Silicon Prairie

While I recently trimmed down my “portfolio” of personal finance blog feeds, I still have enough that around the end of the month I notice a lot of posts about financial goals. While it’s hard to find fault with encouraging people to set goals and work towards them - or have any kind of financial plan - I’ve noticed that many bloggers set goals that depend on things like the stock market. Some of them give monthly updates on these goals, seemingly going against the common advice that long-term investors don’t need to check their portfolio more than once a year.

There’s good and bad in this type of situation. At one level, it’s absurd to say that your personal goal is to have the stock market go up by 1% this month except for a very small group of people. I’m firmly on the side that goals should be based on things that you have a strong influence over, otherwise you’re left with things that are little better than buying lottery tickets. For example, I have a better chance of making money this year by increasing my productivity than by hoping the companies I’m invested in increase their profits significantly. However, there are two ways you can incorporate something beyond your control into your goals.

One way is to consider that often the benefit of a goal isn’t just that you’ll get x in y months. For example, if you set out to lose 20 pounds in 6 months some people might say that’s ridiculous because you can’t control what your body does unless you have a saw and a spare limb. They’re overlooking the fact that by saying where you want to go, trying to get there, and measuring how far you go, you’re growing from the experience alone. If the first goal fails you know more about what’s realistic and what doesn’t work.

So with the larger process of setting goals the fact that your first attempt sometimes doesn’t work isn’t significant. It’s really an ongoing series of goals that become more realistic and more effective with each try. In that context you can set goals that rely on things you can’t control directly, and if they don’t work out the way you want you set another goal that’s more realistic or tries a different approach.

The second way this type of goal can help is by looking at longer time frames. If you have a retirement plan that depends on an 8% average investment return over the next 30 years that’s more realistic than saying the stock market should go up every month this year. Even in this case you can’t assume that what’s worked in the past will automatically work again. You still have to follow your progress from time to time and consider changes such as more small cap and foreign investments if the actual performance doesn’t live up to your expectations.

If you really want to be in control you can also try value cost averaging, where you set a target for your porfolio value at regular intervals and make up the difference with extra investments where necessary. This has the advantages of keeping you in control and helping you invest in things that are below market value and have better chances of going up (the opposite of letting tech stocks dominate your porfolio in 1999/2000). It’s harder to do for most people though, because it can’t be done passively and you need to have extra cash available when your portfolio needs a boost. This probably isn’t what personal finance bloggers have in mind when they write for beginners.

In the end I still think that having a monthly goal depending on the actions of millions of people who live far away is taking too much out of your hands. You can make investments returns of various kinds a part of your plans though. To make it work you just need to look at the right time frame and see it in the context of refining your efforts to get what you really want.

It’s been a busy month, but I’m back with an update on my goals and some more great posts to come. Once again, my goals through June of this year are:

1. Get a consistent income of $4000/month from freelance work
2. Work on passive income/business opportunities so I can start making regular profits in the second half of the year
3. Save up $5000 after paying off credit accounts

Although I made progress on all 3, some more measurable than others, there were two notable things that happened this month. First, in the only news for the third goal I used a cheque from a new client to end the last of my credit accounts (overpaying by $3 so I could have the pleasure of calling in to close it before waiting to see if there was any interest on the next monthly statement). Now my only debt is a personal loan that I’m slowly paying off; I may repay that before the end of the year but with fixed payments it will last into 2010.

This is great progress. Even though the minimum payments on the account I just closed were under $30 and in the last few months I was encouraged to take a “payment holiday”, reducing commitments of that type gives me a lot more freedom to explore new opportunities. I also have less to think about when it comes to managing my money 

Second, although it’s still far from making a profit, the site I’m developing in a partnership went live in February. Thanks to previous interest it has a few thousand users now, but further growth will have to be earned. This has a lot of income potential but some of it is far off. The most important thing right now is that I’m actually running a live service for thousands of people - the experience of keeping a site like this going smoothly should prove invaluable to my plans to profit from technology, even if it doesn’t make any money.

