Other People’s Money
Financial Advice for Young Professionals
Leverage… It’s a beautiful thing, but can also be a double edged sword. Let’s look at our beloved President Trump as an example. In the 90’s his annual loan payments were $300 million, with personal debt of just shy of $1B and debt within his organization amounting to $9B. It would be foolish to only consider the liabilities on the balance sheet of this real estate mogul. What are we getting at here? It’s simple; it takes money to make money.
Real estate is capital intensive, with higher start-up costs, so let’s take a look at the stock market first as a cheaper alternative.
Jan 1st 1950 – Dec 31 2016 – S&P500 averages 12.72% per year.
Jan 1st 2009 – Dec 31 2016 – S&P500 averages 14.93% per year.
Let’s assume you get an unsecured line of credit for 5%.
If you took $10 000 and invested in the S&P500 in 2009 it would’ve grown to $30 441.58 by 2016.
The interest payments would’ve amounted to $500 per year or $4000 over the life of the investment. This would leave you with proceeds of $26 441.58 and a net profit of $16 441.58. Pure profit of over $16K from OTHER PEOPLE’S MONEY. You didn’t put up a dime..
S&P 500 calendar year returns
Employing a strategy like this means you are taking a passive approach and would have to open a self-directed trading account and purchases an ETF like SPY. ETF’s are typically low cost and will track the underlying index minus fees which are typically anywhere from .10% – .50%. This remains a great way to participate in the markets despite your financial knowledge.
Now let’s say you wanted to take this a step further. If you invested some time and researched some of the best Portfolio Managers at the best Asset Management shops you would be doing yourself a favour. We talked about buying an ETF like SPY in the previous paragraph. This is the opposite, an active approach route would allow you the potential to outperform the broader index like the S&P 500 for example. Here’s the Fidelity Contrafund which has outperformed the S&P500 over all major time periods. The difference between the two is the Portfolio Manager decides which companies from the S&P500 will perform the best and includes them in the Mutual Fund. You get out what you put in; a little due diligence means more money in your pocket.
Small preparation like this will help you create buckets of money. Emergency savings, one of everything, down payment, and retirement savings.
This leads us to our next form of OPM. Real estate. Let’s assume you’re purchasing a $300 000 dollar home and putting 20% down or $60 000. As per US Census data, the average home has appreciated 5.4% annually from 1963-2008. We’ll save you the math but you’re basically participating on 5.4% appreciation on a $300 000 investment for your initial deposit of $60 000 and monthly mortgage payments which should have a lower rate than the appreciation percentage which works in your favor.
Looking to get started? Buy this book so that you will know how to construct a diversified portfolio and you don’t get eaten alive out there. A Beginner’s Guide to Investing: How to Grow Your Money the Smart and Easy Way
Time is of the essence. Good luck!