“The salary really isn’t that important to me.”  I replied.  ”I’m mostly just interested in seeing if this is a job I’ll enjoy and look forward to.  I’m sure the salary will be acceptable.”

The previously stoic and confident man looked puzzled.  I waited for a moment, and then realized I’d confused him.  I decided it would be best to explain myself a little more.  I assumed he doesn’t read Brave New Life.

“Let me elaborate.  When I started as an engineer, I made $50K/year while working 70-80 hours a week.  And I was very happy.  I loved learning on the job, debugging complex issues, and being challenged everyday.  I took pride in my work, and looked forward to coming in to the lab every morning.  11 years later, I chose to leave the company despite making over $150K/year.  I was generally working 40 hours/week or less, but wasn’t happy at all.  I left because I no longer enjoyed the work.  In hindsight, I realize now that I hated the job.”

“And so I concluded that the quality of the work outweighs the salary for me.  I realize this might be either incredibly stupid or incredibly clever to say to a hiring manager like you, but I think honesty is best.”

His response surprised me, although maybe it shouldn’t have.  He responded, “I understand what you’re saying, but you need to consider other things as well.  You may find the work rewarding and exciting, and to you that may be sufficient and I respect that. But you also have to consider your family.  You may come to work and that’s you’re reward, but you’re family doesn’t get that reward.”

So, basically, my wife’s job is to take care of the kids and mine is to bring home the bacon.  Welcome to the 1950′s, have you met my wife June Cleaver?

He didn’t say it explicitly, but he was clearly implying that my family’s reward for my work is the money I bring home.  It was interesting to hear a response that could be so insightful on one level, and so flawed on another. It was insightful in that he was thinking about more than just me.  He considered the fact that the choices I make affect my family, and that it would be selfish of me to only consider myself and my own happiness.  I couldn’t agree more.

The Flaw

But while his advice might be noble, he failed to consider what is important to me and my family specifically.  Or more importantly, that not everyone thinks the same.  He jumped to the conclusion that the most important aspect of the job, from my wife’s perspective, would be how much money I bring home.  Normally I’d simply accept the fact that he didn’t consider these things, except for the fact that he chose to dive into my family (a big no-no, by the way, in a corporate interview…).  His assumption is probably a safe assumption for the vast majority of situations, but not in my case.  Instead – If he wanted to consider the impacts and benefits of work for my family, he should have asked the following series of questions:

• How do you feel about traveling to California a few times a year, and the possibility of spending 1-2 weeks in Taiwan each year?  I know that can be rough on your family to be gone for an extended length.

• How do you feel about late night calls with Asia?  It might mean missing dinner with your family a few times a week, or not being able to help bathe your kids and put them to bed.

• Is this a job that will get you out of bed in the morning?  I know how difficult it can be on family life when you’re unsatisfied with your work, and come home tired and disgruntled.

• Are you interested in flexible hours, and the ability to work from home?  As long as you get the job done, I’m fine with that.  And I know it helps when your kids have school functions, or maybe your wife just needs a nap.

• Oh – how about salary?  What were you hoping to make?

Fortunately, my family values me for more than just the money I can provide.  I think that’s true in most families, whether everyone realizes it or not.

I suppose I can’t quite claim that now, since I sorta kinda never got around to doing a report in February.  That’s probably not the smartest decision, considering the LC links are really the only place I make any money on this blog – and even that amount isn’t much.  Luckily, here at BNL we don’t follow the silly old-fashioned idea that we let income (or potential income) drive our decision making on how we spend our time.  I wasn’t motivated to write a report in February and so I didn’t.  This morning I woke up motivated, and so now I’m writing.

Wouldn’t it be nice if we all lived by that philosophy?

I’ve now been investing with Lending Club for about 21 months.  I started with a $10,000 investment, and my portfolio is up to $12,143.  Using the Lending Club algorithm for calculating Net Annualized Return (NAR), I’m sitting at 12.59%.  If you recall from my last update in November, this is down from 14.15% at that time.  So it’s down about 1.5%, but I knew that was coming since I had one note that was already defaulted but not charged off, and quite a few that were late by more than 30 days.

Here’s a snapshot from my Lending Club dashboard today:

12.5% return is great, right about where I wanted to be, and well above my bare minimum goal of 10%.  At 21 months into this experiment, I’m getting more and more confident that a double digit return is an achievable long term goal.

But before we break out the confetti and hire any marching bands, I wanted to do a little more analysis of my current returns and loan status.  The best way I’ve found to do this is through Nickel Steamroller’s powerful  Portfolio Analyzer tool to figure out my estimated future ROI.  I loaded my portfolio into the tool, and it spat out these results:

• Average Age: 374 days
• Estimated ROI: 11.5%

So Nickel Steamroller is forecasting an additional drop of 1%, based on my 13 notes that are over 30 days late.  I think this is reasonable, and the return would still be acceptable.

Strategic Change

Many people have noted that finding loans through my Lendstats filter is getting more difficult.  I agree.  I dug into this a bit, and I learned that Lendstats was updating their database of notes only once a day, in the morning.  I exchanged some emails with the site owner, and he indicated that he wasn’t as active with Lending Club anymore.  Not to get presumptuous, but I didn’t want my income generating ability to be dependent on a tool that wasn’t actively managed by someone motivated to stay in the game. I know it takes a lot of work to run good sites like Lendstats, and if the return in value isn’t high enough (financial, or otherwise) then people lose interest.  Not saying that’s necessarily happening with Lendstats, only that I don’t want to wait around to find out.

