Friday, March 28, 2014

Basic Assumptions I'll Make About You in Investing

In order for the investment advice on my site to be of value, I'll make some assumptions about your attitude, personality, and basic knowledge.  No, I won't expect you to know the Black Scholes equation in your sleep, how to price Credit Default Swaps, or even where the market will go tomorrow.  Except the first one (keeping an open mind), it's alright if any of the points here don't accurately describe you and you're new to my site as long as you're flexible and willing to change.

We may not agree in our views about the markets or the economy but I'll assume we agree on some very basic things outlined below.  However, if you don't change your fundamental views and attitudes to the guidelines below, then unfortunately, there's little I can do to help you.

You must have an open mind.

This goes without saying whenever approaching someone else for advice.  You might not hear what you want to hear but you have faith that it may be of use to you.  And if you run into dangerous advice, you can always exercise your judgement and reject it.

You believe markets will go up in the long run (say a 15+ year time span.)

This is the only statement I'll urge you to accept on faith rather than economic principles or theory.  Markets have been slowly going up over time for many hundreds of years, and there's no rule that says they have to.  OK, they may reflect economic growth but then again, there's no rule that says economic growth has to continue indefinitely.

The world could radically change in less than 2 decades.  We could have nuclear war, an asteroid impact, a devastating volcanic eruption, collapse of major countries, etc. which will definitely hamper the ability to recoup your initial investment even after 15 years.  Let's assume these very low probability scenarios will never turn up - you have bigger problems to worry about if they do!

You are investing to supplement your wealth over time, not get rich quickly.

I hear of stories of people who got rich off of the markets alone but I don't personally know of anyone who accomplished that.  I suppose it happens but it's very rare and not something you can count on, even if you work very hard at this goal.  Worse, you could end up losing big by taking too much risk and/or investing in assets you know little/nothing about.

You don't believe financial markets (and Wall Street) are conspiring against the common people.

This is one of the most bizarre excuses not to invest but it's been popping up more ever since the Occupy Wall Street movement took off a few years ago.  You'd rather not improve your wealth because you perceive it'll make someone else wealthy (and you don't even have proof)?  Well, I've got news for you: most of the wealth in the stock market is from ordinary people like you and me.  Millionaires and the top 1% might own a larger share of the wealth in the stock market but that's still a minority of all the wealth.  Sure, most trades happening are between 2 institutional investors, but those institutions are managing money for ordinary people.

Even all the assets under management at a major investment bank like Goldman Sachs is just a drop in the bucket compared to the entire stock market.  It's very unlikely (and outright illegal) for them to try to manipulate the markets in their favor.

You believe markets are nearly efficient (rather than 100% efficient or rampant with inefficiencies.)

You may have heard of the Efficient Market Hypothesis.  In a nutshell, it states that you cannot use easily accessible information like past prices, financial statement data, and the news to beat the market.  Basically, if there's an obvious opportunity to make a quick buck in the markets, someone has already taken it.  From my observation, the efficient market hypothesis tends to hold up on a day to day basis, but we, as humans, are also subject to psychological biases that make it difficult to invest in our best interests 100% of the time.  For example, if you've ever owned a stock that you truly believe in but continues to lose money and you insist on holding onto it despite analysts and even your friends trying to convince you that it's a bad investment, you've been a victim of your own psychological biases.  Generally, the more volatile a market is, the more likely traders and investors will fall victim to their psychology, and this creates inefficiencies which can be exploited.  This is definitely not a subject for a beginner as I'm still on the road to figuring this out.

You will not cry if you lose a small percentage of your wealth (and give up by selling.)

AKA panic selling.  While getting out of a losing position is generally prudent given the situations, selling because you can't emotionally take the loss is a bad idea.  You aren't thinking logically and letting your emotions dictate your investment decisions!  Instead, decide how much money you're willing to lose on a trade BEFORE you enter it and get out once your threshold is reached.

You have a basic understanding of Algebra, Statistics, and Economics.

