Category Archives: Personal Finance

Investment Strategy: The Investor’s Creed Revisited

Fascinating, aren’t they, these security markets of ours, with their unpredictability, promise, and unscripted daily drama. But individual investors themselves are even more interesting. We’ve become the product of a media driven culture that must have reasons, predictability, blame, scapegoats, and even that “four-letter” word, certainty.

We are becoming a culture of speculators, where hindsight is replacing the reality-based foresight that once was flowing in our now real-time veins. Still, the markets have always been dynamic places where investors can consistently make reasonable returns on their capital. If one complies with the basic principles of the endeavor and doesn’t measure progress too frequently with irrelevant measuring devices, growth in working capital, market value, and spendable income are quite likely to happen… without undue risk taking.

The classic investment strategy is so simple and so trite that most investors dismiss it routinely and move on in their search for the holy investment grail(s): a stock market that only rises and a bond market capable of paying higher interest rates at stable or higher prices. This is mythology, not investing.

Investors who grasp the realities of these wonderful (speculation driven) marketplaces recognize the opportunities and relish them with an understanding that goes beyond the media hype and side show “performance enhancement” barkers. They have no problem with the “uncertainty”; they embrace it.

Simply put, in rising markets:

  • When investment grade equity securities approach the “reasonable” target prices you have set for them, realize your profits, because that’s the “growth” purpose of investing in the stock market.
  • When your income purpose securities rise in market value the equivalent of one-year’s-interest-in-advance, take your profits and reinvest it in similar securities; because compound interest is the safest and most powerful weapon we investors have in our arsenals.

On the flip side, and there has always been a flip side (more commonly dreaded as a “correction”), replenish your equity portfolio with now lower priced investment grade securities. Yes, even some that you may have just sold weeks or even months ago.And, if the correction is occurring in the income purpose allocation of your portfolio, take advantage of the opportunity by adding to positions, increasing yield and reducing cost basis in one magical transaction.

  • Some of you may not know how to add to those somewhat illiquid bond, mortgage, loan, and preferred stock portfolios quite so easily. It’s time you learned about closed end funds (CEFs), the great “liquidators” of the bond market. Many high quality CEFs have 20 year dividend histories for you to salivate over.

This is much more than a “buy low, sell high” oversimplification. It is a long-term strategy that succeeds… cycle, after cycle, after cycle. Do you wonder why Wall Street doesn’t spend more time pushing its managed tax free income, taxable income, and equity CEFs?

  • Unlike mutual funds, CEFs are actually separate investment companies with a fixed number of shares traded on the stock exchanges. The stock can trade (real time) above or below the net asset value of the fund. Both the fees and the net/net dividends are higher than any comparable mutual fund, but your advisor will probably tell you they are more risky due to “leverage”.
  • The leverage is short term borrowing and is absolutely not the same as a margin loan on the portfolio. It’s more like a business line of credit or a receivables financing tool.

I’m sure that most of you understand why your portfolio market values rise and fall throughout time… the very nature of the securities markets. The day to day volatility will vary, but is generally most noticeable surrounding changes in the longer term direction of either market, income purpose or growth purpose.

  • Neither your “working capital” nor your realized income need be affected by the gyrations of your market value; if they are, you are not building a “retirement ready” portfolio.

So rather than rejoicing through each new stock market rally or lamenting each inevitable correction, you should be taking actions that enhance both your working capital and its income productivity, while at the same time, pushing you forward toward long term goals and objectives.

  • Through the application of a few easy to assimilate processes, you can plot a course to an investment portfolio that regularly achieves higher market value highs and (much more importantly), higher market value lows while consistently growing both working capital and income… regardless of what is happening in the financial markets.

Left to its own devices, an unmanaged portfolio (think NASDAQ, DJIA, or S & P 500) is likely to have long periods of unproductive sideways motion. You can ill afford to travel eleven years at a break even pace (the Dow, from December 1999 through November 2010, for example), and it is foolish, even irresponsible, to expect any unmanaged approach to be in sync with your personal financial objectives.The Investor’s Creed

The original “Investor’s Creed” was written at a time when money market funds were paying above 4%, so holding uninvested equity bucket “smart cash” was, in effect, a compounding of profits while waiting for lower equity prices. Income bucket cash is always reinvested ASAP. Since money market rates have become minimal, equity “smart cash” has been placed in tradeable equity CEFs with yields averaging over 6% as a replacement… not as safe, but the compounding makes up for the increased risk over money funds.

