This has nothing to do with one’s actual level of schooling. It has everything to do with one’s actual understanding of the tax codes themselves. They are arcane at times, stupefying at others, but those who take the time to understand them stand to make a solid bounty every year.

This is not about trying to get out of paying one’s dues and evading fees. It is simply about being smart and not overpaying where you don’t need to.

Let me give you a personal example. I am happily employed with a great career as a Product Planning Manager at a large software company. As part of this job I incur a large tax burden – as would anyone in a professional career. I made donations to charity and have a few deductions – but nothing too extreme. However, I also pursue a passion outside of my day-job, in the form of yoga. Last year I took the step forward and actually started teaching.

As part of my journey to start teaching yoga, I applies for a business license (very easy to do) and this year I filed my taxes not only for my day-job, but also for my yoga business.

Since I am now in the business of yoga, that opens a number of doors in terms of tax savings. I am able to write-off all the yoga trainings I attend (many thousands of dollars worth in the past year), my yoga clothing, travel and meals related to my training and other books and supplies for this business. I can even write-off auto mileage incurred while traveling to teach or attend workshops and classes.

The simple fact that I took the step forward and turned what was a serious hobby into a real business with the intent to make a profit (I do get paid for teaching!) opened the doors to a huge bounty of write-offs – saving me many thousands of dollars in taxes.

You might be thinking that I probably didn’t enough from teaching yoga to exceed all those expenses. Here is where it gets interesting. You see, even though my expenses were far more than what I made as a yoga teacher this year, I am able to write off those expenses from the income from my day job! This is a really big deal – and something I would guess that most of the American public is completely unaware of.

The same could hold true if you choose to become a “professional” blogger, writer, teacher, fitness instructor, etc…..with a business license and an intent to earn a profit – you open the door to a host of tax savings by offsetting income you make through another career.

If you haven’t taken the time to study the tax code – it is well worth it: www.irs.gov.

It is oh so simple but oh so good. Anywould would LOVE this. Adults, kids, people who don’t like to eat fruits and veggies, health freaks, EVERYBODY.

It looks good and tastes better. I am drinking this right now before heading to work (after teaching morning yoga practice). You don’t even need a great blender (like a Vita-Mix) to do it (though I think everything tastes better in a Vita-Mix!).

Recipe = 1/2 pint of organic strawberries + 3 medium sized organic bananas + 12-16 ounces water

Makes 3 tall glasses of smoothie goodness. About 350 calories or less. Plenty of fiber, vitamin C and other natural antioxidants. More potassium than you could ever hope for.

We tend to think in terms of big things. Big breaks at works, losing massive amounts of weight, gaining a lot of strength, making a lot of money – we are great at thinking big and stretching ourselves to do a lot to get a lot in a short period of time. Unfortunately, consistency is often underrated.

We forget that sometimes making just incremental improvements on a regular basis will result in utter and  complete transformation of our current situation. For example:

Many people want to want to be a millionaire, and will spend a lot of time thinking about ways to get rich quick, but few will setup up a regular direct investment program that puts some percentage (however small!) of their paycheck into a savings account.

We forget that the decision to skip the morning grande vanilla late will not only save us money, but will do wonders for our health and mental clarity throughout the day.

We forget that eating a few fresh fruits every day can help our body cleanse, rehydrate and nourish our cells.

We forget that waking up just 10 minutes earlier every day can make our mornings far less hectic.

We forget that going for a short walk every day can completely change your emotional being in a positive way, and help you lose weight and keep it off.

We forget that starting with just 5-10 minutes of daily meditation can give us profound mental clarity over time.

…and so on.

Small changes made consistently can transform your life. It is fine to think big, but don’t forget the small stuff and the power of consistency. What small changes can you commit to making today?

However, we don’t naturally act like this is real life. The Ultimatum Game was an experiment that studied the willingness of people to contribute to a common pool of money over time, in return for everybody getting a specific and favorable payout.

Everyone contributes and everyone benefits.

In reality what happens is that people begin to realize that even when they don’t contribute they still reap the rewards. A classic example of this is the effort people make to evade taxes, while still benefiting from public services and infrastructure that other people’s tax dollars provide.

