Investment philosophies

[ygolo]

I wasn't sure where to put this thread. Since very personal things, like risk tolerances, life-style, and goals (financial or otherwise) need to be taken into account, I put it under philosophy. I believe that outside a market, the value of money is subjective.

What prompted this discussion is some stuff from another thread. The how do you decide what is true thread.

My general beliefs:

1. Money is subservient to us, not the other way around. I would never start a corporation that wasn't a "B" (for "benefits") corporation. The reason is that other corporations are legally obligated to maximize return to shareholders. "B" corporations can be chartered to maximize something else while still turning a profit.
   
2. Where money is concerned, it is all about Net-Present-Value(NPV).
   
   You can calculate your assets minus your liabilities to get your "net-worth".
   
   But this sort of calulation is not "design-oriented" (paying homage to my most recent hero R.D. Middlebrook), in that it that the analysis does not yeild insight into what we "should" do.
   
   The NPV calculation, can in theory be used to look at how desicions you make now will likely affect you. There is a whole system of cashflows and tables that allow you to make these calculations. The math is simple, and the idea even simpler.
   
   You can look into it yourself, but it can be sumarized it as aim to "maximize the return on investment". Of course, when you make any type of coherent plan it is good idea to test for sesitivity of your NPV to the assumptions you make.
   
3. The first principle overrides the second when there is a conflict. One of my goals (which is largely a financial one) is be free to do what I want for the rest of my life. The current scheme I am pursuing is regarding finances is
   
   1. Own my home free-and-clear, so I only have to pay property taxes, and repairs (not rent or mortgage).
   2. Get enough residual income (rental property, dividends, interest payments, royalties, pension?, social security?, and the like) to pay for whatever is left (which will be mainly food and entertainment)
   3. Get there as quickly as possible. Being financially free early is worth a lot more to me than eventually being filthy rich.

That's it. That is my whole philosophy of money.

 

[ptgatsby]

1. Own my home free-and-clear, so I only have to pay property taxes, and repairs (not rent or mortgage).
2. Get enough residual income (rental property, dividends, interest payments, royalties, pension?, social security?, and the like) to pay for whatever is left (which will be mainly food and entertainment)
3. Get there as quickly as possible. Being financially free early is worth a lot more to me than eventually being filthy rich.

Out of curiousity, have you figured out how long it would take for you to save this kind of money? Did you base it on your current living style (do you intend to downgrade home or entertainment/etc)? Did you solve what % of your income you need to save in order to achieve the same 1-% in income over (x) years (ie: saving 40% of your income means you are living at 60% of your means - how long does it take to save at 40% to get enough capital to generate 60% of your salary safely, including adjusting for inflation, with a regular stream of payments?).

I'm just curious what you mean by "quickly" and how to intend to step into it (ie: downgrade versus waiting for more capital to maintain your lifestyle, or generate a middle ground where a portion of capital continues to grow, etc).

 

[ygolo]

Out of curiousity, have you figured out how long it would take for you to save this kind of money? Did you base it on your current living style (do you intend to downgrade home or entertainment/etc)? Did you solve what % of your income you need to save in order to achieve the same 1-% in income over (x) years (ie: saving 40% of your income means you are living at 60% of your means - how long does it take to save at 40% to get enough capital to generate 60% of your salary safely, including adjusting for inflation, with a regular stream of payments?).

I did all that, but I am not going to give out too many details on a public forum. I figure if I own my home free-and-clear, I will only need 60% of my original income. And yes, I know how much, I will likely save, and how well mysavings will grow in resonably good and bad (but not catistirophic) market senarios.

I'm just curious what you mean by "quickly" and how to intend to step into it (ie: downgrade versus waiting for more capital to maintain your lifestyle, or generate a middle ground where a portion of capital continues to grow, etc).

Well there are three senarios. Assuming medioce stock, and real estate markets:

1. Under good job market conditions, I can retire at 48-49.
2. Under mediocre job market conditions I can retire at 55.
3. Under poor job market conditions I can still retire but may have to work till 67.

If the whole economy is bad for most of my working career, I may not be able to retire at all.

The life expectancy is about 72 for my race and birth I believe, but I think my family history etc, will lower it to late 60s (but that is just a judgement call).
So I use 60 as my early death age (barring freakish stuff). But for planning for saving purposes, I use 90 so I save enough.

