Hard-won lessons about money and investing
mattcutts.com
mattcutts.com
So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
TL;DR: Live on 35% of your after tax income and you're retired in 10 years. Get it down to 25% and you retire in 7.
And in any case, there's no sense giving up on the idea completely even if you can't hit the most aggressive savings rate; even if you only save 50% of your income, you can retire after 17 years, which puts you on track to retire in your early 40s instead of your late 60s. Even better, as you progress through your career, your salary will likely increase, but your spending doesn't have to match. 50% of your salary right out of college may only be 25% of your salary later on.
This did a couple of things... it kept a lid on living expenses because there was no additional cash, but it also provided an easy way for me to raise my savings every year without having to make too many conscious choices, just by moving every pay raise into savings.
NB I neither agree nor disagree with his ideas (still have to decide.. :))
[1] http://www.mrmoneymustache.com/2011/09/28/get-rich-with-movi... [2] http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-c...
You can always move to the low-cost area when you are ready to stop working.
Median incomes are 75% higher in the high cost area, but housing costs are 200-400% higher, which, being a major expense for just about everyone, quickly erodes any gains you might make on the income side. Services, like internet connections, were also more expensive in the high cost area. Goods like iPhones are the same in both places, you are right, but is actually a larger portion of your disposable income because of the higher living costs.
The one place you might be able to make gains in the high cost area is if you struggle through paying those 400% higher housing costs with the intent of selling your home and moving to a low cost area later in life. Then you can ride that significant equity you have built, assuming the property maintains or increases in value.
That said, my preferred method is to live in a low cost area and work in a high cost area (telecommute).
yes but it also depends how you consider in your calculation the costs of telecommuting (costs of travelling, time lost etc..)
I'm thinking about this right in these days, as I'm living and working in a quite rich but expensive country (Luxembourg) where real estate prices (rent&purchase) have grown a lot in the past years, and are still growing (two digits increase of prices yty), while you have surrounding border areas (Belgium, France, Germany) that are way cheaper (half or even less per square meter) but are located 30-40km away with really congested roads or slow public lines (at least 45min per trip, easy to become 1-2hours in case of accidents or traffic jams)
Since it seems that English isn't your first language, I thought I'd point out that "telecommuting" means you work from home, and "commuting" means that you travel a long distance to get to work. So, there are no costs or time lost when telecommuting, because you don't have to go anywhere.
The commenter you're replying to is saying he works from home in a low cost area, but works for a company in a high cost area (possibly hundreds or thousands of kilometers away).
Unless you earn 3X the median in your area, living on 35% of your salary means living with below average expenses. Whatever your salary, you will probably think normal is normal for your peer group which usually is closer to whatever you earn than median so even if you earn much more than median you will probably be required to be abnormal. Being abnormal is hard to decide.
However you achieve this, it will probably require you to make lifestyle changes that most people like you consider unacceptable. Move someplace cheap. Start a commune in an old mansion with 6 other families/couples. Live in a cabin. Squat. :) Live with your parents. Don't own a car.
Whatever the specific setup, spending 25-35% of your salary is unlikely to be a moderately different from the norm in your peer group. But, also not impossible.
Consider:
(a) Students, broke artists, unemployed and lots of other people do live on very low incomes. It's possible. If you earn the median, then 10-20% of people in your area live on 35% of what you do. Matt mentioned 14k p/a as a grad student.
(b) This is the "find a way" scenario like a startup. Startups may require you to deal with ungodly stress work, 100 hour weeks and do "impossible" things. If retiring within 10 years is valuable to you, it might be worth it.
This would maybe make sense in the 1990s or early 2000s but it's 2014!
ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.
If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth.
Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual growth.
> by what happened in Japan post 1991 1991 Japan and 2014 United States are no where near similar enough to draw that conclusion. I agree that ZIRP forever is not a good policy - and at some point in the next decade we will feel the results of it, but forecasting three decades of economic stagnation is just silly.
This is exactly what scares me about it. It's frothy as hell.
So is it a nice safe place to stash my retirements savings where it will yield 5% consistently until I retire? I don't think so.
>1991 Japan and 2014 United States are no where near similar enough to draw that conclusion
Let's see:
1) Huge crash in property prices caused by a debt bubble (us: 2008 / them: 1991).
2) Central bank responds by trying to reinflate asset values in order to make banks solvent again. They drop interest rates to zero and raise them as soon as growth returns which will be very very soon now, honest. (both countries did and said this; both promised it would be temporary)
3) Growth doesn't return. Banks still effectively insolvent and are propped up only by high asset values and extend & pretend. (both countries did this)
4) Central bank perpetually afraid of raising rates in case it causes a sharp economic contraction for which they will be blamed.
5) ZIRP thus becomes the new normal (it's been 6 years so far for us, and 23 years for them).
So far the path has been identical. Hell, we've even gotten plummeting birth rates too.
>forecasting three decades of economic stagnation is just silly.
I don't know how many decades it will be, but "the new normal" shows no signs of ending any time soon.
Forecasting safe 5% returns is bullshit, anyway.
And re 5% I have several IT (investment companies) with returns of over 10% pa for the last decade
If you have 1M$ and want to live on that, and you're good enough to live with 25k$/yr, you need to consistently "extract" 2.5% on that capital, that means you need to consistently get 4.2% every year. And this exposes another issue: even if you have a safe investment that can give you 4.2%/yr on average, that's not steady, so if some years are bad (or really bad) you need to eat into the capital. If these happens for too many years in a row, the capital could be reduced enough that you need to get higher earnings to counterbalance that.
I'm not a finance expert so feel free to show me the fallacies of my reasoning!
Your reasoning is sound. And it's actually worse than that - the reported inflation in the US (CPI) vastly underestimates realistic costs of living. I would assume that's true in Germany and the rest of the world as well.
Officially, it is 1.7%. However, that includes hedonistic adjustments (you can buy a TV now for $70 that is equivalent to a $2000 TV from 30 years ago; therefore, $70 today is worth $2000 of 30 years ago; weighted by the relative part of your expenses that go towards buying TVs), "owner equivalent rent", which is a speculation by a sampling of home owners about how much rent they would have paid to live in their own house (are they over estimating? underestimating?), some measures ignore food and energy costs (who needs either?) and other shenanigans that make the numbers easy to manipulate on one hand, and impossible to reproduce on the other.
Unless the majority of your expenses are technology related and unchanging (you still happy with your Apple ][ performance, right?), the CPI is probably closer to 5% per year for a while now. Health, Education, Energy, Food and housing, which are responsible for most of everyone's expenses have been appreciating at a much faster rate than the official "inflation".
Yes, that is true. But how is the bond price relevant, from the Fed's perspective, if they aren't selling the bonds?
1999 - 2009 negative real return. Imagine you're the happy dude who retired in 1999 with a family after working for 10 years and diligently saving. Now in 2009 you need to send your kids to school... We also were on the brink of real depression, if that scenario played out you'd be completely wiped.
So basically you need a large buffer than you think you do to account for volatility and rare "tail" events.
As an example, to live off $35k/year in SF as a single person (which would be considered modest in tech circles), you'd need to earn $175k/year.
With a family, this gets more unrealistic. Living off $100k/year (combined) would require earning something like $500k/year.
