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New Financial Strategy for 2017

Updated on January 6, 2017
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Jack Lee, a retired engineer, worked at IBM for 28 years. He has traveled all over the world and has been an active investor for 10 years.

Introduction

Managing your own finances is not hard. Most people have the skills to do it but they lack discipline. Here are a few simple steps to help for the new year.

- Dec. 2016

My Experience

Based on 10 years of personal experience, I have successfully diversified my own retirement portfolio and have consistently generated income over that period. The advice I have is based on my reading on this topic and on first hand experience investing in the market. The most crucial lesson I've learned is that there are no "experts" in this arena. Don't trust anyone who tells you they know what the market is going to do tomorrow. They are guessing just as you or I can do. What is important is to know your own situation. Follow a few basic rules and you will succeed.

Background

The end of a year is a good time to re-assess your financial status. It is also a good time to re-balance your investments. There are also certain tax implications to consider. It is a time of giving. It is also a time when your financial statements arrive in your mail box. What better time to address this than now?

These advices are good for a retiree or someone about to retire. It also applies to millennials who are just starting out their careers or switching careers or jobs. Financial planning is something we all should be doing on an ongoing basis. The problem most people have is not an earning problem but a spending and saving problem. What do I mean? You don't need to have a high salary to save for your retirement. In fact, how much you make has no relation to how well you are prepared for retirement. There are many examples of highly paid atheletes who end up broke or owe taxes they can't afford and file for bankruptcy. How does that happen? They spent more than they took in after taxes.

Simple Steps

  1. Create a spreadsheet with all your current assets Including cash, savings in bank accounts, stocks, bonds, major possessions (such as car, house, collectibles, jewelry), and 401K and IRA accounts.
  2. On the same spreadsheet, list all your current liabilities such as loan balances, credit card balance, taxes, rent, utilities, and insurance.
  3. Create a "net worth" cell at the bottom of the spreadsheet which is just a simple calculation of total assets minus liabilities. It is a good idea to do this calculation on a monthly basis. For some items, you may need to divide the annual bill by 12 to come up with a monthly partition such as your tax bill. Most other items are monthly based. This one number called your net worth is a snapshot in time of how well you are doing.
  4. Create a second spreadsheet that lists all your current personal investments in stocks and mutual funds. If you don't have one, you can start by opening an account in a financial institution such as eTrade.
  5. On this spreadsheet, I suggest you divide the investments into various sections. These will contain the different classes of investment types. A section on mutual funds, on indexed funds, on dividend paying stocks, growth stocks and speculative stocks and commodities...
  6. Transfer all your cash deposits into this account. In fact, there should be two accounts in this financial institution for most people. One that is called a cash account and another called an IRA account. The cash account will contain all your after taxed income and assets. The IRA account will contain any rollover funds and any before tax deposits.
  7. These two accounts are managed similarly but differ only in how the tax is applied. The cash account is for funds at your disposal now and any investments will generate either capital gains or losses in any given year. At the end of the year, you will receive a 1099 summarizing the gains or losses and dividend income if any.
  8. Whenever you leave one company, make sure you rollover any 401K or 403B accounts into this self-managed account.
  9. Choose a diversified investment strategy like this one.
  10. You are well on your way to worry-free retirement. Good luck.

Why Does This Work?

This simple technique is foolproof. It is the same reason why we go to the doctor. for an annual checkup. Every one of us is unique; therefore, you need to track your own specific case on a regular basis. Once you know what your body is like, your normal heart rate, blood pressure and weight, if a sudden change occurs, your doctor will be alerted to some problem.

It is the same idea with your financial health. Once you have a snapshot of your base line, you will be better prepared to deal with any surprises. For example, if suddenly, your insurance bill shoots up, you will be alerted and possibly take some action like getting another quote.

It is also how our brain was designed to work. Based on studies by Jeff Hawkins, his theory on human intelligence is the following. Our brain has a predictive nature that help us deal with the complexities of our daily life. It has an expectation of everything we do on a daily basis, such as walking down the road or driving to work. Our brain is sort of on auto pilot when it is doing repetitive tasks. However, when something new or unexpected happens, such as a blinking yellow light, we will pay more attention, slow down, analyze, and manuever around the obstruction with ease.

End of 2016 Summary

This year, I had a surprise end for 2016. I calculated my returns with all my diversification and I ended the year with a gain of 10%.

It turned out, if I had invested in SPY, I would have gotten 10% gain without all the work.

SPY started the year at about 200 and ended at 223. WOW...

Plot of SPY 2016

Summary

Investing for the long term is not hard. It just takes a little discipline and some common sense.

© 2016 Jack Lee

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