The Right Way to Take Advantage of Sales

Today is Amazon Prime Day. If you are unsure what that entails, the long and short of it is that Amazon has devised a way to clear space in their warehouses for the upcoming fall releases by selling off their less popular merchandise for discounted prices. To top it off, they are creating additional exclusivity around their offers by limiting them to those who are paying members of their customer program, Amazon Prime.

As someone who is prone to fall for the lure of a good discount, it is interesting to see just how skilled Amazon are at creating hype around their products with their promotional efforts, such as Prime Day. People went crazy this time last year, as the 2016 iteration of the special deals day was the company’s biggest day ever. TVs, toys and, curiously enough, Amazon’s own products like their Kindle e-readers and tablet, and the Echo, which powers their voice-based home assistant Alexa, were hot items. Amazon is, of course, happy to knock off some percentages to move additional units of their own goods, to tie customers into their ecosystem, and at the same time recruit more paying members to their loyalty program. At the same time, so many people completely misunderstand what a discount is, and the term “saving money” actually means.

A Dollar Spent is a Dollar Spent

A common phenomenon that marketers rely on to lure consumers to spend money they otherwise wouldn’t is the mental disconnect between the cost of purchase and the money saved from utilising a discount. One friend who worked at a national sporting goods store where people go haywire during sales told stories of people who had never been skiing their whole life, yet spent hundreds and hundreds of dollars on skiing equipment.

With this 30% discount, I’m saving hundreds of dollars. It’s too good an offer to pass on!” the people would exclaim in their credit card-fuelled shopping haze. This type of misguided mental accounting, a mathematical sleight of hand, is one most of us have used to justify a splurge at one point or another. The result is often buyer’s remorse, a basement or an attic filled with stuff we just couldn’t afford to pass up the chance to buy, and a significantly thinner wallet.

While most people are already aware that the reasoning behind purchases like this is, at best, misguided, we will keep falling for it until we have seen the ridiculousness of it spelt out in black and white. So let us examine the faulty reasoning, so that we expose the marketers’ trick once and for all. First of all, it is important to define the two terms up for discussion here: Spending and saving.

Sale written on all behind park bench
Don’t let promotions, advertising and reduced prices fool you into spending more money.

You spend money when you purchase an item. You save money when you have money that you do not spend. It is that simple, and do not let anyone else try to convince you otherwise. If today, you were offered to purchase a TV that used to cost $1,000 for $800, how much would you have spent and saved if you took advantage of that deal? Yes, that is a trick question. The correct answer is that you have spent $800. Did your savings account increase by taking advantage of that promotional deal? If the answer is no, you did not save any money. People take the wrong turn here because it is so easy to draw the mental connection that spending less on a particular item equals saving more. But all you have to remember is that unless the savings account increases, you have not saved any money at all.

How To Make Sales Work to Your Advantage

As we have now established, sales and promotions are all about luring you to spend money that you didn’t originally intend to part ways with, by tricking you with apparent price reductions. Even if we overlook the fact that often advertised price reductions are compared to unrealistically high prices, you typically do not increase the balance of your savings account by purchasing something at a reduced price. The honourable exception to this is if you have made a purchasing decision ahead of time, and are waiting for the right time to make the deal.

Only if you have made the decision, and already allocated a certain amount of money to that purchase, will it make sense to take advantage of a good deal. The conscious consumer will always make their buying decisions independent of any advertised price. Instead, a smart buyer will decide what price a particular item is worth to them, and then try to acquire it at or below that price. If a good deal comes up at below the already specified maximum price, nothing is better than that, because then the difference can be allocated straight to the savings account. In other words, that person has actually saved some money, by acquiring something at less than the price they had budgeted and set aside for that item.

Further, there are tools you can take advantage of that will let you track the price of a particular item over time, and across many different online retailers. These services often differ from country to country, but a quick Google search will reveal which services are the most popular in your part of the world. By taking advantage of services like these, and always reminding yourself of the fact that the only way you can save money on a purchase is if it increases the balance of your savings account, you can make sure that savvy marketers will never dupe you again during sales season.


Why I Am Investing In Cryptocurrencies

Around four years back, cryptocurrencies, and Bitcoin, in particular, gained mainstream media coverage, and my attention, for the first time. The price of a single Bitcoin surged past $200, highlighting its meteoric rise in a relatively short timespan. As someone interested in all things digital, and particularly those that promise to change our world and disrupt traditional industries, I put a lot of time into trying to understand the phenomenon. As the value plunged down towards $50, after peaking at $200 and change, I contemplated making a speculative bet and buy around $1,000 worth of Bitcoin.

Fast forward to today and a single Bitcoin is trading at around $2,500, having peaked a couple of weeks back at more than $3,000. Those one thousand dollars I considered speculating with, would have a potential worth north of $50,000. While it would be great to bask in your applause and admiration for sitting pretty with a 50X return today, the truth is that I am here to share with you why I didn’t purchase any Bitcoins back in 2013. And more than that, I am going to tell you why I am investing some money in cryptocurrencies today, in 2017.

Don’t Invest In What You Don’t Understand

The chief reason I opted not to obtain Bitcoin back in 2013 was that I wasn’t able to comprehend exactly how the technology had potential be transformative. A new digital, constricted and deflationary currency had some value, sure, but despite people far smarter than myself extolled the virtues of the blockchain technology, I just didn’t “get” it. And, as covered in our introduction to investing in the stock market, you should not invest in what you don’t understand. Even though that today means I have missed out on tens of thousand dollars in returns, given the circumstances, it was the right decision at the time.

Investing is about staying disciplined, and sticking to the rules that govern your decision-making process. With the help of hindsight, we can scrutinise the decision I made at the time. The weak point, if any, in my process back then, was the fact that I didn’t understand the transformative value of the technology. With twenty-twenty hindsight, it is easy to say that I should have spent more time digging, investigating and trying to understand. However, a whole lot of people, many of which are far smarter than me, still don’t believe cryptocurrencies have any value as long-term investment objects.

