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Reverse Side Hustles: More Money, Less Risk

Image of 2 arrows and charts for our blog post about reverse side hustles

A reverse side hustle can help you make more money while lowering your risk. We share three principles of finance, so you understand how this works.

We discussed reverse side hustles on The BIGG Success Show today. Here’s a summary of that discussion.

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A Trick to Manage Risk

ponyHave you evolved enough to navigate today’s world? We’d never thought about it before. Then we saw a great article from Time magazine that says we’re moving through the modern world with a pre-historic brain.

According to the research, it’s a problem because it affects the way we analyze risk. We haven’t evolved enough to properly assess the risks we face today.

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How we assess risk

We analyze risk in two ways: instantly based on our feelings and logically.

Most of the time, we use the first way – our feelings – to assess risk. It’s because of the way our brain works. Bells and whistles are quick to go off when we sense risk. However, turning them off is much more difficult because it’s not natural.

So we’re good at assessing short-term risk; we’re not so good at the long-term risks we’re more likely to face in our modern world.

Managing risk

Our definition of bigg success is life on your own terms. It’s implicit in our definition that you own your life. You are the entrepreneur in charge.

There’s a myth that entrepreneurs are risk lovers. While that label certainly applies to a portion of entrepreneurs, you can’t say that about the overwhelming majority of us.

Entrepreneurs are, however, excellent managers of risk. They understand that they can’t predict the future. So they don’t try. They create their own future.

There are many ways to manage risk. One is to diversify, diversify, diversify. That’s the trick – you don’t want to be a one-trick pony. Here are four places to diversify your life:

Diversify your portfolio
We’ve learned this lesson the hard way. Investing is risky, but you can minimize that risk by spreading your investments out.

Diversify your income
Multiple streams of income provide safety. This is more important than ever in today’s business world.

If you’re an entrepreneur, that means not relying on a single product or service to carry you through.

If you’re an employee, it means having a way to make some money on the side. It could be a rental property or a home-based business you can work in your spare time.

Diversify your activities
You gain new insights when you vary what you do. You learn new things by doing new things. You’re able to assess risk better when you bring a well-rounded mind to the problem.

Diversify your relationships
Get to know people who don’t think like you. Listen to their points-of-view. Try to bring some of their thinking into your analysis of risk.

Don’t be a one-trick pony. Diversify, diversify, diversify. It’s one of the keys to reaching bigg success.

How do you manage risk?
Share that with us by leaving a comment, e-mailing us at bigginfo@biggsuccess.com or leaving a voice message at 888.455.BIGG (2444).

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Direct link to The Bigg Success Show audio file:
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Should I Stick with Stocks?

mattress Last time, we talked about a new trend – people stuffing their mattresses the 21st century way. Baby boomers seem to be the main group behind this trend. They are buying treasury bills and gold coins as safe harbors from the volatile stock market.

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It’s understandable that baby boomers are looking for alternatives because many of them are so close to retirement.

But what if you’re not about to retire … should you stick with stocks?
We’ve heard a lot about how the recent decline in stock prices has wiped out all of the last ten years worth of gains. So it’s a really good question. We decided to do some analysis of our own.

Before we start, allow us to make one disclaimer: We’re going to provide an example to help you understand how the market works. Your decisions about your portfolio should be based on your specific situation. We recommend that you talk with a certified financial advisor to help you with that.

Stocks and Certificates of Deposit

To keep it simple, we looked at just two assets – stocks, represented by the S&P 500 (Source: Yahoo! Finance) and risk-free investments, represented by one-month CDs (Source: Federal Reserve) in FDIC-insured institutions.

There may be better assets to invest in (e.g. a broader stock market index), but we still felt that these represented risky assets and risk-free assets relatively well. We were curious about what has happened in the past, looking at various scenarios, with these two assets. This is a good place to insert a couple of caveats:

  • We are looking at historical numbers. We’re not psychic nor do we possess any other ability to project the future.
  • We used nominal pre-tax rates of return, so inflation and taxes have not been factored in to the returns we’ll discuss.