It sums up several basic asset allocation, investment strategy, and investment psychology principles into a fairly clear, personal portfolio management direction statement:

  • My intention is to be fully invested in accordance with my planned equity/fixed income, cost based, asset allocation.
  • Every security I own is for sale at a reasonable target price, while generating some form of cash flow for reinvestment.
  • I am pleased when my equity bucket cash position is low, signaling that my assets are working hard to meet my objectives.
  • I am more pleased when my equity bucket cash is growing steadily, showing that I’ve been capitalizing all reasonable profits.
  • I am confident that I’m always in position to take advantage of new equity opportunities that fit my disciplined selection criteria.

If you’re managing your portfolio properly, your cash + equity CEF position (the “smart cash”) should be rising during rallies, as you take profits on the securities you confidently purchased when prices were falling. And, you could be chock full of this “smart cash” well before the investment gods blow the whistle on the stock market advance.Yes, if you are going about the investment process with an understanding of market cycles, you will be building liquidity while Wall Street is encouraging higher equity weightings, while numerous IPOs are taking advantage of euphoric speculative greed, and while morning drive radio hosts and personal friends are boasting about their ETF and Mutual Fund successes.

While they grow their hat sizes, you will be growing your income production by holding your income purpose allocation on target and salting away the growth purpose portion of your profits, dividends, and interest in an equity based alternative to “de minimis” money fund rates.

This “smart cash”, comprised of realized profits, interest, and dividends, is just taking a breather on the bench after a scoring drive. As the gains compound at equity CEF rates, the disciplined coach looks for sure signs of investor greed in the market place:

  • Fixed income prices falling as speculators abandon their long term goals and reach for the new investment stars that are sure to propel equity prices forever higher.
  • Boring investment grade equities falling in price as well because it is now clear that the market will never fall sharply again… particularly NASDAQ, simply ignoring the fact that it is still less than 25% above where it was nearly twenty years ago (FANG included).

And the beat goes on, cycle after cycle, generation after generation. Will today’s managers and gurus be any smarter than those of the late nineties? Will they ever learn that it is the very strength of rising markets that, eventually, proves to be their greatest weakness.Isn’t it great to be able to say: “Frankly Scarlett, I just don’t care about market directional changes. My working capital and income will continue to grow regardless, possibly even better when income purpose security prices are falling.”

My articles always describe aspects of an investment process I have been using since the 1970’s, as described in my book, “The Brainwashing of the American Investor”. All the disciplines, concepts, and processes described therein work together to produce (in my experience) a safer, more income productive, investment experience. No implementation should be undertaken without a complete understanding of all aspects of the process.

Actions to Do If You Want Your Personal Finances to Improve

At the turn of each year, we all have our dreams and we possess new energy levels to achieve them. This individual expectation is like a cycle. Everybody wants to succeed, at least in their minds but not everybody will. Below is a list of 25 actions you should take if you want to improve your personal finance this year.

1. REVIEW THE PAST YEAR: The first thing you should do is to analyze the past year. Research has shown that of the lots that make ‘new financial resolutions’ every year, less than 10% actually get to follow those resolutions through the year. Does it not bother you that at the beginning of last year, you also made resolutions that you failed at? Why turn around in cycles every year? Take a pen and paper, sit down and review your financial activities for the past year; from your income earnings to spending. Break everything down into tiny bits and you will have a clearer picture of why some of your financial desires didn’t come to pass. It could be that your total expenditure outweighs your income.

Simple Guide: Create a ledger of credit and debit. Every of your income, no matter how little, should come to the credit side while expenditures come to the debit. Sum each side up. If your debit is over 30% of your credit, do you still wonder why that financial dream of yours was out of reach in the past year?

2. CREATE A CHECKLIST OF ALL YOUR FINANCIAL MATTERS: The second step is to create a checklist of all your financial matters, while including ‘Emergency’ as the last in the checklist. This is because emergency situations will always arise and can dent your plans, if you are not adequately prepared.

