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HOT TOPIC Living Unscripted - Handling millions harder than making them?

JScott

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If you have a trusted investment adviser it is not a difficult thing. He charges you a fee as a percentage of the AUM, for instance one percent.
I've never understood why financial advisers charge as a percentage of AUM, as opposed to a percentage of profit/growth relative to some baseline index that represents public equity market returns?

Well, obviously I understand WHY they do it -- they do it so that they don't have to invest successfully to earn a paycheck.

But, I don't understand why the general public accepts this structure for financial management. Why should someone get paid to manage money if they can't beat the S&P or some other index that is simple for the general public to invest in.

Long story short, I'd never take investor money where my returns weren't directly tied to theirs; and I'd never invest money with someone who didn't have their financial interests aligned with my own.
 

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Kevin88660

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I've never understood why financial advisers charge as a percentage of AUM, as opposed to a percentage of profit/growth relative to some baseline index that represents public equity market returns?

Well, obviously I understand WHY they do it -- they do it so that they don't have to invest successfully to earn a paycheck.

But, I don't understand why the general public accepts this structure for financial management. Why should someone get paid to manage money if they can't beat the S&P or some other index that is simple for the general public to invest in.

Long story short, I'd never take investor money where my returns weren't directly tied to theirs; and I'd never invest money with someone who didn't have their financial interests aligned with my own.
Yes partly you are right they need a paycheck regardless of how he market performs.

But the main reason as I see it is how much your portfolio gains in one year has very little to do with the financial adviser.

Just for example at 2016 year end if a client sees an advisor and the client says that he is high risk taker. He is willing to suffer a large drawdown in a bad year in return for long term growth. The advisor recommends a portfolio with a heavy concentration in growth stocks and exposure to technology. Next year the Trump tax cut lead to a huge rally in equity in 2017. The high risk portfolio gained 35 percent. It is not much due to credit of the advisor that so much money is made in that year. It is large due to the ability of the client to take risk and in a good year he will do very well. It would not be fair for the client to give a high performance fee to the adviser just for the gain in that year.

In short the adviser is being paid for his advisory. The client ultimately is the one fighting for the war. The adviser helps to provide his knowledge and experience. He gives the client a menu of different strategies and tell him what is the pro and con of different investment strategies. He gives a recommendation based on the client’s risk appetite and preference but it is ultimately the client’s decision in what to invest.

For instance the client has some new money coming in and he wish to top up his investment. The client may ask himself and the adviser if he should top up now or wait for trump to do something stupid and the market goes lower. Such decision will affect his return for that year but in all likelihood it is a guessing game. Neither the client nor the adviser knows the answer to that questions.
 

Kevin88660

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If you looking for performance based funds to invest then you have to look into hedge fund and managed accounts (traders who manage your money).

This is the space of “active investing” whereby the investment team actively monitor the market to make money for you. They are supposed to generate a return regardless of how the broad market moves. If you make a call to your private banker they will be very happy to introduce funds managed by their proprietary trading team.

But if you study the details of such funds I guess you would probably not like to invest your money into them. This is because such funds are costly. You pay a performance fee ON TOP of the annual management fee to them.

The active investment space is perceived by the investment community as largely a disappointment. People did the research and realized the extra gain they provide was not worth of the fee over the years.

Now the trend is moving towards passive investing- Do it yourself to buy and hold low cost instruments. If the client is not comfortable to totally do it by himself and needs a guiding hand, which is case for most clients, they would prefer to have a investment adviser to teach then how to do it.
 

Kevin88660

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Sorry I miss read your question. You said why not they charge a fee based on superior performance relative to a baseline index. No body dares to do it. That is a good question.

The closest you can get is to have your money run by managed accounts. You get your money managed by math and computing PHD who run algorithms to make money for you. They get nothing if they do not make money. In return they charge you 20-30 percent on any profit made. They charge you a high performance fee to compensate for not having a management fee.

At end of the day I guess the fund managers want to cover their downside as well.
 

JScott

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In short the adviser is being paid for his advisory. The client ultimately is the one fighting for the war. The adviser helps to provide his knowledge and experience. He gives the client a menu of different strategies and tell him what is the pro and con of different investment strategies. He gives a recommendation based on the client’s risk appetite and preference but it is ultimately the client’s decision in what to invest.
Absolutely. So, why should the adviser get paid a different amount depending on how much money the client has under management?

