This post comes from one of our readers, Dan Stelter, who is a personal and business finance enthusiast and freelance financial copywriter. He has been published at a variety of blogs around the web, and as a ghostwriter at a print publication, The Secured Lender. Dan learned his personal finance habits from his parents and life experience. When you don't find him writing about personal finance, you can find him playing practical jokes on his wife, and when he chooses to actually apply himself, at the gym. He currently maintains his own financial and web copywriting business at http://www.freelancewriterinchicago.com.
Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income.
Are you one of those people never able to take the viewpoint everyone else does? When everyone sits down at the table during the holidays, do you just sit there gritting your teeth, trying not to cause a problem?
Great! We have something in common.
I enjoy everything personal finance — it runs through my blood, just like it does yours — but I still dissent on the way many view it. Case in point: Save every dollar you can in every way possible. For example, I take a bit of an issue with the extreme couponers out there. Do you really want to live on ramen noodles for the next six months? How healthy is that, and do you really feel all that good from living that way?
Why I disagree with being a “cheapskate”
The reason I criticize cheap living, to some extent, is because I went way overboard on it in my middle and late twenties (I'm now 31). I never went to the extent the people on TLC's “Extreme Cheapskates” did, but far enough to cause myself misery.
For example, I learned how to shop the local grocery store to keep food costs around $100 per month or so as a single young man. Great from a financial perspective, but it hurt my quality of life.
I think I suffer from undiagnosed hypoglycemia, which is where your body has a hard time regulating blood-sugar levels. It's not too serious — you can't die from it or anything like that. For me, I would get dizzy and could only sustain 20 to 30 minutes of physical exercise at a vigorous rate. Then I would crash, having just enough energy to keep running but feeling dizzy and lightheaded. I knew which foods to eat — those high in protein — but was more concerned with financial security at the time than anything else. So I just dealt with it, and that made life suck a little.
One thing my wife and I don't cut corners on now is food. We're not health fanatics, but we do stay away from junk food, fast food, and instead eat high-protein meals and salads.
Guess what? We feel great most of the time, have good blood pressure levels and are in overall good health. It's worth it more to focus on quality of life than it is to save the money.
This is just one example of focusing on quality of life versus financial security
So, in my opinion, there are some cases where it makes more sense to spend the few extra bucks instead of saving it. We've also done things like:
- Sending my wife to a holistic doctor to help relieve a medical condition. It cost a thousand or two dollars, but medical doctors cost us thousands more and were unable to solve the problem.
- Giving money to church. We have faith that God will provide, so we give more money to church than to our own pocketbook yearly.
In these cases, anyway, we have chosen to spend where it's going to improve the quality of our lives.
Other unconventional things I've done
In contrast to the decisions we've made together, here are some personal decisions I've made:
- Not paying down student loans quickly. Instead, extra money that could pay the 6.8 percent interest on the $27,000 in loans I have goes toward investing. Compounded over 30 to 40 years, after which I'll retire, that adds up to a lot more money earned versus paying the loans off now.
- I don't carry life insurance. This one actually scared my wife a little. It's another $50 to $100 per month or so. We need the breathing room at this point as we're about to purchase a home. I'm in good health and, at 31, there's a very low chance I'll die. I'll get it sometime when money flows more freely.
- Don't put 10 percent of our income into the stock market. Right now it's zero percent because expenses are high and business is slow and we're looking for a home. I'm a freelance writer and entrepreneur, so I'll definitely get to saving more money per year as things pick up. The goal is around $5,000 or so, which hopefully becomes 5 percent of my first target salary. The difference between that and 10 percent of my future income may be invested in other business efforts which are more likely to return many times the stock market's performance over any given timeframe. I understand this is different for people who work in jobs.
I know $5,000 doesn't sound like much, but figure this over 40 years at 8 percent growth per year, which is what the DOW grows at on average: It becomes about $1,229,839.09.
Manage my own investments — defensively
This contrarian viewpoint warrants its own section. How I invest my extra money is largely intended to be simple. I won't let anyone else touch my investments, and I invest with a very contrarian style. Besides, there is no evidence professional financial advisers outperform the market on the average, although I'm certain some do.
The few who have been actually verified beat the market over long periods of time are the greats — Warren Buffet, Benjamin Graham, Peter Lynch, and Jim Cramer, to name just a few. Can I really pick stocks better than they and their team of advisors? Not a chance!
But if I use a very simple strategy that works over the course of 40 years to do so, I do have a chance. Here's how it works:
The market is much smarter than I am. Now, Peter Lynch, in Beating the Street, said the only fund he found that beat the Dow Jones over a 40-year period was the Russell 2000.
That's an index of small US businesses. And 40 years is the average timespan you work before retiring, so that's the reason for the 40. It wasn't by a lot, only a tenth of a percent or so, but it still makes sense. The DOW 30 are large, blue-chip companies whose fastest growth is done, so of course you go to the small companies for the growth.
