Weekly Roundup – Rich Man, Poor Man Edition

The first link listed in this week’s roundup references a great article which outlines the secrets of getting rich. Well, it’s not much of a secret, really, but so few heed the advice. Start investing early, take advantage of compounding interest and never lose money.

Seems simple enough, doesn’t it? Wish I had read it 20 years ago!

The Frugal Roundup

Rich Man, Poor Man (The Power of Compounding). I thoroughly enjoyed this article as it addresses one of the financial wonders of the world. (via The Daily Crux)

Prioritizing Your To-Do List: Getting the Right Things Done. I really like the way this list of priorities can be sorted by various metrics, making it easier to see what really belongs at the top depending on your goals.

Some Deeper Thoughts on Peer-to-Peer (P2P) Lending. While Lending Club has been good to me, I understand (and agree with) many of the points presented here.

22 Manly Ways to Reuse an Altoids Tin. I’m partial to the mini survival kit, but there are several other great uses for these tins.

Bootstrapping Your Start-Up Business with Little or No Money. I started Frugal Dad for less than $50, which obviously has much lower overhead than more traditional businesses.

7 of the Best Free Finance Apps for the iPhone and iPad. I don’t have an iPhone (but the Verizon edition has my attention) or an iPad, but if I did, these would be on my list of downloads.

Best of the Rest

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Your Money Ratios by investment adviser Charles Farrell aims to make the process of preparing for the golden years less complicated—and less anxiety provoking. Farrell developed a series of simple formulas to help readers understand what they need to be saving based on age and household income, while taking as much of the irrational emotion out of the equation as possible.

Comments

  1. I agree with you about compounding, Jason. If I had to pick the one money insight that matters most, it would be the counter-intuitive power of compounding returns.

    However, I hope that people look at the second rule listed in that article as well — AVOID LOSING MONEY. Why is that so important? Because those who ignore the second rule thereby violate the first rule. Every dollar lost by investing in stocks at times of high prices translates over time into the loss of many dollars because of the loss of compounding returns.

    It has become conventional wisdom in recent years to push Buy-and-Hold Investing. Buy-and-Holders are certain to suffer huge losses as the result of going with the same stock allocation at times when stocks are priced insanely high as they do when stocks are priced reasonably. Those of us who believe in the power of compounding should not be encouraging such strategies, in my view. Compounding matters as much when investing as it does when saving.

    Rob

  2. Good point Rob. I think many people, however, misunderstand the fundamentals of long term stock investing. Buy and hold doesn’t capture what is required to be a long term investor, as it suggests buying a stock and subsequently shutting your brain off while weathering the brunt of any stock market downturns. I don’t think this strategy is at all safe or smart. A better way to phrase it is to buy stocks in companies with excellent long term prospects and good management in a tried and true market segment, forgoing fads while looking for a solid dividend yield to provide returns (which should be reinvested) even during market downturns, and hold these stocks until the fundamentals of the underlying company changes. Investing this way results in the investor acting like what they truly are – an owner of the company, rather than a market opportunist, seeking gains solely in the capital value of shares.
    Just my 2 cents.
    Pat
    http://compoundingreturns.blogspot.com

  3. That’s a very nice idea Rob, but how do I implement that with my 401K? My company matches 33% of my 401K contributions. I have limited choices for investment. I don’t want to give up the instant 33% return on investment by not contributing. So what do I do? Put the money in the money market (cash) fund and not buy any stocks? This is a sincere question about how to implement your strategy within the constraints of my 401K situation.

  4. I don’t want to give up the instant 33% return on investment by not contributing. So what do I do? Put the money in the money market (cash) fund and not buy any stocks?

    You certainly do not want to give up the employer match, Tara. But, sure, you can put some in a money market account if that’s the only non-stock option offered.

    Don’t worry about the low return. You’ll be getting a much higher return after you move the money into stocks following the next crash. The thing that matters is your long-term return. Earning 1 percent for two years and then 15 percent for eight years beats the heck out of having a 50 percent loss after two years and then putting the money in a money market because you have lost so much that you cannot stand the thought of ever investing in stocks again.

    That’s just my thought, however. It’s a minority view. Lots of smart and good people think I am nuts.

    Rob

  5. Thanks for your reply – the only choices I have right now are bond funds, stock funds, and one money market (cash) fund. What would your choices be for portfolio distribution given these options? At the moment I am 100% invested in low expense ratio index funds offered by Fidelity and Vanguard, since I have heard bond returns are low and expected to go lower. In fact every time I have invested in bond funds I have lost money.

  6. Tara:

    I’m happy to help to the extent I am able. But I really do not want you to do anything based solely on what I say. I am just some guy who posts junk on the internet, you know? I’ll offer you my take but please understand that that is all it is.

    I am not a big fan of bonds either. I invest in stocks for growth and super-safe asset classes for safety. Bonds are in the middle. I don’t study them enough to feel comfortable investing in them.

    Having your stock money in low-expense index funds is good. That part I like. I think that a 100 percent stock allocation is scary, however. You need to be thinking about how far prices might fall from here and how you would react if they did. This is especially so if you lost money in the earlier crash. if that’s the case, you are going to be even more sensitive to further price drops. So you need to be careful.

    Ordinarily, I would say that a stock allocation of about 30 percent stocks makes sense at today’s prices. But that would be too much of a change all at once for you. I suggest you lower your allocation a bit, then do some reading and some thinking it over, and come back to the question in six months. Perhaps you should go to 50 percent stocks for now.

    Again, please seek out other voices before making a decision. I am a big believer that valuations matter in stock investing, so I am going to give you about the most anti-stock view you are going to hear today (stocks are priced highly today). I of course believe that I am right. But then I would, wouldn’t I? If you investigate what I say and it ends up making sense to you, I am okay with you following the advice. But you need to really understand why I say what I say for it to work for you.

    My guess is that you had some worries and that what I said on my first post got you thinking that perhaps you should listen to those worries. Perhaps you should. But you don’t want to overreact and you don’t want to go to extremes. Given your worries, I think it certainly makes sense for you to lower your stock allocation. But I think you need to take moderate steps or else you may then start worrying that you have gone too far and you will be back to feeling anxious again.

    Just to put numbers on this, I feel confident that you need to lower your stock allocation at least enough to get down to 70 percent stocks. If it were me, I would go down to 50 percent stocks. But I don’t know your situation well enough to say whether that is too extreme a drop for you. It might be. If your sense if that it might be too extreme, just go down to 70 percent for now and then think things over and come back to it in six months.

    I hope that helps a tiny bit.

    Rob

  7. Very happy to see that the land of Pura Vida, made the top 5 retirement destinations because it’s a fantastic place to live with a thriving expat community. But truth be told, Costa Rica’s cost of living is much higher than neighboring Panama, which offers great incentives and much less stringent financial requirements for prospective residents. New Zealand also has onerous entry requirements for foreigners that put the country financially out of reach for most people.

  8. Thanks Rob – have no fears, I am reading many opinions and carefully considering my options, so I won’t be blindly following anyone’s advice. :-) I have 20 years to go until retirement, so I am pondering how much stocks I need in order to not get eaten by inflation, yet not get taken for a painful ride like that last couple of crashes in the dot com bust and the latest crash. It’s hard to find the sweet spot!

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