The Great Big Lie about personal finance blogging!

I often wonder why many PF Bloggers do what they do?

One of my good friends publishes Personal Finance Blog - he considers the blog part of his effort in pursuing financial discipline. The blog helps hold him accountable. $2 Million seems to follow in this path as well. I think this is one of the best results one can expect? These gentlemen seek to work hard, save and invest to the point they achieve financial freedom.

Many personal finance bloggers are looking to escape the daily grind in a Robert Kiwosaki-like effort to create income producing assets. They don't want to be employees, they want to be rentiers - investors with enough dividends and income to not have to work for anyone, but themselves. They read books like Multiple Streams of Income, Rich Dad, Poor Dad and wonder how can they become more independent from their jobs.

Empty Spaces at Money Shaker is one of the best examples of those who aggressively try to develop assets outside of their job that produce significant income. He's doing quite well with real estate, private loans and some oil royalties. He also admits he's sacrificing career growth in his current job for external success.

Then there are others who try to turn their own blogs into commercial engines in their own rights. Very few succeed at this. Consumerism Commentary, PFBlog and PF Advice (by Jeffrey Strain) are three examples of those that seem to be taking in quite a bit. What drives their success is the following:

1. A business like approach to creating a network of financial sites focussing on niche topics
2. An organizatin - whether with one's wife or business partners to accelerate content generation
3. Regular and consistent publishing
4. Creation of attention grabbing properties

My point in this posting is that many people think they can or will escape the rate race by becoming personal finance bloggers; i.e. the advertising and related income from their personal finance blog will be enough to replace their day jobs and day income.

Except for those with very limited needs, demands and lots of time, this is a pipe dream. It's fairly easy for me to identify a small number of financial successful PF Bloggers because there are so few!

The most compelling personal finance blogs are written by financially successful people! Who wants to read a rehashed article about the mutual fund of the month - no one! You can get that from MONEY magazine on line. People do want to learn how to make and save more money than they have - and they want it from financially successful people. Look at the interest in PFBlog - mm is saving very large amounts of money - increasing his networth by almost $200k every year - people want to follow his story and emulate it! Most of his income is still generated form his day job (and expatriot tax benefits). His actual planned investment gain per year is only 8% - though he hopes to do better. However, he plans to save more than $100k from his regular job. Enough years of saving $100k and he expect his investment income to eventually exceed his regular income. People want to read about that.

Remember how popular nycmoney's blog was? She managed to start an internet business (SEO), create an on-line retailer and then grow her $400k in $750k through wise investing. People wanted to know that story.

However, there are many people who believe that by creating a personal finance blog, they will garner large amount of advertising revenue and one day be financially independent. The truth is - it's a lie! Most will never find independence through on-line publishing. Advertising pays very little - hopefully enough to cover webhosting fees, etc....

And let's think about this quite honestly, if you're income is so low that advertising can replace it - if you're fortunate enough to acquire a good amount of advertising - are you really living at a sustainable income? Will personal or family needs change requiring a larger income in the future? If you're happy living like a monk, will many people want to emulate that lifestyle?

The most powerful use of PF blogging is to use it for what it is, a platform to declare your values, goals and mission and compare your progress against them. Secondarily, it's a wonderful source of support along the way and discussion to relevent topics. A blog should not be a MONEY magazine or Personal Finance for Dummies - those things exist - and are done very well by an army of professionals. Why struggle to be second best when you can be yourself - and very successful at it.

I often wonder how many people who earn more than $200k a year complain about jumping out of the rat race? Usually these people are executives and in fairly comfortable positions with attractive future growth options in their current career path. If they live modestly and save much, they can easily save up enough money to be financially independent in 10-20 years. That's not an attractive option for those who want it today.

But for many, there is an important question - should you spend more time thinking about how to succeed in your job and less about starting a side business? Should you spend more time saving what money you have and investing it carefully than starting a side business to live up to your income?

Regards, makingourway

Investing: What is hot money?

Hot money is investment money that rushes after established, well publicized rapid growth assets. Hot money usually rushes in once the financial media has begun to aggressively hype recent past performance of a particular investment. Usually in articles that read "6 hot funds you must own now!"

There are several problems with hot money:

1. By the time an asset class or investment has achieved substantial growth it is often over valued or at least fairly valued.
2. Hot money ends up paying a premium for the asset and increasing the market price even further.
3. Hot money is usually the last to get in, just in time for the original investors to sell at a substantial profit.
4. Asset classes tend to mean revert - this means what goes up, usually goes down, back toward the long term average; e.g. internet stocks went up in the late 90s, they went down in the early 2000s.
5. Hot money leaps from trend to trend to trend - always late to the table, the best dishes already eaten.
6. Hot money ignores value investments.
7. If you followed mutual fund in-flows, you'd notice that after a strong returns the inflows shoot up, funds underperform their investment, performance drops and funds flow out. Think of Fidelity's Magellan fund as an example. Oddly, the funds with the lease inflows usually become the next year's leaders - all part of the mean reversion process.
8. A friend of mine created a spreadsheet based on asset class inflows. He invested in the opposite asset classes (the ones with the least interest) and found that over time he had wonderful returns.
9. After enough rush-in and let the sector crash around you experiences, many trend chasers give up on investing - handicaapping their future growth.

#9 is the biggest danger. After several ridiculous jumps into fast growth areas, a trend chaser may be discouraged from investing in the equities markets. A decision that will put the investor at long term risk due to insufficient returns from "safer" investments.

A better alternative is an asset allocation program with diversified investments.

Regards,

makingourway