If someone has $20M under management and someone else has $21M under management, do you give better advice to the person with $21M under management?

Obviously, if you spend more time advising a client you should be getting paid more, but more $$$ under management doesn't necessarily equate to more time spent on that client or more complex advice.

If someone with $100M is seeking preservation, that may require a whole lot less time, knowledge and effort on your part than someone with $10M seeking high-risk growth. Yet you're necessarily charging the $100M client 10 times as much.

So, not only are you getting paid regardless of results, but you're also getting paid regardless of how much time, knowledge and effort is specifically required for that client.

Again, long story short, your interests are not well-aligned with your clients' interests in the short-term.
 

JScott

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At end of the day I guess the fund managers want to cover their downside as well.
Fund managers' compensation is aligned with their clients. If their clients make a little money, they make a little money. If their clients lose money, they lose money (their time is their biggest asset and if they don't make money, they are working for free). If their clients get insanely wealthy, they get insanely wealthy.

Seems like a reasonable model.

The consulting model also seems reasonable -- you spend 10 hours listening to your client's needs, considering their situation, offering advice and potentially helping them implement that advice, and you get paid for the 10 hours of work you put in. Regardless of whether that client has $100 or $100M.

In the first model, the manager shares risk -- so it's reasonable that their compensation is related to the investment. In the second model, the manager doesn't share any risk, so the amount of money at play shouldn't make a difference in the manager's compensation.

This certainly isn't an attack on you... This is just pointing out that the industry has colluded to create a compensation model that doesn't make sense for consumers. (Note that I'm in the real estate industry, and this industry has done the same thing with transaction commissions. Good for industry professionals; bad for industry clients/customers.)
 

Kevin88660

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Absolutely. So, why should the adviser get paid a different amount depending on how much money the client has under management?

If someone has $20M under management and someone else has $21M under management, do you give better advice to the person with $21M under management?

Obviously, if you spend more time advising a client you should be getting paid more, but more $$$ under management doesn't necessarily equate to more time spent on that client or more complex advice.

If someone with $100M is seeking preservation, that may require a whole lot less time, knowledge and effort on your part than someone with $10M seeking high-risk growth. Yet you're necessarily charging the $100M client 10 times as much.

So, not only are you getting paid regardless of results, but you're also getting paid regardless of how much time, knowledge and effort is specifically required for that client.

Again, long story short, your interests are not well-aligned with your clients' interests in the short-term.
If you have a large sum of money to be managed and you do not feel that you should be paying more simply because you have more money you can go for fee based adviser.

They charge hourly like lawyers and doctors.

I am based in Singapore. This fee model is not poplar because people wanted free advice. Most adviser here are tied to a product distributor company. So they will recommend products that are affiliated to the distributor. So the client will be paying management fee to the funds recommend by the adviser. In return the distributer and adviser are paid sales commission.

There is always conflict of interest. And it is not limited to the finance industry. It really depends on how you vet the adviser and speak to someone whom you can trust and not for a quick buck.
 

Kevin88660

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Fund managers' compensation is aligned with their clients. If their clients make a little money, they make a little money. If their clients lose money, they lose money (their time is their biggest asset and if they don't make money, they are working for free). If their clients get insanely wealthy, they get insanely wealthy.

Seems like a reasonable model.

The consulting model also seems reasonable -- you spend 10 hours listening to your client's needs, considering their situation, offering advice and potentially helping them implement that advice, and you get paid for the 10 hours of work you put in. Regardless of whether that client has $100 or $100M.

In the first model, the manager shares risk -- so it's reasonable that their compensation is related to the investment. In the second model, the manager doesn't share any risk, so the amount of money at play shouldn't make a difference in the manager's compensation.

This certainly isn't an attack on you... This is just pointing out that the industry has colluded to create a compensation model that doesn't make sense for consumers. (Note that I'm in the real estate industry, and this industry has done the same thing with transaction commissions. Good for industry professionals; bad for industry clients/customers.)
If you talk about the performance based hedge fund, they used to be a shining example on how they should set the gold standard in wall street, until they don’t.

They usually charge a one percent management fee and twenty percent performance fee.

The problem is they are expensive investment vehicles to beat the market. People are realizing that and hence running away from it. Why don’t I just pay 1.5 percent management fee to a none performance based mutual fund which I can save a lot more?