As a result of this, people feel cheated because some members of their community are getting more than their fair share. They then stop contributing to the overall pool even though they would be better off by doing so.

Primates have been found to do the same thing. A story from a recent book I read, The Wisdom of Crowds, pointed out a study conducted with Chimps. The researchers had chimps trade pebbles for small pieces of cucumber. One pebble = one cucumber. After some time, the rules changed and some chimps were given a grape (a much tastier snack!) instead of the cucumber. The other Chimps, upon seeing this…would react in disgust, either throwing away their cucumbers or in some cases even refusing to turn in their pebbles at all.

They would forgo a modest payoff just because someone else got something better.

Think of how this unconscious pattern plays out in your own life and in your own community. Think about the improvements we could make in the world by letting go of greed and jealously and really acting in our own best interests – which often are in the best interests of the community as a whole – and not getting sucked into the Ultimatum Game.

There is a saying that the way of thinking that got us to where we are today will not be sufficient to get us to where we need to go in the future.

This is a long post (perhaps my longest to date on this blog) but is utterly needed given the crazy state of the financial world we are living in. In the following words, you’ll see my approach for navigating this mess, and how you can also do the same – while getting a great night’s sleep in the process!

Why should you listen to me?

I am not an investment professional. Everything in this post is simply my opinion. However, I have spent a long time educating myself in this topic. I have a degree in Finance, worked briefly at one of the world’s (formerly) esteemed asset management firms (Merrill Lynch) and was at one time a fairly active “investor.” I say “investor” with “” because I now know too well that speculator would have been a far more fitting term. I’ve gained and lost money and think that people can learn from my experience.

My goal in this post is not to scare you, but simply to shed a little light on what I think might be a way out of this mess for many of us.

There Is Always A Bigger Fish.

Let’s first talk a little about the whole finance industry itself. It’s all built on trust. Specifically, the trust that a financier needs to earn from their investors. It’s a business based on sure things. After all, why would anyone throw their hard earned dollars after something that might not work out in their favor?

While in reality, there are no sure things, in the world of finance, people make a boat-load of money trying to sell you stuff like it is. To close this inherent gap between possibility and reality some of the brightest minds on our planet are employed (or at least were) in this task. It is no surprise that funds invested in equities, commodities, derivatives and other arcane asset vehicles reached epic proportions over the past decade.

Just imagine if the thousands of brilliant MBA/PhD-types applied their skills to political, non-profit or environmental causes instead of going to Wall Street……wow, what a different world we would be in…but I digress…

I have learned that in the world of finance, as in most things, there is always a bigger fish than you. Even if you are a billionaire, there is someone who has more money or more pull (e.g. a foreign government). In finance, it’s the big fish that get paid first when the sky starts to fall. So when Wall Street starts to melt down, unless you are one of them, you better expect to be last in line holding your tin cup.

Since early 2000 – after starting work full-time, I changed my investment approach in a major way. In place of managing a complex array of stocks and options in my portfolio, I started selling my individual stocks and replaced them with more manageable (and in my mind less risky) diversified mutual funds, sector-based ETFs  (exchange traded funds) and other value-oriented funds developed using computer models through FolioFn.

I wanted to get out of the game of stock-picking – realizing too well that the so-called experts trying to sell stocks using overly complicated analysis were using models built by kids that graduated college at the same time as me, and were just as clueless about how businesses really worked. It didn’t make sense, so I wanted to get out of the game.

I felt like I was being chased by far bigger fish, and it was true. I had little to no information advantage for any of my trades.

I continued this trend for a few years, moving a large chunk of my investments into index funds tracking the S&P 500 or the Morgan Stanley International Index. Again, I didn’t want to be in the game of researching and trying to pick individual stocks.

A little over a year ago, seeing the housing hysteria reaching an absurd peak (and starting to crumble in areas like Miami) I started liquidating. Eventually, half of my net worth was sitting in cash or cash-like assets. I even bought a CD for the first time in my life.

It felt a bit odd owning a CD. I even called my brokerage one day to check on the maturity date for it and they commented that someone my age could really stand to have more equities in my portfolio. Yes, the salesmen were just doing their job.

