College Grads, Here’s How to Become Millionaires | Hacker News Reader

College Grads, Here’s How to Become Millionaires

mint.com

88 pointsdrey92 comments

The real reason to save money isn't to invest it in the stock market, it's so that you have the option to pounce when an opportunity arises. Say that a few of your smartest friends are founding a new startup, and they ask you to join, but they won't be able to pay you anything but equity until it gets off the ground. If you've got cashed saved up, you can take this risk; if you don't, you'll have to pass.

Stocks can fall into this category, but you should make that determination based on the fundamentals of the stock, not based on the blanket declaration that stock prices have always gone up in the past. If you see a stock that's grossly undervalued by the market, it's wonderful to have cash to pounce on that. If the whole market is (still) overvalued, which it seems to be to me, it doesn't make sense to pour money into it.

For most people the real value in saving money when they are young is not investment but to avoid debt. 10+k at 22% is a huge trap that catches a lot of people.

PS: 10k of CC debt when you are 30 can easily cost 23,000$ EVERY year in retirement. 10,000 * .22 * (1.07 ^ 35). Even if you pay that off after one year you are still looking at (10,000 * 1.22 * 1.07 ^ 34) = ~121,732$ of lost cushion when you retire.

That's the value of a balanced budget. The value of saving is compound interest, whether in money market or stock dividends, or a brilliant startup (what if the startup you pounce on fails or only breaks even?). Saving early means you start in on the compound interest sooner, which means you get a longer timeframe on your exponential growth.

It's hard to keep a balanced budget that can still handle random expenses like a new transmission or even worse 2 months of unemployment without being in the habit of saving money.

This is extrapolating from a pretty small data set, and worse, the data set was collected in circumstances different from the ones it's being used to make predictions in. It's quite possible stocks will go up in the 2010s, but the fact that stocks went up in the 1940s after losing a bunch in the 1930s isn't a very good reason to think so--- the pattern is extremely weak, and collected from a data set that isn't nearly big enough to falsify these kinds of pattern inferences.

But nonetheless, you can still do better analysis than these kinds of eyeball-the-chart analyses. Does this prediction of cyclic returns hold up under some attempt to retroactively test it, e.g. via cross-validation?

And of course that's ignoring the bigger problem, that it's quite possible average returns in the 21st century will not be as good as average returns in the 20th century were, making any extrapolation too optimistic.

This whole stock story I found also a bit doubtful. Mint is obviously selling its product ;) But a quite boring fixed interest saving plan would do the same effect, probably with less return but with more security.

But a quite boring fixed interest saving plan would do the same effect

No, it wouldn't. It probably wouldn't even beat inflation.

With good state bonds mix you can make between 3 and 5%. That's more than the average inflation, at least where I live.

Exactly. In fact, I'd say it's much more reasonable to expect stocks to do worse in this century. Physical resources are going to be tougher to acquire and more expensive and major scientific advances are going to be more difficult. It won't surprise me at all if the cheap, easy growth of the 19th-20th centuries turns out to be the exception, not the norm. I expect a lot of the current hype and froth around social networking and the web is going to turn out to be no more monetizable than it was ten years ago when people were making similar handwaving arguments about revenue and profitability.

I suppose Asia might buck the trend but a portfolio highly skewed in that direction now is a fairly speculative investment.

Stocks are, generally, fairly speculative. If they weren't, everyone would invest in stocks. The person this article imagined had an unfair advantage- he knew that the decades upcoming would see stock upturns, so stocks were not as speculative. Still, stocks just need to beat the rate of inflation. I can easily see them doing that after they've fallen so much.

A diversified stock portfolio is betting on economic growth. The economy has grown consistently for the last six hundred years.

Well, it's betting on some other factors as well, like the portion of the growth that publicly held firms will capture (versus more of the growth going to new startups or privately held firms). A stock portfolio is by necessity non-diversified on that measure, though large investors can diversify by putting money into VC, angel, and private-equity funds, among other things. It's probably also geographically non-diversified, since some of the fastest-growing markets are hard to buy into (e.g. China is very picky about what kinds of shares it lets foreign investors buy).