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Canadian Capitalist posted a link to a great NY Times article today. The article, covering David Swensen’s reaction to the recent developments in global finance, includes the best paragraph I’ve read this week:

Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”

This may be the shortest summary of the best investment ideas I’ve heard. For all the studies and active interventions we have now, no one really knows what the big picture will be like in a year. It’s the sum of all the small actions of millions of people; predicting what the collective change will be always involves more luck than skill. The best thing you can do is bet on things being unpredictable and not put all your money in one investment.

Swensen easily counters the common but mistaken idea that recent history forms a trend - a market decline today doesn’t automatically mean it will go down again tomorrow. If people knew that would happen it would have gone down more today in anticipation of the future, until it gets to the point where it could go up or down the next day.

Given this unpredictability, all you can do is make it the center of your plan. Instead of trying to time individual stocks use a planned asset allocation to automatically reduce your exposure to the risky areas and increase your exposure to the markets that are ready to grow. The only “market timing” I expect to do is rebalancing my porfotlio early when one or more investments have a big change (as long as the change is big enough to make it worth the costs).

Don’t see small declines as something bad to be avoided - instead see them as part of the same market that will give you gains if you give it time. Personally I like declines. I opened a new S&P 500 position in my TD e-Series account near its low in January and every time I see it go under the level where I bought in (it’s gone down 2% a couple of times) I wish I could add to my investment!

The right attitude is summed up earlier in the article:

What should an individual investor do?

Don’t try anything fancy.

When I see questions like that I want to ask people why they always have to “do” something - why isn’t “not doing” on the table as well? As a starting point, ignoring the news isn’t as bad as it sounds. If you really want to do something advanced this can be a good time to buy underpriced investments - although there are things that went down for good reasons.

On one level I understand how people get excited by the media and think they have to take action, but it doesn’t take much to figure out that ”doing” is frequently just a way to hand over money to people like me. I must really have an obsession with other people being right to complain about that…

The article concludes with an easily forgotten reminder to not react to a one-week or one-month change in the markets when you’re planning for decades in the future:

When the markets decline, try not to pay attention, he said. “Let yourself off the hook,” he said. “If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”

It’s always nice to write about persistence and the virtues of sticking with something through the good and bad times, but like any emotional thing practicing it can be more difficult. Right now I’m working hard on several different income-related things, but the work feels a bit empty. At times it’s enough to make me consider if I’m on the right path.

Fortunately my endless reading has prepared me for this. From reading about other successful people I know that even when you’re highly motivated about something you’ll experience low points. People who try to convince themselves and others that this isn’t the case aren’t admitting the truth. And that’s even if you’re sure you’re doing the right thing - some of the most rewarding challenges involve a lot of risk because you can’t tell how things will end up. So according to this idea I should just ignore the discomfort and press on.

It’s interesting that these feelings of being forced to work disappear completely during regular working hours. At those times I’ve actually cut back on other things a lot and I’m very productive. Right now I’m doing more catching up than moving forward but doing things right will be worth it in the end. However, if I have an afternoon to myself on the weekend even something that takes under an hour can be hard to start. In a way this makes sense because I need to keep things in balance, so increasing my focus during working hours with the knowledge that I can do other things after the work is done means that I’ll have a harder time extending the time that I spend working.

Of course, this is an area that many good writers disagree on; there’s a strong case to be made for not delaying good things too long. I don’t want to spend a lifetime working for others to be free after I’ve given up a lot of time I can’t get back. This doesn’t mean that I should avoid everything unpleasant, just that I should remember what it’s supposed to be contributing to. Committing to a career that I wouldn’t like would be a mistake, but getting through the tough parts of a business that will give me flexible income or passive income is worth it.

