Wisdom of the Masses Q&A


Saturday is the day we can express opinions and answer questions to enjoy the wisdom of the masses.

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At times the masses can be colorful.

My answers to some of last week’s questions are below.

First, let me remind you.  Tomorrow is the last day for our special extended summer offer.

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At times the masses can be fun like in this Cotacachi, Ecuador parade!

Each day when I complete my message, I ask myself, “Is there something here that is interesting… and useful that can help make our readers’ lives better?”

This is why you won’t read a lot of bad global news at our site.  Knowing all the terrible stuff in the world that we cannot do a thing about may be a favorite form of entertainment for the many… but honestly… it is not very useful.   In fact this type of knowledge can be a burden and obstacle.

Plus once one becomes positive enough to overcome the morbid side of life… looking at dead bodies… pain and suffering doesn’t have much kick.   Most news is a waste of time… and time is the one resource we all have… but a resource that is also truly limited.

We live in a universe of unlimited abundance and wisdom.  Yet that infinite wisdom also uses time to make everything go.

Other times the masses can be impossible and… crazy even in the short term.

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In fact short term it is usually best to avoid the masses. See why at “avoid lines”

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Long term, the masses bring music into our lives.

To share the inner intelligence we all have we are making Saturday “Mass Share Day”.

I need your questions and… your answers.

Question: Gary, My wife and I have been living in Cuenca for a month and really love it. I have 12k in a 401k back in the states.
I am 57 and could really use your wisdom on what to do with it.  Your insight would be greatly appreciated. George

Answer: Questions of this nature are impossible to answer accurately without more feedback such as “Is there a purpose you have in mind?”…  “How long can the money be invested before it is needed?” etc so I’ll have to make assumptions and assume that this is a long term investment… that this writer has sufficient income to live now… and that this is set aside for producing income later.

There are two elements to ponder.  First, the investment. Second, the tax and legal position.

Re the investment… first of all, do not bring the money to Ecuador… unless you are ging to invest in real estate or an Ecuador business of your own.

I have written about this numerous times… why I do not trust Ecuador banks and… why even if  one does trust them, it is good to live in one country, bank in a second, through a structure in a third.

See several of my articles about this at Ecuador DiversifiedTriple Protection and Ecuador Florida.

Re the investment, if long term is your goal… then how much risk aversion does one have.

There is a struggle between inflationary and deflationary forces at this time.  Falling real estate prices are hugely deflationary.  Unemployment is deflationary. Falling stock prices deflationary.  Lack of consumer confidence is deflationary.

War… debt…. excessive government interference… early retirement… unfunded welfare and Social Security are all inflationary.

The US appears to be following Japan’s model for dealing with the slowed economy… then deflation will win for now.

In times of deflation…. bonds are the best investment… but right now most bonds pay really low returns.. Plus the deflation will eventually turn to inflation and if one misses the shift… bonds will lose purchasing power.

An alternative is to invest in emerging bonds.  They pay a higher income and have shown some great increases.

According to Morningstar there are two high performing, no load, emerging bond funds.

The first of these two bond funds is MFS Emerging Markets Debt.

The Morningstar stats as of June 2010 show the fund up 10.5% this year.

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The portfolio has a fair degree of risk as its quality breakdown shows. This is the price right now for higher income.  The Morningstar data shows that the fund is manly invested in the lower end of investment  grade bonds.

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Here are the top ten bonds held in this fund… a bit top heavy in Russia.

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The TCW Emerging Markets Income Fund has performed even better, up 14.77% this year.

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This fund’s portfolio has a few safer bonds also. Here is its quality breakdown.

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The bonds this funds hold are quite different to the MFS portfolio.

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An investment split into each of these funds would add diversification without giving up opportunity.

The US dollar has been quite strong and there are many reasons why the US dollar will correct.  Now may be a good time to invest in an emerging market bond fund.

When to exit? Watch interest rates in industrialized countries. As long as the central banks keep interest rates near zero…. demand for emerging bonds will grow.  If major market rates start to climb… reassess your position.  Also watch out for bubbles… the market could push these bonds to sub prime loan level.

Re the structure. Though 401 Ks can be extremely complex, I would try to keep this investment as simple as possible.   If the funds are in a 401K… can be left there and… if they can be invested in the funds above or similar bond funds, then why change?   401K investments are protected by pension (ERISA) laws. This includes the additional protection of the funds from garnishment or attachment by creditors or assigned to anyone else, except in the case of domestic relations court cases dealing with divorce decree or child support orders so the extra asset protection is good.

Usually age 59 is the first age when you can withdraw without penalty as well.   However if your investment options are limited to bad investments you could lend the money to yourself and reinvest, etc.

As mentioned, the 401K laws are complex so check with an expert on this which I am not.  A good source of data on 401Ks is at The Investment FAQ.

Next Question: Thank you for writing.  I’ve wired about 500k to Ecuador this year and I wanted to write off what I can.  With other funds, we bought two parcels of land out here in Vilcabamba and they are right next to each other.  My wife and I are very popular in the raw foods movement.  I was thinking to create a retreat center type business where people come to our land to relax, heal and learn about health.   We are in the process of building a 7 bedroom 7 bathroom guest house and this is where they would stay.  I think that there is a lot we can write-off and depreciate if we create a business out here. Additionally, next year we can earn foreign income and get that 87k tax break.  I don’t know how to structure this, do I create a US or Ecuadorian Business?