It all depends on what you define as 'comfortably' and how well you are able to control your spending on things you don't strictly need. That way you can build up some capital, make that work for you and relax your spending constraints when you are making more money passively.
not adjusting your employee's wages based on their work location, which company is that delusional?
it is about fairness among workers. there should be no penalty for living close to the HQ or major office hubs, which practically always are in high-cost areas.
counter-example being SAP with Waldorf, but that is ending its lifespan for the inverse reason (no one sane wants to move there).
I'm on track to retire in my thirties, or earlier, here in North Carolina. Not hard at all on a mechanical engineer salary.
I think many people in this thread need to consider if that really is the game they want to be playing. I'd think people would be better off maximizing their total happiness. There's research showing that having good memories from the past positively affects momentary happiness in the present [1]. With that in mind, it seems like spending money on great experiences now is a good idea, while excessive saving could be counter productive.
[1]: http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WILSON%...
I knew a guy who wanted to get into freelancing but wouldn't do it because his expenses were too high.
There's happiness, but there's also planning and self control.
MMM/ERE [1][2] are not about maximizing money at all. They are about obtaining only a sufficient level of capital, so that they are no longer obligated to work for income to continue living happily. The numerical value of "sufficient" gets lower as your expenses decrease.
>I'd think people would be better off maximizing their total happiness.
Based on your comments, to you, happiness comes from experiences which require money, which is perfectly fine. Therefore, MMM and ERE are not for you, which again is perfectly fine.
For others who find happiness in experiences requiring little to no funds, MMM/ERE is an exceptional strategy. I would love to spend my days coding, studying chess, reading books, cooking, mentoring youth, and spending time with the small group of people I am close with (I'm rather introverted).
Granted, Heath issues, dependents, or debt can make this a non starter. But, just because most people you work with spend most of what they make every month means you need to do the same.
100k / (1 - (0.28[1] + 0.093[2])) = 159,489.
Plus if you retire, you're going to be managing your own health insurance, so the required living expenses number increases, probably by thousands of dollars a year. And it's not like you can flip from a frugal living style to a more flagrant one afterward, so you're going to have to live with room mates for the rest of your life, and never eat out, still.
[1] http://federal-tax-brackets.net/2014-federal-tax-brackets.ht...
More importantly the goal is not necessarily full retirement. Plenty of things are entertaining and make some money. Perhaps you only make 5k/year as a writer or painter well on its own that might not mean much but it can easily boost your nest egg over the next 20 years. Or perhaps teach a class at the local collage or even some of those short training classes. Not to mention long shot’s like trying your hand at acting.
PS: Your expenses often rise as you age but even just working 10 years entitles you to some Social Security benefits.
How about C) Move to a different state? If the goal is to do this in California, then yes, it's probably not possible.
You might as well say:
TL:DR; Move out into the forest and live off the land and you retire today!
Come on, man. 35% of AFTER TAX income? I make good money and I'd have to live like a homeeless man for 10 years in order to do that. While working as hard as I do. That's absurd.
You need sacrifices to get a reward.
Netflix/Cable TV --> reading a book (from the library) or HN. Starbucks --> broaden your horizons and explore the world of "grind your own." Eating out more than once a week --> eating out once a week, and preparing healthy meals the rest. Sometimes having your friends over for dinner. Gym membership --> enjoy looking for new kettlebell and bodyweight exercises that you can do at home. Go for walks with your wife in the evenings, or incorporate walking/exercise into your weekly date.
I'll admit that overseas travel is one area where I still overspend, so this would fall into the "sacrifice" category if I were to cut back. Even so, the skills in frugality that you learn while working your day job are useful on overseas trips. Haggling while jostling with old ladies at a wet market (in a language you don't understand) in order to buy ingredients for breakfast and a packed lunch is an experience that many travelers will miss out on.
(full disclosure: last holiday was a "relax by the hotel pool/private beach" affair. But even then we had a trip to the supermarket to buy some beer, fruit and snacks instead of pay hotel rates).
Anyway, it's not something that happens over night, rather a skillset you work on like any other. You find your own level of "sacrifice," your own groove, that you're comfortable with. Mr Money Mustache is just one guy but there are plenty of people who have entire sites dedicated to the movement who can talk about this idea of "sacrifice" better than I can.
At least, in the US this assumption is not valid any longer. There is no risk-free investment that can earn you 5% after inflation annually.
If I could earn 5% after inflation without risk I could retire today (well, I'd be retired many years ago, if that's what I want to do). The problem is that's simply not possible. If you have a family you can't take the risk of putting all your money in stocks as there can be periods of well over a decade where the real return is negative and you'll run out of money. You need a lot more buffer.
That is actually really interesting. How much did this broker have to pay to get this box full of highly lucrative leads - access to a large set of newly wealthy individuals, many of which don't have experience with managing large amounts of money. A bunch of people who may be experts of technology, but probably are not experts on finance.
It seems like inviting the fox into the hen house, and telling the hens what it deal it was
http://www.modernluxury.com/san-francisco/story/the-best-inv...
Google did a fantastic job of educating employees before the IPO. They brought in a ton of smart people to bring us up to speed, emphasize the need to diversify and minimize risk, etc. Honestly, I couldn't ask for a company to do a better job of educating us.
In addition, they arranged to give us default accounts with a broker so that we could sell our shares. My decision to park some money in commercial paper was strictly my own, and I should have done more research on it first.
That aside, I have always invested in a small number of individual stocks, with minimal management or effort, and only moving positions between companies slowly over time. Basically, I make bets on long-term trends that I view as technologically inevitable. I don't invest in sexy companies (though some become sexy later), I invest in companies that are undervalued relative to the technology trends. That strategy is pretty trivial but it has allowed me to beat the S&P index pretty consistently over decades (famous last words) with the money I don't have a better use for e.g. savings. In fact, the margin by which I beat the S&P has been slowly improving, which I think reflects the increasing ability of tech to move the needle on the economy.
Since this is a tech site, this would seem like a repeatable strategy that anyone could and would use. But apparently people don't. Of course, I could just be really lucky.
For instance, if you're investing in companies with a market cap less than $10 billion, the risk and overall effort you're putting in is really indefensible if you aren't beating the S&P Mid-Cap Index. Which over the last twenty years - just a sample time period - outperformed the S&P 500 pretty hugely: http://finance.yahoo.com/echarts?s=%5EMID+Interactive#%7B%22...
Or do a little better and compare your performance against a real tech sector index. Do better still and use the tools of modern portfolio theory to measure your portfolio's performance.
> Of course, I could just be really lucky.
It's probably worth reading The Drunkard's Walk.
1) They are are fairly or somewhat undervalued given the conventional market view and metrics.
2) They are likely to be significant beneficiaries of large-scale technological trends that the market is oblivious to and has not priced into the stock.
Then I wait a few years for the trend to become more obvious and for the market to adjust the stock price accordingly for the new upside. My portfolio is essentially a ladder of different technology trends that take 3-4 years to mature. Occasionally one does not pan out but, while I may not make much money, I never lose much money because "good large-cap tech stock".
The only "small caps" I invest in are tech startups. But that is a different portfolio than what I am talking about here.
Since I spend my days thinking about trends in technology anyway, this whole exercise takes little additional effort. I might add or remove something from that list of stocks once a year. When I save money from my paycheck, I semi-randomly put it in a stock on that list so no thinking required.
