The Queen of Versailles

On the train this weekend, I watched a documentary called The Queen of Versailles. Released in 2012, it follows billionaires David Siegel and his engineer turned beauty queen wife Jackie as they embark to build the largest single family home in America starting in 2008. Siegel is the founder of Westgate Resorts, a large timeshare business. David's plans for his home and his business are rocked by the financial crisis, putting the putting the Versailles project on hold, and the sale of PH Westgate in Las Vegas.

Two financial lessons jumped out at me while watching.

1. The dangers of cheap credit.
During the movie, Westgate's business is highly dependant on credit, both for themselves, and for the people buying time-shares in their company. They sell time-shares to people, at low monthly payments, for long mortgages. Instead of setting up a sustainable business, they leverage the mortages into new projects. When the credit drys up, the business cannot make the payments, resulting in the company having to sell their flagship property in Las Vegas. Near the end of the movie, he says that he should have only had 15 properties, instead of 30.

2. The dangers of being too invested in your own company.
Although the Siegel's paid cash for their current home, they took out a mortgage on the property to invest back into Westgate. When the company runs into difficulty, the creditors demand that David take a pay cut, putting their current home at risk. At my company, I have the option to buy shares every year at a small discount. Many of my colleagues buy these and remain invested. So their employment, their pension, and their investments are all tied into one company. I buy the shares to gain the advantage of the discount, but then sell and invest in other companies.

The movie paints an unsympathetic picture of a slightly out of touch billionaire wife trying to cut back and economize (While still eating caviar for Christmas breakfast). There are also some interesting side threads as the movie explores the mind set of people who buy timeshares, and the impact of the financial crisis on ordinary people. I would recommend a watch if you have a chance to find this movie.

Should I Use An Investment Advisor?

As my networth has been increasing, I have been considering getting an investment advisor instead of my DIY approach.

I met with an investment advisor to discuss moving some of my portfolio over to his services. At the time, I had approximately $100,000 in assets that I was willing/able to move into a full service portfolio. Assuming that I was invested in a mutual fund type of portfolio, the advisor would earn around 0.9% in commission. For my $100,000 portfolio, the advisor would get around $900. From the $900, the advisor would have to pay rent, staff, taxes, and then be left with a small profit.

How much advice would $900 get me? The advisor said he would do an initial review of my portfolio, determine an asset mix, and then we would probably meet once a year.

As my portfolio would only offer $900 in revenue, I would be one of the smaller clients, and wouldn't gain the attention or the advice I was looking for. I decided to keep growing my portfolio, until I can offer the revenue to really interest an advisor into working with me.

Do you use a DIY approach, a fee-based advisor, or a commission-based advisor?

This post was included in: Finance Carnival for Young Adults – Check Yourself Before You Wreck Yourself

Is A Premium Credit Card Worth It?

I had a BMO Cashback MasterCard, no fee, earning 0.5% cash back. As my spending increased, I began to look at a fee based card. The BMO Cashback World MasterCard offers 1.25% cash back, but with a $79 annual fee.

At some point, the premium card will return more than the free card. In this case, with a spend of $10535/year or $878/month, the premium card returns more. At this spending rate, the free card will give $52.68 back at the end of the year, and the premium card will give back $131.69, less the $79 annual fee, or $52.69.

Since my annual credit card spend is much less than $10535, I elected to remain with the free card.

Good Advice

I finished reading a book called Confessions of a Subprime Lender about the credit crisis in the US. What struck me was the stories about how many people were living beyond their means, barely getting approved for mortgages, then being forced out when their adjustable rate mortgages adjusted up.

It reminded me of some advice I got a few years ago from a family friend about living within your means. Specifically, he talked about how many people that he worked with in a seasonal, construction type industry depended on their bonuses as part of their income. He on the other hand did rather well treating his bonuses as just that bonuses. He lived on his income, and then used his bonus as an investment.

It also speaks to the greater topic of found money, ie bonuses, tax returns and inheritances. More good advice, park found money in an investment account, wait and decide, rather than spending a new found windfall. Certainly pay yourself, spend 10% on yourself, but invest the rest or pay down debt.