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For 2011, Start Building Wealth: Here’s How

January 9th, 2011 No comments

What’s the secret to financial prosperity? It’s pretty easy to describe but hard in practice. Most people sow the seeds for it without realizing it. For example, if you get a good education you learn skills that help you to think, analyze, and communicate effectively. It takes perhaps decades to complete and even then you are not done. Or, maybe you develop a long term hobby or interest that turns into a business. The first point is that prosperity doesn’t happen over night, it takes time to develop.

When you look at how prosperous people succeed, you will find that they develop skills around their passions, acquire and develop assets, and stick with it all over the long term.

That last statement is important. Success requires a long term commitment, you need to stick to it through times that can be giddy, depressing and everything in between. As investors our resolve was tested during the Great Recession of 2008. How did you fair? It is times like those that will determine if you have the right strategy to build your wealth over the long term.

Seeds Of Success

On this site, we mainly talk about improving your financial education. Once you understand investing basics and how investments make money, you can then study the many different types of investments that are out there. That’s where this site comes in, because we are going to do all of this work for you to find investments that will make you money. The first result of this effort is the Income Portfolio which you can track right along with me. This is a real portfolio that has is being tracked with trades as they occur.

How To Get Started

Getting started is the hardest part, perhaps harder than sticking with it. If you use this strategy, you will find that you can measure your progress and gain confidence quickly. The components are the following:

  • Target an initial goal of money you want to make. My own personal target is a monthly income target.
  • Find investments that offer good income and are attractively valued.
  • Save money, and buy high quality investments that pay dividends, income or interest. All of the investments in the Income Portfolio pay money.
  • Over time, add more money to these investments either monthly, quarterly, etc.
  • Track you progress by measuring your income you make.

Create A Monthly Target

We track the income of the Income Portfolio monthly. You will find that the income of the portfolio increases every month due to money additions, reinvestment and dividend increases. Pick an initial monthly target. For example, if you are able to find investments that pay 4% per year or 7% per year, the following table shows what you would need to invest to get to that target.

Monthly Income Initial Investment (4%) Initial Investment (7%)
$1 $300 $170
$10 $3,000 $1,700
$50 $15,000 $8,500
$100 $30,000 $17,000

Example: Income Portfolio

The income portfolio currently makes $47.46/month. When it first started out in October 2010, it earned $46.52/month. Not bad after about 3 months. Look for future updates that will show further improvement in this portfolio.

Categories: Make Money Investing Tags:

Muni Bonds: Good Value or Value Trap?

December 30th, 2010 No comments

It’s been a roller coaster ride for bonds. Since the 2008 Great Recession, we’ve seen Treasury bonds all over the place in pricing. The most recent move to lower prices has been abrupt and significant. The 10-year note has gone from about 2.5% yield to over 3.3% yield (lower bond prices mean higher yields).

For Municipal bonds however, the story is somewhat different. Like most assets classes, they bottomed in 2009, caught a bid towards recovery and stabilized to prices that were lower than pre-recession prices but stable nonetheless.

Until the last couple of months. Prices have weakened, and yields have gone up. What to make of all of this?

Muni Value Trap?

Value or income investor know all too well about value traps. You see, when the price of an investment decreases its income yield goes up making the investment more attractive from an income point of view. Sometimes, the investment drops in price further wiping out any benefit from the higher yield. This could be for a number of reasons, but in the end the yield was a trap.

Sometimes the market is signaling that the earnings are suspect or unsustainable. Or, the market may be adjusting the multiple offered on the investment perhaps because future earnings are expected to be much lower than expected. Or, it simply could be a market mis-pricing which can occur too.

A real disaster occurs when your investment value drops and the investment lowers its income. You lose both ways. As anyone who invested in large bank stocks say 5 years ago, you lost almost all of your income and much of your capital.

Are muni’s a value trap? Most likely not, if you believe that most of these bonds, especially the higher credit quality ones, will continue to pay.

Why Buy Now?

When buying any asset, the best time to buy is when the uncertainty is highest and your confidence in the long term soundness of the investment is confirmed. It’s difficult to get the bottom, so the best strategy is to buy in smaller chunks overtime. When many other asset classes have been rising, one of the last asset classes that has faltered has been muni bonds.

For Municipal bonds, even though there is credit risk here, the reality is that the vast majority of these bonds will continue to pay, even ones of lower credit quality. If stick with bonds that are higher credit quality, you will buy an investment that offers tax free income at an attractive price with an opportunity for capital gains as well.

If they continue to pay income over time, the likely scenario is that the bonds will recover as the economy recovers.

