Because I typically buy my investment properties occupied so I receive cash flow from the moment I take ownership, this is the first time I’ve had a vacancy.  This gives me an opportunity to secure some new, long-term, quality tenants and gauge my property manager’s proficiency at renting a vacant unit.  To be honest, I’m actually pretty excited about the situation.

I know, I know… it probably sounds rather odd that I’m not the least bit concerned about having a vacant rental unit.  Here’s the reason why:  it all goes back HOW investments are acquired for my portfolio.

PRUDENT INVESTING

I buy investments using a financially conservative approach, the investments must have strong operating fundamentals, and I pick them up at a discount to their true value.  In the case of this particular rental property, the property still produces positive cash flow at only 50% occupied, I’ve got ample cash reserves to cover all operating expenses, I’ve got a robust insurance policy on the property, and I purchased the property in a municipality where the landlord-tenant laws are very favorable, which ensures quick and inexpensive evictions.  These factors dramatically reduce the risk profile of the investment and allow me to continue operating it comfortably even at a reduced occupancy level.

DIVERSIFIED INVESTING

Now, the other reason I’m not at all concerned is because my portfolio is heavily diversified.  My personal Pay Me Plan is constructed from non-correlated, high-quality, productive assets that yield investment income.  I don’t just have a single real estate holding where I’m at the mercy of a disgruntled tenant.  Rather, I’ve got a robust portfolio comprised of income-producing assets that hail from various investment cohorts.

For example, even though there’s a vacant unit in my portfolio of rental properties, I received substantial dividend and distribution increases from some of the financial instruments in my Pay Me Plan over the last few months.

I’ll start with Chevron, the oil behemoth that recently bumped its investor payout by 10%.  Northrop-Grumman, a major defense contractor, boosted its quarterly distribution by 11%.  Public Storage, a real estate company with a pristine balance sheet, raised its dividend by over 13%.  Those inflation-trouncing income hikes more than compensate for the vacancy at the rental property.  See how this works?  That’s the power of diversified income streams and why you should have a panoramic portfolio of investments.

Are you currently earning 20% returns on your investments? Download a free report (includes actual case studies) that reveals how professional investors, elite money managers, and the financially astute earn inflated rates of return regardless of market conditions. CLICK HERE to see how they’re doing it.

To paraphrase the founder of Standard Oil Mr. John Rockefeller, it’s a lot better to have one hundred people owing you a dollar than to have two people owing you $50. The point is this:  when you have money coming in from electric utilities, oil companies, income properties, private businesses, gas pipelines, consumer loans, software developers, tax lien certificates, corporate credit, healthcare manufacturers, option premiums, etc., it’s going to take some extremely hellish economic scenarios to adversely affect your financial standing.

I’ll give you a little insight into my personal Pay Me Plan.  As of right now, no single investment or investment class constitutes more than 20% of my portfolio.  Think of the tremendous defensive moat and margin of safety that provides.  Even if an entire investment class gets hammered by 50%, that only impacts my total portfolio by 10%.  It’s nearly impossible to get “wiped out” when your portfolio is structured in such a conservative fashion. Want to sleep well at night? Diversification helps.

Moreover, when you don’t have all your eggs in one basket and you’re appropriately diversified, you don’t have to worry about selling low in a market crash and succumbing to “behavioral economics”.  Instead, if you recognize that the prices of select, high-quality investments have declined, you view it as an opportunity and can accumulate more assets at discounted levels.

By investing prudently and maintaining ample diversification across non-correlated productive assets that provide organic income growth, risk can be reduced and returns can be enhanced.  Decades of financial research have come to the irrefutable conclusion that a little prudence coupled with proper diversification are some of the keys to safe and profitable investing.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

What accompanies these struggling parts of American cities is an equally disturbing economic history with roots stretching back to the Great Depression.

AN IMPORTANT (AND CONTROVERSIAL) ECONOMIC HISTORY

At the peak of the Great Depression nearly 100 years ago, financial firms were in a panic as investment capital fled the mortgage market due to spiking levels of unemployment.  At the height of the economy’s dislocation in the 1930s, over 24% of eligible workers couldn’t find a job (and you thought today’s employment market was tough!).  Investors were convinced that the increasing pool of unemployed Americans would result in a wave of mortgage defaults, and available mortgage capital dried up at a dramatic pace.

In response to this, the government formed the Federal Housing Administration (FHA), which was responsible for standardizing lending criteria and instilling confidence back into the mortgage markets.

Now, here’s where it gets interesting.  On top of the normal lending criteria, the FHA underwriters were also given specific parameters for loans that included demographic information such as religious affiliation and ethnicity.  This would be illegal today as it constitutes discrimination, but back in that era of American history, our social views weren’t exactly “enlightened”.

