The Van Tharp Institute

January 12, 2005 — Issue #202

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In this Issue:

Feature Article 1

Financial Resolutions, Part Three, By Van K. Tharp, Ph.D.

F-r-e-e Online Tutorial

Maximizing Your Trading Performance With System Backtesting

Tax Tip

You Still Have Some Time to Reduce Your 2004 Income, Steve Meredith

Listening In

Talk about drawdown... 

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Feature Article 

Financial Resolutions For the New Year
Part Three

By

Van K. Tharp, Ph.D.

Co-Author of the New York Times Best Seller – Safe Strategies for Financial Freedom

To kick the new year off right, we’ve created a special set of resolutions to help you think about money differently.  If you’ve already done some of them, then perhaps this will give you some momentum to go even further.  If you haven’t started, then now is the time.  You’ve received seven resolutions already.  Do you want financial freedom?

We’ve present seven resolutions in the first two articles.  The first set will help you develop a base to gain financial freedom.  Click here to see that article.  The second set will help you get out of debt.  Click here to see the second article.

In this issue, we’ll present the remaining resolutions.  These are the resolutions that will give you financial freedom within six months to six years.

Resolution Eight.  Look at your expenses and determine how you can reduce them without changing your lifestyle.  There are three ways you can do this.  First, reduce your debt.  This topic was covered in resolutions five through seven.  Second, you can reduce your taxes.  And, third, you can reduce needless expenses that don’t affect your lifestyle but could alter your health.

Let’s look at taxes first.  If you have some sort of business, and I recommend that you develop one if you don’t, then you can pass a number of your regular expenses through your business.  Furthermore, if it’s appropriate for you, I strongly recommend that you start a c-corporation because there are over 100 different types of expenses that you can deduct as a c-corporation that you cannot deduct in any other form.  We’ll have an accountant who will cover that information in detail in our Infinite Wealth Workshop to be offered later this month in Las Vegas. 

However, even if you do not have a business, it’s still appropriate for you to think about taxes.  For example, as you move from “earned income” (i.e., you working for money) to passive income (i.e., your money working for you), you’ll find that your money is treated much better than you are.  Your money doesn’t have to pay social security, unemployment tax, medicare, etc. on the money it earns, but you do.  As a result, just by moving to passive income, you’ll probably pay 15-20% less in taxes.

In addition, you must also look at what expenses you can reduce.  Start with your bad habits – drinking, smoking, junk food, caffeine – and notice what you can reduce there.  For example, Perhaps you spend $4 each day on a mocha grande at the local coffee shop – that’s $120 each month for caffeine, sugar and foam.  Get rid of that and you’ve just moved $120 closer to financial freedom.  You need several of those probably to accomplish the debt reduction step.  However, just notice how much you can trim off of your monthly expenses without really changing your lifestyle.  You might even improve your life by being healthier.  If you trim $500 off of your expenses, then you’ve just moved $500 closer to financial freedom.

Also look to reduce compulsive spending.  If something costs more than $100, wait at least 24 hours before purchasing it.  You’ll find that perhaps you don’t really need it, it simply related to some empty urge you are trying to fulfill.  Is this something that might make you feel better, but that feeling will go away in a few weeks and then you probably will not use it again?  If so, then don’t buy it.  Many people could easily reduce their financial freedom number by $500 to $2000 per month by reducing their compulsive spending.

Resolution Nine.  Spend some time researching good investments that will bring in decent rates of return.  Try to find at least five or six that will bring you returns of 15% or more each year.  Make a list of them because you’ll need to use that in your plan for financial freedom.  My book Safe Strategies for Financial Freedom is a good starting place for many of you.  Be sure you thoroughly investigate each possibility, because you don’t want to do anything that too risky with your money.

Resolution Ten.  Look at your entire list of assets that you completed in resolution two.  Look at each asset.  How can you turn your non-productive assets (those that don’t pay you any monthly income) into productive assets?  For example, you could sell it.  You could borrow money on it as long as you can find something to invest the borrowed money in that gives you a better return.  Develop a plan for turning most, if not all, of your non-productive assets into productive ones.

Let’s say you have $20,000 in your checking account that is not earning any passive income (or perhaps ½%).  What if you could turn that into real estate wraps that make you returns of 75 to 100%.  If you could make 100%, then you’d be making $20,000 per year.  Divide that $20,000 by 12 months, and you’ll find that you’ve just reduced your financial freedom number by $1,666.67 per month.  For most Americans this could be as much as 1/3 of your number and you could probably pull it off in a few months.  We’ll also be talking about this technique at our Infinite Wealth workshop as well as in our new online course on real estate wraps.