People’s tolerance for this varies a lot. Some people will pay a high price to get access to their paycheck or tax refund early, while others are willing to choose a career that will take 20 years to get them where they want. I think I can undertake things that take 3-5 years to pay off; I make plans beyond that but I want to see results in smaller steps. The important thing is remembering that the end goal is to have full control over my time and do things I enjoy. While it makes sense to do things I don’t like to get the things I do like, I need to stay accountable to my happiness. Allowing myself to have some fun now is one of the best ways to do that, as long as I don’t lose sight of where I want to end up.

My thoughts always lead to one place. I might be doing things now that aren’t completely “fun”, but I know I chose this path because it will help me learn how not to rely on continuous work for 40-5o years. As bad as things might be now - and they really aren’t - the choice to endure this now or drag it out over most of my adult life is not hard!

You don’t have to study economics to understand the idea of a profit curve - increase the price of your product or service and the number of buyers decrease. Multiply the price by the number of sales and you get a line showing where you get the most profit. While this is a simple idea it’s hard to get exact information. Even worse, it’s wrong. A small difference in price will affect the decisions of the buyers who are considering your product or service, but large shifts in price can move you to a different profit curve.

I put this to use recently when I noticed a project I bid for on a freelancing site with an effective hourly rate quite a bit higher than what I was usually aiming for was accepted and went well. This made me think that I should try higher bids on other projects - even if a small number were accepted it would be worth a little extra work. I wasn’t entirely surprised to see that many of the bids received favorable responses. Not only that, but with the higher prices I have less people trying to get them lower - a sign that I’ve reached a different type of customer that’s easier to work with. The ones who aren’t worth working with just ignore me. With these customers it’s actually easier to provide outstanding service that justifies higher prices.

What I learned from this can be applied to any freelancing situation. When you start out you might need to use low prices to break in to the industry and establish yourself, but once you have proven expertise and reliability you can easily underprice yourself. While you might be ok with a slightly higher pay rate, it can be a marketing problem. Price is typically considered as one of the last things you establish but it’s also a part of the positioning.

Positioning is important to understand because it’s part of your image. While it’s very hard to get people to buy a bad product at a high price, if you say your product is excellent but price it very low people will have similar feelings that your positioning is inconsistent. This is one of a growing number of things that I knew ahead of time from reading about other people’s experience, but I’m now relearning from my own experience.

It’s also a great example of how freelance work can teach a lot of business concepts even though when most of the time is spent on unrelated work. That’s a great bonus in addition to the flexible income. I could look at the time I lost being underworked because my prices were too low, but the important thing is that I’ve learned a lesson that will increase my income in the present and my chances of doing greater things in the future. If you’re selling something it might be worth experimenting with different positioning options and the prices that reflect them to see what gives you the most profit for the least work.

Is self-employment or owning a business just a job with another name - one with no minimum wage?

The other day I was reading an interesting internet business blog and found an older post with some thoughts on what’s really important in business. One of the key points was that many people who think they run a business really just have a job - it really is possible even when you’re self-employed. The article goes to great lengths to warn against this possibility and claims most people fail to create a business that actually generates real wealth beyond the average salary or allows them to work less.

Since that is one of my goals, the fact seems scary. Even though I’ve been aware of this distinction for some time (even before reading the excellent E-Myth book, where it’s also mentioned a lot) it doesn’t hurt to be reminded. After all I don’t want to wind up in a job with no one to help me for my whole life. People sometimes talk about this with phrases like “work on your business, not in it” and “passive income” - the later is a kind of magic word for many get-rich-quick schemes but only because it’s based on a valid idea. It’s ok to just have a job with more control, but if your goal is a business that doesn’t depend on you full time you have to approach it the right way.

There’s three things to look at to decide which way you’re going. First, look at what your revenues are based on - do they correspond exactly to the hours you work? Second, what does the business rely on? If you leave for a couple of weeks does everything fall apart? Third, ask yourself if each function involved in the business is best served by having you do it yourself. The sign that you’ve really freed yourself from the need to have a job is when you can make money regardless of whether you’re working or not and you spend your time only on the areas where you can make a big difference in the profit level.