So what stocks have you been trading since 1410AD?

I think you would be surprised at the number of people who own stocks, either through a retirement account (401k, Roth), or a brokerage account.

They may not own many shares, but they are invested in stocks.

I think you'd be surprised at the number of people who don't own stocks and don't even have a 401k or any other type of retirement plan, and I bet they outnumber those who do.

I suggest reading some of Siegel's books. There are good records going back two hundred years. The stock market has beaten every other asset class, every single decade between 1810 and now. You might make an argument that things will change due to a technological singularity, but stock performance has been remarkably consistent over the long run.

http://caps.fool.com/Blogs/1802-2009-performance-of/282249

My lifetime might not be long enough for "the long run." Any longer than that and your 200 years means very little.

The argument is that stocks have been the best asset class investment in each decade for the last two hundred years, not that it takes two hundred years.

I'm going to guess that you'll live for at least another decade, and tell you to go right ahead and consider that the long run. If you've any multiples of decades, you're even more set.

That certainly isn't true. For example, stocks were not the best asset class in the 2000s (bonds did much better this past decade). The linked page is just giving broad "stocks are generally better", but isn't doing decade-by-decade comparisons (which would be interesting to see).

Granted. But aside from the last decade, the article does claim that stocks win. (from 1930 to 1996). The recent decade is astoundingly bad...especially considering all the neat, new things we've gained..

off the top of my head, US stocks in the 70s were also flat over about a decade; as they were in the 30s (counting from '29); and probably some other decade before that, but stocks were not mainstream then

> The argument is that stocks have been the best asset class investment in each decade for the last two hundred years, not that it takes two hundred years.

But that is factually incorrect. "stocks have been the best asset class investment in each decade for the last two hundred years" That is a totally incorrect statement.

To be proper I should post specific statistics rebutting this, but I don't have them at this time. If you are genuinely interested you can look it up yourself.

You (or Siegel) may suffer survivorship bias. Yes, the US stock market has performed well. But what about early Russian stocks, German stocks, French stocks? I'd venture a wild guess that investors got pretty much wiped out between 1917, say, and 1945?

Also, the chances are high that you can find some time grid for which "every single decade" will show whatever you want it to show. For example, between 2000 and 2010, US aggregate stock market performance is... roundabout zero?

I upvoted you for insightful analysis, but I think survivorship bias might be appropriate here. If the economy & political system changes the way it did in Russia, Germany, and France, it's basically moot where you've put your assets. You'll be wiped out either way; the important thing then is that you survive and can rebuild afterwards.

As one of my mentors once told me, "Optimize for the case where we aren't fucked, because if we are, there's nothing we can do about it." He was talking about software architecture and startups, but it applies to finance as well.

In some cases everything is equally bad, but not in others. In France, for example, the stock market was wiped out, but lots of other assets survived the war, especially property (land ownership wasn't generally interfered with), and portable valuables like gold and jewelry. So if you were picking places to put your money in 1935, there are definite winners and losers--- buying land was a good option.

Diversify across geographies, e.g. always hold positions in America, Europe, and China.

At first, I thought we had a misunderstanding but now that I see your point, I have to disagree.

Survivorship bias basically is a sampling error and, in this case, leads you to underestimate the risk of your investments, both of which are never a good thing. Moreover, in almost all cases, it's a tad fatalistic to say "there's nothing we can do about it". I mean, maybe if the world goes under, but anything short of that, I'd like to think there's always sth I can do about it (even if that's just trading one bias for another... ;)

Sampling error is when your sample doesn't match the properties of the population that you're trying to infer for. It's not sampling error if you actually meant to study only the population that you're looking at. I'm saying that when it comes to asset performance, "Countries with a stable political system and market economy" is a better sample than "all countries", at least when you're investing domestically.

The reason for this is that if your home country undergoes political turmoil, you'll need to special-case that anyway. It's very likely that your assets will be seized by force; it's fairly likely that you will be too, and potentially lose your life. Your priority is staying alive and getting out of the country, not preserving $X million in wealth. It's highly unlikely that the country you emigrate to will be able to recognize any claims you might have had on assets in a country in turmoil. The best you can do is to get out and have sufficient friends & skills to rebuild your life.