Answer: You need to speak with two tax professionals… one in Ecuador and one in the US. I have sent you the email addresses of those I use separately.

Have them check a scenario where you operate as a DBA in Ecuador with an overseas travel company registered outside Ecuador and maybe even outside the USA.

Assuming you have US tax concerns, your advisers may find that you gain an advantage in owning and operating the food and house business in your own name.  This will allow you to wrote off all costs and depreciation that reduces your US income tax liability.

Ask them about creating a non Ecuador travel agency that collects reservations and receives a commission thus reducing Ecuador profits and tax liability.

This company can pay you an income… which as long as it is earned income and as you have noted gets reduced by the overseas earned income tax relief. This by the way has risen to $91,500 and is applicable to both husband and wife if both qualify, so could provide $183,000 exemption on foreign earned income.

Let your advisers make sure you qualify for the foreign earned income exclusion either because you work and reside outside the United States or meet either the Bona Fide or Physical Presence tests.

I believe you will find (from your advisers) that you and your wife can earn a salary of up to 91,500 each from your travel company without creating income tax liability.

Plus additional income generated will be reduced by the expenses and depreciation of your housing and food operation (such as employees to help out as well as expenses) in Ecuador.

You may go one step further and find 50% partners for your travel firm in which case you may have a NON controlled foreign corporation.

There are seven levels of corporate structures you can use with international business. One foolproof level for reducing tax is to use a non-controlled foreign corporation.

Learn more about the seven levels of structure at Lesson One of Everlasting Wealth.

Non controlled corporations are explained in detail in my course International Business made EZ. Tomorrow is the last day for you to order this and get my two other courses free.  Enroll here with our extended summer special and save $598.

Next Week’s NEW Questions. Please send your opinions.

Question: Hi Gary, you asked for it!  Your thoughts on the merits of collective wisdom were interesting and in my opinion right on the money.

I believe in the democracy as the best form of government. Direct democracy is for the most part not practical therefore I suppose representative democracy is second best.

In the USA there is considerable “interference” with the purity of this process. Your 1906 example of 800 people judging the weight of the oxen worked because each individual viewed the oxen personally. For US citizens to apply worthwhile collective wisdom in the operation of our country we must each receive similar, accurate information about issues on which we are to make decisions.

I have friends who get all their information from Fox News and have a considerably different view of the world than I do. Other friends get their information from MSNBC and have another view point.

It seems that sustaining all of our “freedoms” will depend on the primary freedom that a modern democracy relies on which is “freedom of the press”. This term should today be “freedom of the media”. Democracy requires a media that presents accurate information without the influence of their corporate owners, reporters, or others, and lets us develop our own opinions.

Today after years of unbridled consolidation, 90% of all US media (TV-Radio-Publishing-online-etc.) is owned by 5 giant entities. All of these five are interested in making money much more than presenting unbiased news.

My question to you is; Can our form of government long exist when our collective wisdom is constantly bombarded with information tainted with opinion which supports a prejudiced view point, instead of neutral, impartial reporting by journalists dedicated to the truth as they witness it or discover it through investigation?

Question: I wish I had sufficient cash flow to finance my life without debt but alas that is not the case.  Can debt be beneficial sometimes?  I have a lot of real estate debt but I always make sure that I keep it in control.  In my financial statement I have a line item for my overall debt ratio.  37.8% at the moment.  I also make sure that my debt is for things that pay me.  Cash flowing real estate.  I insist on a minimum 20% cash on cash return, and usually make much more.

But here is my question.  The US government has a real debt problem which they will need to “solve”.  Probably with higher inflation.  So isn’t it beneficial for me to have the same “problem” so they can inflate away my debt too?  Note that I have no car or credit card  debt.

Question… Actually Comment.

Gary –  Re “The Wisdom of Crowds” – As with other pop-psych and pop-economics books, I had a lot of problems with this book (not least because it conflates a “crowd” with a “flock”. Also, the “wisdom” contradicts many of the points in your own living and investment strategies.

That said, I agree that a blog with the experiences – bad as well as good – of expats is a great idea. Don’t know if you follow Gringo Tree, but the reports of expats lasting 6 months or less before giving up and going home are tragic. Advice when you’re making a major move – even within the US – is give it at least 2 years. No matter where you go, things are really different from what you are used to. In my own case, when I moved from NYC to Seattle, I did give it 2 years at the end of which I realized I would never fit into the Pacific NW and came back to NY.

Although there is no way to prepare for the huge changes of a major move, people need to realize that things will be different, that not all the differences will be wonderful, and it’s they who will have to adapt not the place to which they are going.

Karen J-B

New Question.

I will answer these next week but want your input as well. If you have thoughts or experience that can help answer these questions… send them to me.

Good Morning, Gary:

This morning’s article on the 99’ers was revealing and chilling. I am especially blessed because I was career military under the “old plan”: 50%
of base pay at the highest rank I held. That and early collection of Social Security for my wife and I keeps us relatively comfortable–for the
present. Frankly, I have an ominous feeling that these benefits may be cut or lost at some point. That is a major reason why your information on
international living alternatives, is of great interest to me.

Here’s my question. I have some debt from a surgery a few years ago and some failed business attempts–less than $10k US. Of course, there’s the
note on the car. Do you have to be debt-free to make the move to Ecuador, Mexico or wherever? Would it make sense to pay off the debt faster by
taking advantage of the lower living expenses overseas.

Send your opinions and or questions!

Gary

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