It is possible to have a new hedge fund manager who set up a new fund with a very pro-investor compensation structure. He can ask for no management fee and a very low performance fee. This is because he is new in the business. And he needs to have a big investor to seed his business to have sufficient AUM and hence profit to cover the overhead. And in reality the investors are not looking at him saying “ Oh good you have a very decent profit sharing structure to take care of my interest as well”. They are probably to give it a miss for having no track record.
 

SD Entrepreneur

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The last part of Unscripted hit really close to home for me, as I have needed to start making money on my money years ago already. The issue is that I have been too busy making money in my business instead (or enjoying my free time). This results in 7 figures sitting in cash and withering away it's value to inflation.

MJ makes everything seem very simple and easy...However I feel like there is a lot glossed. Which is fair considering Unscripted is not an investment book. But to be honest, it left me more lost than when I began.

Some inconsistencies:

1.
On the one hand: We should just be able to follow some simple rules and something like 5% year after year is very easy to get.​
On the other hand: Someone must have not told the guys that do this for a living, since all the funds lost their asses during the crash. (Even the "top dogs").​
2.
On the one hand: I need to be in the know enough about the state of the economy and different industries I am investing in so I can manage the money intelligently.​
On the other hand: MJ says he just takes a daily "10 second portfolio peek". It seems like this glosses over all the leg work in the background that has to happen for some days to be just a peek.​
3.
On the one hand: I recognize that there is no free lunch and I need to do my own research.​
On the other hand: It sounds like "unscripted" means the goal is to go from business owner to professional financial adviser (of myself).​
4.
On the one hand, I believe MJ and how well he has been doing.​
On the other hand: The stock market has just been in a crazy rally for almost a decade and most people made money even with poor decisions.​

Now switch gears to my problem. My time is still best spent investing into my business and not figuring out investing. If it was so low risk and easy, then this service would just be offered. To an average bystander, it seems like this exact service is offered. They call themselves financial advisers, portfolio managers or simply the guys that run funds. So where are the guys that are actually competent? Not everyone is the fresh graduate with only book knowledge. They supposedly have the same ideas of diversification (hence why a fund owns so many different stocks). How can I give someone all my money and get a guaranteed 4% back every year and let them keep the rest? I'm begging to give them my money!

The biggest thing I see wrong in the financial industry is there is no Skin in the game. They make money regardless of whether they make me money. Are there any firms or advisers out there that only make a percent of profit? I would be willing to let them make alot of money from me.

On the other hand..... I doubt banks are giving mortgages for 3.5% if they thought they can make 4% somewhere else........So the best I've been able to make of the situation is that unless I want to start working as a hedge fund manager as my 'retirement' job, I have to keep making money till I have enough to amortize over the rest of my life. Which is unfortunately a much bigger number. Can anyone provide any words of wisdom to straighten me out?
Check out The Simple Path to Wealth for a very simplified approach. Don't worry about market crashes, the market historically recovers quickly from them and they are buying opportunities!
 

biophase

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Yes partly you are right they need a paycheck regardless of how he market performs.

But the main reason as I see it is how much your portfolio gains in one year has very little to do with the financial adviser.

Just for example at 2016 year end if a client sees an advisor and the client says that he is high risk taker. He is willing to suffer a large drawdown in a bad year in return for long term growth. The advisor recommends a portfolio with a heavy concentration in growth stocks and exposure to technology. Next year the Trump tax cut lead to a huge rally in equity in 2017. The high risk portfolio gained 35 percent. It is not much due to credit of the advisor that so much money is made in that year. It is large due to the ability of the client to take risk and in a good year he will do very well. It would not be fair for the client to give a high performance fee to the adviser just for the gain in that year.

In short the adviser is being paid for his advisory. The client ultimately is the one fighting for the war. The adviser helps to provide his knowledge and experience. He gives the client a menu of different strategies and tell him what is the pro and con of different investment strategies. He gives a recommendation based on the client’s risk appetite and preference but it is ultimately the client’s decision in what to invest.

For instance the client has some new money coming in and he wish to top up his investment. The client may ask himself and the adviser if he should top up now or wait for trump to do something stupid and the market goes lower. Such decision will affect his return for that year but in all likelihood it is a guessing game. Neither the client nor the adviser knows the answer to that questions.
If this is the case, why is the fee tied to the percentage of invested assets? Why not just make it $5000 a year if it’s all advisory?