You don't need a PhD or even a college degree to be successful at investing.  Even if you never went to college, if you still have a working knowledge from your Statistics and Economics classes, you're good to go.   The more advanced concepts certainly help but they aren't necessary in the beginning.  If you need to brush up your knowledge, maybe take a look at some basic Statistics and Econ books at your local library or university.  Pay attention to the following concepts:

  • Means and Medians
  • Variance and Standard Deviations
  • Correlations
  • Economic Cycles
  • Supply and Demand

You believe successful investing doesn't have to be complicated.

I recommend a simple passive index portfolio for you to start with.  You can further customize it over time as you learn more, get help from an advisor, or undergo changes in your financial and living situation.  Making it too complicated, even with the help of a financial advisor, will likely increase the chances that something will go wrong causing you to lose money.

Tuesday, March 25, 2014

Hedging your investments 101

If an asset is expected to lose money in the long run, it can't help your portfolio, right?  Generally that's true..  however, in special circumstances, it may actually help stabilize your investments if it exhibits negative correlation with your portfolio.  Let's show an example here:

Your portfolio's returns -

Year 1: 15%
Year 2: 15%
Year 3: 15%
Year 4: 15%
Year 5: 15%
Year 6: -50%

6-year ROI: 0.567%
Compound Annual Growth Rate: 0.09% (essentially 0).

The negative-returning asset's returns:

Year 1: -10%
Year 2: -10%
Year 3: -10%
Year 4:: -10%
Year 5: -10%
Year 6: 50%

6-year ROI: -11.4%
Compound Annual Growth Rate: -2.00%

What happens at the beginning of each year you invest 50% in your original portfolio and 50% in this asset that gets negative long-term returns?

Year 1: 2.5%
Year 2: 2.5%
Year 3: 2.5%
Year 4: 2.5%
Year 5: 2.5%
Year 6: 0%

6-year ROI: 13%
Compound Annual Growth Rate: 2.08%

Wait, what?  How did this happen?  We ended up with an even higher return by adding an asset that overall lost money over 6 years!

People often dismiss assets like long-term Treasuries or Gold as bad long-term investments and I definitely agree, at least if you invest 100% in Gold or Treasuries.

So that means the next time you hear of a bank that's about to fail in the news, you should go out and buy its stock because it'll stabilize your portfolio?  If you answered YES, you FAIL!

Your negative-returning asset needs to exhibit negative correlations with your main income-producing assets (i.e. your Stocks and Equity funds) and it needs to be something that investors will flock to during a liquidity crisis (like in 2008.)  Gold and especially Treasuries fit this bill despite their zero to negative real returns over time.

This may sound a bit technical if you don't know your math and statistics but the point I want to make is that simply saying an Asset produces negative returns in the long run is not a good enough reason to exclude it from your investment portfolio.  That's pretty much a straw-man argument, although it doesn't prove it should be included either.  Instead, think about how adding that asset will change your portfolio and is that change beneficial in the long run!  It's one thing if you're new to investing and shun Treasuries simply because of their zero real returns but I've encountered many CFA Charterholders who think the same way.  This is quite a shame as I'm currently studying for the CFA Level 3 exam..  anyone who has endured preparing this grueling exam has practically been bombarded with variations of the following mantra: "Always think of investments in a portfolio context and not in isolation!"

You won't need to hedge your portfolio with that negative returning asset if you know when that -50% return in your equity portfolio is coming.  However, from experience (in 1987, 2000, and 2008), most professional portfolio manager didn't seem to know let alone the little retail investor.  Hedging, if properly performed, will not only reduce the impact of these big drawdowns but also smooth out your portfolio's returns, making it easier to sleep at night.  I'll discuss the Permanent Portfolio and a few other techniques that contribute to this sort of hedging and smoothing out of returns in subsequent posts.

Friday, March 21, 2014

My Take on Harry Browne's 16 Rules of Financial Safety

Harry Browne (1933 - 2006) created 16 rules for aspiring investors to keep themselves safe in good or bad markets.  These rules were originally published on his website, and I have them listed in bold below with my own commentary beneath each respective rule.

1. Your career provides your wealth.

Most of the wealth in the world is created by businesses adding real value to society, not through people making superior investments.  That's not to say investing is useless or a zero-sum game.  The goal of the financial markets is to efficiently lend capital to businesses and/or people in need, whether in the form of stocks (ownership interest), bonds (debt), derivatives (contracts to help reduce financial risk), etc.