Yes, I could do some kind of sophisticated portfolio analysis but that would defeat the goal of spending as little time on it as possible. I only check against the S&P 500 as a sanity check. My lifetime annualized return (decades) is about +2 over the S&P 500 but the last five years has been more like +4, so I can't complain. The annual return relative to the S&P 500 has actually been surprisingly steady over time, so no undue volatility.
Forgive me if I don't believe this in the least.
So what he's describing, beating the S&P 500 by a bit over that period, isn't implausible. Comparing his portfolio's performance to the S&P 500 is an obvious mistake and, more importantly, attributing his portfolio's performance to anything other than luck (good or bad) is very silly.
I didn't pull apart his post as much as I might (it's indicative of a whole range of bad ideas people have with regard to investing, like his ideas regarding sector-specific investing) but the notion that really needs to be attacked is that beating the S&P 500 or total market index can be regarded as indicative of some special ability without taking into account the portfolio's risk.
Certainly not. I suppose I take issue with having been able to do so for "decades", via only large-cap stocks.
That's implausible, to me at least. That would be all-time-great hedge fund manager type results.
I am not suggesting high-risk, short-term strategies but long-term, buy-and-hold strategies that leverage the native knowledge and intelligence of Silicon Valley engineers. I also do high-risk, short-term strategies (options and similar) based on the same domain expertise, and have done alright with those too, but I never recommend that to people.
It would be seriously odd if some random guy on Wall Street understood Silicon Valley and tech better than I do. The technology industry is not driven over the long-term by financial numbers on a spreadsheet. I've been through many tech boom-bust cycles in Silicon Valley and understand the dynamics pretty well. No special magic to this portfolio, and it has been one of the most consistent producers for me. As long as you are not betting the farm on a single company, it is difficult for this to go wrong. At least in tech, I can see the bad things telegraphed long before they materialize in the market because I understand the fundamentals. Even if Wall Street isn't paying attention.
For the poster below, my returns are consistently worse than every hedge fund that has ever wanted to hire me. I'd be a terrible hedge fund manager; I am personally more interested in return on effort than maximum possible returns. (They wanted to hire me for my theoretical skills, not my investing skills.)
Adding to the reading list, I'd very strongly recommend the following:
A Random Walk Down Wall Street by Burton G. Malkiel lays out the basics of portfolio diversification. http://www.powells.com/biblio/1-9780393340747-0
The Great Crash: 1929 by John K. Galbraith tells the story and aftermath of the biggest stock market catastrophe of the past century. It is a slim, highly readable, and incredibly informative book. Parts of it read as if it could have been written yesterday. Much of it provides a background and context on the Crash that corrected a great many misunderstandings and holes in my own knowledge. Galbraith has a dry humor and is a strong (and often disliked by insiders) critic of much of the establishment. Fans of this book are recommended to view his video series The Age of Uncertainty.
http://www.powells.com/biblio/1-9780395859995-9
http://www.powells.com/biblio/1-9780395259474-2
http://fixyt.com/watch?v=KGSID_Uyw7w
And adding to Matt's advice: have savings. The flexibility offered by "fuck you money" as Humphrey Bogart and others have noted is tremendously valuable.
A Random Walk Down Wall Street by Burton G. Malkiel lays out the basics of portfolio diversification.
A Random Walk Down Wall Street is one of the best books I've ever read, and I'd only add that I think The Millionaire Next Door is also excellent. When most of us think about millionaires we think about Hollywood stars, tech company founders, and finance moguls. But most millionaires are actually normal people who spend below their means and invest what they can, usually in index funds and sometimes in a house. If they marry they don't divorce (divorce is very, very expensive and modern marriage is a high-risk endeavor).
Chances are good that most of the millionaires you know don't live like millionaires—which is why they can be millionaires!
Unsystematic risk means risks tied to holding individual stocks. Notice the x-axis. Holding more stocks (diversifying) means removing individual stock risk.
While the conclusions in this book happen to be valid for the vast majority (i.e. somewhere between 95-99% of the population should stick to index investing), people often mis-apply the conclusions in this book to suggest that certain things are impossible, and that is clearly false and misleading.
There are people who invest and trade successfully, and they are not lucky outliers any more than a brain surgeon is a lucky outlier.
I once asked a guy who made his living off of trading stocks and futures how long would it take me to learn. His answer was sobering. If I made it my full time job for 3-5 years, I could learn to be marginally profitable, and with additional years of experience I could make enough to live off of. He guessed maybe 5-10 years of 40+ hours per week dedicated to trading, and even then, if I did not study the right things I could still fail. Contrast this with the average Joe trying his hand at investing, and of course they will fail. You can't dedicate 3-5 hours per week and expect to be a competent brain surgeon.
Using the same logic in this book, we could conclude that it's impossible for anyone to start a successful business. The message should be, it's really hard and takes a lot of work, and it takes a lot of knowledge about how to run a business, and it takes a high level of competency at some skill (coding, carpentry, whatever), and you have to be competent at communicating with others, and leading others, and not have personal baggage to draw your focus away from the business, and, well, you get the idea. It's hard, and it's not for everyone, but it's not impossible.
[0] http://www.amazon.com/The-Intelligent-Asset-Allocator-Portfo...
I wonder and worry about how to save up for later in life, and who knows what the political landscape will look like then. In my country inflation has been 2.16% on average during the years I've been alive.
Where can I store my money in a way that I know it will be there later whn I need it?
(I'm a little nervous about the bank, one time I had a court order against my bank account so it was drained, and I was beingpaid by cheque, but even when I took my paycheque to the bank to deposit it, until that debt was paid off i couldnt even take out enough for groceries. I want something that cant be taken away at a whim without recourse. I negotiated a deal with the collection agency for a repayment schedule, but they still drained my account 2-3 times after our agreement just because. Oops!)
All the books I read on the topic of investment were intended for Australians, so my advice is to read two or three books each on investing in the stock market and real estate, and understanding your countries tax rules as they apply to investors. It has been said that if you read three good books on any subject you should be able to converse with the professions and understand what they're saying.
There probably isn't a place you can put money where a court order won't be able to touch it. Payment agreement before that happens is a good idea, but of course that isn't always possible.
Spread your investment over long time and wide range of different assets and you are as safe as you are going to get.
Usually people suggest passive index funds with low fees to do this in practice. Don't take their word for it but study yourself.
I've lately been thinking that some more reliable means would be to own a "wealth-generating" business. Or a few of them in varied industries, to mitigate risk.
Another method that I've also thought about is antique art and possibly high-quality furniture as well. But that would apply in case of a major war-situation, assuming you could even get those physical items to safety.
Form 1099-OID shows the amount by which
the principal of your TIPS increased due
to inflation or decreased due to deflation.
Increases in principal are taxable for the
year in which they occur, even if your
TIPS hasn't matured, so you haven't yet
received a payment of principal.
No thanks! Count me out of that one!
As a possible alternative (which has its own problems) there are Series I savings bonds (which also attempt to compensate for inflation). Those have the advantage of:[2]
Tax reporting of interest can be deferred
until redemption, final maturity, or other
taxable disposition, whichever occurs first.
