Net Worth Update
|Student Loan A||-0.37||Investments||4,666.24|
|Student Loan B||-5500||Cash||9,744.06|
|Student Loan C||-5500|
Slowly and steadily, it seems like my net-worth is going up. I’m trying to increase my cash to 11K so that I can kill the loans in one shot. I’m also looking into some stocks to purchase, but I’m waiting until they drop to a near 52 week low. (I’m looking at PGX, OAKS, ORC, and AGNC right now.)
My Investment Strategy
My investment philosophy has 3 main goals:
- Minimize loss of future earnings even at the cost of accepting short-term risk
- Optimize asset allocation depending on the investment vehicle
- Diversify my risk portfolio such that the total risk of my portfolio is much less than the sum of its individual parts
Essentially, I want to protect my future earnings, minimize taxes paid on my earnings, and not worry about my investments.
I’m scared of missing out on an opportunity
Generally, when it comes to investing, people are scared of losing what they already have. I’m no different. Who would want to lose all of their money? However, there is something that I’m more scared of – losing my earnings tomorrow. Perhaps I’m too greedy- not only do I not want to lose my money today, but I also don’t want to lose my earnings tomorrow. Unfortunately, this creates a paradox where I can’t reasonably expect to keep my money safe and get a huge return.
Because my primary goal is to not lose earnings in the future, going for safe, non-volatile investments now is actually incredibly risky since it jeopardizes the future I want to achieve. On the other hand, going for high-earning, volatile investments now is actually the safer, less risky play for me because it leaves open the possibility of retaining high earnings tomorrow. Should I choose to go the safe route and invest mostly in CD’s I can only hope to earn 2% per year, effectively forfeiting the higher rates that I desire, whereas if I go the more dangerous route, I can hope to earn well above 2%- (at the risk of losing my principle). Effectively, since I’m mostly concerned with earnings tomorrow, choosing the safe route is tantamount to quitting while investing aggressively is giving my dreams a shot.
Maximize the benefits of retirement accounts
In my case, there are 3 vehicles I can use to run away from taxes and grow my wealth: IRA, 401K, and HSA. All three of these accounts are tax-advantaged, which means that you don’t pay taxes on however much your account grows. Since I want to grow my net-worth, its in my interest to dump as much money as possible into these accounts because it reduces the amount of taxes I pay and increases the rate my money grows. Lets start talking with HSA, or health savings account.
A health savings account is a place where you put your money to use for medical expenses. For a more in depth explanation checkout the madfientist’s post on The Ultimate Retirement Account. Unfortunately, the custodians, (or companies that you can open an HSA with) all charge ridiculous fees. I also live in California, which means that I will still have to pay state taxes on earnings in this account. The most tolerable custodian that I was able to find is Saturna, so you gotta pick your poison.
Because Saturna charges me to reinvest dividends, (and because I live in California), the only way to avoid paying fees and paying the government is to invest in a growth stock that doesn’t pay a dividend. Growth stock’s have a high propensity to grow and appreciate in value. For example, Facebook is a growth stock. Facebook pays no dividends, and increases its earnings quarter after quarter. As you can see, Facebook’s stock price keeps going up as the company grows. They fuel this growth by reinvesting their earnings into the company rather than paying it out to the shareholders.
That’s essentially the reason to buy a growth stock. It can appreciate in value, and when it does, you can sell it for a profit. However, this is extremely risky and tantamount to gambling as no growth stocks have guaranteed growth. What makes buying growth stocks especially risky is that there is no (or little) repayment on your principal investment in the form a dividends.
However, I’d say that we all need a little speculation in our lives, so I’m planning on investing ~$1300 into some growth stock. I’m currently eyeing ATW, but I have not made any firm decision yet.
IRA + 401K
IRA’s and 401K’s are accounts where you invest your money to save for retirement. If you’d like to know more, check out thesimpledollar’s post explaining what these accounts are in more detail.
My investment strategy here differs greatly from my HSA. Instead of searching for investments that will appreciate in value, I’m looking for investments that will pay huge, frequent dividends. Because I want to maximize the tax-free growth of these accounts, I’m looking for stocks that pay out large frequent dividends – with limited growth potential. Investing in this style would normally increase my tax liability. However, since I’m following this strategy inside of a tax-favored investment vehicle, the tax liability on earnings don’t exist.
Essentially, the rule I have set for myself is that I will not buy any stock/security that pays less than a 5% annual dividend. For example, if I bought a stock that cost $100, that stock must pay me a dividend of at least $5 every year.
If you look on the to picture at the left, you should see a bunch of squares with the letter “D” on them. Towards the right of the picture, the frequency of the “D” increases. This means that the company pays a dividend very frequently, (monthly to be precise). Holding everything else constant, it’s much better to hold a stock with a higher dividend frequency.
The asset classes I’ve found that easily produce this criteria are REIT’s (real estate investment trusts) and preferred shares. This is because both of these asset classes are required to pay out cash to their investors, which leads to nice juicy dividends.
The Taxable Brokerage
The taxable brokerage is usually the last place you would want to invest your money. Its just a regular investment account, and you pay taxes on what you earn. In this account, I plan on buying exchange-traded funds comprised of growth companies and mature companies that constantly increase the dividend that they pay. The reason I’m going to choose to buy an ETF (exchange-traded-fund) over just picking a few companies is that my risk is greatly reduced through the diversification the ETF provides. The ETF essentially takes lessens risk by lots of risks with many companies. Unfortunately, the market is overvalued at this time, so I do not plan on starting any major position until prices fall.
Take on multiple risks to lessen overall risk
Ultimately, I want to do something similar to ETF’s, I want to take multiple risks to lessen my overall risk portfolio. For example, take peer to peer lending. In peer to peer lending, you send a lending company your money, and then they divide your money into little bite sized pieces to finance personal loans. You are essentially loaning many different people small amounts of money. Most of these people will pay you back, some won’t, but overall you will make money, because taking many risks (by loaning money to many people) lessened your overall risk of losing your money had you financed a defaulted loan completely.
You win some, you lose some
When it comes to investing, there’s simply no way for me to get rid of discomfort associated with loss. I will lose money. That is a fact and future that I cannot avoid. My losses will feel much worse than my gains will feel good – and that’s something that I have to remind myself each time I take a loss. As a human, I’m predictably irrational, and will probably make the same mistakes over and over again (although I hope they lessen in severity). In the end, all I can really hope to do is win a little more than I lose, for taking on a little pain today is well worth avoiding a miserable hell tomorrow.