Best way to invest your money – and why I hate financial advisors….

stock market investing, alternative investments, financial advisers

This is a symbolic picture of what investing is. Didn’t know if you would know that.

First up this week is a guest post from Barrington Lewis of http://www.barringtonlewis.com/, who is notable for being a very insightful writer and having a cool name.  

Have you ever noticed that even with all of the financial advice out here being advertised in the media – that we unfortunately have an extraordinary amount of people that still can’t retire?  I suppose this is partially due to the problem caused by too many financial advisors (approximately 300,000 to 400,000 of them seeking and competing for wealthy clients (who also get the “best” advice) – when the majority of Americans are respectfully, “less than wealthy” and cannot afford the “best” services.  In addition, the other part of this problem to blame is due to taxes, debt, and a devaluing currency (thanks Feds!).

What upsets me is that most advisors promote the amount of $1 Million as the goal to achieve for retirement.  We see it everywhere – “skip on that latte for 30 years and you’ll have a million dollars!” Or don’t forget the ING commercials of these people carrying around an orange number with $1 Million +, or those who skip out on small purchases (like a bbq grill) and instead count their few orange dollar bills. It’s a joke.

Time Value of Money

Let’s do some simple math – everyone knows (or should know) that the value of money depreciates over time.  So if you’re going to retire 40 years from now – how much would $1Million be worth to you 40 years from now?  We can figure this out by understanding the time value of money formula – which is:

PV= FV/(1+R)t  and  FV=PV(1+R)t

These two formulas represent the present value (PV) of money, and the future value (FV) of money. The variable “R” is just the estimated interest rate…and “t” represents time.

Don’t worry – I won’t get into too many details but basically $1Million 40 years from now will only be worth $208,289 ($1,000,000/(1+4%)40 …assuming that we average 4% growth after taxes and inflation.  Either way –  ask yourself how long could you last with this amount of money in retirement?  5 years? 10 years? 15 years?  Hopefully you don’t have a mortgage or car note in retirement!  Not to mention high healthcare costs (it pays to be healthy).

The point I’m trying to make is that you can’t store money – money is just a medium to purchase goods and services.  It cannot be stored, or in this case, saved.  Ever notice that America is in a Retirement Crisis? Mainly because everyone follows the same advice (put money in savings and contribute to your 401K).  Not the best advice!  These are just ways to build supplemental retirement plans.  The best advice is to build cash flow and/or multiple streams of income.

So what are the best ways to invest nowadays? 

The best way to invest your money is to invest in items that produce an income for you today…not tomorrow.

  • Invest in high yield dividend stocks, & REITs (most of which pay between 10%-20% in annual yield – better than that 1% your savings account offers)
  • Invest in businesses(buy bonds) and invest in business startups
  • Invest time writing eBooks, creating iPhone Apps, etc and selling it on the internet

Passive income is taxed the least and your tax bracket doesn’t begin to increase as you begin to make more money.  Taxes may soon increase (it’s inevitable) – but I bet that this type of income tax will be the last to see an increase.  Think about it.

BE FREE

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Other insane, amazing and must-read financial articles:

When I will become a millionaire

How to Become More Creative

The History of Money

Why Cash Flow is better than Net Worth 

20 responses to “Best way to invest your money – and why I hate financial advisors….

  1. Building passive income always seems attractive to me. I just published my first ebook and I hope to learn a lot about the process so that I can improve and publish a stream of them. I figure if i can get ten ebooks published and each one makes $50 a month then the effort will be well worth my time.

    • Sounds like a plan, although on the surface it I think your return is largely dependant upon the amount of time and effort that goes into the e-books. Let us all know how it goes (I am sure there are several would-be authors reading this and your (super) blog.

    • @Alexa – Congrats on your ebook Alexa. I hope it doubles in what you’re expecting to make per month!
      @mitchell – indeed there is a lot of time and effort going into creating and publishing an ebook (I’ve done 5 so far), especially if you’re really working hard to research, write, and deliver great content – instead of selling crap just trying to make a buck.
      Sales come slow at first – but I think as one becomes better at what he/she does, sales will inevitably pick up.

  2. Mitchell! Love the mention about taking care of your health. Since I began to, I see the doctor once a year for a check up so she can tell me that I am the paragon of health. Cheap and makes me feel like a freakin’ genius.

    Please excuse my ignorance, but would index funds be included in high yield dividend stocks, & REITs?