The best way to create this checklist is to break each financial matter down into months. Many people go through the year with false belief that they have everything sorted out in their heads. The more reason they fail because human beings are susceptible to memory loss. Sort them out in black and white instead, and a new level of motivation will come on you each time you look at the checklist. Alternatively, tools such as PocketGuard and Spendee can help you do this.

3. SET SPECIFIC FINANCIAL GOALS: After creating the checklist, the next step is to set your financial goals complete with specific dates. That is only when your wishes become goals since the dates act as deadlines thereby putting you on delightful pressure to beat them. Any goal without a specific date of achievement is not a goal. You are merely wishing. Sadly, this is what many people do.

By specific, I don’t mean you saying you will make a million naira in August 2018. Be more specific with date. Rather, say ‘August 30, 2018’ for instance. Then it becomes a goal that you can wake up every morning and chase around.

4. KEEP A FAITHFUL BUDGET: The failing of many people is that they are never faithful to their budget. This shows indiscipline. Learn to set and work within budget. That way, you can meet most of your financial plans and obligations. Going beyond budget will only put you in bad debt and make you miserable. If you cannot plan your budget in black and white, there are wonderful digital tools such as Wallet and Personal Capital that enables you to do this and carry your budget around in your phone. Some others like PocketGuard even alert you that you are already spending beyond budget. Take advantage of these tools for better living. One thing you must never do is to simply budget in your head.

5. SPEND WHAT IS LEFT AFTER YOU HAVE SAVED: Learn to live by this rule today. For every dime you earn, save at least 10% of it. Now, this is the difficult part: many people aren’t disciplined enough to do this. The key to achieving this is to separate your business income from your personal finance.

6. LEVERAGE ON GOOD DEBTS AND AVOID BAD DEBTS: Everybody should like debt. This is a principle of the wealthiest people in the world. They like good debt and abhor bad debt. Good debt brings you more cash flow and if well managed, sets you towards financial freedom. Bad debt on the other hand, brings you unneeded luxuries, put serious pressure on you and can make you miserable. If you must boost your personal finance in 2018, try to avoid bad debts.

Good debts are incurred towards fulfilling rewarding financial obligations like the purchase of businesses, investment and stocks or real estate; these are things that will compound your financial interests over time and make you independent. Bad debts are taken out to buy non-essential luxuries such as cars, holiday trips and best proposal dinner. These luxuries don’t compound wealth. Rather, they take what you already have. Decide which one you want.

7. PAY OFF YOUR SMALLER DEBTS FIRST: By now, you must be saying ‘but I am in debt already. My debtors are breathing down my neck’. All well and good. Make it a point of focus to liquidate your bad debts. Start by making a list of your bad debts in order of their sizes. Then settle the smaller debts first. Any debt that is fully settled should be cancelled out before moving to the next.

The logic behind this is simple. The smaller the debt, the easier it is to pay off. With each debt cancelled out, the more confident you will become of liquidating the bigger ones. This confidence brings with it desire not to keep going through the show of cancelling out debts every year. In other words, you’ll become a better manager of your finances.

8. LIVE YOUR MEANS: This must be a strange one. I have heard many people advocating that people should live below their means in order to have reasonable savings. Well, I actually believe people should live their means. If you can afford to conveniently buy out a business, why not? The key to living your means is convenience.

In measuring your convenience level at taking on situations, you must be truthful to self about your financial situation. You might be on a 100, 000.00 Naira per month wage and feel you can live in a two bedroom apartment in town. You should calculated the other supervening expenses like monthly feeding, clothing, welfare and transportation to know how much you are left with to contribute towards the means you want to live.

A simple rule I advocate is this: if a personal financial project is more than 10% of your actual income, then you might be better off living below your means.

9. AVOID HAVING ENTITLEMENT MENTALITY: As a major, nobody owes you anything in life. So quit that lazy mindset. In business as in your personal finance, you are solely responsible for the decisions you make; for your successes and failures. Once this is firmly ingrained in your mind, the zeal not to fail will become a greater motivation that pushes you towards making smart financial choices. You will learn the act of taking responsibility. The most successful entrepreneurs don’t sit down and wait for goodwill from some family members or friends. They struggle their ways through web of failure until the elusive success is captured. Then they work harder to keep the success. You should also have that mindset.