Even more odd, every evening I would look out from my balcony in downtown Bellevu, Washington (one of the most affluent suburbs in the country) at the half-dozen cranes building luxury condos for people who needed yet-to-be-created high paying jobs to afford their crazy mortgage and HOA dues. I saw people who made far less than me spending far more. Again, things just didn’t make sense. So I wanted out of the game. I sold, sold, sold.

Last fall, when the shoe finally dropped, the remaining 50% I had invested in the market got hammered, just like everyone else. Whenever there is panic, I find that the best thing to do it nothing. So I just sat tight, at least initially. Emotions generally do not lead to the best decisions when it comes to financial matters. This much I learned from my early days as a speculator. I am ever grateful for that experience.

However, now that a few months have passed, I’ve been able to re-adjust my portfolio to align with a new way of thinking that in my mind is far more capable of taking me to where I need to go financially in the future.

I now have almost all of my net worth in 100% cash or cash-like fixed income investments. For those of you who think “wow, Ravi’s really setting a low standard when it comes to wealth mastery,” read on to really understand how this could just be the most powerful strategy around for sustainable and long-term wealth accumulation.

In A Bull Market Everyone Is A Genius.

I majored in Finance. I traded my first stock before I could drive a car. I started reading the financial news practically every day since the 5th grade. When I was 10 years old, I entered USA Today’s stock market contest and did very well, placing at the state level against kids years older than me. I got my picture in the paper. I was hooked.

In college, I traded stocks using my savings, making and losing a fair sum in the process. Lucky for my ego it was the late-90′s. A bull market is forgiving on the foolish. In retrospect, I realize that my gains were at most dumb luck though in the euphoria of the late nineties I quickly devised my own theories about how I was just better at it than everyone else.

Over the summer after my sophomore year of college I went to work at Merrill Lynch, where I worked with people who didn’t seem to know that much more than me, but these very people were creating investment products that were supposed to deliver great returns. Everyone seemed to know how to beat the market. Again, things didn’t make common sense but I figured I was just to naive to understand everything, and went along for the ride.

I remember one day during my time at Merrill Lynch  (I worked as an intern in their asset management division in New Jersey) going to a reception with some of the investment banking interns in Manhattan. These kids, some of whom knew far less about finance than me, were pretending like they actually understood how to dissect arcane financial statements and build models showing how some emerging technology would grow over the next 5-10 years. Everyone thought they had some special gift and were in the know. In a bull market I guess everyone is a genius.

Mind you, some of these kids were english literature majors (no joke) and hadn’t traded a stock in their life. Yet here they were thinking they knew everything about business and high finance. It made absolutely no sense, but no one would admit it.

You Think You Know? You Have No Idea.

During my Junior year in college I had my first real experience with a trading environment, in our derivatives class. It was a more advanced finance elective, and a few days a week we’d crowd into the computer lab where we’d proceed to make or lose a lot of play money while putting to use the strategies learned in the lectures.

Straddles, spreads, strangles….once you learned how to apply them it was easy to go on auto-pilot. You turn into a robot, looking at the numbers on your terminal and just applying the right strategy when it met the requirements that the text-book called for. It wasn’t particularly hard. You just had to put your emotions aside and follow rules, ruthlessly.

Then things took a twist. One day in the lab, Professor Hathaway – a man in his late-thirties who retired from trading derivatives as a professional trader (apparently torturing college students was more fun), started dishing our information to certain people at random times during class. Those who understood how to capitalize on the information would see their profits skyrocket. I remember working with my team-mates (we worked in pairs or triads usually) when he sauntered over and handed a slip of paper with some bad news regarding the underlying stock whose derivatives we were trading.

We pulled the trigger and sold a boat-load of calls before the rest of the class saw the news flash across their screens…we went from almost last place to near the top of the class in profits in just a few minutes! Since our results impacted our grades for the class, this was a big deal. We made a few enemies in class that day .

Leaving the computer lab that day I realized that information was really king. Unless you know more than the other investors out there, and have the resources to do something with that information, you can and will get taken for a ride. There is also someone more informed.