But here's an alternative to TIPS: Roth IRA or Roth 401(k). You put your after-tax money in there and then you NEVER have to pay taxes on interest or capital gains. No taxes ever again. Of course that's at the whim of Congress. They can always bend you over 20 years from now by changing the law. TANSTAAFL.
And "startup" doesn't have to be 3-4 people. I remember trying to recruit an engineer when Google was maybe 150 people. I tried to convince the engineer that Google was doing well and it wasn't as risky as it looked, but she decided to go work for Siebel instead.
In other words, don't waste money/time/effort on things where you can't make a big difference. Find an area where you can have a lot of leverage or expertise and put your chips there.
Hindsight being 20/20, for every "She turned down being employee number 151 at Google to work for Siebel LOL" story, there are 10,000 (maybe 100,000) "I took a chance with Pets.com and they still owe me 6 months of back pay" stories.
When you're playing the stock market, going for single stock picks is a really bad idea. Diversification -- even modest diversification of a few companies, but preferably in different markets, hugely reduces your volatility risk. Tech is highly volatile -- investing in Microsoft, Google, Apple, Cisco, and Oracle would be nominally diversified (and there were a couple of huge winners there over the past 10-15 years), but you also incorporate a large sector risk.
When you're working for a start-up, the key is that you're moving beyond simple punch-the-clock (or per-month) income. You're not just earning a wage or salary, but there's some upside potential in the company itself. Of course, that is a tremendous risk, and the odds are good that any given company won't pay off. There are also multiple ways in which that bet is rigged, including options vesting and the fact that your employer can effectively claw back your earnings by firing you (for any or no reason, at any time) before your options vest. You've also got to have the cash to actually buy out your options.
There are other ways of building equity, one of which is to invest in your own business, venture, real estate, etc., outside of your employer. Buying investment rental property, for example.
The key though is that you want to move beyond just "I'm a wage / salary owner" status.
[1] http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-ad...
For account values over $100K, they will do tax loss harvesting for you automatically, and prevent wash sales. For over $500K account values, they will actually buy stocks for the entire S&P 500, and allow you to take tax losses on individual stocks (which you can't claim on ETFs).
I found their presentation to be quite helpful:
http://www.slideshare.net/adamnash/personal-finance-for-engi...
If you want an invite, PM me.
As a rule of thumb, any investment where they call you is no good. If it was any good, it wouldn't need paid sales reps.
Unless they wanted to increase their profits. Just because something is good doesn't mean that sales reps can't convince more people to want it.
Of course they want to increase their profits, but that goes for any outbound sales effort. Just the fact that they try to convince you to want it doesn't mean it is good either, most likely it means you don't have the whole story.
So if you do not initiate the contact stay away from investment deals, especially when they're telephone sales calls.
I also believe that the stock market is a game, not an investment vehicle. The nature of the market has transformed every since the day trader, quants and HFT have entered the markets. As long as you understand this, then putting money in the markets is fine. If you don't want to be a part of the game, then regular people should buy bonds (not bond funds, but actual bonds that pay interest).
My opinion is that Wall Street has shifted focus since the 80s to trying to convince people to dump their money, all their money, into mutual funds. Then these massive fund managers take their 1-3% in various fees and just move money back and forth. I don't trust Vanguard any more than I trust any of these other large mutual fund companies, and I happen to know a lot of people that work at various asset management companies in the Bay Area. They print money without ever beating the SP500, instead they try to change the equation by claiming they beat the SP500 on a risk-weighted basis, etc. The entire thing is a sham, and as the OP remarked, why do the mutual fund managers have yachts but none of the clients do? It's because they make their money from the hundreds of billions of dollars they skim off the top of their customer funds.
When you say "now," are you referring to the period from when financial markets were discovered until the present? Or some more specific period? As far as I knew, boom and bust are not exactly new developments.
In general, the market can stay irrational much longer than you can stay solvent. To win, you basically need more information (in the shannon information theoretic sense) than the market, on average, does. And when you actually compute it, "50% drop every 7-10 years, and not even with 95% certainty" is negligible information.
Shorts and short equivalents are either effectively marked to market (e.g. futures are marked daily, short-sales are effectively as well through margin adjustment) or have a limited time horizon (liquid puts are 3m-6m, illiquid ones can be a couple of years, but with a ridiculously large premium).
Let's say a drop of 50% happens over 1 year - then your 3m/6m "50% drop" puts don't actually net you any money, because it only drops 30% in 6 months. But they keep costing you all the time.
And if you use futures/forwards/short-sales, you might (and often will) get margin called and squeezed on earlier appreciations. Unless you have a really large margin, which -- when you actually earn some money, if ever -- significantly reduces your earning in percentage terms.
Vanguard actively moves clients from their baseline funds to the lower cost/higher minimum Admiral versions.
I just don't see moral hazard in Vanguard, compared to other financial firms with remotely similar capabilities and offerings.
The expense ratio of Admiral Index 500 is .05%, not .2%. So even better than I'd remembered.
The fees for VTI, which is Vanguard's Total Stock Market Fund is 0.05%.
On top of that, in Canada, most brokers will allow you to buy ETFs in a RRSP or TFSA account for no fees. Very cost efficient.
And so does everyone else who tracks the markets, exactly because markets exhibit inherently cyclic behavior and because they haven't been down in a while. An easy-peasy prediction to make.
What would be more compelling would be a screen shot of his portfolio that shows that he is much more invested in short positions than longs, or has moved his investment into something besides equity markets.
What would be downright highly profitable for him, is if he could show over a long series of years that his ability to "imagine" future market conditions outperformed a strategy of just buying the market over the highs and lows and averaging the return.
So beat the day traders, quants on their own game. You dont have to trade daily, just buy stock of a good company at a reasonable price and sit back. Once you have invested in a good company then the next step is not to do anything foolish, like selling your shares just because the company had a bad quarter.
Have you read Ben Graham's Intelligent investor, if not, you should.
It's as frivolous as asking why the executives of Nike have millions but the majority of people who buy Nikes don't.
Asset managers are supposed to be in the business of increasing their customers' wealth. However, most customer don't get as wealthy as the asset managers themselves.
The movie Trading Places nailed this, albeit in the context of commodities rather than stocks. But the principle is the same:
Mortimer Duke: Tell him the good part.
Randolph Duke: The good part, William, is that,
no matter whether our clients make money or
lose money, Duke & Duke get the commissions.
Mortimer Duke: Well? What do you think,
Valentine?
Billy Ray: Sounds to me like you guys a
couple of bookies.
Randolph Duke: [chuckling, patting Billy Ray
on the back] I told you he'd understand.Short version: Open a Vanguard account and invest >=15% of your salary in the appropriate target date fund for the year you want to retire.
P.S. Where possible, become a millionaire in Google's IPO.
If you're near the beginning of your career, you don't have a fixed retirement date in mind, and you're investing a substantial enough fraction of your income that you will likely retire earlier than average, then you might want to pick a standard index fund with a fixed proportion of stocks and bonds based on your tolerance for risk, and leave it that way.
It's really common for people to drastically overestimate the value of startup equity, or to just not understand the basic mechanics of it at all. In my experience people look at the face value of their options and are pretty clueless about how taxes (or even their strike price!) affect what they might actually wind up with.