    Have a peachy one!

    • Barrington wrote the article, I just laid a little editing magic down so the credit for that mention goes to him. Anyway, index funds are not high yeild investments by definition, although their yeild can be high pending the market (if that makes sense). They can also include high yeild divident stocks, but are not themselves defined as high yeild due to the mixture of stocks within them. Hope this clears it up.

  3. Huge problems with this advise. First, you are advising people to risk life savings with junk bonds and start ups. Most people are not savvy enough, that’s why they get an advisor. Second, your future value calculation assumes the $1MM is not invested. Third, you completely ignore risk.

        • Muni bonds are good – but as you can see (given recent events)…they’re not perfect (although they are tax free!). But Muni bonds are best served to those classified as “accredited investors”…or those with excess of $1MM in assets.

    • @Partywave – Please don’t risk your life savings in junk bonds- but do invest in bonds with companies that have tenure. I don’t think I mentioned junk bonds. Startups must be invested with care – and a lot of them fail – but if you never try…you’re guaranteed to fail!
      Second – if I had $1MM invested today – of course it would be worth a lot more in the future. But if I’m starting with zero (or very little, like most of us are), then having a goal of $1MM in the future (30-40yrs from now) seems pointless. Because once I reach that goal – is it really worth it?
      Third – risk is never ignored. There’s risk everywhere and involved in everything we do. Just ask the retirees who were told to “ride the wave” in 2008. Or the people who lost their pensions in Birmingham, AL, San Bernandino, CA, and soon to be Detroit, MI.
      The point is to ultimately diversify into assets that produce income (cash flow), because multiple streams of income will do you a lot better than saving for a rainy day.
      thanks for the comment!

  4. “Invest in high yield dividend stocks, & REITs (most of which pay between 10%-20% in annual yield – better than that 1% your savings account offers)”

    10-20%? Maybe if the company or trust is two months away from insolvency.

    Also, why do you advise investing in corporate bonds vs buying company stock as “investing in businesses”?

    • @jmschlmrs Not exactly – companies offering 10-20% in dividend payouts are common amongst REITs, mainly because 90% of their income must be returned to shareholders in order for the company to avoid paying corporate tax. I own shares of Invesco’s (IVR) and Annaly Capital Management (NLY) to name a couple (I want to be clear that I do own these shares but I’m not promoting them in any way) and these firms have been around for a good while. Their are also a few oil and gas companies that do the same. I just want to give you an example of these high yield stocks that are not close to insolvency!

      Investing in corporate bonds are a bit safer than solely investing in corporate stock. Stockholders receive the best return in most cases, but they also take on the most risk. Therefore, if the company ends up insolvent – the stockholders lose everything while bondholders receive first dibs on whatever is left of the firm. It’s good to invest in stock but be sure to diversify with bonds as well…

      Thanks for your comment!

  5. Thanks Mitchell for your post. As a financial planner, I find myself agreeing and disagreeing with a couple points. First let me start with the disagreement part.

    Chasing yield is usually never a good idea as it comes with great risk. A great rule of thumb is “the greater the reward potential, the greater the risk”.

    Also, a 10% to 20% annual yield from income producing investments seems way too good to be true. You know the old adage: “If it seems too good to be true, then it probably is.”

    Yes, 10% to 20% is feasible for a stock investment (over the short term) that has the potential for appreciation, but not so much from dividends alone. And to imply that someone could earn 20% per year…… well that is not realistic. Does it happen….yes. But it is not the norm. Stocks as a whole may periodically earn a high rate of return, but over the long run you would not want to expect an annual return of 20%.

    Our goal at our firm is to invest our clients’ money into many different buckets (i.e. stocks, bonds, precious metals, real estate, etc.). We strive to lower the risk for clients while getting them a rate of return that will allow them to retire when they desire. We DO NOT chase yield and I think that the majority who do will find themselves in trouble. Just ask a former day trading client who lost $100,000 to $200,000 trying to find the best performing investments.

    Okay, now on to the agreement part.

    You make a wonderful point in that the majority of American’s are “less than wealthy” and cannot afford the services of an advisor. I’ll also add that they are often times turned away by other advisors because these “less than wealthy” prospects due not meet the firm’s investment minimum. Nobody likes to be rejected; this makes people feel like they’re not good enough. This is an under served market that could actually use some help.