Categories: Investing Tags:

Weekend Investor: What To Do With Your Obama Tax Cut

December 12th, 2010 No comments

It’s practically a done deal that the Bush Tax Cuts will be renewed before the end of the year. While there is some political wrangling on the details, a bill will passed.

Even though Bush has been gone as president for almost two years, perhaps his biggest legacy (the signature tax cuts) lives on. Whatever your view on this policy, it’s undeniable that it has been popular. If it wasn’t, the Democrats could have made a convincing case to repeal them because they have been in control of all branches of government the last two years. Instead, the Democrats chose to spend their political capital on the Health Care Reform legislation.

However, the title of this post is concerning the Obama Tax Cuts. If you don’t know what these are, you are not alone because most people don’t know about them. They were a part of the 800B stimulus bill passed last year. Here are the details of the Obama Tax Cut (Making Work Pay Tax Credit) from savingtoinvest.com:

A refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

The main reason that you may know about them is because either you didn’t qualify or because the credit was slowly applied during the year in your paycheck.

Politicians like to send checks to people because the citizen match the money with the political leader. I can say that my mother would do this, even linking the money sometimes to some politicians who has nothing to do with it.

Obama has proposed a similar tax cut that is even more generous that the tax credit that was offered this year. Here are the details:

  • Every taxpayer who earns income will get a 2% credit against their 6.2% payroll tax.
  • This credit applies to everyone including people who didn’t qualify for the MWP Credit because they earn too much.
  • Both you and your spouse can each qualify for this credit up to about $4200 in total, depending on your income. The typical taxpayer will individually qualify for about $1100 each.

What To Do With The Money

A good strategy for your finances is to take new found money and apply it either to pay down existing debt or use it to bulk up your investment portfolio. This Obama Tax Cut was unexpected by everyone, so it really is like found money. It can go along way to improving your personal finances.

Here’s what I’m going to do: Increase the monthly cash added to the Income Portfolio from $50/month to $100/month. So, this money will go to work immediately. Also, because we invest for income in stocks that pay income, we will see the results almost immediately.

If you take the maximum $2100 credit and earn 5% per year, this will add over $100/year in annual income going forward. So, the Obama tax cut can provide dividends for years to come!

What will you do with your Obama Tax Cut?

Categories: Weekend Investor Tags:

In The New Year, Find Your Financial Angel!

December 10th, 2010 No comments

I got this email message from a co-worker about doing a simple thing and the result will be ‘financial abundance’. I’ve copied the message plus the angel below.

You have just been sent a Financial Abundance angel!
Pass her to two people, and be rich in four days.
Pass her to six then be rich in two days.
You ARE already rich!!!
I am not joking; you will find an unexpected windfall. If you delete her, you will never know how she works?..

I’ve never been the type to fall for this method of improving your finances, though attitude can play a factor in your personal finances. Also, great things do happen to people all the time (winning the lottery, inheriting money, etc) that can dramatically improve your finances in a short time.

What is interesting about the fellow who sent this is that he does have real financial problems but he has the means and the capability to create ‘abundance’ if he chose to take steps to improve it. Here is a summary of his finances:

  1. Six figure income.
  2. He owns multiple investment properties.
  3. He owns his primary home.
  4. He has stocks investments both taxable and deferred (retirement accounts).
  5. He has a spouse of similar earnings potential (once school is over).
  6. But, he is out of cash, living paycheck to paycheck.

Even if his angel comes through, he is still going to need to manage his money better. There isn’t any angel that can help him that, he needs to do this on his own.

What are you doing in the new year to improve your finances?

Categories: Personal Finance Tags:

Portfolio Update: More Public Offerings In The Mix

December 4th, 2010 No comments

There is a healthy sign in the marketplace right now: companies are issuing new stock offerings. In the case of our Income Portfolio two of our holdings have issues new offerings: Realty Income (O) and Enterprise Products Partners (EPD).

Why would a company do this? The primary reasons are:

  • The stock price is high enough such that implied return to new investors is low. In the case of issuing common share or units, this is effectively the dividend yield. In both cases mentioned above it’s about 5%.
  • The company believes that it can adequately garner a sufficient return by using the money investing in their business. A high stock price makes this cost of capital lower. In the cases of Realty and Enterprise, their stock prices are near all time highs.
  • Because they can. One never knows how the markets will behave going forward, so it’s always good to get extra resources when times are good.

The inital reaction by the markets to these announcements is what’s called a ‘fear of dilution’, so the stocks normally trade down. More shares for the same amount of earnings effectively makes the earnings per share go down. However, over time, the extra capital should enhance earnings for all shareholders if the company is doing its job.

In this case of Realty and Enterprise, they have a long history of using their capital effectively so there is no cause for alarm.

Categories: Investing, Weekend Investor Tags: