Rich Dad : The Best 20th century Personal Finance

Just want to make sure that you know Robert has a site that teaches people all about personal finance for FREE, it is one of the most comprehensive resources as well ... its called RichDadWorld.

Even if you don't like this old type of personal finance concepts, you should still sign up and browse through the resources briefly. Its a good way to counter check if you have missed anything. Its almost a guarantee you can find some eye opener concepts there or some key concept you already knew but forgot.

Basically it says you record down how much you earn and spend then set a goal and achieve what you really want in life.

Some may ask why is this called last century's methods ? Well, lets look at some facts ...

1. Starting such an exercise is exhausting

2. Keep doing until it becomes a habit is even tougher

3. 90% or Most people WILL NOT be able to do it

4. The Rich didn't really do this before they become rich

Come on, lets face it, as much as I personally a great fan of Rob, his first book is all about his passion. Dying to share what he has done right especially in property investment. Since then, all other works he did are all about business. So for NOW, if you ever approach Rob hoping him to change your life, keep your fingers cross. His aim is in expanding his bussiness. With that note, it is still SUPERB to work something out with Rob if what you have in mind is 'business'.

Ok, I felt bad already making such a comment. So lets add another positive note. Among all the Riches in the world, Rob is the ONLY person I know who are willing to share his failure openly. May be you need to buy him a few more beers before he opened up but relatively he did open up so much more willingly than .... and the person who is so scare to share his faiulre - Mr. Trump.

With the above 4 points, I mark his site a 20th century personal finance. The only thing missing from 20th century personal finance to 21st century is psychology. Intuitively human are lazy, when not paying attention and close focus, we tends to always choose the easiest path. 21st century personal finance is all about securing a solid personal finance without trying too hard ... by using the right ways ( easiest and laziest path possible ).

Lastly I need to re-emphasize ... there is nothing wrong with 20th century personal finance. Here comes another fact ... if you can do all things mentioned in 20th century personal finance persistently, you are almost "guarantee" a success in your personal finance. However, statistically only 10% of the people would be able to make it. If you think you are the 10%, by all mean go do it! Another great point is ... there is really nothing to lose. Even if one day you found out you are not the 10%, its perfectl OK! You have gained a superb experience. Then it is still not too late to explore 21st century personal finance ... after all, there are 91 years for your to catch up ....

The BUBBLE Graph and Economic Psychology

Jason asked about the bubble graph:



That bubble life cycle graph.....I very much want to believe in it. Does anyone know how the dude who came up with it came up with it? Is there any scientific explanation of why a bubble would behave that way? It seems to make sense, but so far I've held off my wife from wanting to buy in this bubble using numbers, data, and facts. It's getting tougher the longer this drags on, and I'd love to show her that bubble lifecycle chart and say "Look! We're right at the precipice! Don't give up now, Dr. So-and-so proved that humans are sheeple and act in this way because of X Y and Z!"



The graph is well-known to demonstrate bubble psychology. The version I use (http://tinyurl.com/ntvgvj) which is widely duplicated on the net, was drawn up by the Professor of Economics and Geography at Hofstra University, Jean-Paul Rodriguez. I cant find his original article on the net anymore, but it was dated 2006.



The reason it works so well, is that there are so many who didn't get in on the bubble run-up and jump in when the price first breaks. They are the last buyers and the next drop has no more buyers to prop it up and we drop longer and deeper. The steepness of the drop can be sudden or slow and steady.



It seems to describe psychological behaviour of bubbles very well.



It has played out almost perfectly in the US. I have included a chart and some links to go over:





Source: Seattlebubble.com





The notches at the top can be slightly different in different bubbles. Here is the chart for California:



http://www.doctorhousingbubble.com/wp-content/uploads/2008/04/ca-median-price.jpg



But when it finally drops- it drops:



http://www.doctorhousingbubble.com/wp-content/uploads/2009/01/socal-housing-prices.png



It is not just RE - all bubble assets TEND to follow the graph. look at gold in the late 1970's. It peaked, dipped ran right back up and then crashed good and hard.



http://www.usagold.com/reference/prices/gold-price-history.gif



A quick look at the NASDAQ chart from 1997-2002 will show a similar pattern.



The shape of the graph gets skewed by desperate efforts of governments to keep the asset at bubble levels, and stop it falling. They do this even at the expense of future generations of savers and tax-payers, and just exacerbate the situation.



It would be better to allow a collapse and then pick up the pieces, rather than the slow bleed that eventually ends at the same place. The Trillions that the US has spent on trying to prop up housing has just slowed the process but the end-point is the same. Income and housing have to come back into balance.



Will we follow the graph?? Who knows, just because the US did doesn't mean we will too. Maybe we are not in a bubble!



Maybe the resilience of our prices is an indication that we were very undervalued in the past (which as I stated before we probably were) and are now reaching fair market value on a global/resource availability scale. Heck, maybe we are the new Monaco of the North?



I personally think that we have over-shot to way over-valued, but that it is just my opinion, which was vindicated for 6 months late last year and early 2009 but which reversed after that. I am waiting to see where we go from here.

As Summer fades the time has come to re-evaluate the bear case

The last twelve months have been very interesting. This time last year the financial crisis was galloping along and taking with it the highly speculative Vancouver Housing market.

We hit a no bid situation as everyone hoarded money, wondering which banks and even countries (eg Iceland) would be closing down. MOI hit twenty months, the stock markets lost 50% in half a year and it looked as if the bears' most dire predictions were coming true and we would all be carried off the cliff.

However the central banks and governments of the world, having done NOTHING to stop the speculative bubble, acted en masse using Trillions of our money, and promising obligations to future generations not yet born, to stem the bleeding.

The result was an abrupt turn around in the Vancouver market.

We really hadn't seen much of a recession in BC early in 2009. The Liberals were still talking about small and manageable deficits, there were lots of large Olympic and non-Olympic related building projects and suddenly we had the lowest mortgage rates in the last 40 years, lower gas and heating bills and Federal tax incentives.

The result was that the fire was reignited. SFH are within spitting distance of the previous highs.

Here is Larry's up-dated price chart:

http://www.yattermatters.com/real-estate/vancouver-real-estate-august-average/

Now it gets interesting. There are a few things worth noting:

1) The Provincial fiscal situation is not good. We are headed for a $2.8 Billion deficit and that assumes the worst is over, which I personally doubt. Cuts ahead, I expect the Federales who are $50 Billion in the hole to follow suit too and start cutting.

2) Unemployment will continue to rise and will do so even if we have the anemic recovery that would be my best case scenario.

3) The big projects are done...Canada Line, Golden Ears, Whistler Highway..where will these folks get hired now?

AND...

The boom that we have seen over the last 6 months or so has been pretty selective. the bubble was everywhere...Vancouver, Fraser Valley, Vancouver Island and the Okanagan and in all types of housing.

The bounce has been mostly in Vancouver and Victoria SFH. One look at Larry's chart will show that. In fact while SFH prices are up an astounding 10% YOY, condos and Town-homes are down 1% YOY.

Similarly the housing situation outside of Vancouver has been much more subdued. Many place are still falling (even beautiful cities, if they are resource based) others just stopped dropping and stabilized but are vulnerable to a dip.

The current graph of house prices is completely compatible with the bursting bubble graph :

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFnvXQvEnPDZvj2jZvn-2LUIy3CDbZNgfw4FIsrEYuaUMdZwo9LoRX1M4JYienfQDiragLrAHWnhrFTrDMi86mqWjOb1ziEsvj9GreoGL4NKOxP4Uh3kUhTzsIV6YWwHqXrLx7YmIPIpX9/s400/bubble-lifecycle.gif

However if prices keep going up, despite a worsening economic environment and a bubble graph which is calling for an imminent drop, then we will have to rethink the basis on which we have made our assumptions..ie we were wrong!

What you can do with mutual fund's high fee ?

It was mentioned that Mutual Fund is one of the few personal finance tools that can provide highest return passively. (A) There are a lot of other venues that can provide higher return but they require much more active effort than mutual fund. (B) There are also a lot of other tools that is more passive than mutual fund, but their returns are not high. (C) There are also some solutions that provide both high return passively but they are NOT personal tools.

However, even the best tool in the world can be a disaster when used wrongly. Mutual fund is no exception. The right way to use mutual fund in your personal finance is;

1. choose the right fund manager

2. choose the largest or most active fund ( In Malaysia, the only choice is Public Mutual )

3. apply Dollar Cost Averaging

4. adopt Buy and Keep, not Buy and Sell. Buy and Switch, however, is a good alternative between the two.

Any activities other than above may stop you from using mutual fund to

1. provide the highest return

2. passively

3. personal tools

With that in place, the only challenge left is its high fee. Although there are many justification on the fee, the future for mutual fund industry is actually the continous effort to streamline this service charge. There are 2 ways to do that;

1. Provide more values from the same high fee or

2. Cut to lower fee by streamlining distribution channels.

The good news in Malaysia is, there are already distinctive winners in both strategies. Public Mutual will continue to provide more values to its investors, the significant threshold is MYR 100,000 where you become a Mutual Gold member to rip those benefits out of the service charges you paid.

On the other hand, Fundsupermart is the winner in low fee funds. However, Fundsupermart is NOT a fund manager. They only provide a trading platform for fund managers to distribute their low fee funds. Buying and Selling funds in fundsupermart is a totally whole new concept comparing to traditional methods. Hence do take sometime to learn and realize what you have given away when paying the lower fee. Whatever result you get in future is the action you take now, its all you now and no one else to blame.

What else can you do if you want to invest with mutual fund but want to minimize the high fee impact ?

Join the industry to promote mutual fund as an agent. All agents get paid in commissions. If you buy from yourself, part of the service charges you paid goes back to yourself. It may not be easy as this actually require a lot more effort to get qualify etc. But the knowledge and experience stay with you.

So in contrast to mutual fund's service charges, you can;

1. rip more values from your fund managers - Public Mutual Gold

2. buy lower fee funds - Fundsupermart

3. buy from yourself - ...

Other related articles

One of the earliest mutual fund articles - an introduction

do you love or hate mutual fund ?

Stock fee vs mutual fund fee

Bad Fund Manager :Force invest or blindly follow rules

Bad Fund Manager: over or under diversify

Interesting Article on the Rich

Having their net worth trashed in this recession. McAfee anti-viral founder blew through $100 Million in bad RE investments. I will post a link at the bottom.

But here's what got me..he sold his waterfront stunning Hawaii estate at auction and only got $1.5 Million for it. It is stupendously beautiful. The sort of place I could happily go and live until I draw my last breath.

http://www.auctioncompanyofamerica.com/pdf/217_G-870web.pdf

What would you get in Vancouver for $1.5 Million??

Anyone want to post some choice comparisons to show just HOW over-priced Vancouver is.

Here is the article:

http://finance.yahoo.com/banking-budgeting/article/107575/rise-of-the-super-rich-hits-a-sobering-wall.html

I'm back

A few things from my trip. There are large parts of this Province that are still in a real estate doldrums. They are areas which actually make things, or dig them out of the ground and are feeling the pinch of the economic slump. Places like Campbell River which just lost it's Mill.

Meanwhile in Victoria, everyone seems to be wondering how much further the Provincial Government will have to cut to make up for the drop off in revenue. I suspect soon the Federal Government will also start worrying about the deficit, and put on hold further plans to spend our way to prosperity.

The banks are making good profits, especially The Royal, though they have all increased their future loan loss provisions, which is prudent considering 60% more Canadians have fallen behind on their mortgages compared with a year ago.

These two facts just don't add up. Home prices are up to new highs in many parts of the country, and yet 60% more people have fallen behind on their mortgages.

That's what happens when a financial crisis hits our biggest trading partner, drags our interest rates down while we are still robust and then the crisis seeps across the border later. It means our assets get that final push of adrenaline from the low interest rates, until the reality of the economic slump brings them back down to reality.

BTW- the banks are making money from the yield curve. What could better than paying people almost nothing on their GICs or deposit accounts and lending it out at 4%-8%. Those are near the highest margins in history. I remember when banks would pay 5- 6% on deposits and lend it out to consumers at 8-10%.

They are netting 2-3% more now and can leverage that up.

BTW the TD CEO just sold $24 Million in stock options (13% of his holdings).

Insure for what ? or against what ?

General insurance is more straight forward, you are insuring your car, house, home content etc. But in life insurance, what does insuring your life mean ? What are you actually insuring for or against ?

• Death - end of life
• Disability - partially or completely unable to live a standard live
• High medical fee
• Accidents
• Income

Death is not a problem actually. Everyone got to go eventually. If anyone is still fear of death then its just becuase his personal growth hasn't reached a mature level yet. But then again, NOT everyone must be mature. Living a whole life like a dump kid is still a life, no different than the smartest ass in the world. Either way, they should and acquire solid personal finance despite the differences.

Death is not a problem, but dying too early or too late is. If you live a purposeless life then dying early may be fine for you. But almost suddenly you will realize you do have purpose afterall at the very moment before you pass on and its too late for you to do any thing about it.

"Sorry Mum I am gone, I meant to say I love you. Here is your ticket to Dubai ..."

Dying too late is only a problem when you are incapable of substaining your life but yet you are alive. This usually occurs in 2 major scenarios; financially drain and health problems. So you use up your money, cann't buy any more Starbuick and you sit outside desperately don't know what else to do. Or you have been in coma for 15 years but your body is still going, lying there doing nothing yet doctor doesn't want to certify you dead. Else with a wealthy and healthy being, no one would complain about dying too late ...

"Hi Nurse, I may not be able to speak but here is your salary for massaging me, thanks !"

Disability is hard word to agree upon in common sense but in this industry, a person is considered disable when he couldn't perform the tasks majority of the people can. This is further percisely identified as losing 2 limbs (Total Permanent Disability) or diagnosed of Cancer (Critical Illness) etc. Your family and you may need some helps when you are 'disable'.

"Kids, I can no longer serve you ... here is your last sum of ..."

Ironically the more we know about our body (more civilized), the harder it is for us to fix it. More complicated systems are invented to cure more complex illness. Cost has gone up so high that the poor sick people wish they could share some medical fee with the healthy ones. Hence insurance is the best bet to the solution. If you are sick, wouldn't it be nice someone else is paying your bill ?

"Doctor, please hospitalized me or else I couldn't pay you ..."

Part of the deal to be human is that we don't know all. Things may happen very sudden and out of our expectation some times. The last thing we want is for a car accident to ruin our life totally. So just in case ... it wouldn't hurt as bad if there are some financial helps ...

"I lost my limbs, but at least I have 3 years to pick up new way of life without too much financial worry."

Some may have noticed that insurance is all about money. If you cann't transform what you need into numbers/money, then perhaps insurance cann't help. Then how about insuring the money itself ? Sure you can! Remember insurance is an example of business that is only limited by human's creativity, which is unlimited. So if you are ill and cann't go do labour for 3 weeks, your insurance could have paid you daily allowances.

There you go, these are the general area of coverage of personal life insurance ;

• Death - end of life
• Disability - (Totally Permanent Disable or Critically ill)
• High medical fee
• Accidents
• Income