At the time, 20% of a mortgage’s approval was based on a neighborhood’s racial profile, religious composition, and social class.  Restrictive deeds and provisions were introduced that were designed to reduce the likelihood of minorities owning homes in certain neighborhoods (brutal, I know).

On the other hand, if the underwriters determined that there was NOT a large number of minorities or “targeted” social groups in the neighborhood surrounding a mortgage applicant’s property, it was considered a good investment and mortgage capital would rapidly fund the loan.

This policy was responsible for the simultaneous co-creation of the suburbs and the ghettos in many parts of the country that we still have to this day.  Mortgage capital flooded into the suburbs, while urban regions were generally neglected.  As a result, areas with substantial minority populations had a much harder time receiving mortgage loans.  Over the course of several decades, those markets and communities often deteriorated in terms of quality.

Lower home ownership rates meant lower property values and lower property taxes.  And lower property taxes led to less area and school funding, which of course created its own unique set of issues.  When you compound these financial shortcomings over the decades and couple that with some cultural conditioning, you can end up with neighborhoods that have been challenged and distressed for generations.

Now, I’m not saying that government policies from the 1930s are entirely to blame for the rough parts of your city; there are many factors that contribute to that.  Nevertheless, this is the unfortunate economic history of how some neighborhoods in your town evolved into ghettos.  The genesis can be traced back to antiquated financial policies that are no longer enforced or even legal.

WHY THIS MATTERS TO US AS INVESTORS

As investors, this historical background is important because it explains a lot of the demand for rental housing in certain areas of the country today.  And that rental demand metric can play a role in helping us identify good markets and opportunities.

Additionally, understanding this economic history can help us forge our mission as investors in residential real estate.  For example, I pride myself on being an outstanding landlord that services working-class Americans by providing a quality rental property at a good price.

In the end, not all of America’s financial and economic history is something we should be proud of, but that doesn’t mean we can’t learn from it.  History can be a phenomenal educator.  Both as a country and as independent investors, we’re not destined to repeat the mistakes of the past as long as we can take a step back and objectively assess the events that have led us to where we are today.  Ultimately, that’s the foundation for sustainable progress.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

The 4% Rule is a financial concept that states that as you enter into your retirement years, you should plan on deducting roughly 4% of your retirement portfolio’s value every year in order to meet your living expenses.  The plan is that the structured withdrawals from your nest egg should provide financial support for at least a couple of decades, and possibly as high as 30 years depending on your investment returns and financial profile.

EXPOSING THE PROBLEMS

The challenge with the approach is that it only works in an ascending market or a market that’s trending horizontally.  If you had tried the 4% Rule in late 2008 when the markets were getting clobbered, you would have been in a world of hurt.  A declining market requires you to withdraw larger and larger percentages of the portfolio in order to meet your expenses.

For example, if your retirement nest egg is worth $100,000, the 4% Rule dictates that you may withdraw $4,000 to meet your expenses.  However, what if the markets hit a rough patch and your portfolio is now only worth $80,000?  Well, in order to extract the same $4,000 from the account in order to supplement your expenses, you now have to withdraw 5% of the portfolio ($4,000 / $80,000).  Do you see the problem here?  You’re now down to $75,000, and unless your portfolio increases in value, you’ll have to deduct an even larger percentage next year in order to meet that same $4,000 requirement.  Subpar investment performance can severely hinder this approach.  By the time the portfolio is down to $20,000, you’re having to deduct 25% of its value to meet your daily expenses.  At that point, you’re hoping and praying that the markets start heading north to replenish all the capital you’ve withdrawn (note: hope and prayer are not investment strategies that I endorse).

And all this is assuming that your cost of living doesn’t increase too dramatically over the years.  What if the US economy hits a period of aggressive inflation like we did during the Carter Administration in the 1970s?  That could REALLY screw up the 4% Rule because now you’re having to extract substantially larger amounts every year.

As you can tell, this is a flawed approach that’s dependent on faulty assumptions – increasing portfolio values, no costly health challenges or emergencies, tepid inflation, etc.

Moreover, neither you nor I have any control over the direction of the markets, so it’s dangerous for us to depend on their mood swings.  Selling off assets and portfolio holdings can work okay in rising market conditions, but that strategy can burn through capital at a rapid rate when markets are declining.  As we demonstrated above with some numbers, when a portfolio is dropping in value, you have to keep extracting larger and larger percentages from it in order to meet your targets.

