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Automatic wealth The 6 steps to financial independence - Masreson M.

Masreson M. Automatic wealth The 6 steps to financial independence - Wiley & sons , 2005. - 291 p.
ISBN 0-471-71027
Download (direct link): automaticwealththesixstepsto2005.pdf
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5. Fixed-income instruments. The rest of your money should be in Treasuries, municipal bonds, or quality corporate paper. Fixed-income instruments like these don’t provide a high return, but they are safe.
In Stage Two, safety should be your main concern.
You will notice that in this second stage there are no stocks, options, futures, metals, rare coins, or derivatives in the portfolio. And there is a good reason for that. When you have less than $100,000 to invest and less than a long time to get rich, you should focus on only two things:
1. Continuing to increase your income by continuing to perfect a financially valued skill such as selling, marketing, product development, or profit management
2. Investing the surplus in high-return equity ventures
If you focus on this for a few years, chances are that you’ll end up with a surfeit of cash—that is, more cash than you need for your side business and real estate ventures. This extra cash should be kept safe. Extra safe. Remember, this is the beginning of your retirement nest egg.
So place this surplus cash in bonds, and reinvest the interest in bonds, too. Make it a primary objective to have this safety reserve grow substantially every year. Once your bond savings become significant, you’ll start to appreciate what a valuable, comforting investment bonds can be.
248 AUTOMATIC WEALTH
As Will Rogers is reported to have said, “It is not the return on my investment that I am concerned about; it is the return of my investment.”
Building the critical skills that will make you wealthy—and that includes learning as much as you can about your local real estate market—is plenty to keep a novice investor busy. Trying to simultaneously develop expertise in stocks or futures or options is foolhardy—foolhardy and unnecessary. By buying up-and-coming properties in your local market and having the bank finance 80 percent of them, you can easily make 20 percent to 25 percent on your money every year. With this being 60 percent of your investment portfolio, who cares if the other 40 percent earns less than 5 percent?
You will make practically nothing on your cash and only about 4 percent on your tax-free bonds (which will probably be worth about 6 percent on a taxable basis). Admittedly, that’s not much. But if you invest reasonably in real estate, financing 80 percent of your investments with bank loans, that larger (60 percent) part of your portfolio should appreciate at 15 percent to 25 percent. That will give you an overall return of between 12 percent and 15 percent.
While you are going through this first, pre-$100,000-net-worth stage of wealth building, a return of 12 percent to 15 percent of your hard-core retirement savings is plenty.
So here’s my basic advice to you if you are in Stage Two:
1. Continue to buy and flip local real estate. Use bank financing to increase your ROI.
2. If you didn’t do it in Stage One, invest some time and money in a side business that you understand.
3. Invest the rest of your savings ultraconservatively—in cash and bonds.
Stage Three: What to Invest in When You Have More Than $100,000 but Less Than You Need to Retire
In the first stage of wealth building—when you have less than $25,000 to invest—the only investment to consider is to start a side business. In Stage Two, you can branch out into conservative investments—but not stocks. I recommend investing in stocks only after you have passed the $100,000 plateau. This is the stage where you have built up your
Step 6: Retire Early 249
investable net worth to between, say, $100,000 and $1 million. You are still actively building wealth, because you have less than you need in order to stop working and live well on your passive income. But you can afford to take a little more risk.
Here’s what I think your Stage Three portfolio should look like:
1. Emergency cash. Everyone needs some cash hidden away for immediate access. There are different opinions as to what constitutes a safe minimum. Some say as little as one month’s pay or expenses. Others argue for six months or more. My suggestion is a little more than three months’ worth of expenses. If, for example, you spend about $75,000 after taxes to maintain your lifestyle, you’ll want to have about $20,000 in cash somewhere . . . just in case.
2. Emergency gold. I’m not a gold nut, but I do like to know that I have a significant amount of gold coins hidden away in case I ever need them. I’ve accumulated rolls of Krugerrands over the years. They are nice to look at, are easy to hide, and provide a substantial feeling of stability in the face of all sorts of imagined disasters—hurricanes, computer hacking, identity theft, government confiscation, the war on terrorism, or the like.
I don’t think you need to buy into the argument that gold will appreciate in value to appreciate the value of gold. I have about 3 percent of my investable net worth in gold. That’s enough to buy a little place somewhere in the tropics and disappear if I ever need to. Not a bad disaster fantasy, I think you’d agree.
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