The Future is Decentralised

Fast forward to today, and the future looks a lot clearer to me. And, despite missing out on some fantastic returns after making the decision not to invest in Bitcoin, I am convinced that we are standing at the very beginning of an age where the technology that enables digital currencies like Bitcoin and Ethereum takes centre stage.

I believe that the future of the internet consists of decentralised applications, where well-crafted “better than free” business models rule. I buy into the idea that we are entering the age of fat protocols, where protocols capture more value, and applications less.

Will Bitcoin and Ethereum turn out to be a profitable investment?

More than that, I think that the emergence of this technology and the abilities it affords us has the potential to change the way good ideas are funded, and democratise early-stage investing through tokens. It was investor Chris Dixon who drew the comparison, in a podcast I was listening to, that we are standing the dawn of a new era, and digital currencies like Bitcoin and Ethereum give everyone the possibility to invest directly into the technology. It would be the equivalent of being able to invest in the internet back in the late 90s. Albeit an imperfect comparison, buying digital currency is not unlike purchasing domains back in the 90s. If we registered a few four or five letter words in the English language as a .com domain back then, you would be pretty well off today.

High Risk, High Reward

It is important to note that purchasing digital currencies at this point is still a very high-risk venture. In fact, I would lean towards branding it speculation more than investing. Even if the technology that powers today’s leading digital currencies such as Bitcoin and Ethereum takes off, there are no guarantees that these assets will retain their value. Other protocols can emerge and take the market, leaving those who got in on what pioneered the technology in the dust.

Even the best case scenario for someone long in Bitcoin and Ethereum will be extreme ups and downs, because of the volatility associated with these assets. Ten percent or larger drop in value in a single day is normal and must be expected by anyone who is thinking about speculating in digital currencies. So, even if I believe the potential payoff is sky high, I would only recommend purchasing digital currencies with money you could comfortably afford to lose. The risks of significant or even complete losses are simply far too high to stake anything else on it.

My Cryptocurrency Investment Strategy

Because I now believe that the currently dominating digital currencies represent a high reward opportunity, I have decided to dip my toes in the water and purchase some digital assets for the first time. As already mentioned, I don’t recommend going in with more than you can comfortably afford to lose, and I will be following my own advice and have decided to cap my investment at $10,000. I made the decision a while back, and initially planned on going all in at once.

But, because I had the feeling that we were in an ICO-driven frenzy, and that a correction was on the horizon, I decided to alter my strategy slightly. Instead of dumping the full $10,000 into Bitcoin and Ethereum at once, I will spread out the purchases. As it stands right now, I have invested a little over half of that with two purchases spread over a few weeks. The plan is to invest the remaining half at some point in the coming months, although I have not set any specific buy-in times yet.

Because I am bullish on both Bitcoin and Ethereum, I am spreading my money between these two currencies. With today’s prices, that means I expect to end up with about two Bitcoins and 20 Ether. Currently, my portfolio consists of 1,05 Bitcoins and 10,99 Ether. And I have, of course, lost a bit of my initial purchase! As soon as I am fully invested according to my plan, I will provide an update, tallying out my total costs and holdings. The plan is, of course, to keep the readers updated with how my investment is doing over time. I will also be exploring the subject of cryptocurrencies further in future articles, so make sure you subscribe to the mailing list if you don’t want to miss out.

Grieving statue

How Grief Affects Your Spending Decisions

After our recent personal tragedy, I have been experiencing feelings I thought were a thing of the past for me: Strong and sudden impulses to spend money mindlessly, and without any particular rhyme or reason to it. In keeping with our strategy for coping with our grief, I shared these concerns with my better half, and it after airing them out, I discovered that this is a typical reaction in times like these.

My partner, who has a consumer-facing role in banking, could tell me, as I shared my thoughts and proposed that we buy a new car, that she had many encounters with people in dire financial straits who confided that their troubles started in similar situations. Whether it stemmed from unfathomable grief such as the loss of a close loved one, or seemingly less severe adverse events like not doing well enough in some aspect of life, people had pointed to events like these as the catalysts that put their finances in a tailspin. Why is it that I just proposed to my partner that we hire someone to remodel our entire house and that people tend to make poor money decisions in hard times?

Control and Rewards

There is no one definite and correct answer to the question posed above but based on my own experiences I have, through much introspection, some reflections on the matter. At the most base level, I believe we humans make poor decisions, especially as it relates to money and spending, in hard times to gain perceived control. When we feel down, it is more often than not the result of events outside our control. There was nothing I could do to affect the events that lead to my daughter being given a mere week to live. Similarly, there is little one can do to regain their job after a firing, or to restore the trust in someone who has committed a profound betrayal.

Struck by unexpected misfortune outside of our control, a whole range negative emotions take hold. Left without power to alter the adversarial outcome, we feel defenceless and paralysed at best, or worse yet, disenfranchised and impotent. Painfully aware that there are no quick fixes for grief, sorrow or loss, and that overcoming these feelings is a long and windy process, we look for quick fixes. We become desperate for something we can control, an outlet where we can force immediate changes simply by saying, doing, or buying.

Further compounding this urge to reclaim a modicum of control over our situation by spending money, most of us raised in Western societies associate spending money with rewards. In our childhood, we finally get to buy that new bike after dutifully saving our hard earned allowances for months or even years. As we transition into adulthood, this is further reinforced as we work hard for bonuses, and the opportunity to spend more money. The act of spending money has become a societal reward, and because doing good leads to both feeling good and buying things, many of us subsequently conflate buying stuff with feeling good.

Is it any wonder then, as we find ourselves at our lowest point, that we turn to mindless and irrational spending in an attempt to make ourselves feel better, and to reclaim control over our lives? In my sorrow, I have gained not just an understanding of my personal psychological shortcomings, but humility and empathy for those who find themselves in financial difficulties after going through personal tragedies. While I previously would be prone to carelessly brushing such circumstances off as a lack of discipline, I now realise that were it not for my incredible spouse; I would find myself in the same situation before long. I did, of course, follow up that realisation with a suggestion that we buy a brand new house, because, I argued, surely we deserved it after being forced to go through something like this.