    Our philosophy at our firm is that we will help those who want help. Period…… We have no investment minimums. In our experience, having a very efficient, technological driven process allows us to work with potential clients of all sizes. No discrimination here.

    Lastly, I’ll point out that we do not steer clients toward a $1,000,000 number. That is not what financial planning is about. It’s unfortunate that advisors do this. Instead, we have clients fill out a detailed Retirement Expense Spreadsheet so that we know what they will be spending in retirement. Then we factor in health insurance costs and taxes. It is a very customized approach that allows us to show a client what approximate “number” they actually need.

    As with any profession, there are always a few bad apples that spoil the whole bunch. Our industry may be leading the way with this but, please don’t “hate” all financial advisors. But if you do, that’s okay, because I like to call myself a “financial planner”. Thanks again for your post.

    • Excellent response Brad,
      Chasing yield for the sake of chasing yield can be risky, however, there are several REITs, Trusts, Oil, and Gas companies that do regularly offer high yield dividends. I personally have owned several (for about 5 years now) that produce north of 10% return for me on an annual basis. I mention two of the investments that I own in the posts above. But of course, these investments work for me – and may not be the best investment for everybody looking to invest some money (age, discretionary income, expenses, and other factors play a part in investment decisions).

      I”m not bashing the profession – because it’s possible that you add value to the average citizen that doesn’t have the time, or doesn’t know (or are too lazy to learn), what to do with their money. But the financial planning/advisor profession reminds me of the fortune teller business – mainly because these professionals try to predict how much I’ll need in retirement, or how high my medical bills will be (assuming that I don’t fall and break a bone, have kidney failure, multiple surgeries, etc), and how volatility or risk on a global scale may or may not affect me in retirement (I wonder how those Greek financial planners (advisors) are doing with their clients…? Detroit? San Bernandino? etc.)

      If more of us spent our working years building up assets and income streams, instead of trying to build up our savings like squirrels stashing nuts for winter, we’d be a lot better off knowing that we can have money coming in every month instead of subtracting from a (hopefully) large amount. It’s obvious that the profession isn’t working or serving the public as it should given that America is facing a retirement crisis – where only 14% of the population feels comfortable enough to retire…you’d think that financial planners (advisors) would come to save the day for the other 86% of us like Superman comes to save the day…think of the commissions!

      The premise behind this post is that multiple streams of income (cash flow) will serve most of us a lot better than building up a 401K and/or a large amount of savings and hope that we don’t outlive it. The same way financial planners (advisors) build up their multiple income streams by acquiring a large amount of clients and living (comfortably) off of the renewals for the products they’ve sold.

      Maybe what’s really on trial here is not the service of a financial planner (advisor), but supplying a sound financial education for most of the country.

      Just my thoughts.

      • Thanks for responding Barrington.

        I must respectfully say that I disagree with most of what you said. Let me explain.

        You indicated that your income producing investments provide you with a return north of 10% annually. What the average person doesn’t know is that when you receive a dividend, the corresponding share price is dropped by the same amount. It’s basically a wash. In layman’s terms, this means that receiving a dividend provides you with no gain. So, if you put $100,000 into a stock paying a 10% dividend, your $100,000 would now be worth $90,000, but you’d have $10,000 from dividends. A wash…. This is why it is important to look at the overall return: appreciation (or depreciation) + yield. Additionally, when you advocate a couple of stocks that pay out a high dividend, this is EXTREMELY risky. We invest our clients money in thousands of different stocks so that we can spread out the risk. By the way, we are an independent firm and do not receive commissions. We are not in the business of receiving commissions from products. We are in the business of disseminating quality advice and building investment portfolios for our clients. And our compensation comes in the form of an annual fee that we charge monthly. We are fully transparent with our pricing which is disclosed on our website. There are no surprises. Commissioned advisors, on the other hand, have an inherent conflict of interest. They receive all of their money upfront so they would have to find something new to sell to their client in order to receive additional income. This makes the client wonder if the advisor is acting in their best interest when a new product is introduced.

        There is nothing wrong with helping clients prepare for the future. I don’t look at it as fortune telling, just PLANNING. Nothing is ever set in stone b/c things change. We have to make changes over time as new information becomes available (i.e. rising healthcare costs). There are strategies, by the way, that can help a person to limit the amount they would spend in medical costs. We help clients determine which insurance to choose from their employer or help individuals choose an appropriate private policy. Cheaper is not always better. And it’s not about the insurance itself, it’s more about protecting your assets. If you don’t manage this risk properly, you could find your self tapping into your investments to pay for a medical claim just because you didn’t have the right coverage – not good. Think of your house….. There’s a chance that you could potentially self insure your house, but would you want to? You will most likely gladly pay a monthly premium for home insurance so that you don’t have to pay for a loss out of pocket.