A MUCH BETTER APPROACH

The solution is to establish a portfolio that yields income without diminishing the asset base.  Collecting significant inflows from productive assets in the form of rental income, stock dividends, interest income, option premiums, business profits, and the like, is the superior approach to harvesting profits from an investment portfolio.  It’s the approach I’ve followed for years and it’s proven itself to be incredibly resilient when executed correctly.

Are you currently earning 20% returns on your investments? Download a free report (includes actual case studies) that reveals how professional investors, elite money managers, and the financially astute earn inflated rates of return regardless of market conditions. CLICK HERE to see how they’re doing it.

By collecting the income provided by your holdings instead of constantly reducing your asset base, you effectively convert the portfolio into a self-sustaining perpetuity that provides long-term cash flow (assuming the fundamentals remain sound).  Cash flow is reliable; capital gains are transitory and subject to tremendous market risks.

Therefore, I would propose that in order to avoid running out of money in your retirement years, consider relying on the investment income provided by your portfolio instead of making systematic withdrawals and hoping that the markets are behaving favorably when you need to extract capital.

After all, why would you want to make a habit of selling something that’s putting money in your pocket on an ongoing basis?  That seems like very short-term thinking.  Besides, you’re supposed to be retired, right?  Sitting in front of your computer trying to sell assets at a favorable price sounds like a lot of work.

I would encourage you to consult with your financial advisor and consider questioning the status quo on this piece of outdated, antiquated financial advice.  The 4% Rule is popular, but inherently flawed – especially in this era of economic uncertainty and increased market volatility.  Protect yourself by adopting an approach where you’re reliant on the income produced by your retirement account, not its ever-changing value.  You’ll thank me when you’re comfortably enjoying your golden years on the back of a cruise ship rocking a stylish socks-with-sandals combo.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

If Larry Ellison (founder of Oracle and multi-billionaire) moves into your town, is your town in better shape or worse shape?  It’s in better shape by a long shot.  Just the drippings from his proverbial plate would greatly benefit numerous aspects of your community’s economy.  It could lead to increased employment (Larry needs a contractor to build his new garage), increased tax revenue (Larry’s big income means big taxes), and increased spending (Larry has a taste for the finer things in life).  If Larry Ellison moves into town, your country treasurer celebrates, and so should you.

I’d like to emphasize that Larry’s prosperity does nothing to diminish your own ambitions and pursuits.  Just because a rich guy lives up the street from you doesn’t mean you too can’t become independently wealthy.  He’s enhancing your neighborhood’s value, he’s invigorating your local economy, and he can serve as an inspirational example of what’s possible.  These are good things.

CLASS WARFARE?

Now, I’m not numb to the fact that there’s a massive income disparity in this country.  The welfare state is growing, the middle class is being compressed, and while the financially prosperous may be few in number, they control a disproportionately large amount of this nation’s wealth.  This is no secret.  There are polarizing views on this matter that make for good political banter from our elected officials.

The 1% exerts tremendous influence and control over the wage rates in this country.  For the last few decades, middle-class earnings have generally stagnated while the cost of living has continued to increase.  As a result, middle-class families have had to use debt to make up the difference.  All the while, corporate executives that control the company purse strings are cashing out stock options that amount to the GDP of small countries.  The business was built on the backs of the working class, but the few at the top receive all the benefits because they’re the ones in control.  Unfair?  Definitely.

So here’s my question to you:  Is there a way you can legally and ethically beat the 1%?  Yes, there is.

BEATING THE 1%

The 1% may have a stranglehold on the country’s wage rates – and they’re not planning to loosen their kung-fu grip anytime soon – but there’s one thing they love to do that we can easily exploit as investors:  they love to lend money.

The elite banking cartels have understood this for centuries.  They loan money to consumers and businesses and collect interest and fees for the duration of the loan.  This lending arrangement is what fuels the mortgage, banking, and credit card industries.  It’s practically the foundation of our economy.  So how can we capitalize on this model to legally and ethically beat the 1%?

Are you currently earning 20% returns on your investments? Download a free report (includes actual case studies) that reveals how professional investors, elite money managers, and the financially astute earn inflated rates of return regardless of market conditions. CLICK HERE to see how they’re doing it.

Well, consider how banks make most of their money.  They lend your deposits out to borrowers, right?  They pay you something paltry like 0.8% interest on your savings, then they turn around and lend that money out at 7% to a business that needs to buy some new equipment.  The bank pockets the interest rate spread — commonly known as the net interest margin.  They receive 7% and they pay you 0.8%.  They can also use a financial construct called fractional reserve banking that allows them to lend out money that they don’t have on deposit.  This use of leverage is what amplifies the returns that banks generate on the money they lend.

Can we do the same thing?  You bet we can.  As investors, we can exploit the same system and beat the banks at their own game.