How to Control Your Spending While Mourning

We all grieve in different ways, and not everyone will be inclined to mindless spending to dull their grief. For those of us with that particular inclination, my most important advice would be to work on alleviating these penchants before they come to the fore. It is of particular importance to dissolve the mental connection made between spending money and feelings of joy and happiness. By abandoning the hedonic treadmill, we can mitigate the urge to spend money when we life lays us low. I believe that the changes in my mindset which I have worked to implement over the past few years are an important contributing factor to why I have been able to avoid going on an all out irrational spending spree this past couple of weeks.

Another way I have been able to kerb detrimental shopping in these difficult times is by looking at the cause of why I want to spend money and try to achieve relief through other means. Realising that I wanted to spend money in an attempt to reassert some control over my destiny, I quickly decided that I could exert control by reallocating funds in a way beneficial to myself and my family, instead of buying meaningless stuff. In other words, instead of buying crap, I took the leap and made some investments I had been eyeing up for a while.

Grieving person
Don’t let grief and sorrow dictate your spending decisions. Photo by eflon.

In the name of transparency, I would be remiss if I didn’t mention that I did, in fact, give in to my impulses at some points in the last few weeks. As there is nothing quite like reading fantasy for escaping the real world, I loaded up my Kindle with fantasy books that featured on my to-read list. And one day, this one especially full of self-pity, I splurged and bought a new guitar. But wait, don’t condemn me yet! Instead of going all gung-ho and acquiring the exclusive and expensive Gibson model I had my eyes on, I made the sensible choice and bought the far cheaper Epiphone equivalent. Once I have reached my goals for guitar practice, perhaps I will allow myself to upgrade.

My point here is that if there is a time to afford yourself certain allowances outside of what you usually would contemplate, that time is when you are down and beaten. Straying from the norm and giving yourself some leeway can help ease some of the constant pressure of grief, if only for a moment. And, as long as you do it a constructive manner, I am convinced that it will be of benefit in the long run.

What’s Next for Abovare?

In my previous post, I mentioned that I was unsure of what the future of Abovare holds. While our wounds are still fresh, I believe that my partner and I have progressed a little in our grieving process since then. We are taking some time together, without the pressure of tasks and to-do-lists, to allow ourselves to feel the loss of our girl. And, in time, we hope that we will rediscover joy and happiness of normalcy and everyday life.

Until then, I will not be making any promises about the activity level here at Abovare. I have, however, found some relief in reimmersing myself with the subject of personal finance in the last few days. And, as long as it is something I am doing because I want to, you may find me sharing some of the most interesting articles I have read on Twitter, participating in the Rockstar Finance Forums, or even publishing new posts here.

Lastly, I want to thank every one of you who reached out to me after my last post, whether it was in the comments of the post, through email, twitter or elsewhere. I know it’s hard to find the words to share with someone suffering a personal tragedy, but everytime someone reaches out, it feels as if they take a small of my sorrow and makes it their own. And that helps. All the kindness I have experience from friends and strangers alike has made me more hopeful than ever, even as I am going through the most difficult period of my life. And I intend to pay it forward, every chance I get and let that be my daughter’s legacy.

Header photo by Marcela.

Mother and child hands

Grief and The Unimportance of Money

A week ago, my partner and I were forced to face the shattering news that nobody ever wants to hear. Our newborn daughter, our first child, our baby girl, who had arrived a month early, would not be going home with us when we eventually left the hospital. A day later, the hospital staff disconnected her from the respirator that helped keep her alive, and a few hours after that, she took her last breaths while resting in her mother and father’s arms.

Devastated by grief, we travelled home from the hospital with the realisation that no matter what the future might bring, our world will never be the same. The weight of missing our firstborn, our baby girl who we’ve been waiting for, planning our lives around, can and will never go away. All we can do is to try to learn and become strong enough to live with the sorrow.

The wound is still fresh, and it is difficult to extract financial wisdom from experiences like these, especially while you are still processing. I find myself at an inflexion point where I feel it necessary to examine every part of my life, leave no stone unturned, to see what matters and what does not as I desperately search for meaning in a world which currently feels devoid of any such thing. Is there a point to me throwing my words about personal finances into the vast void of the internet, or is as meaningless as life without my little girl currently appears?

I don’t have any answers at all at this point, except for this: I would have traded every nickel and dime I ever had and will have, to give my daughter a fair chance at life. All the money I have accumulated could do nothing for her, and now it does nothing for me. No matter what your money situation looks like at the moment, take a look at your life, the things that truly matter, and count yourself lucky for every person you have in your life that truly matters.

Scrabble pieces spelling "failure"

Understanding Why We Fail Financially

A couple of months back I reiterated my goal for the year of publishing an article per week here at Abovare. Today, the merciless calendar shows us that the date is June 3rd, while the most recent article here shows May 8th as its publication date. Where did the month of May go, and why did I fail so spectacularly so shortly after restating my commitment to this goal, and how does this tie in with failure when it comes to building wealth?

The Secret Ingredient of Success

Every single failure is, of course, unique, and has its own set of circumstances and explanations behind why it came crashing down. However, I a firm believer that in the vast majority of cases where we fail to reach the goals we set for ourselves, the number one reason is the lack of one key ingredient behind almost every significant success: Persistence.

The importance of persistence is perfectly illustrated by this old quote, by former American President Calvin Coolidge, recently featured in the movie The Founder, which details the early days of the McDonald’s fast food empire:

Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent.

As a society, we so often misattribute success to “Eureka!” moments and motivation. But if you listen to anyone who has succeeded at something talk about how they got there, you will rarely hear them talk about how it was that one great idea that pulled them over the line. Nor will they be telling you how supremely motivated they were throughout the endeavour, to the extent that working on their thing felt like playtime. No, good ideas are a dime a dozen, and motivation is what will get you started. But what keeps the tough going when the going gets tough is persistence, and that is a matter of fact whether we are discussing writing with a particular frequency, or building wealth.

At this point, it is easy to step back, throw your hands in the air and say: “That’s it! Persistence is a character trait which eludes me, so I can’t build wealth or achieve anything else of note.” But before you throw in the towel, let me fill in some additional tidbits of information regarding my month of May, and my failures. Remember how I also aimed to do a fair bit of running this year? I am crushing that goal, currently on track to do double the mileage I targeted for 2017. And more importantly, despite spending hardly any time thinking about money, I am still on track to meet my financial goals for the year.