10. AVOID THE LOTTERY: This might not go down well with some lottery lovers but if you don’t have firm control of your personal finance, then stay off the lottery. People ask and I tell them lottery is business of luck based on correct punditry or guessing of a given situation. You expend money time and time again in the hope of becoming lucky and hitting the jackpot. But what if you don’t? Let us even assume you win. Have you taken stock of how much you have contributed to the lottery over the months and years and if what you won is up to your contribution? A few will be lucky to hit it big. However, a vast majority of people won’t. The wealthiest people know that waiting for some big manna from heaven is a lazy way of understanding the concept of luck. They know that luck is a deliberate effort of an individual therefore they diversify their portfolio before engaging in lottery.

11. OPERATE 3 DESIGNATED BANK ACCOUNTS: I am advocating this because most times we tend to draw from a single bank account to solve our personal financial challenges. The danger in this is that such practice is an enemy of financial planning and often runs people dry.

If you are serious about securing your financial future, then have 3 bank accounts where you save at different times. The first should be for savings and this could be your salary account. The second is for emergency while the third is for philanthropy. Since you’re working on a budget, you know which account to go to on each occasion and discipline will stop you from touching the other accounts when you have no need to.

Finance experts like Robert Kiyosaki advocate this strategy. I recommend it also.

12. TRACK YOUR NET WORTH ALWAYS: Do you really know how much you are worth? The problem is many people have a false sense of security. They believe selves to be worth more than they actually are. People who take control of their personal finances make it a habit to track their net worth always. Quit blushing over your assets. Try removing your liabilities from those assets to get an idea of how much you are really worth. Whatever remains after you have subtracted your liabilities from your assets is what you are truly worth.

13. DIVERSIFY YOUR INVESTMENT HOLDING: Diversifying will help you to minimize your investment risks. Smart working entails you have your risks spread in different sectors. If your investments in a sector fail, your investments in other areas will help to mitigate the effect of your loss. There are many reasons why you should diversify: loss of business, inflation, taxation, government policies and political instability are a few of the reasons why you should never remain in a single sector as an investor.

14. CREATE PASSIVE INCOME: This is a key to financial freedom. To build passive wealth, you must be involved in activities or buying assets that generate you more income. To boost your personal finance this year, start engaging in activities that will generate you income even when you are not seriously working. Leverage on technology and get involved in online businesses, get involved in genuine network marketing programs, invest in viable businesses and watch your income compound.

15. LEARN THE RULES OF INVESTING: That you want to diversify and create passive income does not mean you should not follow the rules of investing. The first rule of investing is that you should never invest in what you don’t understand. Get adequate knowledge before plunging your hard-earned money. The second rule is that you should never invest money you cannot afford to lose. Investment can be a risky venture, so have liquid cash you can fall back to if the investment fails.

There are other rules you should learn such as the principle of compound interest, legal framework of what you are investing in, and so on.

16. ENGAGE IN YOUR PASSION AND HAVE FUN: Some people are miserable because they are not doing what they love. Some are stuck in jobs they hate just for the salary. To do great things in life, you must be passionate and enthusiastic about what you do. I love providing business and financial solutions to people who need them. It gives me joy.

Learn to be passionate about what you do. That is when you can have fun and enjoy life to the fullest. Not loving what you do can drive you to make poor financial choices.

If you hate what you are presently doing, here is a tip: give yourself sufficient time to properly invest in what you are passionate about. Then move on.

17. EXERCISE TO KEEP YOUR MIND AND BODY IN SHAPE: Many people work few hours and they are fagged out since they don’t perform any kind of exercise. Engaging in physical exercise keeps your mind at alert and your body in great shape to take on any physical activities.

18. TAKE YOUR HEALTH VERY IMPORTANT: All your goals in life will go as far as your health permits. Your health is your number one wealth; therefore you shouldn’t be careless with your health. I have seen people who are careless about what and how they eat and drink, and are clumsy. Personally, I hate sluggishness.