By progressing in your career and living below your means and wisely investing your savings, you can augment your net worth over time by lending your excess cash.  In many cases, that cash helps grow businesses and you earn a handsome return, a win-win for both and you'll likely end up wealthier than if you put that cash under the mattress or in the bank.  Unfortunately, not every dollar you invest will be returned to you (another term for this phenomenon is "risk".)  The rules below will hopefully reduce instances where this happens.

2. Don't assume you can replace your wealth.

People, markets, economies, and politics change over time.  Just because you made a fortune a few years ago doesn't mean you'll be able to make it again.  Take an extreme example, a young professional athlete who makes millions in his 20s.  Do you think he'll have the ability to replicate his early earnings in his 40s or 50s?  Don't assume that money lost in risky investments can always be made back!

3. Recognize the difference between investing and speculating.

When you speculate, you are taking a much higher risk than the average risk in the markets in hopes of a higher return.  You may come out ahead or you may lose all/most of your initial investment.  Many speculators have made a fortune but a large unlucky minority have seen their investment nearly wiped out.  It's OK to speculate and many fledgling companies in the past that are highly successful today would not have made it if nobody speculated on them, but please only speculate with money you can afford to lose!

4. No one can predict the future.

When you read CNBC, SeekingAlpha, the Wall Street Journal, or any other financial news source, you will run into many experts with a variety of views about the state of the markets and the economy in the future.  One might say we'll see a recession next year while another says the economy will expand even faster.  Clearly, they can't all be true as there is only one outcome for the future.

If an expert repeatedly predicts a recession, eventually he/she will get it right.  And when they get it right, they end up receiving a lot of publicity for their prediction with little regard for the failed predictions in the past.  Does that make this expert reliable?

Take a look at the news archives of financial columnists in the past; there's no dearth of predictions of where we will be today.  Some of them may have come true, but how many of them?  And look even further back in history.  How many of these experts were consistently right year after year?

5. No one can move you in and out of investments consistently with precise and profitable timing.

In other words, nobody's perfect, not even the superstars.  Even Warren Buffett missed the Tech Bubble in the later 90s and early 2000s.  Much of the fluctuations in the markets, especially in the short term, are essentially random noise.

6. No trading system will work as well in the future as it did in the past.

Market conditions are constantly changing, and the future is rarely the same as the past.

7. Don't use leverage.

You may have heard some saying about how to invest and get rich with other people's money.  If prudently executed, it may work for real estate investments but not for stocks.  Unlike stocks, a mortgage lender cannot repossess your house if your mortgage falls underwater as long as you keep making the payments.  That's not the case with a margin loan from your broker to buy stocks.  You can lose more than your initial investment.

There's one circumstance when you may use a nominal amount of leverage.  If you save your money in a margin account and need some cash short-term, you can withdraw it from the account without selling any stocks by using margin.  (Say if your car breaks down and you need the cash for repairs...)  The margin interest will usually be lower than the amount in commissions and capital gains taxes you would have paid if you sold your stocks for emergency cash.  But don't margin more than 2 months of after-tax salary or 10% of your current account value, whichever is lower!

8. Don't let anyone make your decisions.

At least, don't let other make decisions with money you cannot afford to lose.

9. Don't ever do anything you don't understand.

Pretty common sense here: if you don't understand an investment, it's best to err on the side of safety.

10. Don't depend on any one investment, institution, or person for your safety.

Diversify your investments, both at the macro level (different asset classes like Stocks, Bonds, Commodities, etc.) and at the micro level (different stocks or use an index fund.)  Diversify among different brokerage firms if you have more than $250,000 in assets.  SIPC insurance in the US covers up to $250,000 in losses to your investment if your broker goes under (not if your investments lose value.)  MF Global's collapse is a clear lesson to diversify among your institutions.  Diversify your money managers as well if you choose that route with money you can afford to lose.

