Mon 18 Jun 2007
I had the unfortunate need to rent a car this weekend since I was blocked in by my housemate and needed to leave town before Washington DC rush hour traffic hit the road. After hitting the road in a Chrysler Pacifica, which drove quite well, in a quazi-fury, I found the good side (there’s always a good side) of my dilemma was that I got to listen to ~ 140 channels on Sirius Radio. After listening to the Elvis channel, 60’s, 70s, and 80s dedicated stations, and a little humor over on The Catholic Channel, I started to look for content.
The Sunday afternoon drive home offered access to the “Moneytalk” radio show on the ABC news and talk channel. Bob Brinker , a 21 year veteran of the show, gave some great tips and practices to be applied by passive investors as well as those nearing retirement age. Some of the points I got while listening to his show.
1. Diversify your investments over large, mid, and small cap stocks covering both the value and the growth side of the market. One of the most simple ways to do this is by investing in broad market index funds such as Vanguard’s Total Stock Market Index Fund or the The Dow Jones Wilshire 5000 Composite Index
2. To move towards a larger portfolio allocation of fixed income as you age. He recommended a max of 50% of a portfolio be in fixed income so that one might take continued advantage of larger historical gains in the stock market to both grow your portfolio and to offset inflation. This goes against the traditional rule to invest 120 - (your age) in fixed income. I agree with Bob’s stance on this rule. There is quite a bit of contention out there as to what the best practice is.
3. Make sure you do a little research before retiring. Specifically, crunch the numbers to determine what percentage of your portfolio you can afford to withdraw each year and figure out when the best time to start withdrawing social security is.
The most important thing that I learned from the show? Critical mass. This makes sense as Bob’s thesis on his site is: Leading You to the Land of Critical Mass.
What is critical mass?
-”An amount or level needed for a specific result or new action to occur”
Critical mass, in finance, is the level you need to reach in order for a portfolio, bank account, or other financial instrument to become self sustaining after all withdrawals and taxes have been applied. His conservative rule is to build up retirement accounts to a level in which the growth in the portfolio each year is enough to account for inflation, withdrawals for living expenses, and taxes without having the account value diminish.
Having an account reach critical mass is extremely exciting! It is a tangible representation of planning, hard work, and time working out in your favor.
I have managed for my prosper account to become self sustaining in that principal & interest repayments are enough to make a new loan ~every week. While I am not currently withdrawing any funds from the account, I hope to one day reach a level where my account would have enough momentum to continue to make loans and withdrawls.
Benchmark levels for my Prosper Account:
1) Reach a level where I can make one new loan each week without contributing additional funds to the account. (Reached)
2) Reach a level where I can make two new loans each week without contributing additional funds to the account.
3) Once I have an account with enough momentum to make three loans a week, I plan on setting an automated order with strict lending criteria so that the account no longer requires my attention.
4) After reaching a level where I am recieving continued cashflow each month to cover emergency expenses, I plan on using the additional funds to auto-fund my ROTH IRA. (Requirement of $4,000/yr in passive income)
5) Endgame: Use all additional funds recieved from prosper to fund a sharebuilder account.
Beating The Broad Market : Forbes.com
-Offers criteria on how to choose the best index funds.