00497 Owning a basket of fresh fruit is better than picking and choosing short-term trades from a basket of rotten fruit and messing yourself up. The necessity of completely updating investment concepts to control your financial future.

I. Current Episode Theme

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The theme of this episode is the global economic market analysis and investment strategy for 2025. The core idea is to hold high-quality assets for the long term, leveraging the power of compound interest to achieve wealth growth. It emphasizes the importance of strategies such as mindful spending, 442/433 asset allocation, and borrowing for investment, avoiding the trap of short-term market fluctuations and viewing investment with a long-term perspective.

II. Briefing Content

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Investment Market Analysis and Disclaimer

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• Don’t Overthink Market Volatility: It is emphasized that ordinary investors do not need to over-focus on global affairs, short-term market fluctuations, company financial reports, etc., as these factors have limited impact on long-term investments. It points out that investors who frequently engage in short-term trading often “pick up pennies and lose dollars,” wasting both time and life.
• CLEC’s Position: It is stated that CLEC (the club) is a non-profit investment and financial management channel that does not provide professional investment advisory services, nor does it receive any returns from members.
• Risk Warning: Investment involves risk; markets go up and down. Proceed with caution. Members need to conduct their own risk assessment and control and be responsible for their investment decisions.
• Importance of Asset Allocation: Over the past year, CLEC has continuously emphasized safe asset allocation, which is key to managing market risk and achieving steady long-term returns.
• Use of Video Resources: James has divided the four-hour-long video 00451 into short videos of about 15 minutes, making it easier for new members or those with limited time to learn. The short videos are subtitled in Chinese, English, and other languages to cater to members from different linguistic backgrounds.

Investment Learning

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• Recommended Learning Videos: It is recommended that everyone watch video 00451 for systematic learning. If you have time, you can watch videos 00398 and 00288. It is emphasized that investing is a field of study that requires continuous learning and practice.
• Necessity of Learning for New Members: For new members who have just joined CLEC, James recommends that they take the time to watch previous videos and systematically learn CLEC’s investment philosophy and strategies to avoid repeatedly asking questions or making incorrect investment decisions due to misunderstandings.
• Answering Complex Questions: Some complex questions cannot be explained clearly through simple messages or emails. These questions often require a comprehensive analysis combining multiple videos and strategies, which members need to learn systematically to grasp.
• Refusal to Do Out-of-Scope Simulations: James clearly states that he will not consider scenarios beyond situation 1 to situation 9, nor will he do simulations outside of CLEC’s investment framework for individual members.
• Global Investment Information: NASDAQ 100 index funds are available in many countries and regions around the world. James has compiled information from various locations into a document for members to easily access.
• Investment Context: It is emphasized that investments need to be viewed in the context of the current market, with a long-term perspective. It’s important to believe that the market will eventually rise, investments require patience, and wealth accumulation takes time, using time to reap the great benefits of compound interest.

Investment Goals and Expectations

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• Wealth Goals: James believes that CLEC members should all be able to achieve assets of over a hundred million in their lifetime. If this goal is not reached, it indicates that something might have gone wrong in the investment process, requiring reflection and improvement.
• Moving Toward Higher Goals: James mentions that many members’ assets have already exceeded one hundred million and are now moving toward the billion mark, which he is very pleased about.

New Zealand Taxation and Investment Strategies

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• New Zealand Tax System: The tax system in New Zealand is similar to that in Australia. Even if stocks are not sold, tax is required on unrealized capital gains.
• Overseas Investment Tax: In New Zealand, unrealized capital gains from investments in overseas markets (such as buying US stocks like QQQ or NDQ) are subject to tax, with a high tax rate of 33% - 39%.
• Tax Avoidance Strategies: The USG fund issued in New Zealand may serve as a temporary tax avoidance measure, as investment in this fund may not require the payment of unrealized capital gains tax.
• ASB Securities Pledge: In New Zealand, ASB Securities can provide stock-pledged loans. The loan ratios vary depending on the fund. For example, some funds can borrow 65%, 70%, or even 50%.

Investment and Consumption Concepts

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• Long-Term Investment Wealth Expectations: James uses data to show that if you have 1 million USD now, long-term investment might turn it into 200 million USD; if you have 10 million NTD now, it could become 2 billion NTD in the future.
• Advocating Spiritual Consumption: James encourages everyone to engage in spiritual consumption, which are consumptions that leave no material trace and cause no environmental pollution. For example, the enjoyment of staying in a good hotel for a few thousand dollars may be better than buying a useless decorative item, as material possessions become old, break down, and are eventually discarded over time.
• Choice of Transportation: Whether to take a 40-minute bus ride or drive a 20-minute car depends on which method makes you feel more comfortable and less anxious. If it doesn’t cause anxiety, it’s a good choice.
• Reducing Material Desires: We should think about “what can we do without” rather than “what do we want.” Reduce our dependence on material goods, avoid buying unnecessary or excessive items, and focus on basic life necessities, such as healthy food.
• Rational Shopping: When shopping, rationally assess the practical use of the item and avoid blindly following trends in consumption.
• Wealth Accumulation for Young People: Young people should try to reduce unnecessary spending and use the saved funds for investments to accumulate wealth more quickly.
• Pursuit of Spiritual Eternity: Our goal is to pursue spiritual and investment eternity. Reduce material desires, simplify life, and use money for things that can bring long-lasting spiritual enjoyment.