> I'm saying that when it comes to asset performance, "Countries with a stable political system and market economy" is a better sample than "all countries",

That's like saying "I'll buy only stocks that go up".

You didn't know, in 1900, that the 20th century would be America's.

That's fair enough. I suppose you might have some clues, like "Get the hell out of Germany when Hitler came to power", but yeah, you can't predict the future.

I've also read in many places that the truly wealthy don't invest in the open market at all, but rather in private investment funds with high barriers to entry and much better, on average, returns.

The article is referring to the business cycle, a well-established economic phenomenon of unpredictable cycles of expansion and contraction.

http://en.wikipedia.org/wiki/Business_cycle

> This is extrapolating from a pretty small data set

I wouldn't call the last century of the US stock market a small data set. Perhaps what you mean is that the author's choice of decade-long windows is too arbitrary?

But regardless, the business cycle is a broadly accepted and easily observable phenomenon. Exactly what causes these cyclic fluctuations is hotly debated (at least it was ten years in my macro-econ classes.)

> it's quite possible average returns in the 21st century will not be as good as average returns in the 20th century

The article wasn't arguing that one should expect those exact returns, but rather that positive returns are cyclical-- good times generally follow bad times.

Save money and invest for your entire life so you can be rich when you are older. I don't know. A lot of people doing this end up spending their whole lives making more and more money, only to realize in the end that they have all the money they need, but very little time to spend it.

Why not spend your days earning as much money as you can, and using that money to do the things you like. So, when you are older, instead of having 1 million dollars in a bank, you have 1 million dollars worth of experience.

dude, beautiful post. The exact strategy I am planning on living my life by

The goal should be to die with a bank balance as close to zero as possible.

I thought the goal was to live a happy life, whether that results in a bank balance of zero or a few million.

The reason I save much of my income isn't because I want to be rich when I retire. It's because I can't think of things to spend it on now that would measurably increase my happiness. I'm not big on spending money just for the sake of spending money - that way lies dissatisfaction and the hedonic treadmill, as your desires increase faster than your ability to pay for those desires.

I'd much rather think hard about what I want from life and then spend money, carefully and judiciously, to achieve that. If it's not something I want, why should I buy it?

Own your money, don't let you money own you.

Money is virtualized power. If you haven't used it all by the end then you've left things undone. An unused tool is a worthless tool.

There is value in having the ability to do something, even if you never actually do it. The options this gives and peace of mind that results is often worth far more than actually exercising that power.

The best example, perhaps, is the military. The point of having a strong military is so that you never have to go to war. You can enjoy all the benefits of having won the war - economic power, national prestige, international bargaining leverage - without actually having to fight it. Once you start fighting, you've lost. Generals usually understand this. Occasionally, you get a president or despot that doesn't (we in America just had one), and the consequences generally aren't pretty.

I get enormous pleasure out of knowing that I don't have to go to work. I could quit any time I wanted to, and my savings would be enough to find another job or get a company off the ground. That's worth a lot more to me than a fancier car or a nicer place to live or a few skydiving trips. It lets me enjoy what really is a pretty nice place to work rather than feeling oppressed by The Man every day.

And I got that job because I could afford to wait another six months or so after my last startup failed, until the right opportunity arose, instead of needing to take the first job offered for financial reasons.

Certainly it's wise to keep some money in reserve through the course of your life. Thanks to my savings I left a boring job last week and have the luxury of taking my time to find or create something genuinely interesting to replace it. In the final arc of your days though it's time to convert potential into actuality.

As for the military, I don't think it's really analogous at all. At least in the modern era a standing army is a constant drain on finances and a constant temptation to extremely expensive mischief. How much healthier would the U.S. economy be now if we had disbanded all conventional forces after WWII and maintained instead a small but sufficient nuclear deterrent?

I cannot speak for you, but I do have my own privatized security force.