So I began looking at other filters out there and found a few good ones.  Nickel Steamroller has a nice one, as does P2P-Picks and Peercube. But before I chose a new tool, I decided to look at the embedded filter on the Lending Club site itself.  I’m glad I did, because I found the filter to be greatly improved compared to when I initially looked at it 21 months ago.  Most of the same filters I used for my initial strategy are now in their embedded filter. As they should be…

I like the idea of having everything all in one place.  It has a few advantages.  First, it’s always sync’d with the latest available loans, so you won’t go clicking on a bunch of loans that are already 100% funded.  Second, there should be no issues if/when Lending Club changes their file format.  All the 3rd party tools import a .csv file, so if fields in their database are added or removed, then the tools tend to break (this happened to Lendstats earlier this year).

So, in the end, I’ve decided to use the Lending Club’s filter.  The parameters I’m using are very similar to the initial strategy.  Specifically:

• Delinquencies (2 yrs): 0-3
• Max Loan Amount: $35K
• Location: All, except California
• Max Debt/Income Ratio: 25%
• Home Ownership: Own, mortgage
• Exclude loans already invested in (nice feature no other tools currently have)
• Interest Rate: D, E, F, and G
• Minimum length of employment: 4 years
• Loan Purpose: Refinancing credit cards, debt consolidation, home improvement, wedding expenses, moving expenses, home down payment

This filter can then be saved in your LC account, so it’s as easy as logging in and opening your filter. This morning there are 6 loans that meet my criteria, so it takes about 5 total mouse clicks from beginning to end to reinvest $150 at $25/note.  Easy peasy.

Side Note

About 9 months ago I also started investing with Prosper.com.  So far, the results have been great.  I’m averaging over 17%, and have already cashed out $1200 while keeping my overall investment principle at $15K.  There are also some really nice features with Prosper.com that Lending Club doesn’t have, and when I have some more time I’ll write a more thorough review.  I’m not claiming that I’ll maintain 17% at Prosper, but my goal is once again to achieve better than 10% like with Lending Club.

Final Thoughts

I know a lot of people are using my original filter, but I rarely here anyone’s results.  If you’re invested using my filters and you don’t mind sharing, I’m sure everyone would love to hear your results of ROI and time invested.  So please feel free and encouraged to leave your results in the comments. Happy investing, ya’ll.

If you’d like to invest in Lending Club yourself, click below.

A few items for full disclosure:

1. If you sign up for LendingClub.com from this site, I get $25.  This isn’t why I write these updates (I would write the same article regardless of this income), but I want to be open about it.  If you’re one of the people that signed up after reading my results, I’d love to hear how you’re doing!

2. While my personal results have been very good so far, there is still significant risk in this investment – as with any investment.  Keep in mind that my $10K initial investment is still only 1% of my overall investment portfolio, so this is still a relatively small personal investment.  

My kids have a board game appropriately titled “The Ladybug Game.” Like most games for kids 3 and up, the concept of the game simply consists of moving across the board from Start to Home.

The game consists of picking a card off a stack, and moving forward (or backwards) the number of spaces on the card. There are a few obstacles during the course like losing a turn, and running into a praying mantis(!).

As you progress across the board, you slowly collect aphids. The final obstacle, just before the end of the game, is a group of ants that require you to give them 10 aphids in order to pass by. If you don’t have enough, you have to take a detour and collect more aphids before coming back.

I’ve played the game dozens of time, but this morning was a new experience for me. It started when my 5-year old son successfully gathered 10 aphids. Soon after, and before he reached the group of ants, he landed on a space to get 3 more aphids. The inventory of aphid tokens was next to me, and opposite of the board to him. He asked me to hand him the 3 aphids owed to him.

“Micah,” I said, “you don’t need any more aphids. You already have 10, that’s enough to give to the ants and finish the game.” He didn’t understand. “Once you have 10 aphids, you don’t need any more. That’s all the aphids you’ll ever need. The rest are completely unnecessary.” He still wasn’t satisfied. At this point in the morning I wasn’t trying to teach any life lessons, and so I relinquished and gave him his aphids. Clearly, his 5-year old mind wasn’t quite ready to learn about marginal utility.

A few minutes later, after my son had already made it past the ants and no longer had the need for aphids, my 3-year old daughter ran over and took one of my son’s excess aphids. To this, he lost his temper and ran after her to get his aphid back. She ran up the stairs, and I grabbed hold of him before he chased after her.

Laughing, I asked him why he needed the aphid. He replied, “because it’s mine.” He struggled to get free, but eventually gave up. As he sulked and walked back to his space on the floor, he grabbed an aphid from the inventory box, and instantly he felt satisfied. Or, I should say, his ego felt satisfied.

Hopefully by this point, the parallels of The Ladybug Game and life are reasonably obvious. The Start is birth, Home is death, and the journey between is life. The obstacles along the path are the obstacles of life that slow you down or speed you up, and Aphids represent money. Once you have enough Aphids to get through the journey (life) there is no reason to collect more.

Well, there’s one reason: ego. The ego is fearful, and this fear drives greed. Greed for money, power, fame, attention, food, drink, attention, sex, love, and respect. But the ego can never be satisfied. The ego always wants bigger, faster, stronger. More!

I’ll forgive my son for letting his ego drive his actions, particularly since the ego is a good survival mechanism for a small child (as it was for our primitive ancestors).