Interpersonal Relationships and Life Planning

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• Finding Connections in Life: In the vast universe, we need to find connections with ourselves and others, especially when we are old and living alone. This connection can be marriage, partners, children, etc.
• About Giving Birth and Adoption: James suggests young members should either have or adopt children because we have sufficient financial resources to raise them, form families, and that it’s a human right, so they shouldn’t give up on it.

Risks of Individual Stock Investment

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• Challenges for Retail Investors in Stock Picking: Retail investors picking individual stocks is like trying to find good fruit in a basket full of rotten fruit. The result is often that the more you pick, the more you mess things up.
• Importance of Cutting Losses: James uses the analogy of a broken elevator to illustrate that if an investment is losing money, it’s better to cut the loss and get on a different elevator (investment) rather than to continue waiting or trying to fix the broken one. When investment goes wrong, one should cut losses decisively instead of holding or averaging down.
• Capital Safety: James advises investors not to send funds overseas, but to keep them locally or in Hong Kong for capital safety.
• Don’t Blindly Pick Stocks: When individual investors can’t distinguish between good and bad stocks, they should avoid stock picking to prevent unnecessary losses.
• Acknowledging Limitations: Investors need to acknowledge their cognitive limitations and their ignorance; this is the essence of investment wisdom.

Investment Advice for Taiwan

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• Cautious Cross-Border Investment: James points out that if stock investments in Taiwan are not performing well, it’s even more unwise to venture into overseas markets like the U.S., because competition in those markets is much more intense.
• Two Strategies to Address Losses: For investors who are losing money in Taiwan stock investments, James gives two pieces of advice: sell all individual stocks and buy 00662 ETF at market price, and hold for the long term; or sell all stocks and put funds in bank deposits, and exit the stock market entirely to avoid further losses.
• Contributions of Taiwanese Retail Investors: James points out that Taiwanese retail investors contribute over 150 billion NTD annually in transaction taxes to the government, so the government is motivated to encourage day trading and other short-term transactions.

Borrowing for Investment Strategies

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• Application of Beta Coefficient: In the US, adjusting the portfolio’s beta coefficient to 1.2 is equivalent to using 20% leverage for investments.
• Order of Leverage Use: James suggests that investors first adjust the portfolio beta coefficient to 1.2, and then consider using credit, mortgages, and other forms of leverage.
• Post-Borrowing Investment Strategy: After borrowing, it is still recommended to invest according to the 442/433 asset allocation ratio.
• Opposing Opportunism: James points out that some investors are always looking for various investment techniques or shortcuts instead of learning diligently, which is not recommended. He emphasizes that there are no shortcuts in investing; only through systematic learning and practice can one grasp the correct investment methods.

Property Investment vs. Renting

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• Long-Term Returns on Property Investment: James uses a property worth 5 million USD as an example. If this money is invested and has an annualized return rate of 14%, it could grow to 1 billion USD after 40 years, and save the 40 years of potential mortgage repayments and property maintenance fees.
• Financial Cost of Renting: If you pay 15,000 USD in rent per month, the total amount repaid in 40 years will be as high as 22 million USD.
• Depreciation Risks of Property: A house built 60 years ago may no longer be habitable. Similarly, a house purchased now may face the same problem in 60 years. In contrast, renting allows the flexibility to choose appropriate housing based on changing needs.

III. Q&A Session

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Brian

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• Sharing 1: Convenience of Having Funds. Brian shared his experience of seeing a dentist in Taiwan. Since he had ample funds, he could pay in cash, unlike some people with limited finances who might experience delays due to cash flow issues. He felt the convenience of having funds.

  • James’s comment: Agreed with Brian’s point, stating that “it’s really good to have money” as it can solve many problems and can even “buy” better relationships.

• Sharing 2: Taiwan Living Experience. Brian chose to stay at a hotel instead of with his parents when returning to Taiwan. He felt that staying at a hotel offered more freedom and fewer constraints. Furthermore, when eating out, he could pay for himself instead of his parents or in-laws, which gave him a sense of financial independence and control.

  • James’s comment: Suggests that family gatherings in Taiwan can be held in hotels, and if family members are willing, they can also stay at the hotel together, using money to obtain a more comfortable living environment and a higher quality of life.

• Sharing 3: Fund Allocation and Investment Strategies. Brian re-adjusted his fund allocation based on James’s investment philosophy. He found that even in the worst market conditions (e.g., a 20% market drop), his funds were still safe. He used funds from broker loans and investment returns and calculated that even after retirement, if he continues to invest a fixed amount each year, his “visualization rate” would not be lower than 200%. He believes the Excel spreadsheets provided by James are very helpful for understanding how funds grow and managing asset allocation.