The last ten years
When we look at the last ten years (going back from December 31, 2008), we see that the stock market underperformed its historical average through almost the entire decade.

The best mix of these two assets for the last ten years would have been no mix at all. Investing 100 percent in CDs provided the best return. Even then, the return was not that great: 3.62% per year by our calculations. The worst return, as you might guess, was being 100 percent invested in stocks over the last ten years. They lost about one percent per year.

What about prior ten-year periods?
One ten-year period isn’t all that instructive. So we went back ten more years (January 1, 1989 to December 31, 1998) and looked at those returns. The highest returns in that period came from a portfolio of 100% stocks, which returned 17.28% annually.

So stocks are one for two. Let’s break the tie and go back another ten years. Can you hear the disco music playing?

A portfolio that was fully invested in stocks delivered the best return in that period (January 1, 1979 to December 31, 1988) as well. They earned a return of 14.36% per year.

Is ten years long enough?
Financial advisors have said for years that stocks perform best over longer periods of time. They used to tell us that we should have at least five years before we needed the money or we shouldn’t invest in stocks. Now we’re hearing more and more that ten years is the magic number.

But here’s the thing … we really shouldn’t even count on that as we’ve learned the last ten years.

How long until you retire?
Let’s think about this … if you’re 40-years old, you might have twenty years before you want to retire. At 30, let’s say you have 30 years. How have the returns looked over that period?

Looking back twenty years, even with the most recent decade, our best bet would have been to be fully invested in stocks. Our return would have been 8.14% annually. It’s ditto for the most recent thirty years. An all-stock portfolio returned 10.21% per annum, about its historical average.

So, our research shows that history shows that you should stick with stocks over the long term. But is there a way to lower your risk without sacrificing returns unjustly?

The price of a higher return
There is a price to pay to get a higher return. That price is more volatility and volatility equals risk. Riskier investments should pay more to compensate you for the risk you’re taking. Stocks are riskier than CDs; therefore, they should pay more.

The price of less risk
We just said that riskier investments generally offer higher returns as compensation for the risk. So why not just invest in CDs and other risk-free assets? Because they may not return enough to get you where you need to go. There is a better answer.

Diversification smoothes it out
When you diversify your assets – investing part of your portfolio in risky assets like stocks and a portion in risk-free assets like CDs, you smooth out the volatility, relative to just investing in stocks, while still getting a higher return than if you invested all your money in just CDs.

Example: A 50/50 Mix

As we discussed earlier, had you just invested in stocks over the last thirty years, you would have made about 10 percent per year on your investment. However, you would have lost about one percent a year in the most recent decade.

What if you can’t stomach losses like that?

Obviously, any money invested in stocks is at risk. However, if we had invested 50 percent in stocks and 50 percent in CDs over the last thirty years:

  • We wouldn’t have lost money over the last decade. In fact, we would have made 1.31% per year.
  • The thirty-year return on our portfolio would have been 8.32% a year. While it’s less than the 10 percent we could have earned by just investing in stocks, it’s not that much less. Looks pretty good right now, doesn’t it?

We want to emphasize again that we’re not saying a 50/50 mix is right for you. Consult your financial planner. We just picked 50/50 to see what would have happened with an even mix of these two assets.

Long on stocks
As you can see from the returns we quoted earlier, the experts are right – stocks are good long term investments. If you need the money ten years from now, you need to be careful. If you’re a 30- or 40-year old funding your retirement, a good basket of stocks as part of a well-diversified portfolio is a great place to stick your money.

Short on dollars
Going back to where we started, more people are investing very conservatively in treasuries right now. The problem is, if you invest too conservatively, you have to make a choice. Will you be short on dollars now or at retirement?

If you choose to fully fund your retirement, it means you’ll have to invest more now to reach your goal, which means you’ll have to sacrifice more now than is probably necessary.