For example, we can borrow money from a bank at a rate of 4%, then use that money to purchase an income property that boasts a 10% cap rate.  Now instead of the bank pocketing the spread, we’re pocketing the spread.  I just did this last month when I closed on another income property for my personal Pay Me Plan.  I pay the bank 3.25% (mortgage rate), and the property yields a cap rate of over 12%.

As investors, if we can keep our cost of capital low – which is very easy to do in this current low interest rate environment – and earn a high rate of return on our investments, we can participate in the same model that the 1% use.  They’ve been doing this for centuries and it’s allowed them to build empires.

LIKE IT OR NOT, WE NEED THEM

The financial cohort and the top income earners have tremendous influence over both the private and public sector.  We all experienced the impact they can have on the economy during the Great Recession.  The rich have a lot of pull.  And whether we like it or not, as long as the current monetary system is in place, we need them.  Businesses need them to buy inventory and finance expansions, consumers need them for car loans and mortgages, and governments need them to facilitate the flow of capital across borders.  We may not agree with their ideologies and their business practices, but we need to maintain this symbiotic relationship for now.

I’d advocate that instead of demonizing the rich, how about you strive to join them?  We can see how the game is played, and it’s a game we can actually participate in.  The 1% may not like to pay much in wages, but they love to lend money.  And if we’re savvy investors that know how to use that money to earn an enhanced return, we can legally and ethically beat them at their own game.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

A couple weeks ago, I was speaking with the Vice President of Acquisitions at a large, publicly traded real estate company with a national presence.  He’s a tenured employee with a respected track record in the industry, and he’s played a key role in some massive transactions over the years.  We were engrossed in a discussion regarding some of his recent acquisition activity in various parts of the country.

When the New York metropolitan market came up, he groaned and lamented over how difficult it was to find “good product” in Manhattan.  “Because the prices are so inflated due to the demand, cap rates are perpetually hovering at undesirable levels,” he said.

Capitalization rate (aka “cap rate”) is a term used in the real estate industry to assess the income return that a property will generate.  Cap rates are calculated by taking the property’s annual net operating income (NOI) and dividing it into the purchase price.  The net operating income is what remains after all operating expenses are subtracted from the rental income.  Keep in mind that NOI is calculated before any financing costs (i.e., a mortgage) are considered.

For example, a property that generates $7,000 in annual NOI (net operating income) and is purchased for $96,000 yields a cap rate of 7.3% ($7,000 / $96,000 = 7.3%).  Where this gets a little tricky is that different people arrive at NOI using slightly different calculations.  Some factor in a vacancy allowance, while others don’t.  Some factor in a maintenance budget, while others don’t.

Are you currently earning 20% returns on your investments? Download a free report (includes actual case studies) that reveals how professional investors, elite money managers, and the financially astute earn inflated rates of return regardless of market conditions. CLICK HERE to see how they’re doing it.

You can even use a little creativity and modify the equation to help you arrive at a reasonable asking price for the property.  For example, using the numbers above, if your market research has shown that cap rates in the area for your target property type are around 7.3% and you know that your target property generates $7,000 in NOI, you can simply divide the NOI by the cap rate and you arrive at roughly $96,000 for your price ($7,000 / 7.3% = $96,000).

Generally speaking, cap rates are most often used in larger commercial real estate transactions, but the concept can also apply to smaller residential deals as well.

CAP RATES VARY BY MARKET

The rule of thumb is the higher the cap rate, the better.  Because cap rates are a function of price, markets with inflated property values (e.g., San Francisco, Boston, New York, etc.) usually boast low cap rates.  In contrast, markets with more reasonable property values such as areas in the South and the Midwest usually offer higher cap rates.

I subscribe to numerous real estate brokerage newsletters and receive quite a few email solicitations from different agencies.  Last weekend I received an email alert about a commercial property that became available in Lomita, California.  It was a mid-sized commercial building on a corner lot with a major bank as the tenant.  The cap rate?  An atrocious 4.4%.  That’s pretty terrible by my standards.  After running the numbers, the cost worked out to be over $300 per square foot.  That’s a hefty price tag.

For illustrative and comparative purposes, I’ll tell you about a couple recent acquisitions for my personal Pay Me Plan.  I paid around $25 – $30 per square foot for the properties, and they offer a cap rate of over 11%, and that’s after factoring in vacancies, management fees, and a maintenance budget.

The difference is in the approach.  I invest for high levels of investment income, I invest in markets with reasonable valuations, and I only acquire select properties that are selling at a discount to their true value.  Following this simple philosophy is what has allowed many investors to identify properties that yield high cap rates even when large commercial acquirers are settling for anemic returns.