My anecdotal opinion is that more startups are cashing out for at least something because of acquihires and low-end mergers. I had a friend whose startup ran out of money, he accepted a few points of another startup in exchange for the assets of his failed startup and that startup that bought his assets ended up selling for $100M+ after less than a year earning him a decent return.
On another note - it would be pretty cool if someone did the equivalent of an index fund but for employee options. Get together with 5-6 of your friends at different startups and exchange options with each other to hedge the risk.
Another way to diversify your exposure is to get advisory roles at startups and pick up 25-100 b.p from 4-5 different companies for helping them out. This has worked out pretty well for myself.
There are some VCs who will also invest a small slice on your behalf if you introduce them to a deal they end up investing in, which can also work out pretty well if you are able to spot good investment deals, know the founders, etc.
For a culture where stock options, M&A and investing is so prevalent there really isn't much information out there in terms of making the right investment decisions and how to handle and work with money.
This is a pretty cool idea, but you'll have to find a lot of friends for it to work. Chances are, your 5-6 friends' options will also end up worthless. Then again, if we're talking about a pool of maybe 1,000 start-ups, then you need to believe that a diverse bundle of start-ups will outperform the S&P500 on average, otherwise it's pointless.
With that specific piece of advice, I'm trying to catch folks in Nebraska or Cleveland who are thinking about accepting a 9-5 job, not folks who are already in the Bay Area and familiar with buying a ticket in the startup lottery.
Of course when I worked for poptel (.5%) I would have been able to retire if we had been brought out by the co-op
BTW in the UK BT 's latest employee 5 year share save returned £60k tax free and that is a scheme available to every one.
It can be dense reading, but no one cares about your money more than you do, so it's your responsibility to make sure you understand what's going on. Doing that research saved me making more mistakes down the road.
Another common mistake with pre-IPO companies is to say "Wow, I get X thousand options!!" But you have to ask how many outstanding shares the company has. What really matters is what percentage of the company (your shares divided by total outstanding shares) is being offered to you.
The economics of the time (especially among proponents of centralized systems) focused a lot on “inefficiencies.” Why produce hundreds of iPad screen designs when only one is needed. Economies of scale. Coase’s answer to the question was transaction costs. The “cost” of weighing all the options and negotiating a deal to have you write a thousand lines of code to go into my bigger bundle of code.
In modern companies like Apple this is extreme. But, if you think about it in a manufacturing economy, it makes more sense.
Anyway, as I said, the more I think about it the deeper some of the concepts and implications seem to be. For example: (a) There are inefficiencies out there on the scale of East/West Germany. (b) Transactions costs are at the root of many/most major inefficiencies.
The part of this blog that got me thinking about this was “working for equity vs. salary.”
I think that for most people, the choice company they work for wass 80% chance and 20% uninformed bias. Applying for a job and interviewing is a big overhead (transaction cost) and your ability understand the company’s chances of success and the magnitude of this success isn’t very good. The fact that many people don’t know what percentage of the company their stock represents is the glaring proof. Prospective employees don’t have anywhere near the information that investors do. How much money is in the bank? What are revenues? Burn rate? Valuation at previous rounds?
The poverty of information and the fact that transaction costs make it impossible for one to consider more than the tiniest semi-random sample of opportunities is exactly the kind of dynamic I think Coase’s work implies.
"Hi Matt, I usually enjoy your posts but I felt this one lacking in a major way.
Investing is something that has huge potential (ie., 100 fold). This is something that I’m sure you’re aware of as an early Google employee (you were invested in the company via stock options, etc). On the other hand, investing has huge downside as well (you can lose all your money).
Many people are advocating people to take a mindless approach to investing by investing in low-cost index funds. I personally think this is decent/good advice for most people who don’t have the time, energy, experience, skills to make investing a lifetime passion. In other words, for the typical person who just wants to focus on his 9-to-5 job and other hobbies and not deal with the world of investing, then sure low-cost index funds are the way to go.
However, there are some people who can benefit in huge ways by becoming experts in investing (whether this be in stocks, real estate, businesses, etc). A few disclaimers first… becoming an expert investor is extremely difficult and most people underestimate what it takes. It’s not about “picking” stocks or getting lucky. Rather, it’s about accumulating the skills, experience and expertise to evaluate investment opportunities in a wise and discerning manner, and to do it exceedingly well. I think it requires an immense amount of time and dedication. And I don’t think 98% of the people out there practically have the time, energy, motivation or focus to develop such skills. But for the 1-2%, I think it’s a possibility if they treat it as a serious lifetime endeavor."
So I guess I don't disagree with anything you wrote, but I question whether it makes sense for a person to devote the majority of their energy to playing the stock market. (And I definitely agree with you that it would indeed take the majority of one's effort over the long term to have any reasonable chance of success beyond pure luck.)
Edit: I should add that I would consider some proven, passive strategies such as tilting to small and value to be exceptions. These do theoretically allow for slightly superior returns without life-consuming effort, at the likely expense of taking on some additional dimensions of risk. I personally keep a moderate small/value tilt.
Meanwhile, index funds have the lovely advantage that you can't do worse than the market.
If you have extra energy to spend investigating investments, use it to diversify into a handful of minimal-overhead index funds rather than just one. And if you fancy yourself an investor as a hobby, take a small fraction of your savings and play with it, and congratulate yourself if you manage to do better than "buy high and sell low".
But in general, most people would greatly improve the status of their investments by just throwing the whole thing into a halfway decent index fund. That's the most sensible general advice when talking to a large audience of people; get them there first, which takes far less effort, and then let people who really think they can do better attempt to do so.
Dave L, I concede that someone who is willing to put in the time and effort, they may become good at selecting stocks. Then again, they may not: I have friends who have spent a lot of time and effort studying individual stocks without much to show for it. And don’t even get me started on the financial press that’s there to distract and mislead investors into bad choices–yikes!
In short, I believe that a passive index fund will outperform a majority of professional active money managers, and it’s the best choice for the vast majority of people.
Furthermore, who would most people name as the greatest investor of the last 50 years? Probably Warren Buffett. Well, guess how Warren Buffett wants his money left to his wife when he dies? Buffett wants the money in an index fund (!). Here’s the article: http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/24/w... and I’ll just quote a bit:
"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers."
So you have to ask yourself: are you smarter than Warren Buffett? Because Buffett is counting on an index fund when he dies.
That's completely irrelevant. Nobody is going to get Buffet rich from index funds. After Buffet dies he won't be around to decide what to invest the money in so he picked index funds because they're a good conservative decision that will outperform most investors.
That does NOT mean that you can't do much, much better than that by, like Dave said, becoming an expert investor.
The suggested portfolio isn't diversified with an International stock market fund. The S&P fund isn't exposed to small-cap and mid-caps, like Vanguard's Total Stock fund. The bond component is small and has no exposure to intermediate/long-term bonds or corporate bonds.
A more conservative portfolio would be, for example:
60% Total US Stock Market
20% Total US Bond Market
20% Total International Stock Market
Edit: I'm not saying that Buffett's suggested portfolio wouldn't outperform a conservative three-fund portfolio. Just that his 90/10 portfolio is very aggressive with a large-cap tilt.
Edit: Conservative is just a relative word. Sure index funds aren't conservative relative to the the things you listed, but they are to many many other strategies that Buffet (for example) used to get as rich as he is.
