How Do You Put Two Eggs into Ten Baskets?

Historical article note: This article was originally published on 2018-12-20. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.

One of the prescribed actions in Financial Planner lectures is to talk about the topic "Don't put all your eggs in the same basket." I always wonder, are all the listeners people with 10 eggs? Can't find the basket with the eggs? According to my observation, the problem faced by 90% of people now is: too many baskets and not enough eggs. Financial management means treating the balance of your own income as eggs and placing them in other people's baskets. If there are not enough eggs, there is no need to worry about not being able to find the basket. Just think about how to lay eggs, and then find a strong basket. It is best to put a small egg in it and it will turn into a big egg when you get it back. The ideal is full, a well-off family, the middle class all want to learn how to make money after having a surplus; the reality is very skinny, after eggs are placed in other people's baskets, some eggs shrink, and some eggs are taken away with the basket. How to lay eggs and how to choose a basket? Let’s explore it together.

Where do the eggs in each household come from? When a family's income is greater than its expenses, there will be a surplus. These surpluses are eggs. We used to put them in savings accounts. Now some people use these savings to buy real estate, some invest in stocks and bonds, and some buy collectibles. The types of eggs are becoming more and more colorful, but no matter what type of eggs, the source is the surplus of income. It is not easy for a family to increase their income. In "The Wealth of Nations", Adam Smith's description of income is as follows: "What causes the rise of labor wages is not the actual size of national wealth, but its continuous growth. Therefore, the highest labor wages are not in the richest countries, but in the most prosperous countries or the countries that get richest quickly." 240 years ago, Ya Lao told us why the income of Canadians is not growing as fast as that of Chinese people, nor is it as high as that of Americans. China is currently the most prosperous country, and the United States is the country that gets rich the fastest. Although Canada is rich, its income is not high because it is neither prosperous nor a holy land for getting rich. Working hard to save money is probably the slowest and most primitive way in Canada. The biggest use of income in Canada is the ability to apply for a loan from a bank, obtain leverage, and complete the egg-laying process. If you only have two eggs, you can only borrow a chicken from the bank to hatch more eggs.

The growth of a country's national wealth is well documented, that is GDP, gross national product. In a financial management lecture I attended recently, the financial management consultant also showed the audience some data on GDP growth and made a prediction: Canada's GDP will grow by 2% per year, and China's GDP will grow by 6% per year. But it is a pity that no further analysis was heard. GDP is an indicator of wealth growth for the entire population. What does this growth rate mean for each family? Take China as an example. GDP growth of 6% per year means that the national wealth will double in 12 years. For a family, if the family wealth fails to double in the next 12 years, the wealth will shrink; if the wealth of the parents stagnates, young people have the opportunity to surpass the wealth of their parents in 12 years. The average age of Chinese multi-millionaires is 39 years old, and the average age of American multi-millionaires is 54 years old. Living in China, it would be strange if you are not anxious. In China, creating wealth through entrepreneurship and innovation is the right way. In Canada, the GDP grows by 2% every year, which means that the national wealth will double in 36 years. For a family, if you have just immigrated to Canada, if you want to surpass the families who came earlier by relying on natural economic growth, you may have to count on the next generation. Therefore, in Canada, using the money of people who came to Canada early to make money is the right way. China is currently a country with a considerable increase in wealth, while Canada has a large stock of wealth, but a small increase. Faced with this situation, there is only one way for new immigrant families to grow their wealth: to surpass the wealth of their predecessors, they need to borrow chickens and eggs from their predecessors, gain leverage, and use other people's chickens to hatch their own eggs.

I am talking about real estate and leverage, not only because I am familiar with this industry, but also because real estate is not only a high-quality basket that has been proven for thousands of years, in which eggs can be safely placed. More importantly, real estate itself is an egg. Once you fall in love with a bank, you can breed chicks. After the chicks grow up, they will lay more eggs. Put 20% of the down payment into the basket of real estate. After falling in love with the mortgage, it becomes a house. After living there for 3 years, you can add a mortgage, take out the equity in the house as a down payment, and buy one. The original house becomes an investment house, and the new house you buy is a self-occupied house. After living for another 3 years, you can add mortgage on the two existing houses, take out the equity, and buy a third house for self-occupation. Investors with good lending skills can buy 5 or 6 investment houses in about 10 years with only 2-3 down payments. Look at it with envy. Let me tell you a secret. People with the highest level of loan skills are actually the stupidest people. They pay a lot of taxes, so banks like them. As long as they come to apply for a loan, the bank will approve it. In Zeng Guofan's words, people with superb loan skills are "clumsy" people. People who buy a house, renovate it and then sell it; people who make a lot of cash income without filing taxes; all the "smart people" who worry about filing taxes, have nothing to do with mortgages, and naturally have no business investing in real estate. A driving instructor, a private piano tutor, a master chef in the family kitchen... they could all have become house owners. Unfortunately, they did not file taxes on their cash income, so they could not apply for a loan. If you pay an extra 4,000 yuan in taxes, you can borrow an extra 4,000 yuan in loans. It is clear at a glance whether it is faster to make money or borrow money. However, too many people are obsessed with the vicious cycle of "tax saving" and struggle all day long with no end in sight. It is really sad to see people who rely on cash income and never get out of the hole they have dug themselves. Canada is a mature capitalist country. Any advantage you take will be doubled. This is neither fate nor luck. If you choose to live in Canada, you must comply with the rules here, otherwise you will have to bear the consequences.