  • James’s comment: Affirming Brian’s approach.

• Sharing 4: Building Confidence in Borrowing for Investment. Brian believes that if he never uses borrowing, he might feel psychological resistance when he actually needs to use it. Therefore, he started to try using broker loans and considered reinvesting the borrowed funds. He believes that practical operation can help better understand how to use borrowing and find the most suitable way.

  • James’s comment: Shared his own experience, that he uses borrowed money as much as possible, rather than spending his own money, when travelling or eating out. He emphasizes that his assets will never be spent, and any income will immediately be used to buy QQQ. He further explains that buying 00662 actually helps the Taiwan Central Bank activate its foreign exchange reserves, reduce inflationary pressure, and also activate idle capital in Taiwan. However, safe asset allocation is a prerequisite for borrowing to invest. Without understanding safe asset allocation, one cannot use this tool.

• Question 1: Regarding his fund allocation, should he put QQQ and QLD into a Roth IRA, and then use the borrowed funds for other investments, such as buying TQQQ, and whether his current fund allocation is reasonable and carries any risks?

• James’s Response:

  • Regarding Asset Allocation: Brian’s current approach is to invest some funds in QQQ, some in QLD (2x leveraged QQQ), and keep some in cash. James points out that when Brian’s retirement account doesn’t have much money, it is not very efficient or risk-free to pledge and put the money in the broker investment account, and to use leveraged funds (such as QLD).
  • Risk of Black Swan Events: James emphasizes that Brian needs to have sufficient cash, exceeding the amount of his brokerage loans. This is to prevent “black swan events,” i.e., unpredictable major risk events.
  • Recommended Asset Allocation: James suggests Brian puts QQQ and QLD into his Roth IRA account, and either keeps the traditional IRA account as cash or keeps enough cash in his brokerage account, ensuring that the cash amount exceeds the borrowed amount.
  • Regarding 442/433 Allocation: James further explains that 442 and 433 are just references, and the specific asset allocation ratio needs to be adjusted according to individual situations. He emphasizes several key principles: have enough cash, and have more cash than borrowed money; the ratio of leveraged funds should not exceed the ratio of the original funds (such as QQQ). For young people, they can do a 442 allocation at the highest, meaning the ratio of leveraged funds and original funds are the same.
  • Post-Allocation Adjustments: James points out that after allocating assets according to the 442 ratio, the ratio of leveraged funds will automatically increase as the market rises, which is normal. Because assets are increasing, and cash is also increasing, the overall safety is actually much higher than the beginning.

Peter

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• Sharing 1: Book Recommendations. Peter recommended two investment and financial management books: “The Long Game” by Nick Maggiulli and “Atomic Habits” by James Clear. He believes that many of the ideas in these books are very similar to James’s investment philosophy.

  • James’s comment: Stated that the content of the books was similar to the investment concepts they discussed, and if anyone has time, they should read them as there is a lot of data that can verify our previous viewpoints.

• Sharing 2: Building a Habit of Borrowing for Investment. Peter shared his experience with borrowing for investment, believing that it’s a habit that needs to be cultivated. Only by being accustomed to this operation will one not feel unfamiliar or resistant to borrowing when assets reach a certain scale (e.g., 1 million, 2 million). Peter also mentioned that in the investment process, you need to construct two curves in your mind: one is the total assets curve rising, and the other is the total liabilities curve also rising, but the slope of the total liabilities curve should be less than that of the total assets curve. This way, assets will increase over time, while the proportion of liabilities will decrease.

• Sharing 3: Negotiating Lower Loan Interest Rates with Banks. Peter shared his experience negotiating lower loan interest rates with the bank. He mentioned that loan interest rates can be negotiated with the bank. He personally called the bank and successfully lowered his loan interest rate by 0.7%. He encourages everyone to not be afraid to try, to take the initiative to communicate with the bank, and to fight for lower loan interest rates.

• Sharing 4: Understanding “Owning Equity Means Owning the World.” Peter expressed that he was impressed with James’s idea that “when you own equity assets in Wall Street stocks, you own the world,” and the idea of “never sell assets.” He now understands the importance of owning equity assets and the meaning of long-term holdings.

• Sharing 5: Importance of Spiritual Consumption. Peter highly agreed with the concept of “spiritual consumption” put forth by James. He believes that traveling, good food, having more children, and being present in their growth, are all good forms of spiritual consumption.

Terry

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• Question 1: Regarding funds management in Roth IRA and investment accounts. Terry mentioned that he has 401k, Roth IRA, and brokerage accounts in the US. He wants to know if he can use leverage in a Roth IRA account, and whether he must borrow via his brokerage investment account.