11. Create a bulletproof portfolio for protection.

You'll want to invest the majority of your wealth in a simple, balanced, and conservative portfolio that will reasonably hold up in any economic climate without major adjustments.  You need a solid plan that you can stick with in the worst of times instead of constant angst over which investments need to be sold or when to reenter the markets.  Harry Browne created an asset allocation known as the Permanent Portfolio to achieve steady and stable returns over the long run without the need to forecast future economic conditions.  More on the Permanent Portfolio in future posts...

12. Speculate only with money you can afford to lose.

This is pretty common sense..  only speculate if you don't mind losing your money.  Maybe create a separate brokerage account with money you can afford to lose and speculate to your heart's content with it.  Use it to chase the latest trends, bottom fish in a down market, try out emerging market stocks, etc.  Just make sure you don't use any leverage here .

13. Keep some assets outside the country in which you live.

If you live in a stable democracy, this may be less of a concern, but if corruption is rampant in your country's leadership, it may be prudent to hold offshore assets.

14. Beware of tax-avoidance schemes.

The only tax avoidance schemes you need are 401K's and IRAs, both of which are unofficially endorsed by the government as legitimate vehicles to avoid or defer taxes for the purpose of saving for retirement.  It's also not too difficult to invest your taxable accounts in a way that's tax efficient by avoiding the Wash Rule and only selling to take capital gains when absolutely necessary.  But with taxes already at historical lows (in the US), there is little incentive to seek out greater tax savings.  This could also backfire in ways:

  • You may end up spending a ton of time and money on lawyers and accountants and not even recoup your consultation fees.
  • If you're caught hiding money in an illegal tax shelter, you could face hefty fines and/or imprisonment.
  • Certain investments that provide tax advantages (i.e. muni bonds) may not be right for your situation.

15. Enjoy yourself with a budget for pleasure.

Most people have the opposite problem: spending too much money.  However, it's also possible that you're saving too much to live a healthy and fulfilling life.  Prioritize what's important to spend money on and cut back on the big ticket items if possible.

16. Whenever you're in doubt about a course of action, it is always better to err on the side of safety.

This goes for everything, even advice I'm giving you.  It's better to be safe than sorry if you don't understand it.

Tuesday, March 18, 2014

Why the Unskilled Labor Market is Broken


The supply of unskilled labor far exceeds the demand so employers have immense bargaining power in this market.  One reason the supply of unskilled labor is high because the search cost of finding such jobs is low (in terms of time, money, and effort).  Individuals in dire need of money to pay living expenses will resort to unskilled labor, thus increasing the supply (even if they are qualified for something better but are out of options in the near term.)  By managing one's finances prudently, one can hope to better avoid a situation where taking on unskilled labor in the short term is necessary to pay the bills (say after losing a professional job.)


Do you know someone who used to make big money until the recession and then went back to working a minimum wage job?  You would think they have some skills and savings, yet they tell you they are struggling to make ends meet at the moment.  What is going on here?

Ever since the Great Recession of 2007-2009, an increasing number of skilled professionals with college and higher degrees have lots their jobs and had to resort to working unskilled labor jobs to pay living expenses.  Let's face it, very few people dream of flipping burgers at McDonalds, ringing the register at Walmart, or scrubbing cars under the blazing sun as their career.  But why is the supply of such labor so high and the pay so low?

Who Works Unskilled Labor

Group 1: People with little/no marketable skills.

  • High school students.
  • High school dropouts.
  • College students.
  • Other people who don't have skills and can't or don't want to learn new skills.

Group 2: People who need cash quickly.

A professional making $50,000 a year and living paycheck to paycheck with little savings suddenly loses his job..  what happens next?  Most likely he/she will get unemployment benefits which are a fraction of his pay at his former job.  Being used to his old extravagant lifestyle, he starts using credit cards to make ends meet.  Now his unemployment benefits end and he still hasn't found a new job and his savings are gone.  He starts getting desperate as there are bills to be paid, so he takes a job at McDonalds as that's the only employer that'll hire him on the spot.  Problem is now, he has to work 60-80 hours a week with the measly pay to make ends meet.  At $10/hr for 80 hours a week, that's only $3200/mo or $38400/yr, still a fraction of his former glory, not to mention leaving very little free time to search for his next professional job.