In real life, and as we exit adolescence and enter adulthood – it’s important to realize and respect the fact that the ego will never be satisfied. It can only be ignored. To ignore it, you simply must recognize it’s existence. This is called Awareness.

Now, I’m not a buddhist monk (who often give up their worldly possessions) or Jesus (who famously said “No one can server two masters… You can not serve both God and money”). But as I become more aware, I’ve come to understand what they understood so long ago.

It’s not enough to say “money can’t buy happiness.” Of course that’s true, but there’s more to it. The desire for more money will absolutely buy unhappiness.

For me, I have enough aphids. I’m done stockpiling them. I’ll continue to look to create and improve my income from the existing stockpile (income investing). Of course, this is still letting my ego hold power in my decision making, but it’s at least putting a limit to the power I give my ego over me.

Realizing you have enough aphids is amazing. It removes the fear that drives the ego, which in turn removes at least one source of one’s unhappiness.

So I’ll ask you, do you already have enough aphids? Or, have you at least defined what is “enough?”

But let’s face it… Pulling off early retirement in your 30′s while living on the grid and living a semi-normal life isn’t an easy path.  Particularly, not everyone can make enough income in 10-15 years to save up several hundred thousand dollars of investment capital, ultimately creating passive income that can sustain a family’s living expenses.

In my case, after paying off my home mortgage, my family and I are spending about $2300/month.  This works out to $27,600 per year in required income. Using the 4% rule, an investor must save up $690,000 in taxable savings in order to retire from that.  If you’re making $100K/year and living a simple life, it won’t take long to save up sufficient funds.  But if you’re making $40K/year and spending the same $27,600, saving up $690K will take several decades.  I regularly receive emails from readers in this predicament, and so I have one thing to say:

Hope is not lost.

Nano-Businesses

According to the always-reliable definition on Wikipedia, a micro-business is a small business with 5 or less employees, and starting with capital of $35K or less.

I like running small businesses.  I enjoy the challenge of transforming nothing into something, the thrill of learning new skills, and the personal test to stretch beyond my comfort zone.  At the same time, I usually don’t want to commit to investing anything close to $35K for a business, nor do I have any desire to hire and manage so many employees.  This is why I’ve coined the term “nano-business” to describe the businesses I’ve started, and continue to run.

Nano-business (noun) – A business made up of 1-3 people, with less than $1,000 initial capital, that targets cash on cash returns, and does not necessarily target long-term capital growth.

Nano-businesses are great for so many reasons.  They can be started on a shoe-string budget, they require as much or as little time commitment as you want (ie. you can still work a full-time job, spend time with your kids, etc.), they can be scaled bigger or abandoned with ease, and the potential monetary loss is minimized because of the low investment required to start the business. And, best of all, a nano-business is a great tool that can bridge the financial gap for someone trying to retire early, but lacking the monetary savings to support their dream.

But before I get into all the benefits of a nano-business, I’ll share some history on how I got involved with my first nano-business…

A Little Backstory

About 5 years ago, my mom was making some insignificant side income selling wholesale jewelry on eBay.  She’d only bought about $1000 worth of jewelry, doubled the prices, and listed the products on eBay.  Seeing her moderate success, I got excited and offered to build her a website so that she could also sell directly to customers (avoiding eBay’s high commission charges and increasing her growth potential).  Being on a shoe-string budget and generally internet-illiterate, my mom was reluctant.  But I showed her how low the monthly payments were to host a site ($7/month at Bluehost), and how cheap it was to buy her very own domain name (first one is free with Bluehost for the first year).  I offered to set up the website, help her mass-import her inventory, set up Paypal, and even do a little search engine optimization.

Eventually she agreed to try it out, so I got the website set up and she immediately started contacting her eBay customers and letting them know about her new site.  A few orders came in.  I was off work for the Christmas holiday, so I spent about 2 weeks improving her site – and soon we started seeing some new customers coming in via Google searches.  I wasn’t making a dime, but we were we both excited at our initial success!

Fast forward a few years, and business was rolling.  My mom was selling about $5K/month at ~50% margins, and very low operational expenses.  Her inventory and customer base continued to grow.  I was doing almost no work (which was fair, since I also wasn’t being paid), but I did enjoy what minimal work I was doing.  Soon after this, my mom, my wife, and I got together and decided we’d start a new website, and this time we’d be partners offering a wider array of products.

So I got busy setting up a new website, a cleaner one that was better optimized for usability. My mom and my wife began looking at new products we could sell, and I’d do the keyword analysis on the products to see whether I thought I could sell the products successfully online.  It was an exciting time, and adrenaline was pumping through our collective veins.

A year later, we were up to about $4000/month in sales on the new site. After paying operating expenses, we were collecting a 40% profit.  Splitting it 3 ways, that meant that my wife and I were making an average of about $1070/month.  We were making good side-income with very little work, and we were having fun doing it.

Nano-businesses: A Breakdown of the Benefits

Here’s a breakdown of some of the benefits of a nano-business based on my own experiences over the past 5 years.

Minimal Investment

There’s an old saying, “You have to spend money to make money.”  That’s all well and good, but for many frugal people (like me), it’s a hard concept to digest.  I realize I could grow a business faster and increase profits by spending more money, but with a nano-business that’s simply not necessary.  A website, for example, can be purchased for just a few dollars per year – and can be hosted on a reliable server for just a few dollars a month.  There are tons of free open-source options to host a website, blog, or e-commerce store that are absolutely free – other than your time to learn the software.  From there, the only costs are inventory (if you’re selling something), advertising (if you can’t or won’t do it yourself), and outsourcing work (again, if you can’t or won’t do it yourself).