Resolution Eleven.  Look at the returns you are now getting on each of your productive assets.  If you are not getting at least 10% per year on any asset, ask yourself how can you double or triple your return rate.  Develop a plan for doing so.

What if you could develop a small Internet business that could make huge returns with very little cost?  What if investing about $2,000 and several months of your time learning and setting up the right web site could net you several thousand dollars per month.  Here’s an example of how you might do that.  First, you find a niche market such as people who own parrots, for example.  You use one of the major search engines to send parrot lovers to an “ask” campaign and find that they want to teach their parrots to talk quickly.  Although you don’t know how to do that, you find a ghost writer who can do that and pay that person $500 to write an ebook entitled “How to Teach Your Parrot to Talk in 24 hours.”  You put that ebook up on your web site for $19.95 and start directing parrot lovers (whom you know want this sort of book) to that site.  Pretty soon, you are selling five books each day for a passive income of $100 a day or $3,000 per month.  For an investment of $2,000, you have reduced your financial freedom number by $3,000 per month.  If you completed a new project like this every three months, how long do you think it will take you to become financially free.  We’ll also be covering this topic at our Infinite Wealth workshop in January.  You will not want to miss it.

Some of you, by completing the first 11 resolutions, might find that you can be financially free within six months.  You might find that all you have to do is re-deploy some money and you’ll be financially free.  If that’s the case, then congratulations.  However, if you are still some distance away from financial freedom, then move on to resolution 12.

Resolution Twelve.  Put aside at least 10% of your income into a brokerage account or some sort of savings account.  This amounts to paying yourself first.  Are you important enough to pay yourself first?  You should be!  Also remember that this is money that you will NEVER touch for expenses because it will become income generation money.  As the money accumulates, then gradually turn it into passive income.

Just think – with these twelve resolutions, you could be financially free within the next six months to six years.  Isn’t it time to get started now?

 

Van Tharp is the author of the New York Times Best Seller – Safe Strategies for Financial Fre-edom, Trade Your Way to Financial Fre-edom and Financial fre-edom Through Electronic Day Trading. His training materials are among the best the world.

Video Article

This week's F-r-e-e On-Line Tutorial

Maximizing Your Trading Performance With System Backtesting

By Chris Anderson, PhD


Education brought to you in a brand new way.  

Follow the link below and join us in this fun new way of learning.

 
C-l-i-c-k Below

On-Line Tutorial

 

New Trading Workshop

How To Trade Exchange Traded Funds (ETFs)

February 4-6, 2005
Orlando, Florida

Register by Next Week, January 19th for a $700 Early Enrollment Discount

What are Exchange-Traded Funds?

They are funds that reflect the big sectors of the market.  For example, you can buy a fund that represents the Internet sector of the market and short another that represents the retail sector of the market.  And you can do this in seconds, as soon as you spot what the big money is doing.  So while big money might take a week to move money around, you can jump in ahead of them and take advantage of money flowing into the sector you’ve just bought.  The advantage is huge.

Learn six different strategies that allow you to take advantage of what big money is doing and turn it into big money for you   Read More...

 

Tax Tips

Tax Tip of the Week

You Still Have Some Time to Reduce Your 2004 Taxable Income

by

Stephen S. Meredith, CPA, PLL

Now that the year is over, what can be done to reduce your 2004 income?  Several things can still be done after the end of the year to reduce your income and lower your taxes.

Contribute to your IRA.  You still have until April to make your contribution.  The limit is $3,000 for 2004 and $4,000 for 2005.  You get an extra $500 if you are over age 50 by December 31.  The deduction phases out between $65,000 and $75,000 if you have a pension plan at work.

Contribute to your Self-Employed Pension Plan.  If you own a business you can contribute to your own pension plan. The amount is usually based on the type of plan and the income earned.  If you have a SEP plan you have until the time the return is actually filed (including extensions) to make your contribution.  Other plans may be limited to the April 15 deadline.  Check with your plan administrator or tax advisor.

Annual bonuses to officers.  Accrual basis corporations may pay a bonus after the year ends and deduct it in 2004 if the corporation has authorized the bonus and actually pays it by the corporation tax return due date (March 15 for calendar year corporations).