Finally, let’s talk about the basket. Every lecture is selling a basket. The insurance lecture said that you should buy life insurance to maintain and increase the value, and the beneficiaries do not have to pay income tax...; the financial management lecture told you how much the stock market has risen in the past 200 years, regardless of whether you can live to be 200 years old...; the American real estate investment lecture told you how good the cash flow is, and it is much cheaper than a house in Hainan...; the tax saving lecture recommended to you If you buy a flow-through, you will lose money, and you are guaranteed to get tax deductions...; joint loans, the interest rate is as high as 8-14%... Needless to say, I am a new immigrant, I was confused when I heard: I only have 2 eggs in my hand, and the basket sellers all say that their own basket is the best, tempting you to put the eggs in other baskets into the basket they sell. As for the audience, they were carrying 2 eggs, running circles among 10 baskets, rushing to listen to the lecture. I heard that someone started from scratch, and now has 7,000 eggs. I had to go and listen. I heard that AIRBNB was making money, so I had to find out... After listening around, I decided to put all two eggs in the basket that makes me rich the fastest. Within a few days, the basket and the eggs disappeared. People who are deceived in investment are because they run out of time and realize that there is no passive income when their active income is dwindling, so they hurriedly fall into the trap of getting rich quickly. Do China’s noisy P2P victims really deserve sympathy? Any kind of investment that has not been tested by two economic cycles may be a fake basket that is half a dream and half a scam. After the eggs are placed in it, the magician takes away the eggs and the basket. Those who dare to put assets into the new asset basket know that this is a gamble. They are willing to gamble but unwilling to admit defeat. If they win the gamble, they will not give money to the country. Then why should the country compensate them if they lose? Real estate is an asset basket that has been tested for thousands of years, but if you want to invest in real estate, you need to go through a two-way choice. Because banks only like conservative people, there are no opportunists among the winners of real estate investment. A shock in the real estate market can throw real estate speculators off several streets, and it can make them remember it for a lifetime, and may leave them with a lifelong fear of disability. Most of the egg-grabbing lectures are ineffective because the organizers just want to grab the eggs from other baskets and do not care about how to help people with only 2 eggs become people with 10 eggs. The left brain of listeners who are looking for baskets is thinking about whether they can find a wealth custodian with whom they can ally with each other, while the right brain is thinking about how they can pay less or no loyalty fees. It would be even better if they could squeeze some commissions and kickbacks from agents. I have never been against investing in financial assets. I recommend investing in real estate after the age of 50 and investing the cash from the mortgage in financial assets instead of continuing to buy investment real estate. Before retirement, it is enough to achieve the goal of 1 million life insurance, own home without mortgage, and 2 million financial assets. There is no need to hold investment properties. Some financial advisors deliberately exaggerate the debt problem and demonize real estate investment, but they cannot prove whether their investment performance can beat the returns of real estate investment. Most people can't even beat index funds. In many lectures, the most frequently asked question by the audience is: "I only have 100,000 yuan on hand, what do you think..." If someone asks me this question, I have only one answer: the money is too small, there is no need to save it, just use it to pay off the home loan. People with dreams in their hearts and two eggs in their hands account for 95% of the audience of various lectures. It's impossible to silence these basket sellers because the audience needs them. Most of the audience do not understand what investment is. In fact, investment is a plan, not a product. Without formulating an investment plan, people looking for investment products will ultimately be unable to achieve their investment goals.

Investment plans vary from person to person, because the rise and fall of major asset classes rotate, and the age of the investor is inversely proportional to the risk-taking ability, so there is no one-size-fits-all investment plan. The life cycle investment method mentioned by Malkiel in "A Walk on Wall Street" is easy to understand: 35% bonds and 65% stocks in the investment portfolio at the age of 35; 65% bonds and 35% stocks at the age of 65. This vividly explains the relationship between the investment portfolio and the life cycle. For rotation of major asset classes, please check the "Merrill Lynch Investment Clock". It's a very simple concept, so I won't repeat it here. Only after a love develops between the ups and downs of major asset classes and their life cycles can your own investment plan be born. The only shortcut to investing is actually to find a mentor you can trust to help you formulate an investment plan and supervise your execution. If you really can't find it, just move towards the three goals of financial freedom: achieving 1 million life insurance before retirement, owning your own home without a mortgage, and 2 million financial assets. To achieve this goal, there is no way to put your cash anywhere, and there is no need to chase any investment hot spots. Han Yu said in "Jinxuejie": Action is accomplished by thinking and destroyed by following. 90% of people like to follow the crowd, and 10% of people think with their heads. Eventually, only 10% of people in the world are rich, and the rest of the people only use the money they earn from birth to the grave for food and medicine.