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While I’m putting a lot of thought into the best way to buy my first house, I’m also considering what will happen after that (aside from unexpected repairs and expenses). Usually when you get investment advice people will tell you not to get in to something without an exit strategy or at least a clear idea of signs that it’s no longer a good investment. Although I don’t consider a house just as an investment, it’s a large purchase that people tend to make several time in their lives so I think it’s worth a similar thought process.  Since I prefer to use other opportunities to build real wealth my exit strategy isn’t about making money - instead it’s about saving money to make the right moves possible.

What, then, should my exit strategy be for my first house? There’s three things to consider: upgrading, outgrowing, and improving. Since I won’t have a large amount of money saved up (unless I start a hot business, grow it 10,000%, and sell it in the next 6 months) my first purchase will involve a lot of tradeoffs. After a few years of regular work I’ll be able to afford a house closer to my ideal. There’s also the possibility of simply needing more space, likely in less than 10 years. Finally, renovations and redecoration can make the house last longer before moving becomes a real need.

To find the appropriate way to balance all these different needs, I need to start by framing the decisions the right way. For me that means one key point - renovations, other improvements, and money saved up for the next house all come from the same place. That means that if I have $10K to spend on housing, I should consider whether it’s better spent improving the current house or investing to pay for a new one within a certain time frame. I don’t hear this in common housing advice, but it makes complete sense to me to lump money spent on your housing situation together and then maximize your gain.

The result of this thinking is that most renovations are a bad idea. It’s well-known that the increase in home value is usually less than the price, even if you don’t borrow the money and pay interest. The only case where renovations would be good is when you absolutely can’t put up with something anymore but you don’t have enough other reasons to go through the cost and effort of moving, or it’s a small change that makes the house a lot more attractive. There’s a lot of smaller projects such as redecorating the walls that have lower costs and can be partly done yourself, so those can be worth the cost. In general though, I expect renovations to decrease the quality of housing that I can get.

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As I drove to pick up a friend around 5 pm recently, I noticed that traffic is getting more and more annoying. In the short time that I’ve been working full-time on a flexible schedule I’ve come to enjoy virtually empty roads when most people are at work or school - so much so that I’ll go to great lengths to avoid driving at times when 75% of the population needs to get somewhere in a hurry. It’s a lot more fun to have the freedom to go as fast as I want and turn anywhere without having to cut through several lanes of cars. As I thought about it, I realized that this idea shapes many areas of my life now.

Consider the simple analogy of traffic jams and stock trading - if you rush to buy a stock (drive) when everyone else is, you’ll get caught in a traffic jam (inflated prices) that will slow down your progress (gains) and in fact leads to frequent accidents (prices going back down and wiping out fortunes). Similarly, if you choose a career that everyone is going for at the same time because it sounds good, your chances of getting a well-paid job go down. This can apply to every area of life where people compete to do something for their own gain.

At first glance many people think that following the crowd is right simply because everyone else is doing it and they don’t want to be left out. Sometimes people avoid the unpopular way because it’s slightly harder - but when the main road is packed with cars that aren’t moving sometimes taking the side roads rewards you for the extra effort. You don’t want the abandoned road with holes big enough to get lost in, but one with only a few other people on it usually takes you where you want to go the fastest.

Hopefully I haven’t stretched the metaphor too far at this point - if you’re still with me, try applying it to different areas of your life. Are you really doing the right thing, or are you just driving across town during rush hour because everyone else is? If you do something a little different you might find that, like driving during the day, it gets you where you want to go a lot faster and with less pressure. Not only are you going faster and free to change direction with ease, but you also enjoy it more. Now I just hope no one follows my advice so I can continue to enjoy it

The ebook I mentioned in my last post is informative, but stories like that are also inspiring. At times I feel like I come up with so many ideas I’ll never have enough time to do them all; however I’ve been focused on a few ideas for some time now so I’m starting to feel more like it’s hard to come up with new business ideas (preferably involving technology). I’ve noticed that many others have this feeling as well. It doesn’t mean I’m stuck - after all I could work for years on the things I have going now - but I like to have a steady flow of new ideas. One of them might turn out to be perfect for my situation and help me get a lot farther. I approach all ideas this way; I might have good ideas now but they aren’t the best ones I could possibly have.

