Stop Learning
There is an enormous amount of literature out there regarding personal finance. It doesn't take up a whole section in the book store for nothing. Get out there and read. You'll find after a while that almost everyone is saying the same thing... pay yourself first, create a plan, start early, etc. Take what you think will work for you and apply it. If it doesn't seem like it's working, try something else. The important part is starting a never giving up.