Flexible Time Commitment

The time commitment for a nano-business is up to the owner.  The owner can work relentlessly in the beginning to get it started, or he can take his time and grow slowly.  He can work hard during weeks where he’s motivated and has free time, or he can take time off to relax.  Are you running an international e-commerce store, but only want to answer your cell phone between 9-5?  Fine, then say that on your website and have them leave a message.  You might lose a sale, but that’s OK.  You work for yourself.  Running a small lawn-service business but only want to work on the weekends?  That’s fine too – you’ll limit your growth and profit, but it’s your business and your decision.

Easy Scalability

A nano-business can be scaled larger in two ways.  Of course, you can grow your business the old-fashioned way through hard work over time, advertising, networking, product expansion, and other traditional means.  Or, with a nano-businesses, you can easily just start a second business.  For example, while I’m running an online store that profits $500/month and only working a few hours a week, there’s no reason I can’t start a second one with the goal of achieving another $500/month.  This may double my time spent working, but also double my profits.  But as a nano-business owner, I get to decide if/when I scale, and what I work on when I do it.

Minimal Risk

Because of the low initial investment, my risk of failure is also reduced.  As a personal example, I have had many nano-businesses fail.  Usually because I lost my passion to do that particular work, but not always.  However, because I only invested a small amount (less than $1000), failing was a perfectly good option.  There was no reason for me to continue doing the work that I was not passionate about, when I had almost nothing to lose.  On the other hand, and speaking from personal experience, I have lived in misery for years on a business I bought for $7000 that failed miserably (This was not within my definition of a nano-business).  I couldn’t let it go, because it seemed like such a waste to lose my $7000 investment.  When I finally gave it up (sold it for $800), it was a huge weight off my shoulders.

Bridging The Early Retirement Financial Gap

Returning to the original point of this article, let’s explore how nano-businesses can help enable an early retirement.  Saving up $600K or more isn’t easy, and for some it could easily be viewed as completely unrealistic.  That’s OK – there’s another way to “retire” early.  It may not be “retirement” by whatever strict definition you choose, but it certainly can help you get out of a job you no longer enjoy, while still reducing any risks of financial bankruptcy.

Let’s assume some basic numbers, and please forgive the over-simplification for the sake of this argument.  We have a 40 year old employee (let’s name her Ophelia), who has been making $50K/year since she was 22 years old.  She has a family now, but for the sake of simplification let’s assume she’s always spent $27,600/year, and will continue to do so.  Let’s also assume that our friend has never invested her savings in anything, instead she’s kept all of her money in cash.

So Ophelia has been saving $22,400/year for 18 years, creating a nest egg of $403,200.  This is well short of the $690,000 needed in savings to retire, based on the 4% rule.  In fact, with $403,200 saved up, Ophelia is only pulling in $16,128/year in passive income, a full $11,472 less than she needs.   This puts her in a deficit that runs $956/month.  This is not a good way to start an early retirement, so the easy answer is that she needs to continue to work for another decade or so.

But we don’t like the easy answers here, and neither does Ophelia.  In fact, Ophelia chooses to reject the conventional view that she is $290K short of her savings goal, therefore she must continue to invest $22K/year for the next 13 years (at which point she will be 53 years old).  Instead, Ophelia breaks down her deficit into a monthly problem.  She is just $956 short each month, and making $956/month is not insurmountable.  In fact, she already has some ideas for businesses.

You see, Ophelia likes making crafts at home to decorate her house and to give as gifts.  So the next time she’s making a gift for a friend, she decides to take a picture of it and put it on Etsy.  The cost of materials was $25 and took an hour to make, so she marks the price up to $50 and posts it to Etsy.com.  There was no cost to posting the product, and since she was giving away the original product as a gift to a friend, she decided that she’d only make another one if an order came in.  Sure enough, a few orders came in.  After a few months of this, Ophelia realized that her sales were good enough that she could buy the materials at a discount by buying in bulk online.  And so she drove the cost of goods to $15, now profiting $35 on each sale.  She was averaging 3 sales per week, or about $400/month while working only 12 hours from home doing something she enjoyed.

For someone making $50K/year, $400/month doesn’t seem all that significant.  But Ophelia didn’t view it like that.  Instead, she saw $400/month as a huge dent in her $956/month deficit once she retires.  Now her deficit was only $556/month.

So Ophelia decides to seek out another business venture.  You see, she’s a computer science major, and has been writing Java for years.  In fact, she’s a bit of an expert.  Her career has been focused on GUI writing for corporate compliance training at a major Fortune 500 company, and the material there is monotonous enough to crush her.  But she never fell out-of-love with programming as a science and art.  So she signs up for a Team Treehouse account to transition her Java experience from her corporate job into writing Android Apps for profit.  She knocks out all that education in 3 months, and begins writing her first app. The downloads start slowly, but soon she’s making $20/day in sales and advertisement clicks on her two best apps.

So now her apps are making $600/month, plus the $400/month from her Etsy crafts.  With just a few months of work up front and a few hours of weekly work from home – she has now overcome her monthly deficit and can safely quit her job.  Better yet, now she can continue to grow her nano-business (or start new ones) now that she has freed up an additional 50 hours per week that she’s not spending in her office cubicle.