So I would realy like to have some means of either retiring much earlier, and/or basically doing what I want and getting paid for it.

EDIT: Actually, I could aim to retire in some "3rd world" country that is still comfortable living. Then I suppose I can retire much earlier. Though I haven't modeled that.

 

[ptgatsby]

I did all that, but I am not going to give out too many details on a public forum. I figure if I own my home free-and-clear, I will only need 60% of my original income. And yes, I know how much, I will likely save, and how well mysavings will grow in resonably good and bad (but not catistirophic) market senarios.

Well, in general this can be solved without using actual numbers (ie: at saving just over 40% of income, aiming for 60% of current income, 10% market return over (x) years, 5% (real return) for income generation, x is roughly 22 years).

I was just curious how you looked at the relative amounts (ie: I'd originally budgeted to save about 50%, but it has turned out to be roughly 41% of my net income.) I have three retirement scenarios - the 30%, which includes owning a place outright (or equivalent), as my minimum, the 60% which is my current lifestyle (plus some, due to mortgage payments) and the ideal scenario, which is my full income... And a few more, but they are just for the model, those are the three that matter to me.

How much "now" and how much "later", I guess, is what I'm asking (just as part of your philosophy... how minimalist are you living now and do you intend to live larger or smaller after, I guess)

1. Under good job market conditions, I can retire at 48-49.
2. Under mediocre job market conditions I can retire at 55.
3. Under poor job market conditions I can still retire but may have to work till 67.

Out of curiousity, what range of returns do you use? For income, I assume a 2% annual increase since I get inflation raises every year, but don't assume rising income... I assume, normally, about a 7% real return on investments across all markets and about a 3% real return on income streams. I based the 7% on the S&P and the 3% on grade AA+ corporate bonds.

The life expectancy is about 72 for my race and birth I believe, but I think my family history etc, will lower it to late 60s (but that is just a judgement call).
So I use 60 as my early death age (barring freakish stuff). But for planning for saving purposes, I use 90 so I save enough.

That seems low... hrmm... Well, unless you wish to share your location and what not, I can't say much, but 90 is a pretty good number. Are you looking to consume your capital then, rather than go self-sustaining indefinitely?

I don't know where you live, so I guess the other question is, have you considered retirement vehicles and/or government forms of old age security?

EDIT: Actually, I could aim to retire in some "3rd world" country that is still comfortable living. Then I suppose I can retire much earlier. Though I haven't modeled that.

Panama is a good location to look into, least it was a couple of years ago. Significant difference and the lifestyle seems really great... I haven't visited though.

 

[ygolo]

Well, in general this can be solved without using actual numbers (ie: at saving just over 40% of income, aiming for 60% of current income, 10% market return over (x) years, 5% (real return) for income generation, x is roughly 22 years).

In retrospect, I could have for most calculations. But I was using a fixed value of savings, and a shifted value for savings when I get promoted. I am seriously impressed by people who can put away 40% of their income.

I was just curious how you looked at the relative amounts (ie: I'd originally budgeted to save about 50%, but it has turned out to be roughly 41% of my net income.) I have three retirement scenarios - the 30%, which includes owning a place outright (or equivalent), as my minimum, the 60% which is my current lifestyle (plus some, due to mortgage payments) and the ideal scenario, which is my full income... And a few more, but they are just for the model, those are the three that matter to me.

How much "now" and how much "later", I guess, is what I'm asking (just as part of your philosophy... how minimalist are you living now and do you intend to live larger or smaller after, I guess)

Of course, all of this will change if I get married and have kids. But, I won't be planning my future wife's retirment without her input

Also, it has come to my attention, that I may need to move for work.

I am fairly content playing chess, and reading books in the library or bookstore. My food expenses may be a bit high. But most (60%) of my budget goes towards mortgage (and used to go towards rent). So with my living space payed-off, I have significantly less burden.

Out of curiousity, what range of returns do you use? For income, I assume a 2% annual increase since I get inflation raises every year, but don't assume rising income... I assume, normally, about a 7% real return on investments across all markets and about a 3% real return on income streams. I based the 7% on the S&P and the 3% on grade AA+ corporate bonds.