Have to control your costs
Next, as a small-time investor, I need to control fees and all other costs. So I found VWO, the Vanguard Russell 2000 Index Fund. Ahh, a nice expense ratio of .23 percent is just how much it costs to administer the fund. Let's see, and yes, Vanguard's reputation for excellence and doing what's in the best interests of its investors.
The other fund I invest in is the Vanguard Emerging Markets ETF and that's because, if you use common sense, you realize foreign economies are immature and have a ton of growth ahead of them. VWO has an expense ratio of .15 percent — razor thin.
Oh, and since I only invest $250 per month or so, I don't want to pay trading costs ($7, a common trade cost is 2.8 percent of $250). Vanguard doesn't charge anything for investing in its ETFs.
Ouch, if you paid trading fees like that, you lose 2.8 percent of your returns right away! Professionals expect the DOW to return 6 to 8 percent in the future 40 years, so that takes you down to 3.2 to 5.2 percent right there! Small, but nasty.
Finally, all this money goes into a Roth IRA, so it will not be taxed when we retire because the investment is made with after-tax dollars. To compare, many mutual funds have expense ratios of 1 to 2 percent.
So if you add an expense ratio of 1 percent plus trading fees of 2.8 percent, that's 3.8 percent of your total returns right there! If the DOW returns 6 to 8 percent per year for the rest of your investing career, you only get 2.2 to 4.2 percent!
Right now, my returns on this fund stink because emerging markets stink, but the prospects for years into the future are incredible.
I also don't have much time to watch my investments
Family, work, taking care of myself, and just living life takes all my time. I do not have 20 hours per month to micromanage my investments, and neither do I want to spend all my time managing my money instead of actually using it!
So that's why I'm using index funds. I don't know what their future returns will be, but I know they'll continue to grow because America is a powerful, stable nation, and the same goes for emerging markets. Any individual stock could go completely bankrupt.
Now, because I'm not smarter than uncontrollable market forces, I use a modified dollar-cost-averaging strategy. With dollar-cost averaging, you put in the same amount of money over the same time interval. You can do it monthly (which is what I do), quarterly, or yearly.
So, for a while, that's what I did. When one of the funds goes 20 percent below its previous most recent peak, I consider that a “buy more” signal. And if either goes 40 percent below its most recent peak, that's a “very strong buy signal.”
VTWO has been well above its most recent peak, with VWO being 24 percent or so below its peak, so I'm buying VWO and putting nothing in monthly to VTWO.
Because the market in general has been running so high for so long, I've sold my entire position out of VTWO at a 51.51 percent gain versus 39.8 percent for the DOW over the same period of time.
My portfolio as a whole has performed 40 percentage points worse than the DOW over the same period
Many people would say, “You don't know what the hell you're doing.”
Admittedly, my portfolio as a whole is getting crushed, but let me explain it to you so it makes sense:
You buy low, sell high, and stay happy when selling at a profit because you never hit the perfect peak.
My portfolio performance, because VWO has not grown worth a rip at the same time as VTWO, sucks. The DOW has grown by 39.8 percent versus a slight loss of .8 percent for VWO over the same time frame — that's horrible.
But I'm not concerned one bit. It's fairly clear that emerging markets will eventually come back, though it could be five to ten years or so. My portfolio is balanced heavily in the favor of emerging markets (roughly 75 percent), so the proper way to view it is this:
I've bought emerging markets while they're on sale!
China's economy has been described as being “like the US in the 1970s” and Brazil, India, and Russia are in a similar state. In other words, they're immature and have tons of time to grow. So, it's just a waiting game and, as I get more money, it'll continue to go into emerging markets.
Why no one will use this strategy
No one, or very few people, will invest this way because it takes years of patience and the discipline to wait for the right time to sell. With VWO, when it comes back, I'll have to figure out a dollar-cost-averaging sell strategy. Something like selling some at 20 percent gains over the 52-week high, 40 percent gains over the 52-week high, and 60 percent and so on would be good.
But I haven't figured that part out yet.
How to protect yourself at the time of retirement
So a natural question everyone here wants to know the answer to is: What if your investments' performance sucks when you're ready to retire and you don't have the money you want at that time?
Good question; and here's the answer: Take out what you need to retire for that year, and leave the rest in so it can grow. Simply repeat that cycle until your overall portfolio is at the point where you have enough to retire the rest of your life. When you do sell, shift it all over to money markets, tax-free municipal bonds, and treasury inflation-protected securities (TIPS — they're guaranteed to increase in value because they pay interest-based gains in the Consumer Price Index. They're a great hedge against inflation, which we may see a lot of soon.)
Whew. Well, that's one of the longest posts I've ever written, but hopefully it gives you a clear idea of what I do and why.
Got questions? Think I'm completely full of it? Let me know in the comments below!