19. BE FLEXIBLE AND ALWAYS ADJUST: We all want to appear to be in charge, that we have planned ahead and are ready to take hold of our financial situations. However changes will occur along the way, some of them beyond our control. The people who take biggest control of their personal finances are people who adjust to favorable evolving trends. They are spontaneous in their approach towards life. The danger of being rigid is that you are not open to new ideas and opportunities. You are stuck with your viewpoint, with your personal understanding of doing things which may be what is limiting you. The wealthiest entrepreneurs and CEOs have a trait in common. They hire the smartest people to bring new innovative ideas that they can learn from and make adequate adjustments along the way. This is how businesses succeed. This is how personal finances compound. There are times when you follow your conviction, but make sure you have taken every necessary factor into consideration.

20. WORK SMART: Have you noticed that while you are stuck in your 9-5 job for a few thousands every month, another person works few hours and earns far higher than you? The rule of the 21st century is working smart. While I loathe laziness and cannot encourage it, yet your hard work should be embedded in working smart. Think of disruptive ways you can engage the public that will generate you more income. Do you have large following on social media? You should leverage on that and promote your passion. Create reasonable awareness. The more awareness you create, the more people that need your services will seek you out. You don’t have to wait for the fat bucks to come to you so you can rent the choicest office space. Take advantage of technology and start with what you have.

21. LEVERAGE ON TECHNOLOGY AND AUTOMATE SAVINGS: This is the age of technology and everything is going digital. You cannot afford to keep living an analogue lifestyle. Get accustomed with the various available technologies that can help boost your personal finance this year. It is useless, for instance, to be carrying cash around when you can easily perform banking transactions on your mobile phone. You can automate your savings and spending so that you don’t exceed your budget. An application like PocketGuard lets you do that.

22. GET INVOLVED IN PHILANTHROPY: I believe that giving is an effective way of receiving. There is fulfillment that comes with helping people around you to be better than they were. Philanthropy is not all about giving alms to the needy. It is about doing the little things to improve the circumstances of those around you. You can engage in community service, render pro bono services to do that really need it and so on.

If you have enjoyed some excellent services from a startup, you can help that business survive by a little words of mouth marketing. Doing such little things go a long way to impact on your personal finance as you will be seen as a trustworthy person whose recommendation is genuine, and this can only be good for your business.

23. HAVE A RETIREMENT PLAN IN PLACE: Some people think retirement is working for several years in the civil service and retiring to a life of pension. Retirement is planning for a life of less stress at work, not that you stop work altogether. Even if you own chain of companies, you cannot work forever. You should give way at some point for younger, more dynamic leadership while you take on the overseer’s role. So what are your retirement plans? Do you have insurance in place? How about retirement savings account? Have you buried your finances in different investment portfolios that will generate you income in years to come?

Do you have any shares or stock holding, and more especially, do you have any real estate investment? Have you taken time to study about some government policies in your country and even study some government introduced financial incentives such as the sukuk bonds in Nigeria to know if it’s a risk worth taking?

I have seen some people go broke after retirement because of lack of adequate planning. Don’t fall into that trap of waiting for some pittance called pension from the government or whatever organization before you can survive. That is a life of misery, unless you want to live your whole life dependent on others for your basic survival.

24. HAVE A MENTOR: I believe so much in the power of imagery. You can only conceive an idea after you have built images in your mind. That is what mentor ship does to you. Whatever financial race you are in today has been won in the past by another. So make a mentor out of that person. Use their struggles and triumphs as a guide so that you can arrive faster at your destination than they did. Ask them relevant questions and get answers. There is no point making some mistakes if they can be avoided by having a mentor. We should learn to do things from a point of comfort.

25. START NOW, IT’S NEVER TOO LATE: Finally, it is never too late to start planning towards your financial independence. You can start putting in the hard work now and realize the benefits later. The danger is in not starting at all.

Tip: Remember to take stock at the end of the year to see how well you performed in boosting your personal finance.

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As human beings, we all plan in our minds to make each year the best year of our lives. Yet, many people fall short of their expectations at the end of the year simply because their financial planning were not adequate or were too over whelmed by circumstances around them that all their financial goals suddenly came to naught.