I assume 3.5% income riase for "moderate" and "good" job raise, since that is rate at which the CPI increases anually on average. In bad conditions, I assume, I am not getting a raise ever again. Company policy is too keep up with inflation.

Under, good job conditions, I factored in two more promotions, with 10% increase in salary (company norms), with 8 year separations. I increase my savings rate by $200 a month for each promotion. Again, I am impressed by people who can keep a steady savings percent of their income.

I was using 4.5% based on my current portfolio, which is mainly short-term investments. Putting money in SPY would be my choice, but the company 401k does not allow it currently. The equivalent anual growth was around 6% for the last 10 years (includes the 2000 crash), and 12% for the last 5 years.

That seems low... hrmm... Well, unless you wish to share your location and what not, I can't say much, but 90 is a pretty good number. Are you looking to consume your capital then, rather than go self-sustaining indefinitely?

I don't know where you live, so I guess the other question is, have you considered retirement vehicles and/or government forms of old age security?

60 was used for the "look, I'm almost half way done" factor. 90 was used for planning. I plan to consume capital unless I can avoid it. I will probably set up a trust for my kin, and I have to look into the best way to deal with probate and estate taxes. By now, you probably guessed I am in the U.S. somewhere (401k and Social Security are the main vehicles).

Panama is a good location to look into, least it was a couple of years ago. Significant difference and the lifestyle seems really great... I haven't visited though.

I do know a little spanish, so maybe.

 

[ptgatsby]

In retrospect, I could have for most calculations. But I was using a fixed value of savings, and a shifted value for savings when I get promoted.

Interesting, I found that using a %savings based on income was a lot more accurate (over the past, when I match it up with my actual expenditures), so I use that instead. But then I don't account for promotions, which would require me to probably use more fixed savings (we don't increase our lifestyle based upon income at this point). That or run a virtual income that is inflation adjusted only and base it on that.

Of course, all of this will change if I get married and have kids. But, I won't be planning my future wife's retirment without her input

And assuming she doesn't carry debt into the relationship, 2 incomes is a lot easier to manage, if you agree on basic QOL. For example, it's a lot cheaper for two people to rent a place than one, and often even if you upgrade to a reasonable size 2 person place from a bachelor place, the relative cost isn't so bad. Assuming she makes something similar.

Course... kids... that's a different story Like blackholes for money.

Also, it has come to my attention, that I may need to move for work.

Yah, that sucks. I was looking at having to go to Korea for a while... the uncertainty was the worst bit...

I am fairly content playing chess, and reading books in the library or bookstore. My food expenses may be a bit high. But most (60%) of my budget goes towards mortgage (and used to go towards rent). So with my living space payed-off, I have significantly less burden.

Whoa, high mortgage I bought my place at about 35% gross inc, which is currently (was higher) 42% net inc... with GF's income, it'd be about 22% current net income.

Course, we bought very minimally - small place that is close for us to get to work. In a similar way, we save our income at a high level because we gave a lot of things up... It all carries a cost.

I assume 3.5% income riase for "moderate" and "good" job raise, since that is rate at which the CPI increases anually on average. In bad conditions, I assume, I am not getting a raise ever again. Company policy is too keep up with inflation.

Mine too, although it seems to manage to be under inflation quite a bit I never worked out where I'd be without the inflation raises... probably not so good

I was using 4.5% based on my current portfolio, which is mainly short-term investments. Putting money in SPY would be my choice, but the company 401k does not allow it currently. The equivalent anual growth was around 6% for the last 10 years (includes the 2000 crash), and 12% for the last 5 years.

I have different views on how to work this out... A part of me thinks I should use actual returns, but a large chunk of the variance comes from inflation (ie: the 12% S&P tracking is really less than 8%, mostly because of the double digit inflation a few decades ago)... but a part of me thinks that I should use the full return since I'm adjusting everything else for inflation. Bleh. And I can't compare it to what has happened since my personal records (spending, etc) only go back a couple of years.

 

[ygolo]

Whoa, high mortgage I bought my place at about 35% gross inc, which is currently (was higher) 42% net inc... with GF's income, it'd be about 22% current net income.

Course, we bought very minimally - small place that is close for us to get to work. In a similar way, we save our income at a high level because we gave a lot of things up... It all carries a cost.