Is this really possible?

Yes.  Ophelia’s journey may seem too simple, too easy, and too ideal.  But the examples I used are real.  I’ve personally run an online e-commerce business, an Android app business, and this blog – all for profit.  My wife continues to sell things on Etsy in the same manner that our fictional Ophelia did. In fact, we’ve found it quite easy to make $1000/month while I work full-time and she watches 2 kids full-time, and I see no reason we can’t easily multiple that when I quit.

The opportunities are endless.  Find something you enjoy doing, and think of ways to monetize it.  If you truly enjoy it, and your goals are only to make nano-business type money, then you’ll find a path to make money, as I’ve done.  And, once you’ve retired, nano-businesses are also a great way to fill the other retirement gap.

So I’ve decided to do a Q&A post answering a few of these questions. But before I begin, let me provide my standard legal disclaimer (CYA). I’m not a professional investment adviser,  or professional anything in the financial world. I hold no degrees or certificates in this field, and nothing written below should be taken as direct advice to anyone reading this. To truly advise, so many things need to be taken into account about personal goals, timelines, life priorities, etc. Even with the context some people give me in their questions, it’s only the surface of what I think needs to be considered when giving proper financial advice.

Now that that’s out of the way, let’s get on with the Q&A.

From User199: 

I am working professional in thirties but have no experience in investments. Have saved up around 50k but its all in saving and checking account.  Just the thought of investments– stocks and  bonds makes me uneasy. but i got to start it sometime.

Can you give some investing basics of how i should go about investing this money.

So much needs to be considered when deciding how and when to invest. Having your first $50K saved up is a great start. The most important part of investing is first stockpiling some capital, as you’ve done. So now let’s ask ourselves a few questions:

What’s your annual budget?

There’s always debate on what’s enough for a “rainy day fund,” but I tend to think 6 months should be a minimum, at least until you have enough capital invested in liquid assets that there’s no reason to keep cash. For example, if I have $500K in stocks and bonds that can be sold in seconds, then why would I want to keep $50K in cash – unless that’s a strategic part of my portfolio? On the other hand, if I was spending $40K/year and had $50K saved up, I’d keep at least $20K in cash for a “rainy day.”

How stable is your job?

No jobs are 100% guaranteed, but some are certainly more reliable than others.  I think it’s important to remember that for the vast majority of people, their ability to earn an income is their biggest asset.  For example, if I have a job where I can reliably make $80K/year – then it becomes easier for me to invest in a higher-risk higher-reward investment. On the other hand, if I work in a field that is always at risk of being outsourced, then it might make more sense to offset the risk of temporary unemployment by having a lower risk investment strategy.

Do you have an investment plan?

If not, you should create one before you begin any investing. Read some books, define your goals, and create a strategy. And remember, your plan can change over time. When I first started investing, I was 100% invested in large cap value stocks. At that time, I had a great income with no wife or kids – so short-term volatility was not a concern. Eventually, I wanted more stability and so I went with a pseudo Permanent Portfolio strategy. Now, as I’ve gotten closer to my planned early retirement, I’ve switched to a mixed portfolio of various income-generating investments.

What’s your timeline?

The reader mentioned having $50K saved up.  If it were me and my goal was to buy a house in a year with the $50K as a down payment, then cash might be the best option. Sure, stocks may rise, but a drop in stocks would destroy the plan to buy the house.  On the other end of the spectrum, if I was planing to save that $50K  for retirement in 30 years, keeping that money in cash would be eaten up by inflation over that timeframe – so I would want to invest the capital in something that gives me returns above the rate of inflation over the long haul.

From email:

If you ever get around to doing a more in-depth post regarding dividend investing, I have a question for you. What is your take on owning a large slew of dividend stocks such as those on the “dividend achievers” list or just owning something like the Vanguard Dividend Appreciation EFT VIG?

Personally, I go back and forth on this, but I lean more and more toward just owning the ETF.  It may yield less than some dividend stocks, but it lets me be “lazy” with my investments, which is a big plus for me since I’d rather spend time either on my mountain bike or with my daughter vs researching stocks. Interested in your thoughts…

You touched upon a few good points in your question. In my opinion, it comes down to several considerations.

First, can I beat the market? Without going into the complex discussion of the efficient market hypothesis, I’ll just say that I do believe the market is mostly (but not completely) efficient. And by that I mean that over a long period of time, one cannot expect to greatly beat the market. But with that said, one likely won’t fall too far behind the market either.

I don’t think I can beat the market by much, but I do think that given the right strategy and planning, I can beat the market slightly in the long run. As Warren Buffet stated, “Rule #1: Never lose money. Rule #2: Never forget Rule #1.” Of course, we all lose money sometimes. But there are stocks out there that, to me, look like guaranteed losses over the long run. Unfortunately, many ETF’s still own some of those stocks. By picking my own stocks, I can apply the filters I’m comfortable with and, hopefully, avoid some of the “guaranteed losses” aforementioned.  (Admittedly, this could also mean I miss a big winner).

Second, can I get a higher and more consistent income and income growth than the ETF?  VIG is somewhat new, so it lacks a track record that I can study. If you look at it though, it’s yield is not much higher than the S&P, but the income growth has been pretty good.  Unfortunately, it’s also had one negative growth year, which would be bad if living on a fixed income.  I do like the idea of mostly investing in the Dividend Achiever’s list, so that my income goes up every year, regardless of capital growth. (Of course, capital growth is also required for dividend growth, otherwise either the P/E gets impossibly low, or the payout ratio gets dangerously high.)