There’s no easy way to come up with lots of profitable ideas - if there were they wouldn’t be profitable. So as much as I wish I could solve this problem once and for all it won’t happen. It’s also critical to remember that there’s no ideas that guarantee success; doing something simple the right way is a lot more important than doing something no one ever thought about. The ebook got me thinking about different types of business though - so, for your convenience, here’s a list of a few different ways you can make money online.

1. Affiliate marketing - sell someone else’s products
   1. Write convincing reviews that link to the product
   2. Write a blog on the subject and link to the product
   3. Post on forums about the product (without spamming of course)
   4. Buy cheap ads that direct people to well-paid affiliate links
   5. Drop-shipping - find a supplier that will package and mail orders so all you have to do is sell the product
   6. Create a network of sites related to the same area and use them to promote each other and multiply profits
2. Create an online service - a website that does something people find useful
   1. Charge users directly to use it
   2. Charge companies in the industry to provide it to their users
   3. Make it free and put ads on the site
   4. Make it free and insert ads into messages (think SMS - companies are getting very interested in this)
   5. Provide online access to someone else’s service and charge a commission
   6. Create a site based on a useful webservice and charge to use it
3. Sell your own products
   1. Design and manufacture physical products
   2. Produce information products that can be copied cheaply 
   3. Create a website that sells products directly
   4. Create an affiliate program so others sell your products for you
   5. Record a video and post it on sites that pay you each time it’s viewed
   6. Find things cheaply from various sources and sell them online, possibly through ebay
4. Popularity - become well-known and trusted through a site such as a blog, and get in touch with others who are well known
   1. Get lots of ads on your site so a small fraction of viewers earn you money
   2. Charge for access to parts of your site
   3. Let marketers pay you to recommend things
   4. Use affiliate links to promote products you like and get paid
   5. Use blogging, podcasting, videos, and email to become an authority on something and then use that to promote specific products
   6. Become an expert on something and sell training
   7. Just plain sell out and allow anyone to use people’s trust in you for any reason as long as they pay 

There’s probably a lot more approaches that could be added to this list, but if you’re looking for ideas you can start by thinking about how each item could apply to things you’re interested in. Good luck!

Given my knowledge of technology and my interest in making money, the world of internet marketing is something that seems like it would naturally draw me in. Sadly, many sources of information have a very unreliable feel and of course there’s countless scams. There is some quality information though. For example, I was recently referred to a free eBook (available as a series of blog posts) by Randy Brown explaining how he started an ad-supported website. If you want to understand how people make money through websites it’s a great read.

Although it’s only one example of how things can be done, I love the no-bullshit approach of the articles and how they lay out step by step what he did and how he learned. There’s no hiding the fact that it takes a lot of work to create something profitable, but Randy ties all the steps together in a simple framework so if you’re interested in creating that type of site you don’t have to wonder what to do. He did so well that he was featured by Google (who provide the majority of his ads) as a success story, so he has something real to base his writing on.

If you’re interested in online business there’s some good ideas here. Although Randy may have been new to creating websites at the beginning he has a lot of specific tips on targeting search engines and building traffic that sound like they can go a long way (I’ve heard some of the same things from many other sources). There’s probably many people now trying to make the exact same site who will be less successful, but if you take the time to come up with a market of your own this could be a good way to approach a business based on an ad-supported site.

As someone who is interested in online business but has a lot to learn, this definitely filled in a few pieces of the puzzle for me. I don’t plan to start that type of site but the detailed story of how it was put together makes a nice case study.