The gal next door spending all weekend pouring over Investors Business Daily. The stockbroker spending 50 hours a week reading analyst reports. The analysts spending 80 hours a week researching business models and speaking with CFOs. The investment banker spending 100 hours a week meeting with senior execs gathering inside information. The corporate execs themselves who are actually creating the futures for the companies you are considering putting your hard earned money into. They are all think they know more.

There is always someone who knows more. That person has the edge. Keep that in mind. You might do OK  when the coffers are overflowing, but when times get tough, you’ll be the last one in line holding the tin cup.

Cold Hard Cash

I now have practically 100% of my net worth invested in cash and cash-like assets (includes fixed income CDs, Money Markets). I do not own corporate bonds, stocks or any other asset that is not insured by the government. I do not own real estate (this is as much a lifestyle choice as an investment choice right now for me). This model for investing is not risk averse, it is simply designed and optimized around a different set of criteria.

First of all, this approach is not wholly unique, there are many others out there (search the web) who talk about the strategies I will describe. Specifically, two successful business-people and bloggers Tim Ferriss and Marc Cuban both discuss the issues with buy and hold investing and the equity market in general. You can read their thoughts on their blogs, or just poke around the web and you’ll run across others who strike a similar chord.

I’ll lay out the logic for my new model for success investing. I hope that no-body reads this post and immediately sells all their stocks. That is not the goal. The goal is to get you to think hard about where you are investing your hard earned money. Think about those investments that have been sold to you as sure things or safe investments, and really consider their true nature. Be conscious of where your money is going, and then make adjustments from an objective point of view. Perhaps your own assessment will lead to the same conclusions as me.

A New Model For Investing

Here are a few considerations for my new model for investing. I’ve already put my money where my mouth is. We’ll see how things fare over the coming years. There may be few sure things, but one thing I do know is certain, with this approach I am going sleep darn well at night! Read on to see why…

1. Cut Spending to Increase Your Rate of Return

The biggest return on investment someone can make is through saving. People are always out looking to make a quick buck in the stock market, but nobody looks at their own checkbook or credit card statements. In today’s market, people would do back-flips for the chance to get as little as an 5-10% return this year on their investments. With interest rates so low and the equity markets in duress, that is not likely for most investors.

However, just imagine if you could cut just 10% out of your monthly expenses. Suppose you spend on average $1000 a month on surplus spending outside of basic living expenses. Perhaps by packing your lunch, skipping your afternoon latte and renting movies instead of going to the theater every week you could cut $100-200 a month from that. There you go, save the difference and you’ve just increased your portfolio by 10-20%! Get hardcore about budgeting and cutting back frivolous expenses and you can surely grow your portfolio by 10% or more this year by just saving more.

2. Invest In Yourself

I spend a lot of money and time on personal development. Between yoga training, personal development seminars, books and other things, I spend thousands of dollars a year on training to improve my own skills. Instead of investing money in some company that you think you might make a quick buck from, how about investing a fraction of that money is real skills training for yourself.

These skills: be it a language, leadership, sport, instrument, marketing, presenting or whatever else…..can be parlayed into money-making opportunities down the road. Who knows, maybe the presentation skills training might help you land a far better paying job. Maybe that language training might make you more relevant to a prospective employer. Maybe the martial arts class will give your the confidence to ask for a well-deserved raise. Investing in yourself is the best investment you can make.

3. Invest Where You Are An Insider

Warren Buffet does not buy 100 or even 1,000 shares of a company. He buys enough to get the attention of the executive staff of the companies he targets, and in most cases he invests enough to actually have controlling interest in the company. If you are going to invest in a company, you need to have an information advantage. This can either come through really and truly knowing more about an industry, or perhaps through investing in a small company where you actually have a say in the vision and future product direction of the firm.

4. Put A Value On A Good Night’s Sleep

The models we use to calculate rate of return on our portfolios are woefully inadequate for the modern world. What if your portfolio had a 1 in 9 chance of doubling this year….but an 8 in 9 chance of dropping by 20%? What if you have to live like that year after year for 10 years? How well would you sleep? Contrast that with being guaranteed a 3-6% rate of return in low-risk income products. How well would you sleep with that guarantee?

