My Financial Advice for Mom and Dad: Putting Cash to Work

By: J.D. Rosendahl | Mon, Oct 26, 2009
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My parents recently sent me their updated personal financial statement, which reflects all of their assets/net worth, which I manage or consult on for them. From 12/31/2007 to 6/30/2009 their net worth is "UP", and there aren't many who can say that during that time frame.

I've always shared with my parents that their wealth will take a large leap forward on a relative basis not by taking on excessive risk and putting money to work, but rather by being conservative and avoiding the bubble melt downs that will impact asset values.

To their liking that is exactly how it has played out during that time span. In fact, avoiding excess risk or managing risk during the past ten years has been a rewarding investment strategy. That doesn't mean we don't invest, we just seek investments or methods that offer low risk ways to make money while avoiding the excessive risk traps.

For us, it's always been about risk management, and that has served us very well. I like to think of it in the old fable of the race between the tortuous and the hare. We're the tortuous.

During the summer and early fall 2009 we put some of their cash to work, but not exactly how most would think given the impressive stock market rallies from the March 2009 lows. We have chosen to put money to work in two new categories for my parents (Tax Receipts and Private Money Loans), which provide them greater diversity in their deflationary investment strategy.

Tax Receipts:

In April 2009, I wrote an article for, "My Financial Advice for Mom and Dad". Since then, we have purchased some tax receipts that pay a modest 10% interest with minimal risk exposure, which I view as a strong bond and real estate investment alternative without the principal fluctuations or low yields. We get roughly 2.5X the interest on a ten year government bond and 10X those of short maturities with about the same risk profile (minimal). And, we get a great cash flowing asset compared to most real estate, which provides little or negative cash flow and/or too great of risk to principal. All in all, a no brainer.

Essentially, as the buyer of tax receipts, we get the state's lien position, which puts us ahead of any other lien holders on the property. All in all, tax receipts are not a bad alternative to owning real estate outright as long as you do your homework. We've put 10-12% of their net worth into tax receipts, and very excited to have that position. It's simply the most exciting investment we own base on the risk/reward relationship. And I hope we push more money into them over time.

Note: Buying tax receipts is something you will have to do on your own. You can't buy them through a broker or bank, and its kind of a frustrating process to purchase, but if you find a way to make it work like we have, its well worth while. Also, there is no open market for this investment so one needs to understand that and have sufficient liquidity outside of this type of investment.

Private Money Lending:

Recently, we found someone who needed a loan for $100,000 on property in California that was worth $400,000 to $500,000. So, my dad and his friend went 50/50 partners on lending money to this individual, and we charged them 10% interest on this loan and took a first deed of trust on the property as collateral.

This is another great bond and real estate ownership alternative. My philosophy is that real estate is still vastly over priced and carries too much risk, but if we maintain loan to values of no more than 25-30% and only do 1st deeds of trust on property we don't mind owning some day should the borrower default than we should be able to minimize or eliminate risk and make another sound and prudent investment.

Note: This type of investment is vastly illiquid, so one needs to have sufficient liquidity prior to making this type of investment. Also, one should consult with professionals like we did to make sure the note and deed were structured to protect my parents and be a viable document that holds up in court if need be. Conceptually, this type of investing isn't hard because we are really playing the roll of lender or bank, but you do need to do a fair amount of due diligence.

Summary: My personal belief is that this note is a great compliment to tax receipt investing. Both make 10%, both have minimal risk when the due diligence is correct, and tax receipts are shorter term in nature and the note is longer term in nature, and they compliment each other perfectly. In combination, these assets provide one great bond and real estate alternative. In addition, they provide a method of diversity not found in most people's net worth. And, they both provide a way of investing that moves money outside of the financial system. Again, it fits the profile of risk management investing and a deflationary investment model, which is what we are all about.


In that April 2009 article, I wrote we looked to sell precious metals on advances and buy it on pull backs. In June, we sold a minor position of gold at $941 and we sold the remainder of their silver at $14-15.20. The gold was a short term gain from gold we bought mid 2008 (most of their gold was purchased in 2003-2005 around $440 and we still own that gold), and the silver was a long term gain (doubling) of their money from purchases several years ago. Note: we sold the other half of their silver for almost a triple above $19 last year.

Between the gold and precious metals stocks they currently own, they have a market weight of their net worth tied to precious metals, and our recent sales we're merely minor steps in taking some gains. We still want to carry a market weight position in assets tied to precious metals. And, if gold were to pull back we would definitely add into our positions.