If persistence, which is, at least to some degree, a character trait, is the most important ingredient for realising your ambitions, how can it be that one person can reach some of his goals, and fail miserably at other targets? Can people be persistent in some matters, while susceptible to quitting at the first hint of friction in others? Probably, but the key is how we spend those precious days or weeks at the beginning, where motivation is plentiful. While planning on everything we aim to achieve, we also set ourselves up for either success or failure. And if persistence is key, we need to emulate it somehow.

How To Fake Persistence

As illustrated by my failings featured in the opening anecdote, I am not a particularly persistent person, if we measure character features. That fact hasn’t stopped me from completing quite a few feats throughout the years that, from the outside, seem like they could only be pulled off through perseverance and grit. The secret? Habits, and systems devised to form them.

Tiger facepalms
Even the coolest cat experiences the odd facepalm-moment on account of their failures. Photo by Tambako.

Motivation, as mentioned earlier in the post, will only get you so far. Once that initial burst of excitement fades, it is persistence which will pull you through, but you can fake persistence by making it as easy as possible to complete whatever it is you aim to achieve. If we once again consider my own, featured mistake, it is easy to see where I went wrong: Eager to read new and inspiring content from other sources, and write and publish new content myself, I made no clear, set schedule for when I should be writing the content. Given the fact that I am a person of no particular endurance as it pertains to completing lofty goals, my productivity decreased as soon as my burst of motivation waned. A month later, here we are, and I have to pull myself up by bootstraps in a what feels like a grand fashion to write another article and get back on track.

Contrast this to the area where I did succeed, running, and what I did differently: In addition to setting concrete goals for what I wanted to achieve with my running, I also created specific plans for how to do it. My training plan detailed when I should be running, for how long, at and which intensity. I alleviated myself of the burden of having to consciously contemplate when, how and what I should by doing to reach my goals, and as a result significantly increased my chances of reaching the goal. Before long, the runs in my plan became a habit, something I looked forward to doing. And then the real magic happened because the progression from following my original plan motivated me to push further and harder, and I was able to build on the established habits to throw in additional sessions to reach my goals sooner.

Create Your Financial Plan Now!

Given that you are reading this right now, it is reasonable to assume that you are motivated, to some degree, to make changes in your financial life. You have likely already thought about what you want to achieve, and perhaps some of the steps you can take to get there. But don’t stop there! I’m not saying that everyone is as devoid of persistence as I am, but why take the chance when it concerns something as important as your finances, your future, and your freedom?

If you haven’t already done it, sit down and get to work on creating a concrete and actionable plan for how you are going to achieve your financial goals. Detail what you are going to do, when you need to do it, to make sure that you save yourself from having to figure that out each time.

How much money do you have available to spend on buying fidget spinners? These are points you need to cover in your plan, and if you are out of funds in the relevant category, then no spinner until you refill that lot. How much money should you be saving each month? So many people make the mistake of thinking that they will just save whatever’s left at the end of the month, meaning that every purchase decision they make has to be weighed up against saving. It requires ridiculous mental strength and restraint to be sensible every single time you’re forced with a decision between “fun and awesome” and “boring and safe.” That’s why you need to make a plan and decide right now that you should be saving $x every single month. Make a non-negotiable commitment to yourself, so that you don’t have to rely on your sound judgement.

If you are unsure where you should start when making your plan, I covered the basics of how I set myself up for financial progress in this post titled How I Learned to Stop Worrying and Love Saving Money, and it is a good place to start. After you’ve finished that, leave a comment if you have any questions or need assistance. I will welcome the distraction from sitting down and figuring out my plan for how I will be reaching my goals for Abovare from here on and out.

Title photo by airpix.

Football team in a huddle

Five Lessons To Learn From Athletes Going Broke

For most people, the earnings of professional athletes at the top of the game in the most popular sports are ridiculous and without meaning. And that is if you break them down into monthly or even weekly sums. Cristiano Ronaldo, the best-paid footballer in the world in 2016, made $82 cool million last year. That’s just shy of $7 million per month, $1,6 million per week, $225,000 per day. Or, put another way, that is $2.6 every single second of every hour of every day, the entire year.

Of course, these kind of numbers are outliers, and not the norm, even at the highest levels. Still, according to The Independent, the average salary for the around 400 players plying their trade at the highest domestic level of English football, The Premier League, was around £30,000 per week back in 2013. That equals about £1.5 million annually, which is around $2.0 million, and the numbers are likely to have increased significantly since those days. The 2016-17 average salary in the NBA is $4.6 million, while the average MLB salary is estimated to be $4.3 million. NFL players, on the other hand, only earn on average $1.9 million yearly.

Or, put another way, professional athletes at the highest level tend to make more money than ordinary people do in a decade, or even a lifetime. However, the truth is that these same athletes go broke shortly after retiring. 60% of Premier League footballers declare bankruptcy  within five years of retiring, with the same estimate circling for NBA players and even worse numbers for NFL players. How is it possible to go bust so quickly after earning these kinds of figures, and what can we learn from their mistakes? Let us take a look at some mistakes our high-earning heroes would do well to avoid, in order to stay clear of dark and troubled financial waters.

1. Don’t Try To Keep Up With The Kobes

Being a professional athlete at the highest level in the most competitive sports means there is a good chance of you being more competitive than the average person. Unfortunately, for many, this often translates to life off the court as well, where they will try to keep up with the appearances of those whose compensation is an order of magnitude higher. While Kobe Bryant, Cristiano Ronaldo and the other stars at the very top of their game can afford to buy a $50 million home and a $5 million car, the person that is pulling $5 million per year can’t. Leading luxurious lifestyles can drain the most well-funded bank account.

Kobe Bryant smiling
Kobe is smiling because he can afford it. That doesn’t mean you can!