Inventory and Personal Property.  When counting inventory, make sure you allocate an amount to any merchandise that is unusable, whether because of damage or simply out of style.  This increases your cost of sales and decreases your profit.  Also look closely at last year’s depreciation schedule.  Do you really have all that furniture and computer equipment?  If not, write off old items and clean up your books now.  Anything that is discarded or replaced that has not been fully depreciated may be written off now if it has any basis on your books.

Out of Pocket Expenses.  If you have a business and pay expenses out of pocket, you may be able to deduct the expense reimbursements made to yourself under an “accountable plan” after year end.  Do your expense reports now and see if there is anything you missed for the year.  There is a special trick here.  Check with your tax advisor.  Remember the mileage rate for ’04 was 37.5 cents per mile.  The new rate is 40.5 cents per mile for ’05.

Charges on Credit Cards are deductible in the year they are charged (except for store charge cards like Sears or Hechts), not the year you actually pay back the credit card company.  Look at your January statements and see if there are December charges you can deduct.

Charitable Contributions Extended through January The Senate's top tax writers on Tuesday January 4 proposed legislation that would extend the period in which Americans can claim tax deductions to charities providing aid to victims of the tsunami that hit South Asia. Under the proposal taxpayers would be permitted to claim a tax deduction in tax year 2004 for donations made for tsunami disaster relief until Jan. 31, 2005.  The House quickly followed suit on January 6 and the President signed the Bill.  This is good only for donations to US charities (not foreign charities) and only through January 31.

Don’t forget elections and carryovers.  If you previously paid Alternative Minimum Tax (AMT) you may get a refund of part of it this year if your income situation changes.  Depreciation rules have changed and the section 179 deduction is larger than it was in prior years for some things, and was reduced for SUV’s bought after October 22, 2004.  There was also a change in the way deductions are made for leasehold improvements, start-up expenses, and organizational cost after October 2004.  Check with your tax advisor on these issues and make sure that you make the elections if they benefit you.  Don’t forget NOL and Capital loss carryovers from last year.

Best wishes for a happy and prosperous New Year!  
Steve. Meredith is a CPA in Richmond Virginia.  He specializes in preparing income tax returns for all types of businesses, estates, trusts, and individuals.  He also consults with new business owners on how to properly structure their business to get the maximum benefit from current tax laws.  Steve deals with many real estate investors and stock market investors.  He has clients nationwide and lectures regularly across the country on tax topics.
The information contained in this article should not be construed as rendering tax or legal advice.  You should consult your own tax advisor as to the applicability of any of this information to your personal situation

 

Listening in....

Excerpts from Dr. Tharp's Discussion Forum

Talk About Drawdown... 
Author: Billy Osborne

About 10 years ago, while yet a rank amateur, I decided I'd take my first plunge into the markets. I took half of my net worth and invested half of it in RGUS.OB and half in REGRF.OB, sister companies that were developing a new axial vane, rotary diesel called the Radmax engine. My average share cost was $1.74 in REGRF.OB and about $2.50 in RGUS.OB. 

In 2003 they bottomed out, REGRF.OB at $.02 per share and RGUS.OB at about $.04 per share. Crazy, to invest half your net worth in pennystocks but, hey, what did I know. What brought them back to life was the fact that a defense contractor, (EASI) Engineered Support Systems Inc. was able to overcome the technical obstacles that previously had impeded their getting the engine into production. They're are now well off their lows and hopefully will eventually erase my losses. Never again will I ever establish a position without first deciding how much (position sizing) and when to get out if I'm wrong (stops). 

Thankfully, I've been given a second chance. Thanks to Dr. Tharp's tutelage I'll never make that mistake again. What a nightmare it has been.
Thanks Doc!

Reply To This Message 

Re: Talk About Drawdown...  
Author: Chris

Thanks for sharing your experience. There is a huge benefit if a person analyzed their trading mistakes. It especially helps to have a coach, psychologist, etc. to help do the analysis. I use one in my local area. (Tharp's on the opposite coast as me).

Reply To This Message 

Re: Talk About Drawdown... 
Author: Andrew 

On reading this post, the first thing that sprang to my mind was the question "What is your exit strategy, where did you place your stop loss, when, if ever, are you going to sell these shares?" To be in a long position and ride that position down over 60% and 80% violates one of the cardinal rules of trading, which is cut your losses. 


Read the full, unedited thread on the forum,   link here. (Hint for finding it, look at the heading and the date) Van K. Tharp and traders, investors and wealth builders around the world connect on this site, share ideas and learn from each other. Search specific topics 

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