Edit: just read Jscotts post below and it was essentially the same question.
 
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Kevin88660

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If this is the case, why is the fee tied to the percentage of invested assets? Why not just make it $5000 a year if it’s all advisory?

Edit: just read Jscotts post below and it was essentially the same question.
This model exists. Some financial advisers charge an hourly fee for consultation like a doctor or lawyer.

But most clients do not like this and hence it is never popular.

Most clients prefer “free advice” to buy products from a specific distribution channel that the adviser is tied to. The client then pay either a distribution cost (reduced surrender value) or a annual management fee to the product manufacturer, who then pays a commission to the adviser.
 

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e_fastlane

e_fastlane

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I just checked, you had the same question a year ago. What steps have you taken since then with all the advice that was given?
I got more serious about putting together a plan (Appreciate the kick in the buy from you guys!) and did alot more research. Overall I decided that I was exactly right about most of my judgements of the situation (for my situation). My primary mistake was just not capitalizing on virtually no risk vehicles to help fight inflation and putting aside a little money every month that "I don't care about" into things that have in fact shown to grow for 80+ years. Putting in a little every month alleviates the anxiety of "is this the right time to invest". Yea, I know. It's not eaking out the most I possibly can. But doing so is just slapping a new Job Title on myself. You can skin it any way you want, but your just dancing around the truth. If it's something I got to do for money that I don't want to do, it's a job. Didn't I make money to not be a slave to it? Unpack that conundrum.

I'm sure that as I grow older, have more free time, develop more interest in investing, etc... It will morph into a hobby and maybe one day I will actively manage a portion of my money as many on here are.

So anyways, I took action to right my wrongs.

I put in 90% of my money into vanguards treasury money market and thats basically liquid cash being shielded from inflation (for the most part).

Then, every single month I put ~5 figures into a distribution of 3 vanguard funds ( total US market/ total world market/bond market). It's about as safe "long term risk" wise as it gets for stocks and it allows me to start taking advantage of the historic growth of the stock market over the decades. I will gain whatever gains I am able to while the economy is rising, then when it tanks I won't lose sleep over it. Now that is about as close to investment not being a job as you can get... While still reaping enough benefit. Literally 5 minutes a month physically and even more importantly how the stock market is doing, how tech is doing, what Trump has done, what the newspaper says, and all other stock changing news is not living rent free in my mind or stealing my mental bandwidth outside of that 5 minutes a month I sit down and buy the same exact 3 investments.
 
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e_fastlane

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I can tell you about my personal experience. Then you can judge if the path I took suits you or not.

I used to have my own business. The profit it generated were much higher than my and my family's expenses, so it allowed us to accumulate a lot of capital.

It came at a cost. 10 to 14 hours a day, a lot of stress and anxiety, sleepless nights and a constant feeling that life was happening somewhere else while I was busy working.

I got the opportunity to sell my business. I did the math: is a 3-4% of what I'm getting from the sale enough to sustain my and my family's expenses, without touching the principal and without touching my previous savings?

The answer was yes and I took the deal.

After that, I researched for an "out of the box" strategy to manage my money. Searched the internet, talked to many wealth managers and private bankers. Found NOTHING tailored to someone in my situation.

The best thing I read is the chapter in Unscripted, which is very general and brief. But I used it as a blueprint.

Then I spent 18 months studying and researching. I read books, blogs and newsletters. After that, I came up with a strategy that, I believe, suits my needs and allows me to sleep well at night. I also selected a wealth manager that acts as a partner/consultant and not as a "Trust me, I take care of everything for an X% fee, whether you earn something or not" scammer.

Now my "job" is reading 3-4 newsletters per month and check my dividend portfolio with my advisor once every quarter.

In terms of "earnings", my time was much better spent in my business. In terms of quality of life, I feel 100 times better than a king now!

No, having money does not free you from keeping learning and educating yourself. And nothing in life is 100% passive. But this is something that comes pretty close to it.

Is it the best path for everyone? Definitely no. I know people that would go crazy for not being busy and hard working all the time. That's just not me.

If you enjoy what you are currently doing, start educating yourself in money management as a hobby, so you'll be ready when the time comes. But if you have enough money to live off a 3-4-5% of your principal, you don't need to become a hedge fund manager. you don't need to grow your capital 20% per year taking irresponsible risks. You can buy safe and stable companies and just cash the dividends. And 3-4 times a year, you just check that your companies are still doing fine, otherwise you sell and you buy something else.