• James’s Response:

  • Restrictions on Retirement Accounts: James clearly stated that retirement accounts (such as 401k, Roth IRA) cannot be used as collateral, meaning one cannot use assets in retirement accounts to borrow. Only assets in a broker’s investment account can be pledged for loans.
  • Role of IRA Assets: James explained that while IRA assets cannot be used directly to pledge for borrowing, the amount of assets affects the interest rates of the loan. When brokers evaluate the borrower’s overall financial situation, they consider the assets in the IRA account, which might lead to more favorable interest rates. However, the amount of assets in an IRA account does not determine how much can be borrowed.
  • Calculating Loan Amounts and Interest Rates: James explained how loan amounts and interest rates are calculated. The amount that can be borrowed is usually 60% to 70% of the assets in the investment account. The interest rate on the loan is determined by a combination of factors, including the base lending rate, the size of assets in the investment account, and the size of assets in retirement accounts such as IRA.

• Question 2: Can one increase income by selling Covered Calls for QQQ?

• James’s Response:

  • Opposing Covered Call Strategy: James explicitly opposed the Covered Call strategy that Terry suggested. He believes the strategy is not necessary and carries high risks.
  • Risks of Covered Call: James explained that if a Covered Call strategy is used and the market suddenly rises significantly, the options would most likely be exercised, forcing the investor to sell QQQ at the agreed price (usually below market price), thus missing out on the profits from the rise. Alternatively, the investor would need to pay more funds to repurchase QQQ.

Jason

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• Sharing: Recognition of CLEC and James’s Investment Philosophy. Jason first expressed his gratitude to CLEC and James, believing that they bring surprises each year. From the initial advice of “sell individual stocks, sell actively managed funds, and go all-in on QQQ” to last year’s “asset allocation,” this year’s “continuous optimization of asset allocation,” and now the “442” and “433” allocation, James’s investment philosophy and strategies are constantly evolving and improving. This has helped investors avoid external interference and truly achieve “not being overjoyed by external gains, and not being saddened by external losses.”

• Question 1: When doing a “smart rebalancing” of asset allocation, if the predetermined ratios are not met, for example, if the ratio of leveraged funds has not yet reached the requirement of a “433” allocation, is it still necessary to perform “smart rebalancing?”

• James’s Response:

  • Trigger Conditions for Rebalancing: James explained that if the ratio of leveraged funds has not reached the predetermined target, for example, the 442 ratio, there is no need to do “smart rebalancing” for the time being. You can wait until the ratio reaches or exceeds the predetermined target before adjusting.

• Question 2: Regarding how to solve children’s university tuition fees. Jason mentioned that university fees in the US are very high, especially for out-of-state students, where tuition and living expenses could reach 100,000 USD annually. Some of his friends are considering “hiding” some funds, such as by purchasing annuities, insurance, or transferring funds to others’ names to apply for student aid to alleviate financial burdens. He would like to know what advice James has on this matter.

• James’s Response:

  • Opposing the Practice of “Hiding Money”: James strongly opposed the practice of “hiding” funds to save on university fees. He believes this practice is counterproductive and may even be illegal.
  • Disadvantages of Annuities and Insurance: James pointed out that investing funds in annuities or insurance may reduce the amount of assets needed for disclosure in the short term, potentially qualifying for more student aid. However, it results in a huge loss of investment returns in the long term. He uses an example of 500,000 USD; if that amount was used for investments with an annual return of 14%, it could grow to 1.3 billion USD in 60 years. Whereas if that money is invested in annuities or insurance, the rate of return would be much lower, and the liquidity of the funds would be restricted.
  • Legal Risks of “Hiding Money”: James specifically emphasized that transferring funds to others’ names, for example, to parents in China, and then having parents send funds back to the US annually, is suspected of money laundering and fraud, which is a serious criminal act in the United States. If discovered, there are severe consequences.
  • Suggested Practice: James suggested that instead of “hiding money,” the money should be used for investments to grow the wealth. Even if one does not help their children pay for university fees, children can apply for student loans themselves. When they graduate and the assets have grown in value, one can use that to help repay the loans.
  • Other Options: James also mentioned that children can earn some of their living expenses by working part-time or at a side job, such as driving a rideshare or doing other small part-time jobs, where they can earn tens of thousands of USD each year.

Opa

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• Sharing 1: Personal Investment Experience and Confidence. Opa shared his experience of going all-in on QQQ. He bought it at the peak of the market, and although it declined for some time, his investment recovered to the previous high by the first half of this year and is now highly profitable. This experience has given him great confidence in long-term investments and a deeper understanding of bear markets.

• Sharing 2: Daughter’s Investment Experience and Transformation. Opa mentioned that his daughter previously had more faith in her financial advisor, and had given the advisor more than 1 million USD to manage. However, the advisor’s investment strategy was too diversified, allocating assets across 20-30 ETFs, covering various indexes and small-cap stocks, which resulted in poor overall returns. Opa had been trying to persuade his daughter to change her investment strategy, but she would not listen. It was not until recently, after having two children, that she began to reconsider due to increased financial pressure. At a Christmas family gathering, Opa once again explained the power of compounding and the impact of the technology sector on productivity to his daughter. His daughter finally understood the importance of long-term and focused investments and plans to transfer about 2 million USD to a broker account that allows stock pledges.