My favorites:
MA, V, BABA, GOOG, FB, JNJ, GILD, HD
That's not many, but these are some of the best long term investment ideas I can find. Stay away from volatile, macro-sensitive sectors like oil, materials, and retail and stick to healthcare, consumer staples, and utilities. People are getting older and wanting to live longer which is bullish for healthcare, and the web isn't going anywhere even if oil is going to $40.
Or you can try an ETF linear combination http://greyenlightenment.com/?p=1540
There are many strategies that beat the market and provide as good risk adjusted returns as an index fund .
Warren Buffett , btw, broke his on advice of avoiding tech by buying IBM, which has lagged the market considerably. most of the time Warren Buffett doesn't pick stocks in the traditional sense but instead gets special preferred shares that pay huge dividends and other perks. The performance of BRK.B is influenced more by the private companies like Geico and than stocks like Coke.
My sense is that investing is a skill and that you have to practice in order to get better. I've enjoyed the books of Thomas Bulkowski (http://thepatternsite.com/mybooks.html) and had fun doing it. Because it's not my primary retirement or savings it is less pressure and I try to minimize the gambling aspect instead relying on something more mechanistic.
With that said the current bull market keeps me humble; right now it's easy but if things take a turn I will try to be honest with myself and, if necessary, reallocate everything in index funds.
We need a rule in financial threads that you can't boast about your investment results unless you're willing to prove it.
>Or you can try an ETF linear combination
Oh, brother. The guy back-tested 4 years of data (one of the all-time great bull runs) with a portfolio of 3 ETFs, one of which is a 3X leveraged QQQ fund. Do you not see the problems with that strategy?
This is why amateurs get crushed. Then they blame the financial world.
I think though the main point of my previous comment was that many people (including posts that suggest everyone invest in only low-cost index funds and bonds) tend to underestimate the vast potential of huge returns in investing if one truly is an expert in investing.
Also, I suggest reading Common Stocks, Uncommon Profits by Philip Fisher and also Beating the Street by Peter Lynch. Both books are from legendary investors and will shed light that is different than the index fund approach/philosophy.
http://www.modernluxury.com/san-francisco/story/the-best-inv...
TL;DR: Put your money into some broad-based, low-cost index funds.
index funds are fine for some one with only a couple of grand spare - with the sort of money that comes from a good ipo you need to be a bit more sophisticated than that.
Here are my 5 simple rules that I followed, no lottery/IPO, just a steady single income. - Max out 401K and get company match - Max out Roth IRA for me and my wife - Invest in Vanguard S&P 500 Index Funds, some international funds and some bonds - Invested in a property in India - Lived below 35% of the salary - Always bought a used car and kept the car for as long as it runs
Results - After 10 years, I am financially independent - I am working for Google just because I enjoy working and not because I need a paycheck - My wife works as a teacher and she enjoys her job as well. She is working because she likes to and not because we need a paycheck
What was hard ? - To see friends buying expensive cars just after getting their first job and not doing the same - Friends buying > 1M$ houses while I kept renting since I like the flexibility and staying in a community - Friends going on exotic trips
I think at the end, its worth it.
Still, I wonder if advice would be different for people who are making less?
The secret here is to start early since the expenses rise exponentially after wife and kids.
For example, going from 100% bonds to 80% bonds and 20% stocks will significantly increase a portfolio's expected return with reduced risk. Another example is owning the Total Stock market (small and mid-caps included) rather than just the S&P 500.
http://bucks.blogs.nytimes.com/2011/09/06/why-and-how-divers...
(...which is a common counter-argument for the markets being efficient. The reasoning behind passive investment is that, net of fees, it's difficult to out-perform the market although of course, everyone can't outperform the market because everyone collectively IS the market)
These days I think in reality most people who have been into indexing for a while give themselves a bit of play money to invest in something more speculative.
This isn't as safe as index funds, but it is an option where you can increase your success rate by being competent. It probably has a risk profile similar to working for equity at a startup, an option only available to people who work in or around startups.
That said, Real Estate during the "banks won't loan anyone money and interest rates are headed up storm" and "loan money to friends/family in the Shark Tank era" don't make my "top wealth-building picks" list for 2015...
Does anyone have any thoughts about whether automated tax loss harvesting is worth the 0.15-0.25% fees that the robo-advisers charge?
Also, it's worth noting that Schwab is launching a free robo-advisor service early next year[0] so that may be the nail in the coffin for startups like Betterment.
[0] http://www.reuters.com/article/2014/10/03/us-charles-schwab-...
Thinking about it, basis points feel too expensive for something that's done entirely in software. I suspect competition from existing players will drive the price right down.
Yes, you get the potential gain on the difference in your net worth; consider it a loan from Uncle Sam to you until you need the capital. It's a much more minimal gain than it seems, though. The only real place I see tax loss harvesting being a no-brainer is in estate planning for money left upon your death.
I agree that in many situations tax loss harvesting isn't helpful and even in the best case it's not amazing but if over the long term it can be worth the 50 basis points that the robo-advisors claim then it might be worth paying 15-25 basis points for it.
Hearing about Schwab's entry into the market makes me think that I should at least hold off to see what changes an established broker makes on the robo-advisor market.
I feel like the services that tout tax-loss harvesting don't do a clear job of explaining that it's only interest free loan if your future tax bracket is the same.
For example, if you're going to be moving to a different state after the tax losses are harvested—say, from MA to CA—then that "interest free" loan will cost you ~5% (the difference in tax rates between those states).
Or, if you're just starting out in your career, and you're going to be in a higher tax bracket in a few years—about the same time that many would start looking at buying real estate—then it's again a cost equal to the delta in marginal tax rates (say, 3% or 8%, depending on how your starting salary compares with your salary 5 years into your career).
I'd love if Vanguard got into this market as well; although it seems like they already are, with their target date index funds. Admittedly, no tax-loss harvesting, if that's important to you.
For a layman's treatment debunking this view (don't mind the title):
http://www.amazon.com/Jackass-Investing-Dont-Profit/dp/09835...
for a more academic flavor:
http://www.amazon.com/Expected-Returns-Investors-Harvesting-...
the best book on stock picking i've read:
http://www.amazon.com/Quantitative-Value-Web-Site-Practition...
He says he believes the market may be entering a dangerous period and all but advises getting out of stocks. (Watch part 1 and part 2). If you followed his advice from 2010 until now, you've lost out big time. My point isn't that Tony Robbins was wrong, it's that it is very hard to predict the market.
You might find a stock that looks good, you check financials, fillings, read forum posts and "expert" financial blogs such as Seeking Alpha. They all concur: stock looks good, BUY! BUY! BUY!
So you buy the stock thinking you are making an informed decision only for it to crash the next day after their latest SEC filing hits the wires.
There you learn they all knew the filing was coming, so they pimped the stock hard so suckers like us bite. Corp officials, analysts, "expert" financial bloggers, even the SEC. They are all on it.
Of course, you have to find them (and I'm certainly not going to share as I have made a significant investment of time finding these people, and many of the stocks they buy are small caps), and you also have to (or should) do your own due diligence on every purchase.
Seeking Alpha specifically is mostly full of people like you describe, but there is also some honest, legitimate advice there.
Why? The inflation adjusted CAGR of the S&P from Jan 1, 2007 to Jan 1, 2014 was almost 4%.