Money sitting in the bank makes a good insurance policy for many things, better than the loophole-laden policies your typical insurance outfit flogs off. Plus interest earned is better than premiums paid.

Kids?

Can make their own damn money, the way we did.

That's a perfectly valid strategy, and you're right to focus on buying experiences rather than things. As long as you don't subsequently complain that those who did save more are in a better financial situation than you are, and therefore they should be taxed to support you.

I guess it depends which one of us has more votes, eh?

Having enough savings to not worry about money is worth more than just about anything else you can spend money on. And unlike a vacation in 10 years you still directly befit from that money every single day.

Think about it this way, if you save 15% you can spend 85% on just about anything you want AND not feel bad. Spend 100% of what you make and you are constantly hoping that nothing bad happens at the end of the month. Spend 101% of what you make and you will soon enter a world of pain.

My experience in life thus far has suggested to me that it's not about saving, but about growth and pushing forward. You can scrimp and save, but if you instead put your resources to task and try to grow, you can move up to the next level, where your savings from the previous level are a pittance.

It is of course inherently more risky, and requires effort, but it seems like a better choice.

A case example is my uncle; a member of his family racked up some huge medical bills due to a hospital's mistake decades ago. He is starting a somewhat risky business venture, and I asked him why he wasn't instead getting a job and working. He told me that the bills were so great that working a regular job would never be able to pay them off, and so this was his only option.

I am in the same position. I lived like a pauper for 5 years, saving all my money. Then most of it got wiped out by a medical emergency. Now I just maximize my income and quality of life. I spend way more money than I used to, yet have also saved up about twice as much as I previously had. I do not recommend the "scrimp and save" approach. As always, YMMV.

Life is too short to not enjoy it.

> I’m a student of the market, the author of Investing 101 and can say with some authority that the market’s miserable decade-long performance is exactly what spells huge opportunity for you.

cringe

That's where I stopped reading.

This article is pretty right on some points. Most millionaires are just good earners (but not rich) who live under their financial capacity, and saved over a long time. Because of the compound effect, it is also much more important to save while young. But of course everything is a trade off: a good dinner for networking or a set of new clothes (think you may have to buy a suit to meet your first customer) can produce a positive return.

This is a particularly good counterpoint to some of the ideas in the article:

http://www.economist.com/node/16479024?story_id=16479024

* Even though stocks have fallen in the last decade, they are still historically expensive. Because the fell from such a high peak in 2000.

* The more people that follow the author's advice of investing in shares (the cult of equity), the worse their collective return will be.

* Unrelated but interesting is that high-yield bonds have outperformed stocks since 1995.

If you'd invested $1,000 a month since 1970 you'd be rich. Yes, but $1,000 a month in 1970 was a lot of money. In 1970 the median household income was around $800 a month (in 1970 dollars).

It'd be more informative to know how rich you'd now be if you'd invested in stocks something like 20% of the median household income for the past 40 years.

I dug up information on the median household income, and the growth of the S&P500, since 1975. Built a spreadsheet based on 10% of the median household income, twenty percent being a huge, huge cut into the money a family could spend at the median levels. Check it out: https://spreadsheets.google.com/ccc?key=t1GNFHQzYRcc4aWOlvZq...

This sounds like a standard spiel that financial advisors at your local bank are trained to give. Even aside from all the problems with this sort of 'analysis' like using past to predict future, extrapolating from a small data set, etc, the fact that their computation of past returns has no reference to inflation should tell you that you'd be better off listening to someone else.

FEED THE MACHINE.

Also don't forget that the total inflation between 1970 and 2000 was 340%, that is 4.03 millions of 2040 dollars would only be worth 0.9 million in todays dollars if history repeats itself.

Yes, but hopefully it doesn't. There was some nasty inflation during that period. It could be worse, it could be better this time around.

If you make 10 dollars an hour and have an hour lunch, cutting 15 minutes off your lunch nets you $50/month. Taking only a 30 minute lunch nets you $100/month.

If that same 10-dollar an hour job isn't picky about overtime, showing up 15 minutes early and leaving 15 minutes late gets you another $100/month.