• Question 1: Regarding the loan interest rate on 2 million USD in a broker account. Opa mentioned that according to the broker’s website, the loan interest rates for 2 million USD is still very high. He would like to know how to get a lower interest rate, and whether the loan interest rate is calculated based on total assets or the actual amount of the loan.

• James’s Response:

  • Negotiating Lower Interest Rates: James first pointed out that loan interest rates can be negotiated with the broker. He suggests that Opa’s daughter directly contact the broker and ask for a lower rate.
  • Interest Rate Calculation Methods: James explained that brokers take a number of factors into consideration when assessing the loan interest rate, including the borrower’s total assets, loan amount, and duration of the loan. Generally, the larger the total asset, the smaller the loan amount as a percentage of the total asset, and the longer the loan duration, the lower the interest rate.
  • Interest Rate for 2 Million: James estimated the loan interest rate that Opa’s daughter could receive based on her situation. He mentioned that the base rate announced on the broker’s website was just a benchmark, and the actual rate would require further negotiations. He recommends that Opa’s daughter directly contact the broker’s staff member, Lisa, for a more detailed consultation. He also provided a calculation formula: 2.9% - 0.5% = 2.4%. 2.9% is the base interest rate for a 2 million loan in the brokerage, and 0.5% is the discount that Opa’s daughter could get based on the size of her assets.

• Question 2: Regarding how to perform asset allocation. Opa’s current asset allocation is 811, which means 80% QQQ, 10% QLD, and 10% Cash. His goal is to adjust the asset allocation to 442, which means 40% QQQ, 40% QLD, and 20% Cash. He wants to know if it’s better to put leveraged assets (such as QLD) in the Roth IRA account, and the normal account in cash plus QQQ, to better maintain the correct ratio of the standard account during a bear market. Also, if there is a “perfect” asset allocation plan, should all the funds in the Roth IRA be allocated to QLD, and the normal account to cash plus QQQ?

• James’s Response:

  • Interpretation of 811 Allocation: James first interpreted the meaning of the 811 allocation and said that there is nothing wrong with the allocation approach.
  • View on “Perfect” Allocation: James believes that if one only has a Roth IRA account and a normal account, then it is acceptable to allocate all of the Roth IRA funds to QLD and allocate the normal account to cash plus QQQ.
  • Flexibility of Asset Allocation: James emphasizes that the specific asset allocation ratio should be adjusted based on individual situations. For example, it depends on the percentage of total assets that the Roth IRA account represents. If the Roth IRA account represents 40% of the total asset, then all the funds in the Roth IRA account can be allocated to QLD to reach the 442 allocation target. However, if the Roth IRA funds only account for a smaller percentage, say 20% or 30%, then the 442 target allocation cannot be reached, and the allocation will most likely be 622.
  • Leverage Choices: James also mentioned that if one hopes to increase the percentage of the Roth IRA account to 40%, one can consider using 3x leveraged ETFs such as TQQQ.

• Question 3: Regarding the use of funds in his 401k account. Opa mentioned that he and his wife’s 401k accounts are still in their respective company plans and cannot be rolled over until they reach the age of 65 (still two years away). He would like to know how to manage these funds now.

• James’s Response:

  • Allocating Cash to the 401k Account: James recommended that Opa allocate cash to his 401k account, because the 401k account usually has some tax-saving policies. Keeping cash in the 401k account can take full advantage of these policies.
  • Regarding QQQ’s Long-Term Investment Returns: James shared some data regarding QQQ’s long-term investment returns. He pointed out that QQQ’s annualized return over the last 5 years is approximately 19%, the annualized return over the last 10 years is approximately 17%, and the annualized return over the last 20 years is approximately 14%. He also points out that QQQ is accelerating human growth, and its future return might be higher and higher, therefore investments must be made.

Young

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• Sharing 1: Observations and Reflections on Social Phenomena. Young shared an observation she made at work and in her life: many people work very hard in their respective fields and put in a lot of time and energy, whether it’s running a business, working at a job. However, they do not give much importance to how they manage their money, or they don’t know how to make effective investments. Young believes this might be because they do not understand investments, or they do not realize the importance of investments. She emphasizes that as long as one has the correct investment methods, they can achieve greater freedom in their work and life.

• Sharing 2: Risks of Insurance Products. Young has worked in the insurance industry for many years. She has come in contact with many clients and has seen many unreasonable insurance products. She gave a specific example: a client paid 500,000 RMB in insurance premiums every year for three years, totaling 1.5 million RMB. It has been 8 years now, and some years ago, this client borrowed over 800,000 RMB due to a cash shortage. If the client now wants to withdraw the policy, after deducting the borrowed amount, he can only get back 300,000 RMB. That is to say, he would still lose money. In addition, the client has never paid any interest on the loan. Young points out that the interest rate on policy loans in China is often 5%, while the return on the policy is only 3%. This means the interest paid annually by clients is far higher than the returns provided by the insurance company.