The Economics of Unskilled Labor

Unskilled labor jobs don't require much training which means an employer can hire pretty much anyone for the job.  This makes it a last resort option for even the skilled professional who lost his job but desperately needs cash to keep the roof over his head and food on the table.  These people are also competing against the students and dropouts who don't have many other employment options.  I'm no economist but when the supply is too high, employers can demand low wages - that's exactly what happens.

I don't have official statistics but I'm willing to bet that the vast majority of people working these jobs hate them and do not want to be there, but due to their desperate financial situations, they have no other choice, whether in the short term or long term.

The Importance of an Emergency Fund

It may seem far fetched if I tell you that irresponsible spending among the population will lead to an increase demand for survival jobs and unskilled labor.  If you lost your job and had only $1000 in the bank left and your rent of $800 is due in a week, would you be doing everything you can to find another source of income, even if it's minimum wage?  I bet you would.  Now if you had $20,000 or even $50,000 in the bank and just lost your job and can survive on $1000 - $2000 a month, would you take a survival job?  Hell no!  There's no way you'd go work 7 to 12 hours a day at some $8-12/hr job at some depressing fast food or department store when you could be spending that time applying for jobs and networking!  So please, get your financial house of cards in order so you can focus on moving on to your next job if you lose your current one rather than suffer at some survival job just so you won't lose your house and car!


Professionals with skills in demand shouldn't be working survival jobs, period!  Do something useful for the world with your skills, and if you're unemployed, live off of your savings until you find your next professional job!  Stop living paycheck to paycheck and save up some cash so you don't need to work at Walmart to pay the bills if you suddenly lose your job.  Hopefully, by reducing the supply of unskilled labor, the unskilled folks will see their wages increase as well instead of having to lobby for minimum wage hikes.

Friday, March 14, 2014

10 commandments of credit card rewards

1. Thou shall not utilize reward credit cards if one regularly carries a credit card balance.

Don't even think about signing up for a bunch of shiny new reward credit cards if you carry a significant credit card balance on a regular basis.  You'll be tempted to charge even more.  Work on reducing your credit card debt first - you'll pay less interest from now on as a result and that in itself is generally a much greater reward than the best sign-in offers you can find.

Theoretically, you can collect rewards and pay back debt at the same time but it'll require immense discipline.  One bad move or late payment and you'll be in further debt than before.  I don't recommend this route as it can be difficult for many to pull off successfully.  OK, it may not be as hard as daytrading, but at least daytrading offers a more favorable risk to reward profile.  In any case, focus on paying off your CC debt first THEN focus on collecting points to keep your sanity in check.

2. Thou shall use credit responsibly.

The reward cards you accumulate will not only provide you benefits based on your spending but also provide a line of credit in case a real emergency strikes and you need to pony up fast (i.e. major home/car repair, hospitalization, family emergency, etc.)  However, never charge anything you cannot afford to pay cash for (unless you lost your job and need to put food on the table or one of the aforementioned emergency situations came up.)  As tempting as it may be, it's easier to not get into CC debt than to get out of the debt!

I recommend a credit score of at least 720 and little/no revolving CC debt before proceeding.  Try to open 2-3 cards in a single day if possible so the hit to your credit score is minimal, but don't apply to too many on a single day either or you won't be able to meet the minimum spend offers on all of them (more on that later.)

3. Thou shall stay organized.

There are countless credit card offers with great sign-in bonuses out there.  When you have more than 2 or 3 cards, it's easy to lose track and possibly miss a payment.  Even if you're super organized and have a great credit score, it's bound to happen, even to the best of us.  Late fees will ensue as a result.  The longer you wait to pay the late fee and the balance, the more your credit score will drop.  Don't stress yourself out if you miss a payment once in a while but do set up your infrastructure to be super organized so late fees will happen only once in a blue moon.  Some tips in this regard:

  • Register your credit card accounts on
  • Always sign up for email reminders for payment due dates.
  • Use a spreadsheet to track sign-in bonuses and when the cards will start charging an annual fee.
  • Check your spreadsheet and your credit card accounts every 2 weeks to make sure they're all paid.
  • If you miss a payment, you can try Ramit Sethi's script here to try to get it waived.  Don't let your guard down and think you can rely on this; some credit card issuers might offer to waive the late fee the first 1 or 2 times you miss a payment as a courtesy but don't count on having this life line being there 100% of the time!
4. Thou shall monitor one's credit score regularly.