My personal long term perspective on gold is essentially this: Every asset (stocks, bonds, oil, and real estate) has gone through a bubble phase driven by the U.S. Treasury dumping more dollars onto the plant, and that money in the past has funneled into different assets at different times creating asset bubbles. So, why should gold be any different? In my opinion it should not. I feel gold will have its day of bubble mania too!!!

I've also shared with my parents that if we get the bubble mania, fundamental and technical analysis might not help in identifying we are in a bubble, but more of a social indicator will work like past bubbles in other assets.

It's not until my dad's friends are all talking about gold and silver, and how and when they are buying and day trading it, that we will have the appropriate signal a bubble has formed. We might also see a parabolic spike in the price of metals because it's a relatively small market and there is no price resistance.

For the time being, the price of metals and social attitude does not reflect the public has bellied up to the precious metal's bar in mass yet. So, if we're to get the bubble phase it's ahead of us in time. And, a pull back or consolidation at some point might be needed to create the pivot technically for the bubble phase.

Lastly, I've shared with my parents that we will hold market weights in precious metal investments as a diversity strategy until such time as the public is entering the market more discernibly, and then we will look to dollar cost average out. Why? The public has always marked significant market tops in all asset bubbles.


I've been actively trading the stock market for my parents for the past several years. And while we've made some long trades on this recent move higher, we've not taken full advantage of it. Honestly, it moved much faster than I had originally thought and without much of a pull back.

However, since my parents didn't lose money in 2008, we have no reason to chase returns in a desperate move to make up losses. And I'm not interested in chasing the long side of this current market, even if it goes higher from here because the risk component is too elevated for our comfort level.

There's a sports analogy that fits us very well. We don't want to swing at every pitch, as that just creates a lot of strike outs. We'd rather manage risk and slow the investment world down from fast pitch baseball to slow pitch softball and pick low risk investment opportunities that fit us well.

As far as stocks go, I've shared my vision with my parents that we should expect a consolidation or pull back from recent highs anytime now, and the pending consolidation or sell off might very well serve as another buying opportunity on the long side of the stock market.

I'm still bearish in the long run, but the bear market bounce might pick up momentum after some corrective behavior, but we need to see a pull back or consolidation to provide context to the market to analyze the worthiness of trading long and making sure another melt down isn't in progress. As always, we'll let the market through technical analysis be our guide.

Retirement Accounts:

A year ago, my parents retired and move out of California (a high income tax state) and into a much lower income tax state. And since they have retired, their federal tax rate has moved down, and their combined tax rates are much lower.

Since their retirement, I have been advising them to dollar cost average money out of the retirement plans. It's really not an investment strategy because it's moving money from cash in retirement accounts to cash in taxable accounts.

It's really a risk management strategy via tax planning. We want to take their money out of their retirement plans while their combined tax rates are low. But more importantly, we want to distribute money in a dollar cost average method before Uncle Sam and maybe states raise their tax rates.

We believe it's just a matter of when tax rates go higher. Since they have to take their money out of their retirement plans at some point in the future, and why not at minimal tax rates? That's now for them, and prior to the expected hike in tax rates.

Note: Talk to your tax advisor to make sure you've planned this move so it fits you're personal situation.

In summary:

We look to add to our gold or maybe gold stocks on pull backs. As always, the technical analysis in the future will guide our decision.

We will continue to invest in tax receipts and I would like to see us over weight our investment at some point into tax receipts in the future, as it's my new primary buy and hold investment for my parents.

We might trade the long side of the stock market should we get the appropriate pull back or consolidation, as we're not interested in chasing the liquidity driven momentum in the current stock markets. Again, technical analysis will guide our decisions.

And lastly, we continue to hold our minor positions of short bond funds, and while the short bond funds might take some time to payoff, we're very comfortable being short long bonds, as I feel some day the bubble channel in bonds comes to an end.

When I look at the structure of my parent's net worth we have market weight or less invested in gold bars, a very modest house with no debt, tax receipts and private money lending. Those assets provide my parents a level of true diversity outside of just stocks and bonds not found by most investors. Nor, do they have the majority of their wealth in their primary residence, a strategy that is failing so many of late. Add in the mattress money and roughly half of their wealth is outside the financial system (the banks, brokerage firms, and insurance companies), another great deflationary model diversity strategy.

Hope all is well



Author: J.D. Rosendahl

J.D. Rosendahl

J.D. Rosendahl is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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