• Sharing 3: Agreement with James’s Investment Philosophy. Young stated that she agrees with James’s investment philosophy, especially the point that “you shouldn’t try to make money that isn’t necessary.” She believes that we should focus our primary time and energy on our work and lives, instead of spending a lot of time researching investment products such as stocks and funds. All one needs to do is to hold long-term investments in the stocks of the world’s best 100 companies, and then spend more time enhancing our spiritual energy, being with our families, and enjoying life.

• Question: Regarding the risks for clients opening an account in Hong Kong to purchase US Treasury bonds. Young mentioned that the interest rates on Chinese government bonds are very low, at about 1.6%, while the interest rates on US Treasury bonds are as high as 4.6%. Some people she knows are recommending that Chinese clients open bank accounts in Hong Kong, then exchange RMB into USD to purchase 5 or 10 year US Treasury bonds. She would like to know what risks are involved in such operations.

• James’s Response:

  • Need to Understand Specific Operational Details: James first pointed out that he would need to understand more specific operation details before he can assess the risks involved. He specifically mentioned that the normal procedure for treasury bonds does not require going through an insurance company, and he was unclear about the specific procedure and organizations involved in purchasing US treasury bonds, therefore he cannot provide concrete suggestions.
  • Doubts Regarding “High Returns”: James expressed doubts about this kind of “high return” investment method. He believes that if there really was such a good investment opportunity, the insurance company’s own funds would be invested, instead of recommending it to clients. He reminds everyone not to easily trust the so-called high-return and low-risk investment products, because there are often unknown risks behind them.

Wave

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• Question 1: Regarding asset allocation after retirement and calculating amounts for pledging and borrowing. Wave mentioned that she is planning to retire this year, and she would like to know whether she can pledge her stocks to borrow funds after retirement, and how to calculate the amount that can be borrowed. She also mentioned that her 30 year-old son would like to understand the issues of pledging and loans, and how to explain the methods of calculation to him, and where to find relevant information.

• James’s Response:

  • Asset Allocation after Retirement: James first introduced two different methods of asset allocation after retirement:
    • Not Pledging and Borrowing: If you are not planning to pledge and borrow funds, you can allocate 80% of your assets to QQQ and 20% to cash. Each year, you can use the cash part to pay living expenses, and rebalance at the end of the year, re-adjusting the ratio back to 80% and 20%.
    • Pledging and Borrowing: If you plan to pledge and borrow funds, then you should adopt the 433 method of asset allocation, which means 40% QQQ, 30% QLD (2x leverage QQQ), 30% cash (or money market fund). Each year, you can borrow 2% of your total asset for living expenses, and also rebalance at the end of the year.
  • Calculating Loan Amounts: James explained that the amount that can be borrowed depends on total assets and the type of asset. Generally, about 60%-70% of the total assets can be borrowed. However, different types of assets will have different ratios. For example, the amount that can be borrowed from QQQ is about 70%, while the amount that can be borrowed from cash and money market funds such as SWVXX can be as high as 96%.
  • Regarding the Choice Between 442 and 433: James points out that for young people, 442 and 433 are both acceptable asset allocation options. The 442 allocation can achieve higher expected returns, but the risk is also comparatively higher; the 433 allocation is more stable. He suggests that Wave’s son choose the allocation method most suitable for his personal risk tolerance and investment goals. If one plans to do pledging from the very start, 433 allocation can be considered, because the taxes paid will be less when making changes to the assets.
  • Regarding Learning Resources: James told Wave that he had organized and provided all of the articles and video links that covered the topics of asset allocation and pledging stock for loans, and she can find details on calculation methods and operation guides from these resources.

• Question 2: Regarding the view that “the estate will only be 1 million.” Wave mentioned that she recently saw a video by James that mentioned “the estate will only be 1 million in the future,” which moved her greatly. She believes that if one can increase one’s wealth via borrowing for investment, and use that wealth for helping others during one’s lifetime, that would be very meaningful.

• James’s Response:

  • Explaining “Estate Will Only Be 1 Million”: James explained that it does not actually mean that only 1 million will be left to the children as an estate, but that one should use investment loans to make the most of one’s assets, so that one can do more meaningful things with the funds, instead of leaving all of the wealth to the children. He used an example of 300 million in assets. If 290 million are borrowed out, only 1 million will be left, but the 300 million in assets, and the 290 million in liabilities, can still be transferred to the children, and they can use that borrowed money and the rest of the assets.
  • Regarding Estate Planning: James also mentioned that in order to avoid high estate taxes, one can consider establishing a trust, and transferring assets into that trust, similar to how Buffet and Bill Gates do it.

Julia (Continued)

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• Question 1: Regarding the calculation and negotiation of interest rates on stock-pledged loans, and the impact of retirement account assets on borrowing rates.