Some cards, notably Discover and the Barclays Arrival cards, offer periodic updates on your FAKO Credit Score (an educated estimate.)  While this isn't the score lenders use to evaluate your eligibility for credit, it should give you a heads up if something fishy is going on.  At the same time, pull up your credit scores every 6-12 months from one of the 3 Credit Bureaus..  you can triangulate an estimate of your score based on your official report from several months ago and your current FAKO score.

5. Thou shall not significantly increase one's spending to collect more rewards.

So why are you going through all this trouble to get frequent flyer miles and reward points?  To get free stuff, obviously!  If you're spending more money than necessary to get points for that flight to Paris, aren't you better off just buying that ticket directly like most people?

6. Thou shall prioritize towards fulfilling the sign-in bonuses (aka "minimum spend") on reward cards first.

Many cards offer, say, 30000 points for spending $3000 or so in the first 3 months and 1 point per $1 normally.  You will gain 33000 points by spending $3000 in the first 3 months, the equivalent of 11 points per $1 spent.  If you spend $20000 a year, you could potentially earn 200K points by selecting the right cards for their sign in bonuses, more than enough for 2 (maybe 3-4) round trip tickets to Europe or Asia.  You now have free plane tickets for an overseas trip for the whole family!  More on how to do this later..

7. Thou shall pay attention to the terms of offers.

When does the "minimum spend" period begin?  When does it end?  It can be the day you apply, the day the card is approved, or the day you activate the card.  Not sure?  Contact the issuer!

When do you reward points or frequent flyer miles expire?  After a set period of time (usually 12-18 months)?  Never?  Make sure before you're faced with surprises.

Also, some sign-in offers, notably for the Starwood Prefered card, are not available if you've already redeemed another sign-in bonus.

8. Thou shall pace one's credit card sign-ups so that sign-in bonuses can all be fulfilled within their deadlines.

This is common sense but don't take on more sign in offers at a time than what you can handle.  You may be stuck with a dilemma of not fulfilling sign in bonuses and wasting all that effort or overspending and violating rule 5.

9. Thou shall look into ways to collect rewards for bills that cannot be (directly) paid using credit cards.

Amazon Payments allows you to send up to $1000 to anyone with an Amazon Payments account by charging it to a credit card and collecting the points.  Make sure you specify the payment is for good and services or you will be charged for a cash advance.  I generally like to use Amazon Payments to reimburse friends; it can also be a great way to pay your roommates if you split the rent but write one check each month.

Vanilla Reload cards can be purchased at your local CVS and sometimes can be loaded with credit cards, thus earning points.  They cost $3.95 to load up to $500.  Redeem the Vanilla Reload cards into an AMEX Bluebird account.  Order checks from Bluebird and write them to pay folks who don't take credit cards: rent, mortgage, college tuition, etc.  In this way, you can indirectly earn points for paying your rent, a major big ticket expense!

4/4/2014 Update: Vanilla Reload Cards can no longer be purchased using Credit Cards.  However, other alternatives to loading your Bluebird account exist.

More on this later..

10. Thou shall not engage in Manufactured Spending or create a closed loop (at least not on a large scale.)

Manufactured spending is when you spend using credit cards and essentially pay yourself with those points.  It can be done using Vanilla Reload cards and writing a check to yourself, a credit card you owe money for, or a friend or family member who gives you the money back (aka a closed loop.)  In theory you can earn unlimited points this way, but in practice, credit card issuers will shut you down long before you accumulate 1 million points this way.  Your account will be flagged for suspicious activity and possibly be suspended.  In the worst case, your account will be closed and you'll lose all the points you worked so hard for.  Please don't abuse the system this way.

