Aug 222016
 

Falling Victim

The pharaohs of ancient Egypt created the first pyramid schemes. 😆 But since then these schemes have evolved to become more elaborate. The most recent example has taken shape in the form of a Gifting Circle, which specifically targets affluent women. According to the Better Business Bureau, a consumer watchdog, the scam works by inviting women to join wine parties and luring them in with the promise of a $40,000 payout if they invest just $5,000 themselves and recruit their friends. Organizers at the party claim to create “abundance and spiritual healing” for anyone who signs up. 😇

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Personally I thought spirituality was about self development and discovering meaning from within. I didn’t realize it could be bought with money, lol. But I am certainly no expert on the subject. 😌

Evan Kelly, an advisor for BBB Mainland B.C., says that since $5,000 is somewhat prohibitive, this scheme tends to go after wealthy women and their circle of friends. “After all, a friend asked you to join. It couldn’t possibly be a scam, right?” Kelly says. But eventually the pyramid collapses under its own weight and members on the bottom lose thousands.

So if you ever get invited to a party that might be held under false pretense then enjoy yourself and drink responsibly. 🙂 But please DO NOT sign up for any programs they want you to join, especially if it involves recruiting more of your friends.

Here are some tips from the Better Business Bureau for avoiding potential scams such as this.

  • Do your own independent research and be skeptical.
  • If there’s no actual product or service being offered, question how it makes money?
  • Be careful of investments that promise low risk and high returns.

So the lesson here is simple: Money can’t always buy brains. However, brains will almost certainly make us more money. 😀 To improve our financial literacy, we can take this online quiz I recently stumbled across. It contains 6 short questions related to personal finance and should help us make better money decisions. Feel free to take the quiz here and see if you can ace it on your first try. 😉 To put things into perspective, the national average score in the U.S. is 3.16. Hmm. That seems kind of low to me.

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Random Useless Fact:

A polar bear’s fur is not white. Each hair is a clear hollow tube. The bear looks white because of the way its hairs reflect the sunlight.

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Jul 212016
 

Proper Portfolio Diversification 

Once upon a time a topiary artist invested all his money in shears and hedge funds. 😆 But he lost all of it because he wasn’t properly diversified. We diversify our assets so if one investment fails miserably it won’t drag down the rest of our portfolio with it. Owning 10 stocks is better than 1. But there comes a point when adding more stocks to a portfolio ceases to make a measurable benefit. Many experts suggest that optimal diversification is achieved when an investor holds 15 to 20 stocks spread across various sectors of the economy. 🙂

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So if our portfolio contains 100 different stocks in 10 different industries then we are properly diversified right? Hold the mayo. I would argue no. Although we have a wide range of stocks and sectors, we really only have one asset class – stocks. Common stocks represent equity in publicly traded companies. But if a business becomes insolvent then its equity could be completely wiped out. This is why we have other asset classes such as bonds, which gives investors some recourse in a liquidation situation.

Okay, so diversification means having a balanced portfolio of index funds with both stocks and bonds right? Well, not quite. The capital markets can be highly volatile and it operates on a system that isn’t always reliable. In 1914 the US stock market shut down for 4 straight months. 😞 More recently in 2001 the NYSE was offline again for several days. This means at any time investors could be locked out of the market without warning. So other than financial assets, we can also invest in hard assets such as real estate, private businesses, gold, or other commodities. Over the past 2 decades Canada has gradually lowered interest rates and loosened borrowing rules, which encouraged consumer borrowing. This made the cost of living more expensive, especially in larger cities. But those who bought homes in Toronto circa 1996 and kept it until now would have seen their home prices rise to keep up with, or even surpass the inflation rate.

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May 232016
 

The Problem with Vertical Structures

I once applied for a job at McDonald’s. But I soon got myself into a pickle when I couldn’t cut the mustard answering some tough interview questions. 😆  I’ve always admired how quickly fast food workers can be promoted to manager if they work hard enough. When most people think about their careers they imagine themselves moving up the ranks, or climbing the ladder, which are both vertical analogies. In today’s corporate world, the idea of a hierarchy is not only a way to organize a company, but it also dictates how people think about relationships, contribution, accountability, and power.

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But in a fast changing economy that requires communication and interdependence across multiple disciplines, locations, and specialties, the top down method of management often isn’t flexible enough to deal with every situation. Instead, a sideways approach that aligns the values of same level workers might provide more value. 🙂

Let’s pretend there is a boat in a lake. If we want to raise the boat higher, we could try to lift it out of the water. But that would take a lot of energy and sooner or later the boat will drop back to its original level. But if we add water to the lake the boat will eventually rise on its own. This is the essence of the horizontal approach to financial success.