We still don’t know if we’ve hit bottom on the stock market. But here’s what we do know – most market timers get it wrong most of the time. That’s why we won’t try!

If you have time until you need the money, invest in a well-diversified portfolio. You won’t be quite as happy in the good times, but you won’t be nearly as upset during the bad. 

We really appreciate you spending some time with us today. Join us next time when we interview John Jantsch, The Duct Tape Marketer, about how to make customers stick without busting the bank. Until then, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

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Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00265-111408.mp3

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Where Should I Stuff My Money?

mattress In days gone by, mattress stuffers hid all their money somewhere in or around their home – in the backyard, in cans, between the pages of books, in the walls, in a cookie jar, and even under a removable section of floorboards.

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A recent article in the Wall Street Journal talked about the new generation of mattress stuffers. People increasingly don’t trust anyone or anything, a response to falling home prices, crashing stock prices, bank troubles, and government ineptitude.

It’s something we don’t talk about much, but an increasing number of people are taking matters into their own hands to prepare for the next crash. Needless to say, these people aren’t optimists!

They’re pulling their money out of the stock market and stuffing their mattresses the 21st century way.

Stuffing money in treasuries

Instead of actually stuffing cash into their mattresses, they’re buying treasury bills, the safest of all investments. Most financial experts refer to these and other treasury securities as risk-free investments.

Stuffing money in gold

New generation mattress stuffers are also buying gold coins in record amounts. You may have noticed an increase in the number of ads on TV about gold. This flight to safety has been evident after just about every financial crisis, as people return to the gold standard.

Who is primarily driving this trend?

Many baby boomers have taken a huge hit to their portfolios just as they near retirement. They are the driving force behind this trend because they don’t have time to recover from the recent stock market losses before they retire.

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What if you’re not ready to retire?

If you’re not close to retiring, it’s crucial to think clearly about this new mattress stuffing strategy. There are definitely some pros and cons.

Pro: We should own a well-diversified portfolio.
Experts tell us to diversify, diversify, diversify. Typically, the more diversified we are, the better. A diversified portfolio might include stocks, bonds including treasuries, real estate, and perhaps some commodities like gold. Diversification generally delivers the best return given the overall risk.

Pro: Treasuries should be part of most diversified portfolios.
Until recently, a lot of people found treasuries kind of boring because they didn’t deliver enough return. That’s because they aren’t considered risky at all, which is also why they are an essential component of a fully diversified portfolio.

Pro: Gold may also be a wise investment as a small part of a diversified portfolio.
Gold and other tangible assets usually perform best in times of high inflation. So gold can serve as “insurance” against such times. The reason that people often flock to gold in times like these is that, historically, it has been an acceptable way to pay for things.

Con: If you put all of your assets in treasuries, your returns will be much lower.
This lower return is not unjustified. After all, you’re investing in an asset that’s considered to be risk-free. The problem with this strategy is that you may not end up with as much money as you need for your retirement.

Con: It’s dangerous to put a significant percentage of your assets into gold coins.
If experts recommend gold at all (and many more are these days) as part of your portfolio, most suggest keeping it to around five percent of your total assets. Unlike treasuries, gold carries risk – its price goes up and down. One other tidbit – gold has underperformed most other assets historically.

Con: There’s no cash flow with gold.
Treasuries pay interest at regular intervals. You don’t earn any money on a gold bar or a gold coin. The only way to make money by holding gold is to sell it at a price higher than what you paid for it.

Next time, we’ll take this discussion a step further. We’ll apply some real world numbers to help you with your diversification decisions.

We are so thankful that you took the time to read our post today. Until next time, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

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Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00306-011209.mp3

Related posts

Mania in the Market and Rising Above the Crowd

When It Comes to Investing, Time is on Your Side

Squirrels, Nuts and Business Cycles

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Smart Investors, Tough Times

investing People who find joy in bad news have to be pretty happy lately. The financial crisis has dominated the news, as we watch Wall Street and Washington scramble.