I'll admit, I do strategically engage in Manufactured Spending on a smaller scale when I shop at Target.  Target's Redcard offers a 5% discount on all purchases at their stores, but I won't receive that award if I use another card that I need to meet the minimum spend on.  Suppose I get 11 points per $1 with the minimum spend factored in, and I spent $100 on merchandise at Target.  I can walk away by getting 5% off AND fulfilling some of the minimum spend on my other card this way:

Step 1, Use credit card with minimum spend to load a Vanilla Reload card as in #9 and that money goes to a Bluebird account.
Step 2, At Target, swipe the Redcard and get 5% off.
Step 3, Use the money in your Bluebird account that you filled with the credit card to pay off the Redcard.

As a rule of thumb, a few hundred dollars in Manufactured Spending a month is generally fine, so strategically use it to maximize your rewards.  $1000 a month is pushing it..  $10,000 a month and you'll alert the issuer (unless your income is very high.)


Many thanks to Chris Guillebeau for introducing me to maximizing credit card rewards.  You can check out his site to find actual reward cards after reading the 10 commandments above.  Enjoy your credit card rewards responsibly!

Tuesday, March 11, 2014

Pomodoro technique: guard your time.

The Pomodoro Technique was developed by Francesco Cirillo almost 30 years ago as a system to stay focused and maximize the use of his study time in college.  It's a godsend for people like me who could use some help concentrating on a large project by working in bursts with short breaks in between.  The method boils down to the following:

  • Get a to-do list on paper (preferably) or at least in your mind.
  • Set a timer for 25 minutes and do a task on your to-do list
    • Try not to get sidetracked during the time and defer any interruptions or urges if it's humanly possible.
    • If interrupted (by your own thoughts or someone else), you stop the timer, handle the interruption, and restart the time back at 0 again.
    • Once the timer rings after 25 minutes of uninterrupted work, record that accomplishment and take a 5 minute break.
    • However, every 4 "Pomodoros" (what the author call the 25 minute unit of uninterrupted activity described above), take a 15-20 minute break instead of 5.
The author recommends using a Pomodoro shaped timer (pomodoro is Italian for tomato), but I've found success using various smartphone apps that automate the process with alarms and timed breaks.  One example is the Pomodroido app for Android.

Personally, this technique alone has worked wonders in putting in nearly 300 hours of studying in a span of around 5 months for the CFA exams.  I don't think I could have passed Levels 1 and 2 of the CFA exam without it.

Let me know what's your experience with the Pomodoro Technique in the comments below.

Friday, March 7, 2014

Want to save money? Then be pound wise, penny foolish!

In other words, focus on saving as much money as possible on the big-ticket items while relaxing the rules on the smaller items.  (Ideally, you also want to save as much as possible on the smaller items but often times, it's simply not worth the mental energy.)


The #1 big ticket item for practically everyone on this planet is Housing!

I generally recommend limiting spending no more than 1/3 of your family's after-tax income on housing (not including utilities.)  If you're renting, this amount is simply the rent.  If you own your home, it's the mortgage payment (minus interest deductions) + property taxes + HOA fees (if any) + insurance + amortized maintenance fees.  If you already own a home and it's consuming more than 1/3 of your take-home pay, it may be difficult and costly to get out so it's best to plan ahead and not get into that situation when buying a home.

Check out Padmapper and Airbnb if you're looking for rentals and Zillow if you're buying a house.

If you live in North America, your car is your #2 highest expense.

Car related expenses include gas, insurance, maintenance, and possibly a car payment.  Here are a few tips on how to get the most out of the money spent on a car:
  • Buy used!  New cars depreciate quickly in the first few years.  Be sure to check the CarFax report on the car and have a trusted mechanic inspect it before buying.  Shops like Firestone will usually have a deal for about $18-25 for car inspection.  I'd not finance the car unless you can get a low interest rate (say 2% or under) and are hard pressed for the cash.
  • Check how much it'll cost to insure before you buy it.  Check with several insurance companies.  If you're renewing your insurance policy every 6 - 12 months, get quotes from competing insurance companies to see if they offer a better deal.
  • Don't neglect routine maintenance or it may cost you more in the long run.  Change the oil every 4000 or so miles or according to the schedule in the user's manual.
  • Gas mileage is often an overrated area to save money but don't overlook it.  Hybrid cars generally attain over 40 MPG but the premium you pay isn't worth it unless you drive over 20,000 miles (32,000 km) a year.  Do be mindful and make sure you really need it before purchasing that 15-20 MPG SUV..  it'll cost you 3 times the gas compared to a Prius.
  • Here's a video by Dave Ramsey on how to better afford cars by avoiding car payments.  (The numbers might not be that accurate but the general idea is solid.)
  • Here are some notes on various cars (go to the box on the right: "What are OTHERS saying about Your car?")
Other recurring big ticket expenses