BIG MONEY IS CURRENTLY PUSHING CAP RATES LOWER

Over the last 24 months, hedge funds and private equity companies that are moving their capital into housing markets like Atlanta and Phoenix have been overpaying for properties left and right.  They’re hoping to capitalize on a rebound in home prices (read: asset appreciation, not investment income).

Because they’re not trying to maximize the cash flow provided by these properties, they’re paying absurd premiums and driving down their own cap rates.  In my opinion, that’s not a prudent investing approach.  Yes, they’re inflating home prices for the surrounding area, which is great for local homeowners, but it’s simply a poor use of investment capital to pay $1.35 for something that really costs $1.00.

In closing, cap rates are a useful metric to use when you’re calculating the income return provided by an investment property.  Moreover, you can also use cap rates to help assess the valuation of a property.  And as an important reminder, if you’re going to use someone else’s estimation of a property’s cap rate, be sure you check their math and verify what rates and expenses were used to calculate the figure.

Those are my thoughts.  Feel free to share some of yours below.  Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

The tone of the meeting quickly turned from pleasant to somber as I explained why the long-dated bonds in her retirement account were a poor investment choice given the current economic climate (and she had a lot of them in there).

I clarified that, “When interest rates are artificially low and are practically guaranteed to begin rising within a few years, locking yourself into long-term corporate bonds is generally not a prudent move.”

She gave me a look of frustration and concern.  This was an educated, professional person with years of schooling and work experience.  However, she never learned how to properly manage her finances and employ her money.  She was blindly following the advice of a well-meaning financial planner that was obviously leading her astray.

In reviewing and reflecting on that session, I can’t help but think that by commanding a basic level of investment education, she could have easily saved herself from some potentially costly financial moves as she approaches retirement within the next few years.

TRADITIONAL EDUCATION VS. INVESTMENT EDUCATION

In school, we learned about ancient Mesopotamia, frog anatomy, and where igneous rocks come from.  Let me ask you, how much of that information are you readily using today to advance your life?  Any of it?

Traditional education provides you with a knowledge foundation and prepares you to join the labor force.   In contrast, investment education teaches you how to get your money working for you.  Traditional education can make you a living, but investment education can make you a fortune.  And for that reason, I’d advocate that investment education is absolutely imperative.

Will you allow me some room to be brutally honest for moment?  Money can be a tricky SOB.  If you don’t learn to employ it as your servant, it can easily become your master and dictate numerous facets of your life.

What I find utterly perplexing is that many of us attend school for 15 years (or longer) to become formally educated so we’re more attractive to employers, thereby allowing us to find a job and begin earning a living.  But that’s where it all stops.

This is NOT financially intelligent.  Following the status quo rarely is.  The answer is to become financially educated.

ACQUIRING INVESTMENT EDUCATION

The more educated you are as an investor, the higher the returns you’ll earn, the less you’ll pay in taxes, the greater the financial fortress you’ll have surrounding you, and the more flexibility you’ll have in your approaches.  You’ll also have a sense of reassurance and confidence during periods of economic unrest and turmoil.

A big part of investment education is learning how to profit in all market conditions.  If you only know how to make money when markets are going up, then that means you’re dependent on some outside catalyst that’s beyond your control.  Market movements are a function of supply, demand, geopolitical forces, economic fundamentals, monetary policy, and a plethora of other factors.  Do you have much control over those variables?  Nope.

So with so much to contend with, doesn’t it simply make sense to acquire investment education that covers strategies for profiting in up markets, down markets, and markets that are trending sideways?

With an advanced traditional education, your earnings will probably max out at a few hundred thousand dollars a year, you’ll pay a hefty amount in taxes, and someone else will be controlling your time and income potential.  In contrast, with a superb investment education, your earning potential is unlimited, the tax laws are skewed in your favor, and you have a tremendous amount of control over your time and income.

As we discussed in the blog entry “So, What Exactly Is Investing”, investing is simply the art of making money with money.  And investment education teaches you how to do exactly that – make money with your money.  The class may have been missing from your high school curriculum, but it’s never too late to start learning.  The knowledge will benefit you for the rest of your life.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

Why?  Because proper investing mechanics are driven by investing systems that generate predictable outcomes.  And when outcomes become predictable, the excitement is lost.  While investing with a system may be boring, it can also be immensely profitable when applied with regularity.

If you want to become an accomplished investor, it behooves you to understand that emotion should NOT be part of your approach.  Making money through investing is an intellectual pursuit, not an emotional pursuit.