For the past year I have slept very well, and now that I am in all cash I really really sleep well. There is a huge value in this. Most of us never think about it, but I urge you to factor your own stress and sanity into your financial planning. It is priceless.

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So there you have it. I hope this has given you a fresh perspective for navigating the financial mess we are in right now.

It does not have to be scary.

You can be in control.

Just take some time top think about what you are really after financially, get hardcore about your expenses and budgeting, and at the end of day just be sure to set a little something aside for the biggest investment opportunity available to you right now, yourself.

The Dow today was down 700 points at one point after the $700 billion governmental bailout package was shot down by the House. Chances are that the planned re-vote will also fail.

What do you do in situations like this? Well, I have a philosophy around how to deal with these type of situations. It’s based on over 10 years of active investing and general interest in how financial markets work.

The first thing you do in a situation like this…is DO NOTHING. A common reaction is to immediately sell to avoid further losses. Getting rid of the assets gives a false sense of calm since the loss is no longer visible when you check your brokerage account and look at the performance of the individual assets you still own!

Another common reaction is to buy or dollar-cost-average. That is to say, assume that the market can’t go down any more and buy low with assumption the coming gains will offset your loss. Again, this strategy rarely works.

In situations where there is massive panic and market reaction, I DO NOTHING. I do not buy or sell. I sit with what I have.

What I do DO, is I plan. I think about what kind of assets I have. What industries am I invested in? How much money do I have in commodities like Gold and Oil-related assets/industries? How much cash do I have? Where is my cash invested? Is my cash in a money market? If so, is the money market “safe” (i.e. investing in assets that are not exposed to the financial turmoil under way)? How much exposure do I have in US vs Global markets? Is my money in FDIC insured accounts/assets?

I plan like crazy.

Planning gets you out of your emotions and gives you  a way to logically think about where you are at financially. You then are in a much better position to make prudent decisions with your money once the markets have had a chance to digest all the news that is current hitting the airwaves.

Normally, markets over-react to news (both on the upside and downside). Right now, I am guessing that we haven’t seen the end of the decline. However, I would also guess that we will see some degree of recover after the markets have settled. I don’t know when this will happen, but for now I am waiting this out. Once the news stops trumpeting impending market doom as the big front-page headline, I’ll adjust and take any required action on my portfolio.

I worked at Merrill Lynch (just for a summer) about 10 years ago, and the thought of that company EVER getting bought or going out of business was the furthest thing from my imagination then. I also had an offer to work for Lehman Brothers before coming to Microsoft that I almost accepted. Now, that company filed for bankruptcy as well. A few years ago the thought of that happening would have been unfathomable.

The financial markets are reeling. Even those who didn’t invest directly in those companies shares are affected, since even index mutual funds have a fair exposure to the financial services industry. With almost half of all American adults invested in the stock market in some way, this means that a lot of people are losing money.

What to do at times like this?

I am no financial expert, but I tend to approach situations like this the same way I approach other situations filled with stress and fear in my life.

First of all, I think about what my long term vision is. In the case of finances, I am looking to grow my assets over the long term. I’m not looking to try to get rich quick through my investments or take excessive risk. I take enough risk in my job every day, and prefer to place my energy there. I expect my “day-job” to be the source of my real wealth over the long-term, not short-term portfolio gains.

Next, I think about the things that I can control, and don’t worry about the things that I can’t control or have already happened. If I have assets that have already lost tons of value, I don’t worry about the loss, but instead think about what I can do right now, which is either do nothing or sell to prevent future losses. Generally, if I don’t think an asset that I own is compelling enough to buy right now, I sell it.

Lastly, I think about how I can better set things up so that a dire situation doesn’t happen again in the future. In the case of finances, proper asset allocation would ensure that you are not overexposed to any single asset class. At the end of the day, I have my own opinions about where the US financial markets are headed over the next 3-5 years, and it is NOT a positive outlook. I’ve focused on investing in fixed income assets (for the first time ever!), commodities (gold), the energy sector and funds that are global in nature. This has been my strategy for the past few years, and it has served me well.

So this is what I do, what is your approach to finances at a time like this?