Category Archives: investing

Twitter IPO and diversifying your portfolio

Good to GrrrrreatYay for the upcoming Twitter IPO and congrats to Buster for being a part of that story!

The stock market is the world’s most profitable money-making engine, and investing in it (as part of a diversified portfolio) is almost a prerequisite for the lazy early-retiree. But if you’re looking for riskier investments or unique ways to diversify, investing directly in early-stage companies seems lucrative.

And whenever a company goes public, or a major acquisition makes headlines, the idea becomes even more salient. For instance, Baylor3217 asks:

I’ve been a pretty avid [twitter] user the last 4 years or so. Had I wanted to invest $100,000 – $200,000 3-4 years ago, could I have done that as a nobody and what could it have entitled me to in the upcoming IPO?

At the $100k level, you’d be considered an angel investor in the tech world, meaning you are investing a relatively small amount of cash into a very-early-stage company. You’d be given equity and expected to advise the company, make connections to potential clients and Venture Capitalists, etc. To put this in perspective, by the end of 2009, Twitter had already raised over $100MM in venture capital, so a $100k investment would have been laughed at, to be honest.

VC rounds usually start at around $1MM. Like with angel investment, VC is not just a money/equity swap. Venture Capitalists sit on the boards of the companies they invest in, so they are expected/required to have decades of relevant business/entrepreneurship experience. Even more importantly, VC is about connections, as startup founders don’t only look at deal terms when comparing VC deals. Since money is the fuel that will propel their company out of “startup mode”, they want the highest octane fuel they can get, meaning a sharp VC who will give good advice, connect them to potential clients, and eventually help them through a liquidity event (acquisition, IPO). It’s called “smart money.”

The answer to “what could it have entitled me” would have been totally up to the terms of the investment deal you made with Twitter. These are some VERY complex arrangements, involving esoteric clauses like liquidation preference and “capped participation”. Google those terms and if you’re not falling asleep reading their definitions, you might make a good angel investor.

Lastly, it’s easy to look at Twitter’s IPO and say, “I should have invested 4 years ago.” What you should really ask yourself is “Do I know what will be making headlines in the business papers 4 years from now, and do I have access to these people?”

If all the above doesn’t deter you from angel investing, you still have that $100-200k, and you wouldn’t mind never seeing it again, you may have what it takes to become an angel investor.

[This content was originally published on the Mr Money Mustache forum]

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MMMMM (Me Merrily Meeting Mr. Money Mustache)

mustache bearMonday afternoon I had the pleasure of meeting one of my favorite bloggers, Mr Money Mustache. Along with blogger pal Erica from Northwest Edible Life, he hosted a little get-together here in Seattle for his readers. There was even an offer of free beer if you rode your bike, but unfortunately I couldn’t take advantage of it as I rode the scooter to get home in time to take the Foundry Boys to Cub Scouts.

It was really fun to see MMM and watch him dish out advice face-to-face. I didn’t hear it all but the most commonly repeated refrain of his was that everybody should be riding a bike. I wholeheartedly agree! As I told someone there Monday night, replacing most car commuting with bike rides is the 2nd biggest improvement to my quality of life (marrying Mrs Foundry is #1 of course).

I knew I was among my own kind when someone in a group asked how many people love making spreadsheets, and everyone proudly agreed “I do!”

I got a warm feeling from being able to give some investing advice, based on the Gone Fishin’ In the Foundry portfolio.

But mostly it was great meeting others who share a passion for frugality, finances, and good beer. Hope to see you again next time!

Peer-to-Peer Investing 101

One of my previous posts was about how any investing can be socially responsible, provided that it’s a means to an end: one no longer needs paid employment and can choose from a variety of unpaid socially responsible activities such as volunteering or tutoring.

I sort of feel like that’s a cop-out answer, so let’s look at one area of investing that I think is very socially responsible: Peer-to-Peer Lending, or lending money to others, without traditional financial institutions (i.e. banks) acting as middleman.

I’ve had, and currently have, P2P investments in a few different organizations. I’ll explain the pros and cons of each:

The first one is Microplace. It’s very similar to the more-popular Kiva, where your money is loaned to small businesses in developing nations. The main difference is that investments at Microplace earn interest, currently around 1%. That’s about the same rate you’ll get from a CD so it’s not going to let you retire or even keep pace with inflation. However, it can be a small part of a well-diversified portfolio since it’s probably not tightly correlated with investments in the US stock market*.