A big impressive job title doesn’t trump a good idea. The best value-creating initiative can come from literally anyone in an organization. In fact, the person who most understands the processes, concerns, and responsibilities of a software engineer isn’t his or her manager. It’s other software engineers. 😀 Real influence doesn’t come from controlling others that report to us. It comes from our ability to add value across the field we’re in.

The horizontal approach has seen success in real life situations. Valve Corporation develops video games such as the Counter-Strike and Portal series. It also operates Steam, a popular digital distribution platform with over 125 million active users.

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According to its employee handbook the company has no managers or bosses. The company employs about 300 workers. There are different roles and disciplines within Valve but everyone is treated as equals in terms of their job positions.

Horizontal Approach to Everything

Branching out horizontally to find success can be applied to pretty much anything.

  • One way to become the best point guard on a basketball team is to play other positions. By adding skills horizontally instead of aiming for one specific goal we can develop a better understanding of how the entire game is played.
  • One way to become a good parent and have a healthy relationship with our kids is to be more supportive to our spouse. By helping to lift each other up the family bond will become even stronger.
  • One way to become the best pastry chef is to study a wide variety of other culinary baking skills to gain inspiration and unique ideas. 🍴
  • When it comes to personal development, meditation and positive thinking is important to create a happier and healthier state of mind. But doing these things alone may not be enough. Instead of focusing 100% on spiritual enlightenment, we could also extend our efforts horizontally to other aspects of our well-being such as eating a cleaner diet or getting more exercise. A healthy body will help to create a more fulfilled mind and spirit. 😉

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May 162016
 

The Enemy of Success is Delusion

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Author and public speaker Steve Siebold has helped many people with their careers. His clients include Fortune 500 companies and his books are considered by many to be the gold standard in the field of psychological performance training. One important distinction that Steve notices between the middle class and the wealthy is in how they think.

“The average person believes they are far more competent at what they do for a living than they actually are. Many people believe they are overworked and underpaid, but this is rarely true. In a free market economy we are normally getting paid very close to what we’re worth.” ~Steve

I happen to agree. An employer probably wont pay someone $30/hour if the labor is only worth $20/hour. Workers are replaceable. If a company consistently overpays its employees then it won’t stay in business for very long, assuming all other market conditions being equal. The employee can make the same choice. If a pharmacist is being paid $20/hour but believes he is worth $30/hour then he is free to offer his professional services to another company. Since the labor market is based on supply and demand, it’s important to consider both sides when thinking about compensation.

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May 092016
 

Time and Annual Returns

I recently watched an interesting YouTube video about time and the rate of return, by finance columnist Preet Banerjee. He explains the relationship between an investor’s time horizon and his or her rate of return. Here’s a question to illustrate an example. If our goal is to accumulate $100,000 by age 65, how much do we need to save per month?

Here’s a table that breaks down how much investors will need to put away each month depending on their current age and the expected rate of return. For example, we can see that someone at age 30 who expects their portfolio to return 4% a year should save $109 per month.

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As we can see, the rate of return is a much stronger factor for investors with a longer time horizon. The 20 year old still has 45 years until retirement and how much he has to save is heavily influenced by his average investment returns. On the other hand, the 60 year old investor only has 5 more years before retirement so most of his accumulated wealth will come from savings rather than from investment gains. This means he shouldn’t take on more investment risk and reach for higher returns since the his rate of return simply doesn’t matter very much. This is why I have a relatively high risk tolerance, even though some people don’t approve. It’s because I’m in my twenties and if I can get that higher rate of return on my portfolio now, my life would be so much better in the future. 😀

The other thing to note about the table is that time trumps rate of return in most cases. If one person starts to invest at age 40 and earns a 2% rate of return, and someone else starts just 10 years later but earns a 6% rate of return, then the first person would still come out ahead despite making 4% a year less. In other words if we start investing 10 years earlier than our peers, then that will have the same effect as outperforming their investments by more than 4% each year. Wow! Let that sink in. 😆

We can also track our retirement progress with this information. For example if we plan to retire in 15 years we can use the AGE 50 row of numbers in the table above. Let’s say we want to accumulate an extra $300,000 between now and our retirement date. We know the table is based on an accumulation of $100,000. So to find out how much we need to save each month we just multiply the green numbers by 3, since $300,000 is 3 times $100,000. The tricky part is guessing which rate of return we are most likely going to see over the next 15 years, but I think 4% sounds like a reasonable assumption.

So start investing as early as possible and front load more risk to the earlier stages of wealth accumulation. 🙂

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Random Useless Fact:

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