One of the challenges I occasionally face with investment coaching clients is that they have a subtle “adrenaline addiction” and they’re always seeking excitement.  Well that’s fine, but it’s in your best interest not to be seeking excitement when it comes to your finances. 

Investing – when done correctly – should be boring.

Learn to keep yourself in check.  Once you start getting excited, it’s time to step away for a moment.  Your emotions are surfacing and you risk negating your intellect.  Take a break and remove the emotion so you can regain your composure and your competitive edge.

Investing novices often find themselves chasing news headlines and acting on “tips” from financial pundits that are on TV.  They jump in and out of stocks or other asset classes hoping to capitalize on some big move. 

It’s been my experience that you don’t accumulate sustainable wealth by chasing news headlines and rallies.  Rather, you accumulate sustainable wealth by having a solid investment game plan and sticking to it.  That’s the approach that’s worked for me, and that’s the approach that’s worked for a lot of the successful investors I’ve studied over the years.  These folks are not thrill-seekers when it comes to their finances; they’re very methodical and consistent.   

PRICE CHARTS:  VISUAL DEPICTIONS OF HUMAN EMOTION

Have a look at this chart.  Not very boring, huh?  Can you see the emotion?  Buyers were stepping in and just bidding the stock price higher and higher even though the fundamentals of the underlying business didn’t justify its excessive valuation (at the time).  That’s when you know there’s trouble brewing.  And check out the violent exit once the panic set in.  This is NOT sensible investing.  What you’re witnessing here is a herd mentality where people bought into the hype and excitement and didn’t want to miss out on “easy money”.  This was pure momentum and physics in action.  Well, history has shown us repeatedly that those that buy late into an irrational rally end up paying dearly once logic and reason re-emerge.  All of the dramatic activity and price fluctuations you see in this chart was driven by extreme emotion, not common sense.

By the way, any guesses on what this chart represents?  This was the stock of Netflix (ticker: NFLX) in late 2011.  Its price went from the mid-60s, all the way up to 297, and then back down to the 60s all within the span of less than two years.  Talk about a roller coaster!

These patterns are predictable and they’re seen repeatedly in various price charts.  Market tops tend to come after markets rally long enough to get everyone optimistic and euphoric again. Then, once the folks on the sidelines that sat out the rally in disbelief finally become the last buyers to deploy capital because they’re in fear of “missing out” on any more gains, that’s when the wind usually changes.  Buying pressure starts to decline, the sellers are fearful of losing their profits, and they begin selling their positions.  The late buyers don’t want to be wrong, so they sit back and stomach the precipitous plunge hoping they’ll be right and the price will turn back up.  At a certain point, panic overtakes the market and a flurry of sell orders overpower any remaining buyers, which drives down the asset price even further.  It’s all emotion… and that’s the problem.  To me, that’s NOT investing; that’s gambling.

What often occurs in scenarios like this is after the asset price collapses, that’s when the “smart money” enters back in and acquires portfolio holdings at a fraction of their true value. They have a system – a boring, proven, reliable system – that’s incredibly effective at generating favorable, long-term investment profits.

Investing is a game of skill and intellect, not luck and emotion.  I’ll say it again:  investing should be boring because you follow a system.  It’s a calculated, strategic approach to making money with money.  Doing it well means being able to disregard the biochemical storm that’s raging between your ears (emotion) and simply following a proven plan.

Personally, I don’t really worry if the markets move higher or lower on a day-to-day basis. If they move higher, the positions and holdings I have will continue to provide investment income.  And if they move lower, the positions and holdings I have will continue to provide investment income (and possibly give me an opportunity to accumulate more).  In reviewing my portfolio activity over the years, it’s evident that I’ll typically only exit a position or jettison a holding if the fundamentals change.  Other than that, I’m happy to sit back and collect the cash flow provided by the productive assets that I own.  The approach is simple, boring, and immensely effective.

Hype, greed, fear, panic… irrational exuberance.  As an investor, these are your enemies.  Your mind has the potential to be the greatest soap opera scriptwriter in history.  Don’t let your emotions impact your investing.  Remember:  good investing should be boring, and that’s what makes it so lucrative.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

In the world of business and investing, when a simple change evolves from a temporary detour into a sustainable new direction that’s backed by fundamentals, a new trend emerges.  And when a new trend alters a familiar course or practice, the change can be very disruptive.  Entire industries can be impacted, cultural ideals are often reformed, and massive transfers of wealth can occur.  “Paradigm shift” was a popular buzzword in the late 1990s that described trend changes of this magnitude.

Here are some legitimate trends that have occurred within the last few decades that are supported by current consumer buying habits:

Consider this:  what if someone tried to sell you a pager today?  It’s an absurd thought, right?  Totally comical.  Imagine walking into the mall this week and there’s some dude sitting at a kiosk with a couple dozen pagers on display in a glass case.  You’d probably shake your head and smirk as you walk by.