They were not pleased, and felt I let them down by not being more active in investing for them.
What stocks?
The book explains a bunch of mistakes he made when investing.
http://www.amazon.com/Mathematician-Plays-The-Stock-Market/d...
This is good advice. YMMV but my retirement fund with Vanguard has been yielding ~10% annually (VWELX).
Almost everyone should be doing most of their equity investments through a passive low cost index like Vanguard's.
Microsoft pushed giving and 30 years later there are still people blindly pumping money into United Way. (Maybe not the best charity!) Google seems to have pushed their smart people into another half-baked set of assumptions.
I'm forcing myself NOT to get involved on this one (the solution to one person's narrow experience isn't another guy with different narrow experience ranting in the comments) but I will point out that Schwab Charitable (their DAF) has lower minimums and fees than Vanguard.
A lot of nerds spend more time researching a graphics card than a stock pick or charity. Like anything else, put the time in and you'll be rewarded over the long term.
Bond prices have an inverse relationship with interest rates. Bond prices fall when interest rates rise. When you own individual bonds, you cannot lose your principal if you hold to maturity unless the issuer defaults. Most bond funds do not hold bonds to maturity, so investors in bond funds have significant exposure to interest rate risk. This is especially true today given the interest rate environment.
There are other ways to address interest rate risk with bond funds, especially if you have a longer horizon. You can buy short-term bond funds, and there are even defined maturity funds. But you don't find any mention of those in the post. It's just bonds = bond funds.
It all comes back to your comment, "put the time in and you'll be rewarded over the long term." Even seemingly simple financial advice ("buy a bond fund!") is insufficient because it requires more time and effort to execute correctly than most people are willing to put in.
(1)As in if the issuers fail you get nothing.
PS: Granted if bonds where still paying 10+% that would be another story, but after taxes there only slightly ahead of inflation.
http://bucks.blogs.nytimes.com/2011/09/06/why-and-how-divers...
Sorry to ding, but "I don't think bonds are a good investment for most people" is exactly the type of MattCuttsian financial generalization I'm trying to discourage in my little corner of this thread.
First off most methods of diversifying bonds (bond funds) add interest rate risks so there not predictable returns. Which means you can buy specific bonds. A 1 year T-Bill pays under 1% before taxes which is hardly worth the hassle for most people. To get better returns in the short term your stuck with increased risks. Sure, longer term bonds have higher returns but not all that high and your still stuck with inflation risks.
As to the classic advice of sticking 50% of your portfolio into bonds your basically getting negative risk adjusted returns. If you want liquidity just hold cash it's safer and more flexible. As to being an inflation hedge I don't see how we can have less inflation in the future.
PS: There are edge cases, but as long as interest rates are this low their fairly rare.
Edit: I do agree it's a good idea to keep some liquidity, but nothing is wrong with just holding some cash.
Don't get me wrong there generally small risk adjusted net gain in any portfolio if you spend the effort picking the correct set of bonds. The problem is there a far more complex financial instrument than stocks which makes them really easy to mess up. Add to that the current returns and it's just a poor bet for most people.
Also, I note you in no way actually defended them. In there defense a condo association saving up for known long term repairs are basically an ideal bond invester.
PS: A 1/10 th percent gain on 50 billion is worth a lot of effort a 1% percent gain on 50k is not worth much.
If you're a Googler with a 3% Cali muni, that's equivalent to a taxable 6.07% yield. Beats cash.
EX: People have paid 50 k for a 30 year T bill, waited 5 years and sold that for less than 50k. The important thing to remember in such situations is just because you did not sell the bond does not mean you did not lose money.
Also The tax-exempt status of municipal bonds does not extend in all instances to the alternative mininimum tax. - See more at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcat...
"Under some circumstances, a taxpayer who receives tax-exempt interest will have a greater portion of his - See more at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcat... ". So that tax free bond might not actually be tax free.
For a Googler making a big salary, that's 39.6% Federal plus 11% California state. Matt didn't say this in his post, you obviously don't know what you're talking about in your comment, and we've once again proven why giving investment advice on the internet is stupid.
It's either so general to be obvious, or so specific to an individual that it risks misleading people in similar (but not similar enough) scenarios. Matt did the world no favors with his post and you're not doing much with your comments.
You've mentioned my limited experience but other than Schwab vs. Vanguard for donor-advised funds, what would you do differently? Of course people have to do their own research, but limited experience is no reason not to share information and ideas.
I'm somewhat bedazzled by Reddit's /r/personalfinance group. It's a weird mix of debt support group, FICO score obsessive-compulsives, bots posting FAQ entries, and what appears to be 14 year olds who watch that guy who yells on the finance channel instead of doing their algebra homework repeating the same boilerplate advice over and over regardless of what the panicked, desperate OP declares is his unique financial situation and needs.
Between that, pg's insane essay yesterday on "being mean", and a discussion with a knucklehead here last week who didn't understand dilution or liquidity, your post caught me at an odd time.
My first problem with your post is that it lacks context. It goes from "gee shucks here's some dumb shit I did" to vague recommendations straight out of elementary school economics to "choose a credit union -- but not the one I chose" to suddenly talking about donor-assisted charity funds and maintaining your own mini-index fund by purchasing 75 stocks. You also use the phrase "sunshine tax" referring to weather just to make sure it's a big ol' swirl of mixed metaphors.
As someone who's only previously read your stuff when you're outlining guidelines (and teasing vague hints) of how not to piss off Googlebot, it's a little weird.
It's the same problem /r/personalfinance faces. It's not clear how old you are, where you live, what your marital/child situation is, what your health is, what your parent's health is, what your values are, or just how fucking rich you are. I don't blame you for not saying it and I don't want to know. But without that, you're a talking head spouting finance with no track record and no background, and you're saying nothing that I haven't heard from that blonde lady with the fancy haircut or the Reddit finance bot.
It's the blogger's curse, one I find myself asking whenever I start clicking around the web: why did you write this post, who the hell are you, and why should I take you seriously?
You lost your shirt on Cisco, you nearly lost it all with unsecured notes, and now you're giving me advice about securities? Um, ok. Paul Graham's doing his Dale-Carnegie-On-A-Bumper-Sticker schtick, I guess why not?
Context aside, some specifics relating to your article:
1. You are probably a bad stock picker
Should read "I am a bad stock picker." Overlaps with "just buy an index." Also, for support you link to an article written by someone who was banned for life from the securities industry.
2. No one cares about your money as much as you do
No one cares about your health as much as you do either. That doesn't mean you shouldn't visit a doctor when there's a lump in your ballsack. The world isn't melting and there are trustworthy financial organizations. Though I'd sure love to know why Google Finance sucks so hard. Financial news is a bot-filled hellhole, and given its highly keyworded nature with ticker symbols included, Google still insists on showing me blurbs from an Oregon utility (Portland General electric company) instead of GE, the 9th largest corporation on the planet. Nice scripts, dude. Reminds me of the time Google Translate autodetected Gesundheit as Spanish.
3. Wall Street is not your friend
This is a "hard won" lesson for you? How exactly were you maimed by the lack of regulation on Wall Street? You weren't even holding securities and you still made out okay. Also... capitalism? Zero sum? This is news? Sounds like rhetoric to me.
