Investment 101


Investment leverage

For the average Joe like us, real estate and stocks are the only viable investment vehicles for building wealth. I’m not a fan of lending clubs because lending money out to entrepreneurs is like giving wealth away, and lending to poor people at such high rates may send them bankrupt, which is unethical. Anyway, I have summarized several rules in investing in both assets, most of these rules are just a summary of what’s already available on the net, but I think it would be helpful for anyone who want to become successful in investing. You can find examples of how I applied these rules in my posts.

  1. Money is earned, not saved. Therefore, you should never sacrifice your lifestyle to save.
  2. That said, you still need money to grow money. Money can either be borrowed or saved. Therefore, if you cannot borrow enough to grow your nest egg, you still need to save.
  3. Whenever you can borrow money safely and at a favorable interest rate, do it! Grab as much as you can. By safe I mean if it’s a mortgage, it has to be guaranteed by rent with a bit of wiggle room; and if it’s a margin loan, even if your equity drops 70% from the peak (when you are more experienced you may lower the number a bit), it won’t trigger a margin call.
  4. Maximize your tax advantaged accounts. This means maximize your 401k or 403b, Roth IRA and if you can also contribute to a 457b, maximize it too. This is easier said than done, so just contribute as much as you can, but at least you should contribute enough into 401k to take full advantage of your employer match, and maximize Roth IRA first.
  5. Tax really hurts, but to retire early you need money in your taxable accounts too. However, you do have one best way to grow your taxable nest egg tax free. i.e. To purchase a primary residence below market value, renovate it, rent out a room or two, and sell it at least 2 years later for a tax free profit, then move on to the next primary residence.
  6. The next best method of tax optimization is by taking advantage of the lower tax rate for capital gains and dividends.
  7. Avoid selling at a loss in a broad market down turn, and never use margin at fresh market highs.
  8. Crunch the numbers before any investment, if the numbers are too good to be true …… GO FOR IT! Big opportunities come once or twice in a life time, if I hesitated on these opportunities during the great recession, my retirement plan would be postponed for at least another 5-10 years.
  9. Find a cheaper place to retire, but without sacrificing lifestyle and convenience. Yes, if you look hard, such places do exist, I already found one for myself.