        You indicated that people should spend more of their time building up assets and income streams instead of saving to a 401k. Well, this is strange advice, b/c savings accounts, 401ks, etc. are assets. It’s perfectly acceptable to build up a lump sum nest egg and live off of it during retirement. In fact, a nest egg of stocks, bonds, etc. would be generating an income stream anyway. But unlike your strategy, we would be doing so at much less risk since it appears that you will only own a handful of stocks at any one given time.

        As for the majority of Americans feeling unable to retire comfortably, some of this has to do with their own decisions and habits. As mentioned in my last post, we will gladly help those who want help. Many people know the importance of saving, but they simply do not do so. They would rather live in the here and now spending everything they make. As a financial planner, I can lead a client to water, but can’t make them drink it.

        At the end of the day, there is certainly more than one way to skin a cat. You just have to be comfortable with the methods chosen.

        • @Brad
          Good response – and it’s correct that there’s more than one way to skin a cat. Investing for income also helps for if/when there’s a loss of employment. There’s nothing wrong with diversification and spreading risk – but what happens if you’re doing exactly as you said, but then there’s a loss of employment? That individual would be withdrawing those invested funds at a loss with all of the penalties, taxes, and fees involved.
          Investing in high yield dividend stocks does produce income – and when one purchases these types of assets (such as myself), they’re not so concerned about the loss of principal. Just like my rental property – hasn’t budged in terms of equity for the last 2yrs, but I receive monthly income (like $500 monthly profit after mortgage) and I don’t necessarily care for appreciation or even depreciation (to some degree) at this point.
          Some people definitely need planning – and I’m sure you’re an asset to your clients (and they, you). But planning for income versus planning for expenses does a body good. And a nest egg of stocks and bonds are indeed assets (hence, my investing in REITs and other dividend stocks)…but I’m mostly interested in those that pay dividends (i.e., an income stream).

          I’m sure we can go back and forth until eternity – so I’d rather agree to disagree… and risk is always involved with investing (as you stated, there’s more than one way to skin the proverbial cat)!

          Thanks for your comments – I appreciate your opinion/feedback.

  6. Did Brad Tinnon suggest that when there’s a dividend it drops the share price??? I don’t know where he gets that idea, but I have 12 stocks that pay dividends between 3 and 18%. In absolutely none of those cases does the share price fall because of the dividend yield. I don’t know that much about accounting, but I can see when there is CASH in my account that wasn’t there before. It does not trigger a drop in the stock, nor does it necessarily cause the underlying company to suffer in any way from an income or expense standpoint. Where would someone get such nonsense?

    I understand that professionals like to see every side of things and justify their employment, but sometimes the simple way is the best. I also have an idea of why the idea of capital appreciation is so popular. Capital appreciation means a larger chunk of change that one can turn into an annuity, which is often the implied method of getting retirement income.

    If I save up $1M by say age 67, I can translate that into a “guaranteed” cash payment for the rest of my life (or actually up until the age of 100) through an annuity. It’s simple, it gets people paid their commissions, it’s easy to explain, and it provides a solid base.

    Human beings are life forms, and like all life forms we always want more. A kid rides a bicycle and they usually want a car. A high schooler or college student gets a car where you can see the ground through the floor, they want a decent car. They get some more money saved and trade up to a car where most of the paint matches and it runs 6 days out of 7, and they want a pretty car. They get a pretty car, they want a gorgeous/safe/luxurious/enviable car to be seen in and around. And it never stops. That’s just one of the most common places where comfort, social status and functionality drive up income requirements. If I have a 6% annual return after taxes and inflation (what I’ve read is the average), I can probably invest 3% of my total into securing more income if I want something sustainable — that’s $30k, and most folks don’t want to live on the other $30k year after year. They want MORE. They don’t even know why they want more, but it is almost a universal. Even the folks who don’t care about “money and fancy things” still want fun experiences, and those aren’t free.

    So what we have is a near-universal desire that most folks don’t talk about. And I don’t know what to do about it except continue building my wealth.

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