Hidden Stocks

 I prefer to invest in the stock of companies that most people have never heard of, for several reasons. The first is that everyone has an opinion on popular well known stocks, and this can distract you from why you bought it, causing you to doubt your analysis and to lose your nerve.

Another is that financial pundits are always commenting on popular stocks causing them to run up and down on the latest commentary. Or it is easy to imagine that the stock is being swayed by commentary when it is just a generally volatile stock. I think it is easier to ride out the ups and downs when they seem random as opposed to caused by rumor or opinion.

Fad investments

One of the most alluring and dangerous investments is fad investments. These stocks offer the prospect of a quick return, but that return can disappear in an instant. They take several forms where the company sells a faddish product like clothes or the stock gets caught up in a strong momentum swell, or both. It can be particularly dangerous to be leveraged in these trades. It is hard to know how long the fad will last, and a single event like an after hours earning report can sink the stock.

These trades are the opposite of a long-term investment that compounds over years. They are also risky and time-consuming, because you have to constantly monitor them waiting for the momentum to change.

Barbell Investments

 A barbell is an interesting analogy for investing where the investor puts their money in two distinct and different investment types or strategies. Often this is a division of high and low risk investments common for dividing long and short-term investments. For example putting long-term investments in stocks and holding cash for monthly expenses. This division shows up in separating stock investments between taxed and tax-free accounts, in which certain investments make sense in one account or the other.

An interesting question is whether it might make sense to invest some money in more mid-tier investments to both cover expenses and generate more return.

Barbell Life Strategy: http://bitsbusiness.com/life/barbell-for-life/

Financial Independence-Retire Early (FIRE) Math

 Retiring early to leave the corporate world and enjoy personal passions or pursuits is a dream considered by many Generation X and Millennial individuals. Whether one wants to change professions or pursue an independent project, a certain amount of financial cushion is needed to bridge the gap. With a large enough cushion and the right investments, never returning to the corporate world is possible. The math isn't that complicated, but critical to having confidence in choosing early retirement.

The key to a sustainable retirement is earning a return on investments that are greater than your costs plus inflation, such that you aren't spending the equity of your portfolio. So, you will need a sizeable portfolio to begin with, such that the earnings on that portfolio cover all of your expenses and grows faster than inflation.

So starting with a $1 million portfolio, and annual expenses of $50,000 ($4167/month) you would need to earn on average a 7% return to cover a 2% inflation rate. The federal reserve usually targets about a 2% inflation rate. Inflation is a tricky number to estimate, so it is important to understand how you think prices for your most expensive expenses will increase. A 7% return means your portfolio must increase by at least $70,000, so minus your $50K expenses, you'll have $1.02M at the end of year 1. If you can generate extra income that will help cover costs or potentially allow investing in less risky investments.

Probably the two biggest threats to this financial model is unexpected costs or poor investment returns. So, insurance that can cover large bills or negative returns, will go a long way towards financial independence. Unfortunately, that can mean higher monthly costs or lower average investment returns, respectively.