“Comparison is the thief of all joy” goes the saying, and this doesn’t just apply to athletes. Stop looking at your neighbour to determine where you should be spending your hard earned money. You can only achieve financial security by spending within your means, and getting there involves making a personal and informed decision about what matters in your life. And that’s before we even consider the fact that your neighbour is probably swimming in debt, barely staying afloat, to finance the big house, those brand new cars and all those nights out. Never let anyone else’s appearances be the basis for your financial decisions.

2. Don’t Abandon Control

Being an athlete at the highest level often means extreme focus and dedication to your trade. Some athletes take this focus one step too far, outsourcing every part of their financial life to others. It’s not uncommon to hear stories from athletes in their late twenties who have never paid a bill or even checked their account balance.

While a narrow-minded focus can be beneficial, you need to show some degree of involvement in your personal finances. If you believe this advice doesn’t apply to the regular guy or girl, think again. Far too many people are happy to let their spouse do the whole money thing, and stay completely out of it themselves. Your money is your future, your freedom and your safety, and while soliciting advice is OK, abandoning all control of your finances is not.

3. Don’t Take Advice From The Wrong People

A bad advice-stand.
Be advised that not all advice is good advice.

The dumb jock is a typical stereotype applied to athletes, and their money management skills, or lack thereof, are often used to perpetuate it. A more nuanced story is that most athletes, especially in football (soccer), are brought into the game and start making money at an early stage. At this point, it is easy to rely on the advice of people who haven’t necessarily been properly vetted. Far too many athletes have ended up losing their money by taking malicious advice from people looking to enrich themselves, or people with good intentions dishing out poor advice.

Deciding on whose advice to act on and whose to ignore is among the most important decisions one will make with regards to their finances. While there are no guarantees, the first step to differentiating between good and bad advice is to educate yourself. The more you know, the more critical you can be when assessing potential advisors. References and introductions from real life persons that you know and trust are additional ways to tilt the odds in your favour.

4. Don’t Fail To Plan Ahead

Athletes’ careers are short, and in most sports, an athlete will reach the end of their career in their mid to late thirties. And that’s if they don’t suffer career-ending injuries, the yips or similar threats that can cut an athlete’s already short career. Failing to plan for what comes after is a surefire way to financial ruin because once the deposits stop landing in your account, the funds will be depleted before you know it. Even a healthy $2 million savings account will only last you four years if you’re spending $500,000 annually, which is not uncommon among the rich and famous.

If you think about it though, none of us has any guarantees. Your employer could go bankrupt tomorrow, and you’d be without a job and a regular income. Or you could be faced with unexpected medical expenses. In these situations, just like the athlete when his career ends, it is an awkward position to find yourself in unless you have planned ahead. But to build wealth is to create freedom for yourself, and by saving and investing in a way that puts your money to work, you will be far better equipped to handle life’s curveballs.

5. Don’t Be Stupid

It is the sad truth that in addition to poor spending habits, lack of knowledge, poor advice and planning, some people just tend to be stupid with money. That goes for athletes, but there are enough examples out there of ordinary people making extraordinary stupid money decisions. Advice under this headline is of the sort that everyone knows, but some just won’t heed because, well, they prefer to act stupid.

Don’t gamble and don’t spend money you don’t have (credit) to finance consumption. If someone offers you a quick and guaranteed return, grab your wallet and run, and generally just try to stay away from investments you don’t understand. If you only follow this advice, you are unlikely to slip further than you can comfortably recover from with a bit of grit and hustle.

And when you inevitably end up doing something stupid, because we all do, far more often than we will admit, do not let it define you. Pick up your tools, start working at correcting your mistakes and live life on your own terms.

Coins of different currencies

Collecting Small Wins for Big Financial Gains

Talking about giving up your daily latte, and pocketing the money instead as a road to financial success has become a bit of a cliché in the literature of personal finance, to the point that it is easy to make fun of all the people parroting the same advice. Nevermind that the average American spend just shy of $100 per month on coffee, and cutting that one expense could grow to more than to $16,000 in 10 years if you invested the money in the market instead. Those thinking about the specifics when it comes to the “Latte Factor” are missing the point because the actual value comes from learning to collect small wins.

Slow and Steady Doesn’t Crash and Burn

There comes the point in every person’s financial awakening where one will throb with restlessness, fervently trying to uncover the easiest way to make a lot of money as quick as possible. Most of us have it in us that once we start working on something, we want to see immediate results. It is human nature, and this impatience is at the root of much good.

When it comes to your money, however, impatience of this kind is not a friend. When someone joins a Ponzi scheme after hearing all the potential upsides, or invest loads of money in a penny stock, it is because they let their impatience take the wheel. And when you let your impatience control your finances, you might just find yourself just ruined by currency speculation, or just having lost after putting it all on red, in hopes of getting a quick and big win.

No, when it comes to building wealth, slow and steady is the name of the game. It might not win you the race, but you will be minimising the chance that you crash and burn. Financial success is all about extracting the best possible returns with the least amount of risk, and it takes time and patience to identify the risk associated with financial moves, not to mention familiarising yourself with your personal tolerance for risk.

Small and Sustainable Improvements

It is a symptom of a performance-centric western culture that we tend to focus too much on the desired end-state, rather than the process that we underestimate the difficulty of making drastic changes. Many websites writing about personal finance do it from the aspect of building enough wealth to retire, which, while doable, is a massive undertaking. I am conscious about this here at Abovare, and instead of talking about reaching Financial Independence and Retire Early (which amounts to the highly memorable acronym FIRE) I try to focus on building wealth to increase your freedom to live life on your terms.

But wait! It seems unreasonable to exonerate myself when the topic of the very first article published here at Abovare was to start your financial awakening with defining your desired end state. While I still believe it is important to be clear about why you want to do something, and what success looks like, I am now here to tell you that it’s OK not to do it all at once. Building significant wealth, especially of the size that allows you freedom to choose how and where you want to live your life, takes time, and you don’t have to do it all at once.

Snail ornament
Slow and steady might not win the race, but it will get you where you want to be. Photo by Bruce Guenter.