Third, do I enjoy researching stocks? Like you, I enjoy my mountain bike and time with my daughter. But I also enjoy researching stocks, reading financial reports, studying business models, and reviewing the quality of a company’s management team. Time is limited, but the good news is that generally I only re-balance my portfolio once per year (sometimes twice). And when I do, I generally just review the stocks where something looks amiss. I always document why I bought a stock, and I make sure that the reasons I liked the stock are still true. For example, if I bought a stock because I found it to be a good company with a solid competitive moat, but some short term incident had driven the P/E from a long-term average of 15 all the way down to 9, I write that down. When I review the data annually, if the P/E is now at 16, that’s a pretty big red flag (and hopefully it’s because the price rose, not that earnings are down!)

If the idea of reading an earnings report and a balance sheet makes your head spin, I couldn’t recommend picking individual stocks.

From email:

I’m looking to start saving to buy a house. To do this I need to be able to invest my money properly and get a pretty good return on my investment. Currently I have a financial guy that handles my retirement account but he’s lackluster at being proactive and I dont really feel he’s really on top of his game. I’ve spoken to a few other folks to get other options but when I tell them I want a return of at least 5-8% they always give me the same response of, thats not realistic in this economy blah blah blah. So my question(s) is(are) do you have a firm or company you recommend that I can explore my investing options with or will they all give me the same response at which point I need to do this on my own? I’m super interested in financial investing and the whole industry but it feels so overwhelming, at which my next question would be, what would I need to do to get started learning and immersing myself in all this? Are there any good books or etc that can get me up to speed quickly and give me enough knowledge to start navigating these waters?

Personally, I like managing the money myself rather than paying a money manager.  Not so much because they rarely beat the market long-term, while still charging a fee, but also because they rarely take the time to truly understand your personal goals and priorities (i.e. It’s not always about making the most money).  If you want to learn to invest for yourself, then I can recommend a few books that helped me the most.

- The Intelligent Asset Allocator

- The Little Book That Beats The Market

- Rich Dad, Poor Dad

- The Intelligent Investor

These books range in what they offer with regards to the technical vs. strategic parts of investing, but I found those 4 to affect my investing more than any others.  I’ll also recommend the list of books that MMM recommends. I’ve read almost all of the investing books on his page over the years, and mostly agree with him on that list.

I also recommend to everyone that they should read Warren Buffet’s letters to shareholders.  I’ve literally read every one.

One last thought: the biggest mistake I see in people’s investment strategy is that they don’t define their goal, and treat their investments like a business. The goal shouldn’t be limited to “make as much money as possible.” Everyone should consider their time frame (saving for retirement in 20 years? saving for a house next year? etc), income (dividends) vs. capital gains, volatility (which plays into time frame), and so on…

[Follow Up Email] I’ve heard that financial advisors can get access to certain funds or what not with lower fees that I’ll be able to buy. Should I expect an account with higher fees, but maybe that can be offset with higher returns? Currently I’ve got an ING account for my mutual funds and a scottrade account for some stocks. I try not to buy too many stocks until I’ve got a reasonable amount to offset the trading fees.

Also what are the big things I need to watch out for, learn from now before I do anything too crazy? Maybe these kinds of pitfalls will be covered in the literature you recommended, but maybe there are some things you’ve learned along the way that I need to be aware of before I get into this. I’m a big fan of learning from people who have gone before me, rather than make the mistakes myself, if at all possible.

I’m only making $3.92/hour, less than minimum wage.  There are no perks, no benefits, no pension.  I work 24 hours a day, 7 days a week.  I get no holidays or vacations off.  I’m literally doing my job in my sleep.

Hi, my name is BNL, and I’m an investor.

By now, I’ve now been investing with Lending Club for 15 months.  I started with a $10,000 investment, and my portfolio is up to $11,756.  Using the Lending Club algorithm for calculating Net Annualized Return (NAR), I’m sitting at 14.15%.  If you recall from my last update in August, this is slightly down from 14.32% at that time, but not by much.  Hopefully, this is a sign that my return rate is stabilizing at this high rate or return, although I’ll be the first to admit that this is probably overly optimistic.  Here’s a snapshot from my Lending Club dashboard:

14% return is great, more than I could have hoped for.  Then again, I still think it’s better than we should be hoping for – especially considering that there’s 1 loan in Default, and 13 additional loans that are at least a month late.

When I considered the late loans in my last update, I made some calculations under the extremely negative assumption that all of my late notes would eventually default. What’s interesting is that at that time, I had 9 late loans and 8 loans that were already charged off.  Of those 9 late loans, only 4 of them actually defaulted, which works out to a 45% default rate on my late loans.  This is actually pretty close to Lending Club’s estimate of 47% default rate on loans that are late by 31 days or more.  I like when things work out like they’re supposed to.  :)

Rather than doing similar magical hand waving to estimate my future results, I decided to try out Nickel Steamrollers fancy little Portfolio Analyzer tool to figure out my estimated future ROI (thanks for the pointer, Megan).  I loaded my portfolio into the tool, and it spat out the results:

• Average Age: 280 days
• Weighted Return: 19.33%
• Estimated ROI: 13.34%

Not bad!  I’ll take 13.34% as a long term return… Hell, I’d put my entire portfolio into this if it was guaranteed!