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We don’t usually do this – in fact, we’ve never done it in the 230 shows we’ve done so far. But this subject is so important and so timely. So we want to share some valuable information that our newsletter subscribers received in their In boxes last Friday.

In the last edition of The Bigg Success Weekly, we discussed “Profiting from Panic”. It was about maintaining the proper mindset in the midst of all this turmoil.

We started with the safety net that exists for depositors, investors, and insureds. Here are some links directly to pages that can answer your questions about banks, brokers, and insurers in a hurry. 

Banks

In general, banks are insured by the Federal Deposit Insurance Corporation (FDIC). However, not all money invested through banks is insured. What would happen if your bank failed? If you have accounts with a failed bank, what should you do? How can you obtain a release of lien, if a failed institution is your lienholder? The following links provide the answers to all of these questions:

What is the FDIC

A Guide to What Is and Is Not Protected by FDIC Insurance

FDIC Bank Find (make sure your institution is FDIC insured)

When a Bank Fails- Facts for Depositors, Creditors, and Borrowers

Is My Account Fully Insured?

Obtaining a Lien Release

Brokers

Accounts with brokerage firms also offer some protection through the Securities Investor Protection Corporation (SIPC). The coverage isn't anything like that offered by the FDIC, but it's still important to know what remedies might be available to you. 

How SIPC Protects You

Insurers

While banks and brokers have federal backing, insurance companies have backing through associations at the state level.

The National Conference of Insurance Guaranty Funds

If your insurance company fails, you'll want to contact your state's Department of Insurance, since insurance companies are overseen by that department in each state in which they operate. Click here for a directory of each state's office. 

Your State's Department of Insurance or Guaranty Association

Two billionaires, two eras, one mindset

Warren Buffett, the richest man in the world according to Forbes, recently invested $5 billion in Goldman Sachs, in the midst of all this turmoil. That’s pretty typical of how he’s made his fortune – he says he’s “fearful when others are greedy and greedy when others are fearful.”

He has also opined, “We want to do business in [a pessimistic] environment, not because we like pessimism but because we like the prices it produces.”
 
From: The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor, by Robert Hagstrom, Jr. 

Warren Buffett is not alone.

J. Paul Getty was one of the first billionaires and the richest man in the world in his day, according to The Guinness Book of World Records. He said, “I began buying stocks at the depths of the [Great] Depression. Prices were at their lowest, and there weren’t many stock buyers around. Most people with money to invest were unable to see the forest of potential profit for the multitudinous trees of their largely baseless fears.”

He went on to say that he made over 100 times his investment on many of these stocks!

From: How To Be Rich, by J. Paul Getty.

Our best strategy

So we can learn from these two men that we shouldn’t panic, even in turbulent times. Now, you may not want to rush out and buy a bunch of stocks. However, you probably shouldn’t sell out right now either.

These two billionaires made a fortune by going against grain. So keep making those 401(k) contributions. By investing consistently over time – paycheck by paycheck – you’re dollar-cost averaging into the market. In bad times, you’ll buy more shares with the same money than you can in good times – just like the billionaires. 

Above all – diversify, diversify, diversify. Diversification is one of the four key investment principles, according to William Sharpe, a Nobel Prize winning financial economist. Our newsletter subscribers read about these as well as some ideas to simply put them into practice.

Today, more than ever, it’s important for you to take on the role of Chief Investment Officer for you and your family. You can’t count on Wall Street or Washington to do it for you!

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If you would like to get the newsletter we’ve referred to here, just e-mail us: bigginfo@biggsuccess.com, with “Profiting from Panic” in the subject line. We’ll send it to you and sign you up for The Bigg Success Weekly!

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Next time, we’ll discuss why it’s so important to move beyond personal productivity. Until then, here’s to your bigg success! 

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