In fact, I would argue that attempting to do it all at once is a surefire way to assure that your motivation will flare out before long. And once that happens, it won’t be long until you find yourself living the same way you did before starting your project of change. A better way of approaching such a massive task is to focus on small, achievable and sustainable changes. The type of changes you can pull off without having to make radical alterations to your lifestyle in the short term. The sort of changes like, say, skipping your daily latte, that are entirely doable and leave you with $16,000 invested a decade from now.

Many Small Pieces of a Big Pie

The beauty of minor changes is that, possibly after some initial discomfort, they barely register. The magic of this is that, after a period of settlement, you are free to identify the next change you want to make. Perhaps that is cutting your cable which cost you $80 per month, possibly leaving you with another $13,500 in your investment account after those ten years. And then, instead of watching TV, you start cooking your food at home, saving another $200 per month. That can result in an additional $35,000 invested after ten years. By making some small, but lasting changes to your life, you were able to rack up $65,000 in your investment account.

For some, that will be enough. Others again want to continue adapting their life, step by step, until they lead a lifestyle that aligns with their financial goals. The point here is not to discuss what is or should be enough, but rather, to illustrate that focusing on small wins can yield significant financial gains over time. And, just as important, to remind you that it is OK to take it one step at a time. Even if your savings rate is not at a point that will let you retire anytime soon, that is fine. The important thing is that you are moving in the right direction.

Graph with stacks of coins

The Efficient Market: A Hypothesis

The western capitalist societies place an inordinate amount of confidence in the abstract concept of “the market”. We commonly rely on the market to solve our problems, to ensure that our world progresses in the right direction, and to distribute the collective wealth we have created. However, many people fail to understand what a functioning market entails, and the requirements that must be fulfilled for a market to be considered efficient.

The previous article in our Introduction to Investing-series looked at the company, and how they form the basis of what we refer to as “the market”, and how, when looking at it through the lens of investing in the stock market, any given market is made up of a selection of public companies. In this article, we will investigate the economic theory of efficient markets as it relates to the stock markets where we are considering placing our hard earned money.

The Characteristics of An Efficient Market

When we talk about a market being efficient, we are referring to collective of every participating investor’s ability to price companies in a way that accurately reflect the value of said company. Now, you might argue that one person’s idea of what a company is worth can vary wildly from what the next person thinks, and you would be right. In fact, the very idea of an efficient market is that the collective valuation, the sum of all those individual investor’s varying opinions, is the right value. The market aggregate negates the irrationality of the individual investor.

Or, stated as Eugene Fama, the Nobel Prize-winning economist, did when he formulated the hypothesis of an efficient market in 1970: The price of an asset fully reflects all available information of said asset. In other words, Fama states that the market, which is a composite of every participating investor, will digest every single piece of information about a stock, and adjust their valuation accordingly. Information in this case in not just limited to financial reporting such as earnings and similar, but changes to the competitive and regulative landscapes, even all rumours which may affect the company.

Image of dollar bills
In an efficient market all information is reflected by a company’s stock price.

The stone cold implication of an efficient market is that there is absolutely no reliable way to generate returns more than market growth. This because every piece of information available is, at any given time, reflected by the price of stock. As such, there is no point in trying to predict whether the price of an asset will rise or fall in the future because it is entirely random.

If this sounds familiar, it is because most personal finance bloggers out there espouse the teachings of the efficient market hypothesis. In particular, a direct result of an efficient market is that because of the transaction costs incurred by active portfolio management, placing your money in an index fund is likely to yield superior returns. A recent report has given weight to this claim.

Financial Markets Are Not Efficient

Think about the necessary requirements for a market to be truly efficient. All information would have to be absorbed and acted upon immediately because any lag in adjusting the price according to new information is a market inefficiency. Further, human beings are not rational, even in the aggregate. Studies within the field of behavioural finance have shown that masses overreact to fear in downturns, and become overconfident in good times.

In addition to lag times and irrational decision makers, other issues such as insider trading make efficient markets a theoretical construct, more than a financial law. However, the underlying theories continue to stand strong after 50 years in the limelight, and it is worth having the ideal of an efficient market in the back of our heads as we make our investment decisions. If you want to read a more detailed discussion about the subject, a good place to start is Burton Malkiel’s research paper The Efficient Market Hypothesis and Its Critics. It was published in 2003, but a global recession followed by a near unprecedented bull market later, its discussion points still stand.

How To Invest In A Non-Efficient Market

Having established that the financial markets in which we invest are not efficient, it stands to reason that it is possible to generate returns in excess of what the market as a whole provides. How do we account for this, and can we easily construct our investment portfolios in a way that allows us to capture the excess returns?

The short answer is no. Even in a market with inefficiency, it’s hard to create extra returns. Yes, it is possible to make calculated bets and create excess returns by winning these bets. However, even in a market that is a not perfectly efficient, the return is correlated with risk, and you only “win” or create extra profits by making a bet which is more of a sure thing that the market price indicates. Otherwise, you have flipped a coin and won, which isn’t a sustainable long-term strategy.

Further, even if someone could pick winners more reliably than the market, there is simply no incentive for them to share this information with the public. Think about it, if you knew of a sure thing that other people did not, why would you share this information with the world? You would simply be telling the market to account for your knowledge and thus reducing the size of your jackpot. You can turn on the TV every single day and find people telling you that everyone else is a fraud, but they are the real deal, so you should listen to them and, more importantly, pay them for their secrets. These people don’t know. They have a more or less informed opinion, but if they knew a sure thing, they would not be sharing it with the world or even their employers. Instead, they would put all the money they could accumulate on their sure thing, and collect the proceeds.

A sustainable strategy in an almost efficient market, which is theoretically sound and with a proven track record, is long-term value investing. This strategy can be executed either by investing in broad market index funds or by creating a diversified portfolio. Whether you aim to beat the market or not, you will likely be able to generate significant returns over the long term by adopting a long-term value investing strategy.

The next editions of this article series will look at the principles of portfolio management and detail why index funds are an alternative to doing it yourself. Be sure you don’t miss out by subscribing to our mailing list. You can also follow us on Twitter or Facebook, where we shout out whenever we publish a new post.