Well, back in 1993, that dude was sitting pretty.  Business was good if you were in the pager business.  But today, not so much.  What happened?  The trend changed in a big way.  Consumers started redirecting their purchases to a new mobile communication device called a cell phone.  Can you think of a single person over the age of 15 that doesn’t own a cell phone or smart phone today?  Pretty amazing stuff.

Yes, change used to be slower and more forgiving.  But today, things are moving so fast that if you aren’t adapting to new trends quickly, you risk being rendered obsolete.  The post office is learning this lesson the hard way…

THE EFFECTS OF A CHANGING TREND

A recent press release about the United States Postal Service (USPS) highlighted the dramatic effects of changing trends.  With the advent and increasing prevalence of email over the last few decades, the USPS has been experiencing a precipitous decline in postal mailing volume.  At the point of writing this now, they’re losing money at the rate of $10 billion per year (ouch!).  A cash burn rate like that is unsustainable; they’re hemorrhaging money every month.

Truth be told, I pay nearly all of my bills online.  If I need to contact someone, I send an email, reach out to them through social media, send a text message, or I simply call them.  Unless it’s a special occasion or a business transaction, I’m probably not going to mail you a letter.  So, when you’ve got billions of dollars in unfunded liabilities in the form of pension obligations, massive fixed costs, and a declining source of revenue, that’s a challenging operating environment even for the most savvy business team.  The USPS has an uphill battle to fight.

A CONSTANT STRUGGLE FOR TECH

This is a constant struggle for companies in the technology sector – they have to perpetually adapt to the trend and innovate, or they risk obsolescence.  Agility and nimbleness are difficult traits for large companies to adopt.  Blackberry didn’t adapt quickly enough to changes in the cell phone space, and it ended up losing market share to Apple and Samsung.  Media companies like Yellow Pages didn’t adapt quickly enough to the Internet as an emerging advertising medium, and they got hammered.  Honestly, when was the last time you opened up a Yellow Pages?  I know of several large companies that have elected to stop advertising in phone directories entirely.

Do you remember Tower Records?  What about Blockbuster Video?  Netscape?  Circuit City?  Borders?  Trends are a moving target, and when you couple that with a constantly evolving technology landscape and a fad-chasing consumer, companies are facing a daunting task.

INVESTORS ARE POISED TO BENEFIT

As independent investors, we have a tremendous amount of autonomy and flexibility in our approach.   As trends emerge and evolve, we can simple rotate in and out of them, while prudently limiting our downside risk.

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Additionally, some industries and investments have less exposure to trends and are thus more stable in nature.  For example, housing is a basic human need in a civilized society.  I’d also put water, electricity, food, energy, and other essential services into that category.  These industries will occasionally face the need for adaptation, but will rarely face the risk of obsolescence.  And for that reason, essential services have historically been a good place for investment capital.

Now, if you’re going to invest in sectors and companies that have more exposure to consumer trends, then you need to apply the appropriate strategies in order to protect yourself.  For more information on how to do this properly so you can guard your money while still earning ample returns, check out Chapter 11 of
The Pay Me Plan home study course – the entire chapter is dedicated to minimizing your investment risk.

Trends can and will change, folks.  And certain fields like technology, entertainment, and fashion feel the winds of change more than others.  Nevertheless, with change comes opportunity for those that can adapt and embrace it.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

Eventually we started chatting about why we were on a flight.  He told me that he was heading out to a friend’s wedding, and I explained that I had just spent a few days in the Midwest visiting some of my rental properties.   That captured his interest, and he asked if I was planning to invest in Las Vegas since it’s pretty close to California.

My answer was simply “nope.”  I got a perplexed look back from across the aisle.

“Why not?” he inquired.  “You know, the housing market is really recovering out there.”

The conversation continued for a good 25 minutes, so I’ll give you the condensed version…

Yes, I’m in agreement that the housing market may be recovering in Las Vegas.  However, keep in mind that my investment approach – and the approach that I recommend to my members and clients – is centered around the creation of investment income, not relying on price appreciation (capital gains).  My plan is rarely to buy a property for a low price and then turn around and sell it for a higher price within a short timeline (flipping); that doesn’t fit my model.  My plan is to buy a property, collect rental income, and capitalize on the tax benefits afforded to us as investors.