I hope my experience can help clear the confusion you seem to have in your mind!
Keep in mind that a rising tide raises all ships. It's the boom of the century. Everyone is winning. Both good and bad ideas. My uncle's highly erudite strategy of investing in the tips he gets at his jobs water cooler is making him BANK. I fully expect to hear him talking about how wallstreet is scamming hard working americans just as soon as the crash comes. It wasn't Joe's advice that was bad, that made him tons of money. It was wallstreets scams.

I'm sure you see where my anecdotal story is saying.

I don't doubt that you, MJ and others take this type of thing into account and will adapt to the market when the crash happens. But there is no way around it. Unless you know something that others don't (please share that sweet sweet inside information then!) or you luck out on timing, statistically, you will likely lose a big portions of your gains when the crash happens. Again, almost regardless of strategy. Then slowly start the cycle back of gaining it back. Averaging around what just the s&p500 will bring. A little more, or a little less. Statistically, likely, a little less.

There are supercomputers being used to crunch WAY more factors than you could ever take into account. You are looking at factors quarterly, they are doing it every second. They haven't shown to be able to beat just investing in an an index, by much.

What MJ does with the Paycheck Pot is a bit different, but mainly for psychological reasons. Ultimately his invested funds will be effected just the same by the crash, but yes, he will keep getting dividends which may be psychologically important while he waits for everything to come back up as it historically does. Thats great. But there is no way around the fact that the only reason it works is because he made an ENORMOUS truck full of money and needs so little of it to spend every year (he does not hide this fact, so nothing nefarious is going on).

That's what my research has shown me.
 
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Kevin88660

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Keep in mind that a rising tide raises all ships. It's the boom of the century. Everyone is winning. Both good and bad ideas. My uncle's highly erudite strategy of investing in the tips he gets at his jobs water cooler is making him BANK. I fully expect to hear him talking about how wallstreet is scamming hard working americans just as soon as the crash comes. It wasn't Joe's advice that was bad, that made him tons of money. It was wallstreets scams.

I'm sure you see where my anecdotal story is saying.

I don't doubt that you, MJ and others take this type of thing into account and will adapt to the market when the crash happens. But there is no way around it. Unless you know something that others don't (please share that sweet sweet inside information then!) or you luck out on timing, statistically, you will likely lose a big portions of your gains when the crash happens. Again, almost regardless of strategy. Then slowly start the cycle back of gaining it back. Averaging around what just the s&p500 will bring. A little more, or a little less. Statistically, likely, a little less.

There are supercomputers being used to crunch WAY more factors than you could ever take into account. You are looking at factors quarterly, they are doing it every second. They haven't shown to be able to beat just investing in an an index, by much.

What MJ does with the Paycheck Pot is a bit different, but mainly for psychological reasons. Ultimately his invested funds will be effected just the same by the crash, but yes, he will keep getting dividends which may be psychologically important while he waits for everything to come back up as it historically does. Thats great. But there is no way around the fact that the only reason it works is because he made an ENORMOUS truck full of money and needs so little of it to spend every year (he does not hide this fact, so nothing nefarious is going on).

That's what my research has shown me.
High yield investment typically has less volatility. This means that if market crash MJ’s paycheck pot will fall a lot less.
 
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e_fastlane

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High yield investment typically has less volatility. This means that if market crash MJ’s paycheck pot will fall a lot less.
Which is besides any point since as High Yield Investments, they are inherently more risky and likely to have the investor lose more money at any on point, than normal investments.
 

Kevin88660

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Which is besides any point since as High Yield Investments, they are inherently more risky and likely to have the investor lose more money at any on point, than normal investments.
Dividend stocks have far less volatility than the broad market.

Investment grade corporate bond etf can give you close to 4 percent yield.

Even none investment grade corporate bond etf that carry higher default risk, isn't that risky since you are diversified and individual entity’s default risk does not impact your holdings that much.

The risk I am talking about is mark to market capital depreciation risk, which is the biggest risk in the case if financial crisis. That risk is much smaller if you are just holding dividend stocks and bonds, compared to a typical equity index.
 
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e_fastlane

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Dividend stocks have far less volatility than the broad market.

Investment grade corporate bond etf can give you close to 4 percent yield.