Show up 15 minutes early, take a half hour lunch, $200/month. On $10/hour, that's not something to scoff at.

Easier to get rich by focusing on increasing your income, rather than saving what you have, if you are on that low-level wage.

If you make 10 dollars an hour, chances are you work fixed hours. At least in my experience.

And you are already working those extra 15 minutes without the compensation.

Saving is good, but the "miracle of compound interest" is hard to believe in after a decade where you literally would have been better off stuffing your money under a mattress. Past returns are no guarantee of future gains, so the argument that "we're at a low point and can only go up" doesn't really hold. I mean, I hope the market will go up, I've been investing in a disciplined asset allocation rebalance once a year style for the past 8 years, but, I'm just sayin'

So if you don't invest the money in the stock market, where else? Yourself. Live off savings and do a startup. Pay for education. Other ideas?

Real estate.

Gold. Silver. Copper. Aluminum.

Yet another "spend less, invest in the market" article.

The best advice I've ever heard on getting rich.

Get a job and bank 10-20% every week. Live on the rest. Get there faster? Get a second job and bank all of that.

I've been telling this to anybody who'd listen ever since I started doing it myself:

Continue living like a college student for 5 years after you leave college and you'll never need to worry about saving for retirement.

It really is that easy. You're going from a state where you have $500/month in expenses and zero income to a state where you have $5,000/month in income. It's trivial to save $10k/year at that point unless you go out of your way not to.

Even at 10% returns (which you can pretty much always get), your money will double every five years. Don't touch it 30 years, and that's a lot of doubling. And speaking of 30, that's when you can stop.

I essentially retired when I was 30 years old, and now just work the occasional short contract to pay the rent. Meanwhile the stack keeps growing in the background, waiting for grey-haired Jason to retire on it 20 years from now.

Living like a student for 5 (or more) years is a great strategy, but I just wanted to correct the doubling time math you presented. To double every 5 years you need a 15% annual return (1.15^5 = 2.011). A 10% annual return doubles every 7.2 years, thus the rule of 72:

http://en.wikipedia.org/wiki/Rule_of_72

Of course you need no college debt for this plan.

I don't really see how it's so easy to get 10% returns as well. Stocks may average 10% long-term but for the last five years you certainly didn't double your money.

That's exactly what you need them to do: 10% average long term. And they always have.

What planet are you on where 10% returns are easy to get? Interest rates are about 1% right now for fixed-return investments. It seems to me that there's no such thing as a safe investment these days and there hasn't been one for a while. Please advise!

This one. Here's the S&P 500 since 1950 (as far back as Yahoo has data, but the stock market as a whole looks pretty much like that back to 1800):

http://is.gd/dWQmU

See if you can find a 30 year slice of that chart where it doesn't average 10% annual returns.

If you're investing for retirement, that's how much time you have. Patience...

hmm, so I guess by this argument, if I flip a coin 3 times and it comes up heads, the next time is more likely to be tails...

The argument is that stock market returns are not a random process but exhibit mean reversion:

http://en.wikipedia.org/wiki/Mean_reversion_%28finance%29

In short, large deviations one way are more often followed by large deviations the other. If mean reversion is true, the coin flipping analogy is not an accurate one.

Don't know about the stock thing, but finding a cheap city to live in (Pittsburgh being one) and living like you're a poor college student is definitely one way to save a crapload of money. What some people earn and spend in a year will probably last me 3-4 years if not more.

How's the pay, though? I moved to the Valley because the extra income is much, much more than the extra costs. I wouldn't want to move somewhere cheap unless I either stopped working, or started a business with income not connected to the local wages.

The extra income in the Valley isn't enough to make up for the increase in cost of living compared to many places, such as Austin, where you can also find good tech jobs.

http://swz.salary.com/costoflivingwizard/layoutscripts/coll_...

Exactly -- Pittsburgh also has a lot of tech jobs, with most of the big players having branches in the city, as well as a lot of startups in the area, most of them related in some way to CMU. And if you're at all interested in robotics, this is the place to be.