First and foremost, the reason I’m not currently investing in Las Vegas is because of the market fundamentals in that metropolitan area.  The economy is heavily dependent on a single source: the casino industry.  And the casino industry itself is very economically sensitive due to its reliance on consumer sentiment and discretionary income.  Do you remember what happened in Las Vegas when the economy initially crashed in 2008?  Unemployment levels spiked, home prices collapsed, and local businesses got slammed.  Yes, that was the case with many areas around the country, but Las Vegas got hit extra hard.  The casinos had only a handful of visitors trickling in, which sent shock waves reverberating through the entire Las Vegas market.  Nearly everyone in the area felt it.

THE MOST DANGEROUS NUMBER IN BUSINESS

In my years of study and research as an investor, I’ve come to realize that “ONE” is the most dangerous number in business.  Whether we’re talking about ONE customer, ONE supplier, or ONE product line, there’s a tremendous amount of risk if you’ve got ONE of anything because you’re completely dependent on that single source.  And in the case of Las Vegas, when so much of your economy is predicated on ONE industry – and an industry that’s economically volatile at that – the risk profile of the investment becomes tremendously elevated.

Let’s contrast the Las Vegas economy to another metropolitan area in the same general part of the country – Phoenix, Arizona.  Phoenix has a pretty diverse economy with a growing population and solid employment.  They’ve got major sports franchises, technology companies, aerospace facilities, call centers, resorts, distribution warehouses, colleges, and much more, all feeding their local economy.  That’s the kind of diversity we like to see as investors.  Yes, Phoenix also took a hit during the Great Recession, but it doesn’t negate the fact that its economy is much more diversified and robust.

Now, I’m not saying that investors can’t make money in Las Vegas by acquiring rental properties.  As a matter of fact, I know of several people that have done pretty well for themselves investing in Las Vegas.  And to be perfectly honest, Las Vegas is an ideal destination for some fun and excitement.  There’s tons of cool stuff to do.  But in my opinion, there are other real estate markets around the country that offer better prospects for investors.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

Habits are a fascinating human construct.  You weren’t born with any habits, but you’ve managed to acquire them over the course of your life.  We develop them as a result of our consistent thoughts and actions.  The more we practice something, the more it becomes engrained in our minds until eventually a habit is formed.  The psychological consensus is that it takes the average human roughly 21 days to form a habit of medium complexity.

FINANCIAL HABITS

I’d propose to you that by developing prudent and effective financial habits, you will become the kind of person who inevitably and relentlessly moves toward the achievement of your long-term monetary goals.  Why?  Because habits have very predictable consequences.

“We first make our habits, and then our habits make us” –John Dryden

Good financial habits are hard to form, but are easy to live with.  Bad financial habits on the other hand, are easy to form, but are hard to live with.  And with habits being such a dominate force in our lives, it behooves us to develop productive, empowering, financially-affirming habits.  Wouldn’t you agree?

Here are some examples of good financial habits that you can easily integrate into your life:

1)  Consistently saving and investing 10%+ of your income

2)  Minimizing or eliminating consumer debt

3)  Accumulating productive assets

4)  Ongoing and continual financial education

5)  Maintain a strong credit rating by honoring your obligations

These are just five examples; there are many more.  For me personally, I made it a point to develop a specific habit that has served me very well over the years, and I’d like to share it with you.  It’s a habit that I credit with accelerating my financial results at a relatively young age.  It’s the habit of doing something every day to move me toward my financial goals.

One of my financial habits: regularly attending financial seminars and conferences.

DELAYED RESPONSES AND OUTCOMES

Now, here’s where it gets a little tricky.  The results of our habits often have a delayed response and outcome; they don’t emerge overnight.  To use a non-financial example, drinking a single glass of wine won’t turn you into an alcoholic in one evening, which is a good thing.  However, if you’re sucking down a couple bottles of scotch every afternoon, that habit may have some serious consequences in the months and years to follow.  There’s a delayed response and outcome.  The same can be said regarding diet.  Eating pizza for dinner and skipping the gym for a day won’t do too much damage, but if that becomes your daily routine, a potentially harmful habit is formed and the results are cumulative.

Keep in mind that this concept of delayed responses and outcomes doesn’t just apply in the negative sense.  Good habits don’t yield immediate results either.  You can’t invest $500 and expect a massive, instantaneous, financial windfall; that’s unrealistic.  However, if you invest $500 monthly into an economically sound investment that produces monthly cash flow, you may not see immense results overnight, but you’ve certainly set yourself up to reap the benefits of your investing activities down the road.

I’m of the opinion that if you practice good financial habits over an extended period, it’s only a matter of time before you start to manifest results.  Investing is neutral; it doesn’t favor one person over another.  Consistent actions form habits and habits ultimately form futures.  Why don’t you take a few minutes to outline some good financial habits that you can start implementing in your life?

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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This post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.