Even none investment grade corporate bond etf that carry higher default risk, isn't that risky since you are diversified and individual entity’s default risk does not impact your holdings that much.

The risk I am talking about is mark to market capital depreciation risk, which is the biggest risk in the case if financial crisis. That risk is much smaller if you are just holding dividend stocks and bonds, compared to a typical equity index.
There is no free lunch. I won't get in an argument about each type of investment and it's risks. But yield in general is directly tied to the chance of loss (or some other cost, like opportunity cost, as an example). Period. It's not always a perfect correlation, but a free open market get's it right, on average. If your understanding of a specific vehicle shows it's reward doesn't line up to it's risk, it's likely that there is something not being taken into account.

I am not saying anything controversial. It's basic principles. On average, a free market will produce a corollary risk/reward ratio. The only loophole here is if you have any REAL insider knowledge. Which is illegal for that exact reason.

EDIT: I did want to add that I acknowledge the risks may be of different types (like how I mentioned opportunity cost). This means that it may make more sense for someone to do one type of investment than another. So I am not saying that what MJ does is bad. It may certainly be the best thing he can do for his scenario. I am just saying, there is no free lunch and because of that we just all have to decide how much and what kind of risk may be best for us.
 

Kevin88660

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There is no free lunch. I won't get in an argument about each type of investment and it's risks. But yield in general is directly tied to the chance of loss (or some other cost, like opportunity cost, as an example). Period. It's not always a perfect correlation, but a free open market get's it right, on average. If your understanding of a specific vehicle shows it's reward doesn't line up to it's risk, it's likely that there is something not being taken into account.

I am not saying anything controversial. It's basic principles. On average, a free market will produce a corollary risk/reward ratio. The only loophole here is if you have any REAL insider knowledge. Which is illegal for that exact reason.
It is not a free lunch. Because dividend stocks and corporate bonds have less upward capital appreciation potential. It is a classical defensive portfolio.

Companies that pay dividends are usually stable enterprise in traditional business that do not see huge growth potential. If not they would have reinvested the cash instead of paying dividends to shareholders.

For the past ten years if you invested in Tech they outperform the defensive portfolio significantly.
 
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e_fastlane

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It is not a free lunch. Because dividend stocks and corporate bonds have less upward capital appreciation potential. It is a classical defensive portfolio.

Companies that pay dividends are usually stable enterprise in traditional business that do not see huge growth potential. If not they would have reinvested the cash instead of paying dividends to shareholders.

For the past ten years if you invested in Tech they outperform the defensive portfolio significantly.
Until the landscape changes and it can change gradually or suddenly. Sears too was once a stable powerhouse if I remember correctly. Buying a house used to be considered a"foolproof investment" as well. Until it wasn't...in ONE DAY.

Don't get me wrong. I understand what you are saying. I agree with your initial statement on it's face. But what I said in my post that you quoted was just meant as an example and to hint at something deeper. Those stocks may not lose as much principle as other stocks during a typical crash. But they have risks hidden elsewhere then.
 

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Have you looked at commercial real estate? I have friends in this business. It can be a pretty low-stress way to make money if you structure it well.
 

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But yield in general is directly tied to the chance of loss (or some other cost, like opportunity cost, as an example). Period. It's not always a perfect correlation, but a free open market get's it right, on average. If your understanding of a specific vehicle shows it's reward doesn't line up to it's risk, it's likely that there is something not being taken into account.
I was going to say the same thing (I said it on page one of this thread), but didn't feel like debating any more in this thread. You said it better than I could have anyway...

Everyone needs to read the above again. And again. And again. This truism must be internalized if you want to be a successful investor.
 

Jon L

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.....Sounds alot like a job... Starting a business is no joke.
I'm curious what you're looking for in an investment scheme? It seems like you want something that doesn't require work or knowledge and that pays better than a bank. Your excellent point quoted by JScott above shows that you know this kind of thing doesn't exist. So...what do you want? And, do any of the above investment schemes sound interesting to you?
 

Ozz81

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Keep in mind that a rising tide raises all ships. It's the boom of the century. Everyone is winning. Both good and bad ideas. My uncle's highly erudite strategy of investing in the tips he gets at his jobs water cooler is making him BANK. I fully expect to hear him talking about how wallstreet is scamming hard working americans just as soon as the crash comes. It wasn't Joe's advice that was bad, that made him tons of money. It was wallstreets scams.

