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August 30, 2011


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"The very wealthy are in a different position than most of us on this one. They already have their wealth and are simply concerned with preserving it. The rest of us (at least most of us) are building our wealth and need to take a bit of risk to get the returns we want/need."

That's not entirely true. Too often I hear people talk about investment choices only with the "expected value" (return) in mind without thinking about the risks (standard deviation). For example, I hear people say they should not pay off their mortgage because the interest rate on the mortgage is lower than the expected return of the stock market. This kind of thinking is wrong because it ignores the risks component. The stock market has risks, but paying off your mortgage is guaranteed return. Leverage amplifies your risks (both upside risks and downside risks), and the math works out such that unless you borrow at or below the risk free rate, you should not be borrowing money to buy stocks.

Managing risks properly is a big component of having a good portfolio.

Cash is King. Or, perhaps, cash flow is king. That's a tenet that applies to rich, middle class, and poor alike. Not only with investments, but with preserving one's career and earning power.

Living below means is essential. One will find it very hard to improve finances without employing that approach. That's a great lesson to learn from the wealthy!

I don't consider my wife and I very wealthy, let's just say "well off".
We started with $400 in November 1956 after emigrating from the UK, and did all of the things that this blog recommends, even before the creation of the internet, which boils down to living well below your means, working hard, and saving hard. Our role models were our very working class parents and extended family members that instilled their values in us as we grew up as children during the tough times of WWII. A popular WWII slogan that still makes sense today is "Waste not - Want not".

We retired in 1992 and 1993 after raising 3 children and having satisfying careers as an engineer and a teacher, and were out of debt and very comfortable financially, but not "well off".

After retiring I became very interested in managing our finances and it helped that I was very computer literate and knew how to write software (however I came from the pre-Windows era). After writing very complex scientific software it was a snap to switch to financial software because it didn't require the very complex mathematics that I used during my career and after 2 or 3 years I had put together a very complete suite of programs to aid our investing. My very first home computer was a Commodore 64 that I purchased at Toys 'R Us but I quickly outgrew that and soon gravitated to some of the early PCs that used the MS-DOS operating system. To make a long story short, as I started marketing my software to a group of investors that were using the same commercial data service that I had subscribed to, the emergence of the Internet started making a huge impact on the world. Hi-Tech companies were springing up everywhere along with lots of Internet websites with vendors that thought the days of Brick & Mortar stores were coming to an end. They turned out to be wrong of course but meanwhile a state of euphoria over the Internet was growing and the Nasdaq started zooming upwards. It helped that I was in touch with hundreds of avid, older, & more experienced investors that were sharing ideas on an Internet Bulletin Board, called "Money Talk". The data service also used to hold a big annual conference at major cities with well known guest speakers in the world of finance from which I learned a lot. The bottom line was that we all started investing heavily in mutual funds that owned computer and internet related companies and rode the market up ever higher and higher from mid 1997 until the Bubble burst in March 2000. I was completely out of the market within the 4 trading days after the top, as were most of my new found friends.

After that "once in a lifetime" investment experience I went into a "Capital Preservation" mode and became more and more conservative as our portfolio continued to grow. Near the end of 2007 the NYSE & NASDAQ (New High - New Low) and (Up Vol - Down Vol) summation indicators finally turned negative and I decided it was time to go completely into income investments and today I hold only CDs, & Investment grade corporate bonds in our IRAs, and Muni Bonds in our Trust Account, all of which will be held to maturity. Our APR from 1/93 to today is 17.69% with never a losing year. The Bubble APR from 6/97 to 3/00 was 63.1%.

I guess we have moved from being "comfortable" in 1992 to "well off" today, but our lifestyle is pretty much the same and we still get teased about some of our frugalities, most of which are far too embarassing to disclose. I will say however that our house Chardonnay wine is $1.98/bottle when you buy a case - and we much prefer it to the oakey tasting expensive ones.

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