4. Think about working for equity vs. salary
Series A pinch, plenty of signs of a bubble ready to burst, interest rates ready to rise and suck the dumb money out of the Valley, energy prices in turmoil, housing still weak, and you're suggesting people dive into a startup in lieu of salary ("versus") in December, 2014 in order to retire? Let's meet back in 5 years and see how that worked out, deal?
5. Prefer index funds
Fascinating. 50/50 stock/bond split you say? And a plug for Vanguard LifeStrategy? Did you really just say "diversify but watch out for fees"in 339 words and slip a brand in? What is this, BuzzFeed? And... "Prefer"? Why? Versus what? And did you just link to that shitty site run by the guy banned for life from the securities industry again? Yes, yes you did.
6. Prefer credit unions over banks
"Wall Street is like [sic] carnival sideshow designed to separate you from your money." Really, dude? Half the credit unions in the US have less than $20 million in assets. Call me weird but I'd like my bank to be worth more money than I am. Deposit a couple six figure checks and you'll learn fast where service comes from at even the shittiest Bank of America branch. They'll give you more than lollipops. And, bonus: they can afford to make an Android app. Credit unions are great, except when they suck. Check yours, read the fine print, then consider that getting direct deposit to the bank that has ATMs everywhere might work out just the same on fees and better interest rates on savings to boot. And with an Android app!
7. Prefer Vanguard over almost anyone else
"I consider them one of the only companies on your side in the financial world." What an odd endorsement. Have you exhaustively researched the other discount brokers and their services? E-trade for individual 401ks? Schwab for low-deposit requirements across the board, extensive checking/banking options (varies by state)? Chase/Wells Fargo for HSAs? A not insane recommendation would be "use Vanguard as a baseline, they're tough to beat." And maybe keep your financial industry ethical intuition to yourself?
8. You probably don’t need a “assets under management” financial advisor
Another dubious section but CLEARLY should refer to the need for a tax advisor and/or estate planner. Two posts upthread I'm arguing with a guy who doesn't know how interest is taxed. Nobody gets this shit right and .25-.5% for a few years (especially when you're starting out) might be worth it. As for your well-earned phobia about outsiders touching your money, perhaps we could compromise? Trust but verify, perhaps? And maybe "don't get your advice on the internet" -- oops, isn't that pretty much what Scott Adams says in your first paragraph?
9. Consider municipal bonds
No discussion of risk. No discussion of how to compute effective tax rate.
--
I realize this is harsh but I just don't understand why you woke up with a belly full of turkey and decided to become Suze Ortman. If you wanted to provide anecdotes and share mistakes you made, go for it. But when you turned the corner into being "an authority" on such a huge, complex beast that affects everyone in incredibly subtle, different ways -- you lost me.
Anyway, your really a perfect example of someone that bought bonds without actually really understanding them or their tax implications that well. Sure, it worked out well for you, but when giving advice it's really important to understand the big picture. Not just, hey it worked for me and your probably in exactly the same situation aka let’s assume without saying that everyone lives in California.
You can simulate the behavior of a single bond by rolling your investments into shorter and shorter duration bond funds over time. The reason you would do this is if you have a known date for when you are going to need the principal. (This is the same justification you would use for buying an individual bond.) By controlling the duration via reinvestment into bond funds, you are diversifying away a majority of of the default risk (the major risk of owning bonds) while still being able to ensure your bonds are worth at least as much as your principal on a fixed date determined at the beginning of the investment.
As an aside, concern about the market price of a bond is usually a good example of focusing on the wrong thing. If a bond's price has declined because of increased default risk, this is obviously bad. But if a bond's price has declined because of increased interest rates, this means you will be able to re-invest the coupon at a larger yield, so depending on your investment goals (such as having a robust inflation adjusted income stream for retirement) this may not be strictly a bad thing.
http://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fu...
As I noted, there are ways to address interest rate risk with bond funds, but you're ignoring the most important question in the context of this discussion: how many retail investors who put money into bond funds actually know about laddering strategies?
> But if a bond's price has declined because of increased interest rates, this means you will be able to re-invest the coupon at a larger yield...
This is true, but you have to wait until maturity unless you're willing to sell your bond at a loss. Despite the low interest rate environment, there are still a good number of retail investors buying exposure to long-dated bonds because they don't take the time to understand their investments. Many of these investors will either have to realize potentially painful losses or wait a long time before they have the opportunity to buy new bonds with higher yields.
Also, the point is not to hedge 'interest rate risk' by just buying shorter duration funds, full stop. Interest rates do not pose a risk unless you had a set date to liquidate your investment. If you are not planning on liquidating your bonds then interest rates pose no risk, they just affect the growth of the income stream.
The point is, if you are concerned about getting your principal returned, decide upon how many years down the road you need it back. That is your initial duration. To maximize your return under that constraint, buy a fund at that duration. Then yearly rebalance with other shorter duration funds (while reinvesting coupons properly) to taper the net duration down over the course of the investment period. There you go, you've just simulated a single bond but now are no longer exposed to default risk.
Again: perpetuating the idea that 'getting your principal back' is a feature only found if you buy individual bonds directly is untrue and can result in terrible investment decisions. It presents a false dilemma between a 'secure principal' and diversification. Forgoing diversification in bonds is one of the most dangerous things you can do. More than any other asset class, bonds benefit immeasurably from diversification (and probably also active management) since default risk is the major risk the investor faces.
To highlight this, I used the author's lack of distinction between bonds and bond funds and the most simple difference between how they function as employed by your average retail investor. You're obviously free to go off on a wild tangent detailing in more depth the way that bond funds can be used, but ironically you're only proving my original point: this is not nearly as simple as the OP's advice ("buy a bond fund!") and requires an investment of time and effort that exceeds what the vast majority of people are willing to put in.
The interest rate environment at this moment is interesting with QE coming to an end, but I'm trying to give advice that will work well long-term.
> I’d also recommend investing in a bond index fund. Bonds tend to do well when stocks do poorly, and vice versa, so investing in both will tend to reduce your risk.
Notwithstanding the fact that "bonds tend to do well when stocks do poorly" is a vast oversimplifcation[1], "I’d also recommend investing in a bond index fund" is far too general a statement to be considered actionable advice.
This is not actionable advice either:
> But there is a simple trick to minimize your taxes: buy municipal bonds for the state where you live. For example, Vanguard offers municipal bond funds for many states, including a bond fund for California.
Vanguard offers multiple bond funds for California (there's an intermediate-term and long-term). Which one are you referring to, and why?
If you followed the title of your post ("Nine hard-won lessons about money and investing") and didn't package your own lessons as "advice" (your words, not mine) for everyone else, I think folks would have responded less critically to it. Instead, you ironically dissed financial advisors while providing "advice" far less detailed and actionable than one could expect from even the most mediocre or inexperienced of financial advisors.
[1] https://media.pimco.com/Documents/PIMCO_Quantitative_Researc...
There's a possibility that the market is in another bubble right now.
some of my active funds saw the problems with the banks and got out before the crash now no index fund is ever likely to make up the difference - the active fund is now always ahead of the index
but the question is how do you select the active fund which will consistently beat the market in the future.
Holding Enron in a portfolio consisting of hundreds of securities will have little impact on the overall portfolio returns. That's the whole point of diversification.