I'm sure you see where my anecdotal story is saying.

I don't doubt that you, MJ and others take this type of thing into account and will adapt to the market when the crash happens. But there is no way around it. Unless you know something that others don't (please share that sweet sweet inside information then!) or you luck out on timing, statistically, you will likely lose a big portions of your gains when the crash happens. Again, almost regardless of strategy. Then slowly start the cycle back of gaining it back. Averaging around what just the s&p500 will bring. A little more, or a little less. Statistically, likely, a little less.

There are supercomputers being used to crunch WAY more factors than you could ever take into account. You are looking at factors quarterly, they are doing it every second. They haven't shown to be able to beat just investing in an an index, by much.

What MJ does with the Paycheck Pot is a bit different, but mainly for psychological reasons. Ultimately his invested funds will be effected just the same by the crash, but yes, he will keep getting dividends which may be psychologically important while he waits for everything to come back up as it historically does. Thats great. But there is no way around the fact that the only reason it works is because he made an ENORMOUS truck full of money and needs so little of it to spend every year (he does not hide this fact, so nothing nefarious is going on).

That's what my research has shown me.
I'm not sure if you understand completely the purpose of a Paycheck Pot.

The dividends are not a "psychological relief" when the market crashes (because it will, we all know, it always did and will always do).

The dividends are meant to SUBSTITUTE the income generated by your active, full time job. The dividends are paid out of a portion of the earnings of the companies you own. If THIS is your goal (at least, this is the goal of a Paycheck Pot), you don't care about market fluctuations or crashes, as long as the companies you own are still doing well, as far as their business is concerned. I don't care if the supercomputers used in High Frequency Trading operate in the millisecond timeframe and I check my portfolio once every quarter. I'm not checking stock prices, I'm checking earnings, payout ratios and business fundamentals!

What you describe is an accumulation plan: you set aside a certain amount of money every month in a very well diversified set of ETFs/funds. That's a good long term strategy to save and invest, but has nothing to do with a Paycheck Pot.

Just to be clear!
 
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e_fastlane

e_fastlane

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I'm curious what you're looking for in an investment scheme? It seems like you want something that doesn't require work or knowledge and that pays better than a bank. Your excellent point quoted by JScott above shows that you know this kind of thing doesn't exist. So...what do you want? And, do any of the above investment schemes sound interesting to you?
I was not looking for business ideas, which is basically what most peoples advice ended up being.

My point was that public rhetoric is that "money makes money". Purposefully or not, that is also an idea that Unscripted gives (to some readers atleast). The idea that once you make enough money, thats where you can stop working and finally kick back and relax while your money is doing all the work for you.

From my research, that does not exist unless you have ALOT more money than is being implied and understood by most lay people and readers. Basically the type of money that the money working for you is just an afterthought for future generations and you could just live on the principle otherwise.

Yea, 3% might be reasonably easy to get with almost no work and risk. But thats basically just inflation proofing your money. So your living the rest of your life on capital. But lets just assume that 5+% is reasonably easy to get without work and risk (Not a safe assumption). If you want to spend 300k a year, you need 6,000,000 in the bank. OK. Thats reasonable . Oh but wait, there's more to the story that's not mentioned. If your actually smart and want to be safe, you know you shouldn't put all your money in the market and you shouldn't have more than 10-20% in the market. That number just inflated your principal requirements to 60,000,000! Oh how that picture has changed. Of course it's not that cut and dry, as you can use part of your capital to subsidise the yearly earnings. But you are likely delusional to think that you will have 60 million in the bank but will be ok only spending 300k a year. You know whats better than being 6ft and crammed into economy seats to your japan vacation? First class where you can actually almost enjoy the flight. There goes 40k for you and your 2 kids. I know some people will be fine with 300k a year while being a deca-millionaire, but most wont.

My original posts purpose was to see "if I'm missing something". I value your guys insights and it's always good to see other smart peoples point of views. I have concluded that no, I am not missing any puzzle pieces here.
 
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e_fastlane

e_fastlane

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I'm not sure if you understand completely the purpose of a Paycheck Pot.

The dividends are not a "psychological relief" when the market crashes (because it will, we all know, it always did and will always do).