I bought a fairly big condo and was renting out the spare rooms, but recently I've been too lazy to get a second roommate, and my current one is way behind in rent. He usually comes through, even if late. So now, I just budget as if I didn't have roommates (also, I won't have roommates forever). I bought big enough to comfortably support a family when the time came. But maybe I got a little ahead of myself.

I have different views on how to work this out... A part of me thinks I should use actual returns, but a large chunk of the variance comes from inflation (ie: the 12% S&P tracking is really less than 8%, mostly because of the double digit inflation a few decades ago)... but a part of me thinks that I should use the full return since I'm adjusting everything else for inflation. Bleh. And I can't compare it to what has happened since my personal records (spending, etc) only go back a couple of years.

I guess I didn't really acount for inflation when looking at SPY (my mistake).

But I think my 401k people did, when I checked the rate of return my way it was about 8% on my portfolio. I may have more money than I thought, and I guess being able to use SPY is not as much of an improvement as I thought(or maybe there is some other discrepency I need to figure out). Still the fund management fees bug me.

I think this is the big one in terms of inflation. Since, this will likely be the biggest asset (this or the home).

One option is to do everything in terms of today's dollars--including the salary you will need in the future. As long as you are consistent, you will be OK.

 

[ptgatsby]

One option is to do everything in terms of today's dollars--including the salary you will need in the future. As long as you are consistent, you will be OK.

The one problem with this is that I include all my loans in the calculation - they are naturally devalued by my increasing purchasing power... That was pointed out to me over the weekend, which is why I'm looking into it now.

Having a home is good though, since like rent, tends to track inflation very well. Course, no one ever includes depreciation on the home they own

 

[ygolo]

The one problem with this is that I include all my loans in the calculation - they are naturally devalued by my increasing purchasing power... That was pointed out to me over the weekend, which is why I'm looking into it now.

Did you ever get details about this? It still ssems to me like you can just convert the cashflows for paying off the loan into today's dollars and be fine.

 

[ptgatsby]

Did you ever get details about this? It still ssems to me like you can just convert the cashflows for paying off the loan into today's dollars and be fine.

I'm pretty sure you could... I haven't tried because I've done too many spreadsheets already worked out looking at FV... I don't want to rework them to PV.

I think, however, it'd be a lot of work - I could probably do salary projection and savings, even pull down my mortgage stuff to PV... but it doesn't flow naturally to me... although that has more to do with being used to the old way

Mind you, my attention isn't on this right now. I'm stuck doing it for school right now. Sadly, when I took my CSC, I had no problem with this crap. Years later and I'm struggling through it again. Use it or lose it I guess!

 

[1487610420]

*bump*

 

[highlander]

[*]Where money is concerned, it is all about Net-Present-Value(NPV).

You can calculate your assets minus your liabilities to get your "net-worth".

But this sort of calulation is not "design-oriented" (paying homage to my most recent hero R.D. Middlebrook), in that it that the analysis does not yeild insight into what we "should" do.

The NPV calculation, can in theory be used to look at how desicions you make now will likely affect you. There is a whole system of cashflows and tables that allow you to make these calculations. The math is simple, and the idea even simpler.

You can look into it yourself, but it can be sumarized it as aim to "maximize the return on investment". Of course, when you make any type of coherent plan it is good idea to test for sesitivity of your NPV to the assumptions you make.

[*] The first principle overrides the second when there is a conflict. One of my goals (which is largely a financial one) is be free to do what I want for the rest of my life. The current scheme I am pursuing is regarding finances is

1. Own my home free-and-clear, so I only have to pay property taxes, and repairs (not rent or mortgage).
2. Get enough residual income (rental property, dividends, interest payments, royalties, pension?, social security?, and the like) to pay for whatever is left (which will be mainly food and entertainment)
3. Get there as quickly as possible. Being financially free early is worth a lot more to me than eventually being filthy rich.

[/LIST]

That's it. That is my whole philosophy of money.

I did all that, but I am not going to give out too many details on a public forum. I figure if I own my home free-and-clear, I will only need 60% of my original income. And yes, I know how much, I will likely save, and how well mysavings will grow in resonably good and bad (but not catistirophic) market senarios.