  • Debt payments: negotiate a lower interest rate if possible.  If not, start by paying off the highest interest rate debt and the minimum on the rest.  If you have no emergency fund, try to save 1/2 of the money left each month and use the other half to pay the debt.
  • Vacations: if you have decent credit, you may qualify for various credit cards that offer 30,000 - 50,000 points for spending $1000 - $5000 in the first 3 months.  If you're lucky, the card will waive the annual fee the first year.  Take advantage of these offers to cut costs on your plane ticket and hotel costs.  More on this in future posts.

Wait, but I want to also be Penny Wise

If you have the time and energy to micromanage your finances, more power to you!  From experience, there's only so many decisions a person can make everyday in their busy lives before their judgement starts to take a beating.  Psychologists call this phenomenon Decision Fatigue.  In extreme cases, putting an unnecessary emphasis on saving money on the smaller things in life may eventually backfire as it becomes an uphill battle to resist your urges.

Saving money is also a place where it pays to apply the 80/20 rule.  Figure out which 20% or so of your spending is bringing you 80% of your satisfaction and standard of living and avoid cutting back on those items.  For everything you spend money on, ask yourself "what if I DIDN'T spend money on this?"  Paying your rent and debt might not bring that much satisfaction but not paying them will bring you a house of pain (no pun intended.)  Cut back on the things and services that you're spending 80% of your budget but only bringing you 20% of the satisfaction.  Your goal is to align your spending so that every $1 you spend brings roughly the same unit of "satisfaction" regardless of what items.

About Budgets

Most personal finance authors and bloggers recommend keeping a budget but many don't keep one themselves in practice.  Ramit Sethi recommends doing away with the concept of keeping budgets.  I recommend a middle ground: budget your big ticket items like housing, car-related expenses, and major debt payments.  If it's recurring and costs more than 10% of your take-home pay, give it its own category in your budget.  Set a goal to save $X dollars every month (say $500 or maybe 20% of your take home pay.)  The money left over after your big ticket items and savings goal is put into a category called "Everything Else".  This is the money you use to pay for your daily lattes as well as smaller recurring expenses like gym memberships.

I find it easier to keep track of my major expenses while not being bogged down in details with this approach.  If you have the spare time, you can budget your smaller items.


Hopefully, you've gained some insight on better optimizing your spending from this article.  Prioritize your efforts on the big ticket items is the bottom line (and move on to the smaller expenses if it's worthwhile.)  I will expand on several of the concepts here in future posts (as well as provide some Investing and Productivity tips.)  Thanks for reading and stay tuned!

Tuesday, March 4, 2014

Basics of risk and return

Investing is a risky endeavor.  There is a real possibility of losing some of your hard earned cash.  But why bother?  Because there's a greater possibility of earning more cash in the long run, if you invest properly!

Suppose you have 4 investments all requiring $100 upfront and the outcome is determined by a flip of a coin.

#1:  Pays $130 on heads, $90 on tails.
#2: $220 on heads, nothing on tails.
#3: $110 on heads, nothing on tails.
#4: $220 on heads, $90 on tails.

#1 and #2 have the same expected return but #2 has a higher risk since there's the possibility of losing your entire $100.  So most people, being risk averse, will pick #1.  No sane person will pick #3 which has a negative expected return.  Many investments masquerade as something innoculous but are similar to #3..  fortunately, they can be uncovered with some due diligence and research.  More on that in a later post.  #4 has the highest expected return and the same risk as #1 but in reality, you will almost never find such an investment (or else we will all be millionaires.)  More on that in a later post too.

Bottom line is, investing requires money to make more money in the future, and money lost cannot be invested to generate income and capital gains for the future.  So it is important to determine your risk tolerance before you make the leap and invest.