Title photo by Ken Teegardin

Big arrows pointing up

Revisiting Our Goals for 2017

Goals serve two primary functions: They act as maps, saying something about where we want to end up at a particular point in time. And, more importantly, they give us the required information to create our itineraries and evaluate our progress compared to the plan as we go along.

While setting objectively good goals is important, creating goals only to see if you reached them at the specified time is akin to travelling blindfolded. Sure, it is possible to end up where you want to go, but it is much harder than it would if you just removed the blindfold. And when it comes to our personal goals, we rid ourselves of the blindfold by regularly measuring how we are progressing compared to the plan.

As we are heading into the Easter weekend, I find it is a perfect time to take advantage of the peace and quiet that usually accompanies the holidays to reflect on how I am doing so far concerning my goals for the year. It is barely a couple of weeks since we closed the door on the first quarter of the year, and I find evaluating your progress quarterly a fine way of balancing the lackadaisical forgetfulness of my personal goals even existing against the compulsive thinking about them far too often.

In the post Better Goals for A Better Year I outlined my personal goals for 2017, and I will go through them one by one, and share my thoughts on how I have been progressing through the first quarter of the year.


Read at least 20 books from cover to cover: I barely read at all through January and February, but thankfully I was able to get back into the habit in March. According to Goodreads I am more or less on track to meet my goal after completing five books so far.

Write at least 50 posts for Abovare: I published ten new articles in the first quarter of 2017, putting me on track to publish only 40 posts throughout the year. Here, I am quite clearly lagging behind if I still aim to reach my goal. Given that I want to spend more time marketing and promoting the site over the summer, as well as exploring other ideas for the site in addition to just content production, I need to act. I will be using the next couple of months to build a reserve of finished, but not published posts. Doing this will allow me to spend time elsewhere later on, but still publish new posts according to my set schedule of about once every week.

Practice the guitar four days of the week: I failed. Miserably. Not much more to say about this one, other than that I have had to come to terms with the fact that I just haven’t been willing to prioritise putting the required work in to become a better guitarist. I consider this goal more or less on hold at the moment, and I will at some point reevaluate whether I truly want to pursue this further, or instead just want to pick up the guitar whenever I feel like it.

Health and Fitness

Complete at least 120 workout-sessions: Throughout the first three months of 2017 I completed no less than 37 training sessions, putting me on track for nearly 150 sessions in 2017, and well ahead of schedule. The vast majority of these sessions were running, and I have been thoroughly enjoying measuring the progress I have been making and feeling my capacity increase from week to week. Unfortunately, I have not been able to do as many strength sessions as I wanted, and with the cross country-skiing season coming to an end, I can only admit that it was a paltry season for me this time around.

Run at least 1,000 kilometres: Strava tells me I am no less than 137 kilometres ahead of pace already, so barring any unforeseen events, I am confident of reaching this goal.

Blue skies and ground with snow
Running during winter, even in nature and on trails, is easy in conditions like these.

10K and Half-Marathon Race Goals: I am hoping to complete a 10K in less than 40 minutes, and a half-marathon in less than 1 hour and 40 minutes. Currently, I am pretty certain that I will be able to reach the latter goal, whereas the former will require some more specific pace-focused training.


Increase year-over-year net worth growth with 50%: This goal is a bit of a dark spot, because, as I’ve mentioned several times before, our family is extending come summer, and I am not entirely certain how that will affect my financial situation. Overall, I would consider myself well on track to reach the goal after the first quarter of the year, but I suppose I will only know towards the end of the third quarter how I am really doing, and what the effect of having a child has on my finances.

Invest 10% of my take-home pay in the stock market: Because of the family expansion taking place this summer, I have been hoarding up on cash with reckless abandon, investing the bare minimum every month. Whether or not I can realise this goal very much depends on the unknowns listed in the above point, but as it stands right now, I am planning to invest significant portions of my cash reserves towards the end of the year. Does that count as being on track?

Establish a concrete plan for building a new source of income: This goal was set from a long-term point of view, and I am grateful to myself for that. I keep working away at Abovare, without having any concrete plans on monetizing the site through ads or otherwise at the moment, but towards the end of the year, I should be able to formulate a coherent plan for turning using it as a springboard for a new income stream.

Those were my goals and a status report on how I’ve progressed throughout the first three months of the year. All in all, I am giving myself a job pretty well done so far. I have been enjoying the start of the year, and if I can continue the year in the same trajectory with regards to goals, 2017 should end up being a good year. And I have a feeling that the birth of our firstborn child will add to that as well!

How have you been doing so far in 2017? Are you meeting your goals for the most part, or have you identified that you are way off track and need to take corrective action? Be sure to join the discussion by leaving a comment below.

Title photo by Qubed Steak.

Financial District San Francisco

Understanding The Company

Investing in the stock market usually entails making a bet regarding a company. But what is a company, anyways? Says Wikipedia: “A company, abbreviated co., is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise.

This article is the second in a series intended to serve as an introduction to investing in the stock market. If you missed the first article, be sure to go back and read it before proceeding. There, we established that the company is the foundation for all investing in stocks. Here, we will look at what constitutes a company, how one might differ from the next, and what investing in a company means.

As per the Wikipedia-definition in the opening paragraph, a company is simply a legal entity, comprising people gathered with the intent of doing business. And, as established in the first part of this series on getting started with investing, everybody in the western world has a relation of one kind or another to the concept. What two people think instantly think about when hearing the word company, however, will vary wildly. While one person might instinctively mention Apple, the world’s most valuable enterprise, another could very well use their favoured local, laundromat.

While it might seem that these two entities have little in common, the fundamentals of a company still apply to both. Both aim to conduct business and rely on turning a profit over a certain time span to justify its existence. And, likewise, both Apple and the local laundromat is ultimately controlled by its shareholders, all of which want to see a return on the investments they have made in the respective companies. To better understand the likeness and differences between companies, it is important to know the common distinctions made between companies.

Different Types of Companies

This list is not an exhaustive investigation of all known classifications of companies, but rather a primer on some of the most familiar terms and classifications of companies you are likely to come across as you get started with investing.

