Well, obviously, the best thing to do is some combination of investing in a house, Chinese mutual funds, regular US mutual funds, and online gambling. Let's think about the best way to allocate our free cash...
I see investing in a house as a long-term investment. It really starts to make sense once you are able to pay it off which takes a long time. Just for giggles I made this amortization model which I'm happy to share with you, my loyal readers. Click on the link to download it: Mortgage Example.
Jesse, Alan, and I continued the conversation from the last post through email, and I will post some highlights here just for the sake of reminding myself. It started with a link to these sites, which I find very informative:
1. House prices vs. Inflation
2. Excel file for above
3. History of Fed Funds Rate
I bought my house in September 2004 which appears to be more than halfway up the bubble. So, it wasn't the worst time to buy, but I was pretty close. Looks like if you got in around 2001, you are golden. If you bought in early 2006, you probably paid too much. I'm wondering how much of my extra cash I should put towards extra payments on the principal of my house vs. other investing options.
I think about how great it would be to have my house in Memphis paid off and just collecting rent.
I think a cool short term investment would be a mutual fund invested in China. I may start looking into this.
Meanwhile my 401k and Roth IRA are invested in normal old mutual funds and bonds and whatnot.
Somebody do some math and tell me how to allocate please.
Here's some simple math.
ReplyDeleteLet's say X is the money you're going to invest and Y is your investment return. Let's say you want a double return on your investment. Let's see how the math adds up.
2 * X = Y
Let's do some investing. Square each side. You end up with
4 * X^2 = Y^2
Remember Y^2 = Y * Y and Y = 2 * X so we can play numbers magic and say that
4 * X^2 = 2 * X * Y
Let's subtract Y^2 from each side, just because that's a legal move. Then
4 * X^2 - Y^2 = 2 * X * Y - Y^2
If you remember your algebra, 4 * X^2 - Y^2 = (2 * X + Y) * (2 * X - Y) so then
(2 * X + Y) * (2 * X - Y) = 2 * X * Y - Y^2
Now let's separate a common Y out of the right side because we don't want all our eggs in one basket. Here's what you get.
(2 * X + Y) * (2 * X - Y) = Y * (2 * X - Y)
Hey, look! There's a (2 * X - Y) on each side of the equation. We can eliminate them. Those are extra fees we don't need. So then
2 * X + Y = Y
Remember at the beginning 2 * X = Y. So now we have
Y + Y = Y
Wait, huh? The only way that equation works is if Y = 0 (which equals your investment return).
So simple...
ReplyDeleteWe have a money manager... would it be so bad to ask him the important questions, and post the answers? Rachel would probably be willing to talk with us. Maybe we could get some burning questions together, and see what she thinks?
ReplyDelete