Furthermore, I’d argue that money otherwise earmarked for charitable giving in one’s budget could instead be invested here. Since the money invested at Microplace earns interest, it will begin to compound, enabling you to invest more and more, increasing your ability to do good in the world.

The other P2P institution I have experience with is called LendingClub**. It’s a similar to Microplace, though the borrowers are here in the USA. They’re frequently looking to do debt consolidation, or for starting money for a business. Since the loan amounts are typically in the $10k – $20k range, investors pool together their money in $25 chunks to fund a loan. That way, a single investor can buy dozens of loans to ensure that if one loan defaults, you don’t lose all your money.

Borrowers get lower rates than they’d otherwise get from banks, which has two benefits: immediately, the borrower can free him/herself from the high rates charged by banks and credit card companies. And in the long run, this will cause competition among lenders which will lower rates for everyone.

LendingClub is a powerful but dangerous tool in the investing portfolio. The company brags about returns in the 10 – 14% range, which of course is unheard of in the stock and bond markets. But no return of that level is without risks. I’ve had one loan default on me so far, which is money down the drain. Even so, my average rate of return with LendingClub is over 9%. I don’t ever plan on having more than 2% of my total investment money in a risky product like P2P lending.

Before you put any money into LendingClub, you should research the complex filtering tools and develop an investment strategy. Since I’m lazy, I copied the strategies of folks who have demonstrated success tweaking and scientifically re-checking their own returns. For example, here’s one from a blogger named Brave New Life.

Anyone else have investments they feel are socially responsible?

* In other words, means ups and downs in the domestic stock market probably have little impact on the ability of Microplace loan recipients to repay their loans.

** The link to LendingClub is referral link, that gives you $100 for signing up and making an investment. I don’t get anything.

Any investing can be Socially Responsible Investing [foundry mailbag]

Last week was Gold Week here at the Foundry, and the past few weeks are turning into Investing Week, a topic that I’m still learning a lot about and totally fascinated by.

Foundry Friend and reader Betsy commented with a great suggestion for a topic, so-called “socially responsible investing” or simply “social investing.” She writes:

I would be interested to hear your thoughts on having one’s investments match their values, even if it means lessening returns.

In fact, Venessa recently asked “Exactly which companies are these index funds investing in?” And we both had an “ew” moment when we read down the list. Most were companies we dislike or distrust, and a few are brands we actively boycot!

So what’s going on here? Is there a way to reconcile the wisdom of diversified index fund investing with one’s personal values? Or does the conscientious investor just need to hold one’s nose while building wealth?

For most people, investing is really going to be a little of both. Apparently there is a way to attain an acceptable level of diversification while limiting investments to “socially responsible” funds, at least according to this academic paper. Maybe this is callous of me, but I don’t really have time to read academic papers, and to pick and choose funds. I have a “set it and forget it” method to investing.

However, there is a bright side. I’m here to argue that one’s level of social responsibility is determined less by the investments themselves, and more by what you do with your life once you’re living off those investments.

If someone lives the Foundry lifestyle and becomes financially independent at age 40, they have the opportunity to spend the majority of their adult life doing whatever moves them. Personally, I plan on spending much of my time volunteering and that’s what lets me sleep at night, regardless of what’s in my portfolio. I know that I have a finite number of years until I reach this goal, and that my investments are a means to a very socially responsible end.

In my next post, I’ll discuss a method of investing that I feel is very socially responsible that won’t replace the traditional index fund investing style, but is a good way to complement it.

The “Gone Fishin’ in the Foundry” Portfolio

[This is the final installment of a series on investing. Here was part one and here was part two.]

Instead of giving up on the Gone Fishin’ Portfolio when I found out that one of the recommended funds is closed, I decided to “leave the nest” of blindly following the advice in the book and put my newfound investment knowledge to the test. I made a few changes (let’s call them “improvements”) to the recommendations in the book.

Here’s my new portfolio. It’s essentially the same as the one in the book, but without the closed fund*, and it wraps multiple International investments into one International index fund (fewer funds to worry about means an even easier time investing, at the cost of a slightly less-customized portfolio).