What I get from that is "The cost of living in Austin, TX is 26.4% lower than in San Jose, CA" and "Employers in Austin, TX typically pay 20.9% less than employers in San Francisco, CA." Pretend I make exactly $100k here and pay 33% tax. Moving to Austin costs me $14k in net income (0.209 * 0.67 * 100000), so my living expenses here would have to be at least $53k (14000 / 0.264) just to break even by reducing them.

But that would mean I'd been spending over 79% of my net income just in living expenses, which to me sounds too precariously balanced to be sustainable. In reality I make somewhat more and save half of it, so I'd barely come out ahead if my rent in Austin dropped to $0.

You can't throw taxes into the mix without knowing whatt the site is using to calculate cost of living. (I don't know either.) I'd assume that taxes are already included since that's part of what'd you'd consider when moving between areas, and is another area where you'd save by moving.

If we assume that taxes are included: Moving to Austin costs $20.9k in total salary. Total expenses would have to be $79,167 ($20,900 / 0.264) or less for the Valley to win out. If the hypothetical person saves more than $20,833 a year (after taxes since we're assuming those are part of the cost of living), having higher earnings is preferable to having a lower cost of living to increase the size of the savings. Many people don't save that much.

You also chose San Jose as the city for the comparison, when most people I know prefer to live in San Francisco, where the cost of living is even higher. Moving to Austin from San Francisco supposedly results in a 42.7% decrease in cost of living. You'd have to be saving $51,053 after taxes for moving to be a bad idea financially.

Yeah, I should have just chosen San Jose (as a proxy for "outside San Francisco") rather than that weird SF/SJ split I chose just because many colleagues and I happen to commute there from the valley. And you're right that they may be including taxes, but a lot of that is federal so I wouldn't expect to see a big difference. SF->Austin just demonstrates what a bad deal SF is financially, because SF->SJ gets you half the savings (22%) with no pay cut at all.

What I've been working on is a way to make the value of my tuition while in school. I think I can figure out a marketing service I can sell for $100/week but I can't figure out how to scale it. The challenge of making 50,000/year on my own is fun to ponder but I'm not making much progress.

Exploit the learning and networking resources at your school instead. If you show that you are motivated, there are faculty who will be happy to teach you everything you want to know for zero extra dollars, and might even pay you a small stipend for it. You are surrounded by smart, motivated co-students in a way you will not be when you enter the workforce and more than half of your colleagues enter a downward spiral of mediocrity and low-grade alcoholism.

After you graduate (unless you're in the humanities or something), 50k is really just not that much money. And certainly not worth missing out on once in a lifetime opportunities for.

I can understand this if I invest in something like an index fund, which is updated regularly to reflect a particular stock market. But it doesn't help if I invest in companies X, Y and Z. They might go bankrupt, in which I will lose my money completely.

"because of the really rotten returns in the 1930s, investors could expect a “catch-up” decade and they got it."

I'm not sure it works like that...

The S&P, adjusted for inflation, has returned -30% for the last ten years

But go ahead and feed the machines at goldman sachs some money.

Many would argue that ten years isn't nearly long term enough. 40 years perhaps.

Measuring stock performance by looking at one of the biggest bubbles in recent years and comparing it to one of the biggest crashes in recent years is a little bit dishonest. Given that this article is writing to young people interested explaining how they should invest if they're interested in their financial situation 30 years from now, a 30-year outlook is more reasonable.

That's only if you put your money in a the start, put 100$ in every week inflation adjusted and you will have made money over the last 10 years.

PS: I made over 40% last year just buying mutual funds in my 401K. Look for the worst 40 years to dollar cost average inflation adjusted and your return is going surprise you.

Translation: I need to exist stocks into cash before you idiots realize we're in for a severe bout of deflation.

12000 X %473(inflation) = $5,676,000

This is why I don't trust banks. Realistically you would of been smarter to buy capital that could immediately help your situation.

It seems to me bettering yourself as a person with that money results in greater gain.

http://inflationdata.com/Inflation/Inflation_Calculators/Inf...

No, 12000 X 473% = 12000 X 4.73 = 56,760.

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