Going Forward

Some people have asked how I plan to manage my portfolio in the future.  Will I just keep reinvesting profits, or will I start taking money out?  The answer is both.  For now, I plan to keep building the portfolio up to $15K by reinvesting my profits.  Once I get to $15K, I’d like to make this investment a legitimate income producing machine by withdrawing excess cash above $15K each month.  If I maintain a 12% NAR or better, then a $15K investment will result in $150/month of income.  Not exactly high rolling, but it’s also a nice little buffer of cash flow for when I quit my full-time job.

Side Note

A few months ago I also started investing with Prosper.com.  Once I have my investments mature a little, I’ll start comparing results with Lending Club.  So far, the results from Prosper are superior to Lending Club – but it’s way too early to call.

A few items for full disclosure:

1. If you sign up for LendingClub.com from this site, I get $25.  This isn’t why I write these updates (I would write the same article regardless of this income), but I want to be open about it.  If you’re one of the people that signed up after reading my results, I’d love to hear about your results!

2. While my personal results have been very good so far, there is still significant risk in this investment – as with any investment.  Keep in mind that my $10K initial investment is still only 1% of my overall investment portfolio, so this is still a relatively small personal investment.  

A well diversified portfolio of stocks and bonds are a great foundation, but a portfolio that solely relies on this strategy has a few flaws:

1. In the short term, the stock market tends to rise and fall together – despite diversifying across many equity types.  2012 has been a great example of this.  Sure, my portfolio is up nearly 20% this year, but so are all diversified stock portfolios.  And next year, if the market is down 20% – mine will be down too.  Investing in dividend growth (DG) stocks is a good hedge against this, since the dividend is less likely to be cut despite drops in capital value, but if you need to (or want to) sell a stock at that time, you’ll potentially end up taking a significant loss.
2. Dividends are great, but when the S&P only pays out 2% on average, the income just isn’t that great.  Even more high-yielding DG stocks are only in the 3-5% range.

I’m not proposing that DG stocks aren’t a good investment (they still make up the heavy majority of my overall diversified portfolio), but I do think they can be supplemented with some larger income generating methods.

Part 1 – My First Rental Property

A few weeks ago, I finally made decided to actively pursue a rental property.  I created a plan to pay cash on a distressed home, fix it up, and rent it out for a high return.

At first, I had visions of doing what I’d read about by MMM and Lacking Ambition – finding a fixer-upper, do most of the work myself, and subsequently build in an immediate large amount of equity in the process.  Then I’d rent out the house at a competitive rate and turn a high profit.

Unfortunately, after about a month of research and consulting with my real estate agent who specialized in foreclosures, I learned that the local market for this type of investing was overly saturated and prices were being driven up by too many fix-n-flippers looking to make a quick buck.  We tried anyways, but his prediction proved to be true.  The only areas open to fix-n-rent are in the lower scale areas of town.  Although I have no fundamental issue with this, the fact is that when you rent a house for $700-800/month you often end up with tenants that can barely making ends meet.  I had no desire to get into the business of evictions…

I explored every price range from $50K-$200K for a property.  I searched every property type from single-family houses, to condo’s, to town houses.  And I walked through houses ranging in age from from 50-year old beaters to 5-year old ready-to-move-in homes.  And after a few weeks, I found the deal I was looking for.

It was a foreclosed single-family residential (SFR) just a few miles from my house. It was in my home’s school district, and was a house and neighborhood I would happily move into myself. The HUD listing price had just dropped from $180K to $162K that day, and so I pounced on it.  I figured the cost to fix it up would be ~10K if I did the work myself, but that the after repair value (ARV) would be at least $200K, and the rental comps showed I could easily charge $1350/month.

I offered $163K the day the price dropped, giving an extra thousand on top of the listing price to ensure I got the property.  The next morning my agent called…  I had been outbid.

Damn.

…

A few days later, my agent called with another house on the east side of town. It was a newer house built in 2007, and was in great condition.  It had recently sold for $190K twice in the past 3 months, but both times the buyer’s financing fell through.  HUD had grown weary of this, so they dropped the price to $172K.

I drove out there that day to view the property, and discovered it was a 4-bedroom, 2.5 bath home in new condition having only been built in 2007 (and sold for $235k).  Again, it was a house I’d happily live in it myself.  Doing a rental comparison of the area, I found I should be able to easily rent the house for $1300/month, and potentially for $1400/month.  The only downside (sort of) was that I wouldn’t get to improve my carpentry skills by fixing anything up, since it was already in near-perfect condition.

Well, that’s not true. There was a second downside: the neighborhood was a heavily controlled HOA area, and the HOA fees came out to be $90/month! Since this would eat into my profit, I decided to take a chance and offer only $162K. My realtor warned that this low-ball bid would potentially cost me the house, but that he’d write it up that night and submit it.

The sales comps on the house showed that the house was worth $195K-$210K as is, so I would be banking an immediate $30-$50K in equity if my price was accepted.

The next morning my realtor and I traded some text messages:

10:21AM (agent):  I’ve been on the phone with HUD all morning.  They aren’t happy, but I think we might get it.

10:24AM (me):  Awesome.  That’s why you make the big bucks.  Make it happen.

11:01AM (agent): I’m good but I didn’t think I was this good.  You’re under contract.  I need $1000 earnest money and your signature on the contract by this afternoon so I can overnight it to them today.