Asset Type Vanguard Fund (Symbol) Percentage
US Large-Cap (i.e. big companies) 500 Index (VFINX) 15%
US Small-Cap (i.e. small companies) Tax-Managed Small-Cap (VTMSX) 15%
International Total International Stock Index (VGTSX) 30%
Investment-Grade (i.e. low-risk) Bonds Total Bond Market Index (VBMFX) 20%
TIPS (bonds indexed to inflation) Inflation-Protected Securities Fund (VIPSX) 10%
Real Estate REIT Index (VGSIX) 5%
Precious Metals Precious Metals and Mining Fund (VGPMX) 5%

What’s that last fund? It’s an investment in precious metals, like gold! But it mostly invests in the companies that extract the precious metals, which tend to follow the ups and downs of the metals themselves, but also produce profits which make them a higher-yield investment.** So we’re back where we started, with a small investment in gold. Katie was right after all!

After the one-time hassle of setting this up, all I need to do is a yearly “rebalance”. Each investment will rise or fall in value, which will make the percentages deviate from the targets above. I simply sell the ones that are too high, to buy more of the ones that are too low.*** It should take about 30 minutes a year! I can spend the rest of the time going fishin!

PS: If any of the above terms seems like mumbo-jumbo, PLEASE read the book before doing any investing. I’m no financial wiz, and I was able to grasp it. So you will too. Also, feel free to ask investing questions. Love answering them!

* Should VWEHX open back up, I’d allocate 10% to it, and drop the short-term bond allocation down to 10%.

** Go back and read the quote from investment guru Warren Buffett if you don’t understand why this is the case.

*** AKA “sell high, buy low”. Alternatively, I can save up cash over the year and add value to the underperforming funds until everything balances out. Still “buying low” but removing the potential tax implications of selling assets.

The Gone Fishin’ Portfolio


[This is part 2 of a series on investing. Here was part one.]

I read a number of books on money and investing, each presenting what the author believed to be the BEST way to invest your money. But none of them were able to back up their claims with as much research as The Gone Fishin’ Portfolio.

The author, Alexander Green, first walks readers though the basics of money, which should be review if you’ve been a Foundry reader for a while:

  • the magical compounding effects of saving a lot of money early on
  • why not to “outsmart” or “time” the market when investing
  • why to not trust your investments to a “professional.”

With that out of the way, he gets to the interesting stuff: an investment plan that is based off nobel-prize-winning research on the importance of asset allocation, keeping fees/taxes low, and staying the course (no matter what the latest “news” is from Wall Street).

The author even makes it dead-simple by giving you the actual Vanguard funds that represent each investment. So I went to shift my investments around in Vanguard to match the advice from the book. Uh oh! Since the book was written, one of the funds was closed to new investors. So there goes that portfolio.

In the next post, I’ll explain how I modified the advice in the book to get around this little roadblock, and to make the portfolio even easier to manage.

Ok, fine! I invested in gold, sorta (Diversification 101)

This post continues the discussion on investing in gold, by segueing to investing in general. In a previous post, I explained why not to invest in gold, because I think it’s currently experiencing a bubble in valuation. Then a friend wrote a guest post with an interesting theory that the price of gold isn’t inflated, rather the value of the dollar has decreased.

In this post I’ll begin to explain why a bit of precious metals investment may actually be a helpful thing, as long as you’re spreading your money around to a diverse array of investments.

Living the lifestyle I write about on this blog is saving a lot of money (it’s also increasing my quality of life…go figure!). In the old days, when I was doing the standard “save 10%” thing (and then spending the other 90% whether I needed to or not), it was pretty straightforward how to invest it: a little into the 401k and some into a savings account for short- or medium-term goals.

Now that The Foundry’s savings rate hovers around 50%, we’re stashing a lot more money away for a rainy day. As such, I’ve been doing some research about investing and decided that the “rule of thumb” portfolio* isn’t going to cut it any longer. I need a portfolio that…

  1. performs as well as a stock-heavy portfolio (over decades).
  2. spreads money over many different types of investments, in a calculated way, to decrease risk.
  3. takes the guesswork out of the complex tax implications of each kind of investment.
  4. most importantly, is simple to manage (I’m talking “minutes per year”).

I read a number of books on money and investing, each presenting what the author believed to be the BEST way to invest your money. But only one author was able to back up his claims with research into nobel-prize winning investment theory, and present it in an easy to understand format.

Find out which book in our next installment on investing…

*  The rule of thumb being “invest your age in bonds and the rest in stocks.” So a 30 year old would have 30% of their investments in a bond fund and 70% in a stock fund. That way their portfolio gets increasingly conservative as they near retirement.