You also have to guard yourself against those instances in life where rational decision-making on your part creates perverse incentives for counterparties that you may encounter. For example, I don’t think most people realize a danger that arises when you try to pay off your home mortgage early. If you ever lose a job, take a pay cut, or encounter some difficulty with making your mortgage payment once a good chunk of the principal has been paid off, the bank is going to be less likely to work with you if they have clarity that they will make a profit.
I include below five factors that I consider when evaluating a mutual fund offering that are a little bit different than the standard/conventional advice that is repeated ad nauseam on the topic:
#1. Pay attention to the manager rather than the fund when calculating performance history. Most people rely on a fund’s performance history when reviewing the 3, 5, and 10 year history for a mutual fund. But you should care about the specific person. For the past five years, it’s not that there has been something magical about “center fielder for the Los Angeles Angels.” Instead, Mike Trout is the magic player, and he happens to be center field. People fall into the trap of following the track record of the fund name rather than the manager. It is the manager who selects the stocks, and that is the track record you should study.
I do not like art as a long-term investment. Why?
Artwork not generate any cash flow. Strike One.
Artwork costs money in storage fees. Strike Two.
Artwork costs insurance. Strike Three.
Artwork sales require expert opinions on authenticity and valuation. Strike One.
Artwork can be damaged for a 100% loss with a toss of coffee. Strike two.
Artwork contains high transaction fees to buy. Strike three.
Artwork is taxed at a rate over ten percentage points higher than the capital gains rate. Strike one.
In 1900, it required a net worth of $39,000 to be classified as America’s top 1%. The median factory worker earned just shy of $500 per year. At the end of the Gilded Age, it would have been a fair claim to suggest that the United States resembled an aristocracy, as over half of America’s richest 1% received at least $20,000 in inheritance. Statistically speaking, if you were at the top crest of America’s wealth distribution, it was more likely than not that your wealth could be tied to receiving something from your parents.
There is a reason why you don’t see many investors get interested in physical ownership of real estate until they can ensure that they can afford a property management company to run the day-to-day operations and the size of the family wealth is substantial enough that a single apartment complex won’t consume most of the family’s assets. In effect, this means that outright physical real estate ownership in the portfolios of investors with less than $1,000,000 in investable assets but takes off quickly once you study the assets of investors that have over $2,500,000 to invest. So why don’t you see a lot of real estate investments from the wealthy before that $2.5 million net worth point?