The dividends are meant to SUBSTITUTE the income generated by your active, full time job. The dividends are paid out of a portion of the earnings of the companies you own. If THIS is your goal (at least, this is the goal of a Paycheck Pot), you don't care about market fluctuations or crashes, as long as the companies you own are still doing well, as far as their business is concerned. I don't care if the supercomputers used in High Frequency Trading operate in the millisecond timeframe and I check my portfolio once every quarter. I'm not checking stock prices, I'm checking earnings, payout ratios and business fundamentals!

What you describe is an accumulation plan: you set aside a certain amount of money every month in a very well diversified set of ETFs/funds. That's a good long term strategy to save and invest, but has nothing to do with a Paycheck Pot.

Just to be clear!
Everything you just mentioned is just psychological relief.

Substitute income? What are you talking about. Look at my previous posts to see where I am coming from. To actually effectively substitute income, you would need to either

1. Have a much larger principle than most people realize; To the point that this "investment strategy" is really just helping future generations.

2. Willing to take much larger risk. People love to gloss over risk as if it's some abstract calculation you can write off by being smart enough to of calculated it in the first place. Don't forget, there are real work implications to risk. It's a statistical game of chance. Your gambling with your livelihood. Thats cool. But don't pretend thats not what your doing and what your selling.

3. You sign yourself up for another business. Which is cool. But then it's not "I do nothing while my money brings in my income". If the new business is your hobby and you don't consider it a job... Also cool.... But also doesn't make it not a job. Just one you enjoy. That could be the point of all this, but that's a different thing than the "plan" actually being sold.

4. You lower your living standards drastically, or atleast relative to the amount of money you have. You can do this without having any money though and plenty of people do this with regular jobs and low capital. You will be making most of the same arguments super couponers and super savers make. Totally valid if thats how you want to live, but most people on here don't. The point of making the money is to live how you actually want to live.

5. Some combination of all the previous points.
 

Ozz81

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Probably what you are missing is that nothing is 100% passive, hands-off, brain-off, live-like-a-king without any effort or risk. And you consider 99% of the above not enough.

Probably the Paychek Pot lifestyle is not for you. Not yet, at least.

My advice is to keep on working and earning that nice juice and keep looking for ideas.

My best!
 
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e_fastlane

e_fastlane

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Probably what you are missing is that nothing is 100% passive, hands-off, brain-off, live-like-a-king without any effort or risk. And you consider 99% of the above not enough.

Probably the Paychek Pot lifestyle is not for you. Not yet, at least.

My advice is to keep on working and earning that nice juice and keep looking for ideas.

My best!
I vehemently disagree with your "99%" comment and that is in fact the point, and the problem that I am addressing with my thread. The irony here is strong and I don't know how you can read this thread and come away with your conclusion.

If you are saying the 99% then you either are intentionally misleading or ignorantly don't know that what the real percent is like (Let's say 30%). Big order of magnitude difference. My business that I work full time is also 99% of the way there then. I'm living GREAT. I'm mostly enjoying what I do. I look forward to coming to work. But I'm not selling my life as passive income that requires no work.

I am not trying to be abrasive here and I say these things with the upmost of respect while still disagreeing. I just legitimately think what you are saying is misleading and damaging. It's selling a delusion to people that are trying to make something of themselves.
 

Ozz81

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Ok, no problem! I don’t have to and I don’t need to convince you or sell you anything.

To be honest, keeping up with this thread kept me busier than checking my portfolio this month.

I’m sorry I couldn’t be of any help.

Cheers!
 

JScott

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If your actually smart and want to be safe, you know you shouldn't put all your money in the market and you shouldn't have more than 10-20% in the market. That number just inflated your principal requirements to 60,000,000!

My original posts purpose was to see "if I'm missing something".
I think what you're missing is that just because you only have 10-20% of your money in the market DOESN'T MEAN that the other 80-90% is just sitting in a saving account.

You can have 10-20% of your money in equities, 10-20% of your money in real estate, 10-20% of your money in notes, 10-20% of your money in businesses, etc. As long as your blended average return is 5%, your numbers still work out.

Now, that said, I'm not a big fan of the "only 10-20% of your money in the market." Personally, I'd rather spend a year or two learning about a couple aspects of investing, and then put a more significant amount of money into each. Sure, you can put some of your money into the market, but you don't have much control of the stock market. There are other asset classes where you do have more control.

Of course, that requires upfront study/research/work... That siad, I think most people who aren't willing to put in a little effort to better understand investing principles probably aren't going to accumulate the $6M in the first place...
 

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