Big Corporations and Small Companies

The first and most noticeable difference between the two entities in our example is scale. One is the world’s most valuable company, as measured by market capitalisation, employs tens of thousands of people and sees daily sales in the billions. The other is perhaps a business with a single location, employing a handful of individuals, with daily sales in the low thousands.

Startups and Lifestyle Businesses

Not all small companies are created equally. One company employing five people can be radically different regarding scope and ambitions from the next. Small businesses positioned for rapid growth and world domination, typically leveraging technology to add value, are often referred to as “Startups”. Conversely, small and medium businesses without ambitions of global domination are characterised as “Lifestyle Businesses.” The name is derived from the fact that founders and owners, frequently one and the same, start these businesses to generate a living and sustain a particular lifestyle.

While media attention surrounding small businesses focuses primarily on startups, lifestyle businesses are not only profitable companies for thousands of founders and investors, but they are also pivotal providers of work for millions of people in America alone. So be careful not to dismiss the viability and importance of running, investing in, or working for a lifestyle business, even if it might seem less glamorous than the fast-paced life at a startup, or lack the corporate shine of a global megacorporation.

Public and Private Companies

An important distinction between companies, especially as it relates to investing, is that some companies are private, while others are public. A public company is listed on a stock exchange, and anyone with the required capital to purchase a single share of stock can become an investor in a public company. Commonly, shareholders of public companies receive voting rights based on the percentage of issued shares held. If you own 10% of the shares, you control 10% of the votes and thus have a significant say in the composition of the company board.

Conversely, a private company is not listed on an exchange, and, broadly speaking, not a viable investment opportunity for the general populace. Investing in privately held companies is quite a different ball game compared to publicly listed businesses and requires additional skills and know-how.

In other words, when someone refers to investing in “the market” or similar terms, that person is always talking about the universe of publicly listed companies. Remember that adage from legendary investor Warren Buffet, on how you should only invest in what you understand? Well, that goes double and triple for private companies, so make sure you investigate and thoroughly familiarise yourselves with the risks involved before you invest in private companies.

Blue Chips and Penny Stocks

If you were thinking that you were going to play it safe by only investing in public companies, it is good to be aware that not all publicly listed companies are equal. When someone asks you to picture a publicly traded company, you will most likely be imagining a Blue Chip stock. These are the mastodons of the corporate world, nationally or even internationally recognised brands, financially sound and often considered too big to fail. You know better than making a false assumption like that, of course, but generally speaking, Blue Chips are the safest investments when it comes to individual stocks.

On the other end of the spectrum are what is commonly referred to as Penny Stocks. Strictly speaking, Penny Stocks are all companies trading for less than $5 per share, but colloquially they are considered the opposites of Blue Chips. Penny Stocks are often listed on lesser known exchanges, suffer from low volume and liquidity, and are considered severely more risky than their opposites.

Making Money From Investing

As an investor, we commonly make money or see our investments grow, through one of two different ways, both of which we will look at a bit more closely here. Let us start with the most obvious way, which is that company value increases. The result is that the value of your share of the company increases as well, and it is now worth more than you originally paid to acquire it. You have made a profit!

Unfortunately, there is a caveat. Yes, your investment is now worth more than you paid for it, but you no more money in your pocket than you did yesterday before the value of your investment rose. This situation is called sitting on unrealised gains, and it highlights the importance of a stock’s liquidity, which is a measure for how often the shares of a stock is bought and sold. High liquidity stocks, which investors buy and sell frequently, are naturally easier to convert into cold hard cash than those which see lower trading volumes.

Another aspect which affects your true returns when realising your gains is transaction costs. Buying and selling are transactions which incur costs and returns realised through selling shares will be reduced by the cost of the sale. If your volume is large enough, these costs will be negligible, but underestimating the effects of transaction costs on long-term returns is a frequent mistake among investors.

The other way of earning money through investing in stocks is by receiving dividends. Distributing dividends is a way for the management of a company to return money to their shareholders, and it comes in the form of a direct payout. Think of dividends as the stock market equivalent of receiving interest on your bank deposits, and dividends are commonly measured, just like interest, as a percentage of your equity in the company.

Underestimating the effects of transaction costs on long-term returns is a frequent mistake among investors.

While some believe dividend-focused investing is a more efficient way of creating returns for yourself, others will claim alternative strategies to be more effective. With the reasonable assumption of some degree of market efficiency and a long-term investment horizon, sticking to your strategy is more important than which strategy you choose. Incurring transaction costs by making redundant sales and purchases will damage your long-term returns.

How To Pick Stock Market Winners

The million, billion and even trillion dollar question when it comes to investing is how do we pick the winners? How do we identify the companies that will perform best in the long run, and thus secure significant returns and minimise losses?

Unless you have a crystal ball or know someone with one who would be willing to give you some pointers, the boring truth is that it is impossible to know. Making this realisation, however, is the first step towards generating stable, long-term returns from your investments.

It also helps to understand the true nature investing. Circling back to the example at the very beginning of this article, the differences between the giant conglomerate that is a Fortune 500 company and your local laundromat are, at the end of the day, nuances. The one thing that is more important than anything else applies universally to every company out there, and that is that a company is just a collection of people doing business. So, no matter which company you invest in, you are making a bet that this company is run by, and employs the best and brightest people. By investing, you make the bet that the individuals who comprise the company you invest in have what it takes to outperform the competition, and generate superior returns per dollar spent.

By investing, you make the bet that the individuals who comprise the company you invest in have what it takes to outperform the competition.

Understanding this can be a daunting experience. How can you possibly gain enough insight into the people in so many companies, across so many industries, that you can ever feel comfortable assuming the risk investing entails? Fortunately, there is a way to invest which effectively eliminates the risk associated with owning individual shares, while still rewarding us with the upsides of providing capital to an expanding economy. The concept of diversification is an essential part of a well-constructed investment strategy, and it is one of several concepts we will explore in the upcoming instalments of this series, which will centre around modern portfolio theory.

Make sure you don’t miss that, or any other posts from Abovare by subscribing to our mailing list to receive an email notification when we publish a new post. You can also follow us on Facebook or Twitter, and receive updates and tidbits of information.

Title photo by gags9999.