• James’s Response:

  • Interest Calculation: James explained that interest on stock-pledged loans consists of two parts: a fixed spread (also called fixed interest rate spread, which depends on the broker and borrower’s creditworthiness) and a floating rate (usually referencing SOFR, the Secured Overnight Financing Rate). For a loan of 1 million, if the fixed spread is 4%, the total borrowing rate may reach about 8% when combined with the floating rate.
  • Interest Rate Negotiation: James emphasized that loan interest rates are negotiable with the broker. He advises Julia to proactively communicate with the broker to negotiate a lower rate.
  • Impact of Retirement Account Assets: James pointed out that while assets in retirement accounts (such as IRA, 401k) cannot be directly pledged for loans, the amount of these assets impacts the borrowing rate. When assessing the borrower’s overall repayment ability and risk status, brokers will consider the assets in retirement accounts. If the assets in retirement accounts are substantial, the borrower might qualify for more favorable interest rates.

• Question 2: After opening an account, can one apply for a stock-pledged loan immediately? Will the borrowing limit be adjusted annually?

• James’s Response:

  • Apply Immediately: James confirmed that one can apply for a stock-pledged loan immediately after opening an account.
  • Limit Adjustments: James explained that the borrowing limit is calculated based on the asset value of the account, which will fluctuate with market conditions. Therefore, the borrowing limit is not fixed but is dynamically adjusted according to the market.

• Question 3: If there are investment losses, will the borrowing limit decrease?

• James’s Response:

  • Yes: James clearly pointed out that if there are investment losses, leading to a decline in the account asset value, the borrowing limit will decrease accordingly. He gave an example: If there were originally 1 million in assets, the borrowing limit may be 700,000. If there was a loss of 300,000, leaving 700,000, the borrowing limit would become 490,000 (70% of 700,000). Brokers will re-calculate the borrowing limit based on the updated net asset value.
  • Dynamic Adjustment of Borrowing Limits: James emphasized that brokers dynamically adjust the borrowing limit based on the real-time value of the assets in the account. This means if there are investment losses, the borrowing limit decreases. If there are investment profits, the borrowing limit increases.

• Question 4: What is the difference between stock-pledged loans and margin?

• James’s Response:

  • Interest Costs: James pointed out that the interest on margin loans is usually higher than that on stock-pledged loans.
  • Risk of Forced Liquidation: James explained that both margin and stock-pledged loans carry the risk of forced liquidation. However, margin has a stricter forced liquidation mechanism. When the net asset value of the account falls below a certain maintenance margin ratio, the broker will immediately force liquidation to recover the loan. Stock-pledged loans have a relatively more lenient forced liquidation mechanism. Brokers may give the borrower some buffer time or communicate with the borrower before forcing liquidation. Overall, the forced liquidation risk of margin loans is higher.

• Question 5: After borrowing funds, can they be used for investment?

• James’s Response:

  • No: James stated clearly that using borrowed money to reinvest in the stock market is illegal. He emphasized that brokers usually specify in the loan agreements that the loan cannot be used to purchase stocks or other investment products.
  • Risks of Violations: James explained that brokers can monitor the flow of funds, and although it may not immediately trigger forced liquidation, if such activities are discovered, it may lead to the account being frozen and loans being recalled with severe consequences.
  • Recommendations: James advises members to strictly comply with the broker’s regulations and use the borrowed funds for consumption or other non-investment purposes.

Shawn

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• Question 1: Regarding the calculation of borrowing limits under a 433 asset allocation. Shawn mentioned that he is currently using a 433 asset allocation, which means 40% QQQ, 30% QLD (2x leveraged QQQ), and 30% cash. He would like to know if, when calculating his borrowing limits, the broker also includes the QLD component.

• James’s Response:

  • QLD is Not Included: James clearly stated that in a 433 allocation, the broker does not include QLD when calculating the borrowing limit. This means only the QQQ and cash parts are used to calculate the borrowing limit.
  • Specific Calculation: James provided an example: If Shawn has 1 million in total assets, and the 433 allocation is 400,000 in QQQ, 300,000 in QLD, and 300,000 in cash, the amount that can be borrowed is 70% of the 400,000 in QQQ, which is 280,000, plus 96% of the 300,000 in cash (assuming the borrowing ratio for cash or money market funds such as SWVXX is 96%), which is 288,000. Combined, the total amount that can be borrowed is 568,000.
  • Significance of the 433 Allocation: James explained that the significance of the 433 allocation lies in its balance of returns and risks. By allocating a certain percentage of leveraged funds (such as QLD), the expected return of the overall investment portfolio can be increased. At the same time, allocating a certain percentage of cash can reduce the risk of the investment portfolio and provide a buffer during market declines.

• Question 2: If the 433 allocation method is used and the total asset is 1 million, then borrowing 2% annually (20,000) may not be enough for retirement.