This is one moment that I wished I had a car instead of a bike!   I now had 29 minutes to ride to the bank, get a cashiers check, find a place to hold an 11:30 conference call for work, and be home by noon to watch my daughter.  So I hopped on my bike, rode like mad to the Wells Fargo, and got the cashiers check.  I then scurried over to a Starbucks to get online for my conference call, held the meeting from their outdoor patio, ended it a few minutes early, and raced home just before noon.

My exciting and busy life as a real estate mogul had commenced!

Part 2 – Private Money Lending

During my search for a rental house, and in my past real estate experiments, I’ve learned 2 few things.

1. Success is all about connections
2. Most real estate investors are willing to work hard, but few have the money to scale their business

While driving between houses in my real estate agents Hummer (yes, BNL in a Hummer burning gas at 10mpg), and as he discussed his recent trip to Boston where he and friends rented Ferrari’s and other high-end European cars I’ve never even heard of, I managed to turn the conversation back to real estate investing.  I learned that my agent was also a fix-and-flipper on the side.  Intrigued, I asked how he funded his deals.  Considering he makes over $300K/year in real estate, surely he must pay cash, right?

Sort of.  Much like others in this field, he uses other people’s cash instead of his own.  And he borrows the money from a number of hard money lenders at 2-4 points, and 12-15% interest rate.  I half jokingly laughed and replied that I would gladly beat those terms.

Quick explanation: For those not familiar , “points” basically means that he pays me a percentage of the loan up front.  This helps pay for processing fees, and lost money from having my money inactive between investments.  For example, 2 points on a $100,000 means he pays me $2000 up front.

A few hours later, after a long day of looking at houses, he brought the loan idea back up.  He told me about a deal he has lined up to buy a house for $72K, which needed $20K in work – but that he thought he could sell for $120K within 3 months.  He offered me a 12% interest rate.  I counter offered him with 2 points plus 12% interest – still better than any deal he can get from the big time hard-money lenders in the area.  We had a deal.

And with that, my new career in hard money lending had also begun.

On this particular deal, if he does sell it in 3 months I’d be looking at lending out $92K for a 3 month return of $4600.  That’s a 5% return in 3 months, or roughly a 20% annualized return.  Thinking overly optimistically, if I could repeat this deal 4 times per year, I could nearly pay my family’s entire annual expenses off this $92K.

Of course, there are risks.  But since the money is backed by a first lien on the house, and since I’m only funding 76% ARV, if he did foreclose I’d be buying the house at an extreme discount.

Let me know if the hard money business is interesting to you guys – I’ve been researching it a lot the past few weeks, and would be glad to write a post about the associated risks and risk mitigation that I’ve been learning about.  I’ll also be meeting with an attorney before I sign the contract – so I could use that time (and my money) to ask any questions you all have on it…

Putting It All Together

Once both of these deals close later this month, I’ve made a plan to combine my rental business with my private money lending business.  Here’s how it works:

First, since I’ll be paying cash for the rental property, I can then open a no-fee HELOC on the rental property.  A quick investigation shows I can get that opened at about 4% interest with a 50% loan-to-value. I may be able to do even better once I shop around more. But the beauty of the HELOC is that you only pay the interest when the money is actually loaned out.  As soon as you pay all or a portion of it back, the interest payments are immediately reduced.

With the HELOC opened, I’ll use that to fund any future hard money loans.  The spread between the 4% rate I’ll pay and the 12% I’ll charge will spread of 8%, plus I’ll continue to get 2 points at the beginning of each loan.

I’d like to target 2 hard money loans per year, averaging $100K in value and 4 months in duration.  Of course, I realize some of that is out of my control.

If this can be done, I should be able to turn this single property into a cash flowing machine that can pay nearly all of my family’s annual expenses.

• $10,800 in annual rental profit (after taxes, insurance, HOA fees, and assuming some vacancy time and some repair)
• $9300 in annual hard money income (after paying HELOC interest, assuming 2 deals per year as described above)

Although this may be somewhat optimistic, this would effectively be creating a 12.5% ROI of my $160K investment, all while being backed by hard assets (the rental house I’ll own, and the house with a deed of trust for the hard money loan).

I can’t believe an entire month went by without a single post on this site – especially when I have so much to say.  I just hope your October was as exciting and fun as mine was!

I promise I’ll do my best not to go AWOL for so long again. (And thanks to the people emailing me to make sure I wasn’t dead).

It was a month of long hours at work due to taking on more than I should have (old habits are hard to break), but it was also filled with exciting BNL-style activities like riding my bike a lot, relaxing with my family, reading a lot, and finding some cool new investments.  In fact, I’ve already written a post on the new investments – look for that on Sunday or Monday.

New Theme

If you’re not reading this post in your email or RSS-reader, then I’m sure you’ve noticed the new theme.  My compliments go to WooThemes, and their free theme called “Typebased.”  I‘ve been wanting to change my theme for a year now, but dreading how much work it would take.  But thanks to their free theme, it took less than an hour.  Now I just need to create a fancy new header at the top, since the one up there now is just a screen grab from my old theme.  Talk about lazy…

That’s about all I have to say for now.  Hope you all have a great weekend.

Bonus Tip

Oh, a quick bonus tip of the day for you parents out there: Don’t forget that tomorrow is the first Saturday of the month, and you know what that means, right?  It’s my favorite way to kick off the weekend.