Well there are three senarios. Assuming medioce stock, and real estate markets:

1. Under good job market conditions, I can retire at 48-49.
2. Under mediocre job market conditions I can retire at 55.
3. Under poor job market conditions I can still retire but may have to work till 67.

At least you're planning and you're considering different scenarios. My principles are:

- Live below your means
- Save at least 10% of income each year; never dip into it
- Eliminate debt
- Diversify your investments, adjusting your risk profile as you get older
- Buy mutual funds with very low expense ratios

I'm conflicted about a mortgage. You get to write off the interest but then you still have to pay interest. I guess as I get older, I think the primary result of debt to keep us all enslaved. So my current thinking is to avoid it at all costs. I live in a big house and if I had to do it over again, I'd have a smaller one that would be paid off by now.

Outside of a mortgage, any kind of debt should be avoided at all costs (though clearly this is not always practical).

With regards to retirement, it's all about standard of living and what I hear is that people tend to underestimate what they are accustomed to.

 

[rav3n]

Short term investment decisions should be handled like guerrila warfare. In and out in a hurry. Greed goes hand-in-hand with bear behaviour.

Long-term investment decisions are self-explanatory. Make wise investment choices, ones not fraught full of over-hyped, over-inflated glam stocks. Diversify and balance your portfolio.

Don't panic. Being a lemming isn't the way to maximise returns. Lemming behaviour includes investing in mutual funds. You're overpaying for negligible services with little to no transparency.

 

[highlander]

Short term investment decisions should be handled like guerrila warfare. In and out in a hurry. Greed goes hand-in-hand with bear behaviour.

Long-term investment decisions are self-explanatory. Make wise investment choices, ones not fraught full of over-hyped, over-inflated glam stocks. Diversify and balance your portfolio.

Don't panic. Being a lemming isn't the way to maximise returns. Lemming behaviour includes investing in mutual funds. You're overpaying for negligible services with little to no transparency.

I agree with diversification, balance, and wisdom. I also agree that it is easy to overpay for "negligible services". Note I say Low Expense Ratios.

I used to invest in individual stocks. I used to spend a lot of personal time and energy on it - following these individual companies - analyzing the financials, etc. A good friend of mine who is in the investing business basically told me I was gambling. He recommended investing in index funds. I should have taken his advice.

Yeah - it's boring.

You accumulate wealth through discipline of saving, living below your means, avoiding debt and compounding of your investment over time. You can also be an entrepreneur.

 

[FDG]

Outside of a mortgage, any kind of debt should be avoided at all costs (though clearly this is not always practical).

I agree when it comes to personal finance, disagree when it comes to business finance (esp. if you can manage to found a limited liability company).

 

[strawberries]

i've invested in managed funds since my late teens - i don't have the time to manage my own stuff closely, but i know people who work in investment banking and they helped me find fund managers to suit my risk tolerance/goals.

the branding of this conversation in terms of philosophy reminds me of a series on the BBC called million dollar traders. a dutch hedge fund manager - lex van dam - gave a million dollars to a bunch of amateurs from all different backgrounds to trade with - it was around the time of the crisis.

it was fascinating seeing which types of personalities suit trading, how personal values and personality affect a person's trading choices and how different people react to the stresses/volatility of the market. from memory the most successful traders were a former soldier and a single mum…? some of them cracked and quit from the pressure.

i'm sure it's on youtube somewhere if people feel like checking it out.

 

[mmhmm]

i diversify modestly, but my long term goal is to build concentrations.
i never invest in businesses i don't know, and never ever use my
feelings. ever. when investing i strictly stick to data and reasoning.
it doesn't come naturally, so i surround myself with the best at
what they do. that's how i eliminate self doubt--there's no
place for it. being wrong is inevitable, but you
can eliminate self-doubt by self-educating.

i also invest invest locally, regionally and internationally.

 

[Oberon]

These days I would stick with companies that manufacture tangible goods. I'd stay out of financials, IT, and service-industry stocks, but that's just me.

 

[InvisibleJim]

I'm currently raking in cash from BP, I need to re-analyse if it is worth holding on to them after Christmas.

 

[Mole]

We all have twenty-four hours in a day - no more, no less. And not one of us can increase it by a minute by investing.