• James’s Response:

  • 1 Million in Assets Not Enough for Retirement: James agreed with Shawn’s point. He pointed out that if the total assets is only 1 million, even if 2% is borrowed annually, that would only be 20,000, which would not be enough for retirement.
  • 433 Allocation is for Total Assets: James emphasized that the 433 allocation is with regard to the total assets, not a single account. He advises Shawn to include all assets, including retirement accounts (such as IRA, 401k) and non-retirement accounts, in the 433 asset allocation framework.
  • Allocation Across Different Accounts: James advises that QQQ and QLD should be allocated primarily to retirement accounts, because retirement accounts usually have tax benefits, allowing for tax deferral, thus enhancing the effect of compounding returns. The cash portion should primarily be allocated to non-retirement accounts to allow for ease of access when needed.

• Question 3: Concerned about the possibility of hacking or accidental errors leading to the sale of QQQ; is there a way to restrict the selling of QQQ in the account?

• James’s Response:

  • Account Security Concerns: James stated he understands Shawn’s concern because long-term holdings of QQQ, once sold, would lead to large tax burdens.
  • Possibility of Restricting Selling: James said that he is not certain whether there is a function that directly restricts the selling of a specific stock in the account, as he does not work at a brokerage and is unclear about the specific operation permissions and function settings. However, he advises Shawn to contact the broker directly (for example, Lisa, whom he recommended) and inquire if they have the relevant settings or services.
  • Strengthening Account Security: James emphasized that protecting the account is very important. He advised Shawn to take actions to strengthen the security level of the account, such as using a strong password, enabling two-factor authentication, and using a hardware security key.

IV. Key Insights

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Investing requires learning, new members need to watch previous videos to learn systematically. – James

• The background of this idea is the influx of new members, who are asking many questions that have already been answered in previous videos. Therefore new members need systematic learning.

Acknowledging one’s own ignorance is power, and ignorance is wisdom. – James

• The reason why many retail investors lose money is that they are overconfident, trade frequently, chase highs and sell lows, and cannot understand the essence of the market. Acknowledging one’s cognitive limitations is necessary to avoid making rash decisions, and to make more rational investment decisions.

It’s great to have money, you can use it to resolve worries, and to buy relationships. – James

• This is based on Brian’s sharing of his experiences after gaining financial independence, and his ability to spend his own money, and treat his family, which gave him more freedom and control. It shows the conveniences that money provides.

Humanity is growing at an accelerating pace, and investment returns will get higher and higher. – James

• This conclusion is based on data on QQQ’s past 20 years of investment returns, and emphasizes the effects of compound interest due to technological developments. Long-term investment in high-quality assets that are representative of the direction of technological development allows one to share the bonuses of human progress.

Encourage borrowing for investment, leave only 1 million in the estate, show respect. – James

• This is based on long-term investments, compounding returns, and sensible asset allocation, allowing one to maximize wealth, and to use loans to enhance one’s quality of life, or to help others. With sensible asset allocation, loans for investment can accelerate the growth of wealth, and not simply accumulating wealth to leave to the next generation.

There are no shortcuts in investing, only through systematic learning and practice can one master correct investment methods. – James

• This is a message to those who are trying to find investment skills and shortcuts, but are unwilling to learn systematically. Investing is a complex field of study that requires continuous learning and practice in order to improve one’s investment expertise.

When you own equity assets in Wall Street stocks, you own the world. – James

• This is an emphasis on the importance of long-term holdings of high-quality equity assets. Stocks are not merely an investment tool, but also represent ownership of a company. By holding the stocks of the world’s best companies, one can share in the wealth generated by these companies worldwide.

Don’t try to make money that isn’t necessary. – James

• This is to advise investors not to over-pursue short-term gains while overlooking the value of long-term investing. We should focus our main time and energy on our work and lives, instead of spending too much time researching short-term market fluctuations or attempting to earn the difference by trading frequently.

The numbers 442 and 433 are merely references, and the specific asset allocation ratio must be adjusted according to individual situations. – James

• This is to emphasize the flexibility and personalization of asset allocation. Each person has a different risk tolerance, investment goals, capital size, etc., and therefore, they need to devise the appropriate asset allocation plan based on their actual situation.

Protecting account security is very important. – James

• This reminds investors to take account security seriously, and to take the necessary actions to prevent the account from being stolen or accidentally mishandled. Because if this occurs, it will lead to severe losses, and especially for long-term held assets, the losses would be even greater.

V. Summary

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This episode focuses on long-term investment, asset allocation, borrowing for investment, and investment mindset. James emphasizes the importance of holding high-quality assets for the long term and the core idea of using compound interest to achieve wealth growth. He also explains the 442/433 asset allocation strategies in detail, as well as the precautions and operational methods for borrowing for investment. At the same time, he analyzes and explains some common investment misconceptions, such as over-focusing on short-term market fluctuations, blindly seeking high returns, ignoring risk control, and lacking investment knowledge and experience. In addition, James also shares some practical investment tools and methods, such as how to leverage brokerage resources, how to negotiate loan interest rates with the broker, and how to enhance account security.

In summary, this episode is full of useful content and a great deal of information, providing in-depth exploration of all aspects of long-term investing. It is highly valuable for those who wish to achieve wealth growth through long-term investing, and also for those who wish to enhance their investment expertise.