Hard-won lessons about money and investing

https://www.mattcutts.com/blog/make-money-investing-tips/

by sethbannon • 12 years ago

366 248 12 years ago

err4nt• 12 years ago

I'm at the start of a long career and trying to save sacrificially. I know if i over-save i still have it if i need it, but so far every dollar i have put into savings has been on a one-way trip!

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!)

TheSpiceIsLife• 12 years ago

I live in Australia. Here the interest rate on cash deposits is around 2.75%, or 3.6% for a 180 day term deposit minimum $10,000. Inflation the past few years has been between 2.2 - 2.9%. No point holding money in a bank account or term deposit as an 'investment' - I only hold cash because it's handy to have.

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.

ollifi• 12 years ago

Having time and mind for saving is an excellent place to be. There are no guarantees with these things. As you say the only sure thing is that inflation will destroy significant portion of your savings in only few decades. If you think things in timespans of several years you really should look into investing. This way you don't sit on your money but buy something that generates value and thus will be valuable also in future.

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.

zo12• 12 years ago

What little advice I can offer. From what I've gathered, there is no sure-fire way to protect your capital from constant things such as inflation and wild things such as economic "incidents", for lack of a better term.

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.

walshemj10• 12 years ago

Indexed Link Gilt's or TIPS (in the USA) can do that

j_lev5• 12 years ago

If you’re an employee working for salary, it’s going to be hard to reach that level of independence. ... You can try to radically lower your financial burn rate, but few Americans have taken that step.

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.

seanmcdirmid• 12 years ago

And don't have kids.

jamesaguilar3• 12 years ago

Or do, and cut from other areas/don't get on the hoighty-toighty daycare/lessons/private school treadmill. But kids are definitely an expense.

phamilton2• 12 years ago

Having kids doesn't change the math. That's MMM's point in the post. It's all about savings rate. Kids mean it is harder to save 35%, but the math doesn't change.

adamio• 12 years ago

What about rent or mortgage? In most major cities low rent could be easily 35% of after tax income already

JoshTriplett3• 12 years ago

Depends on how much home you go for; most people buy or rent far more home than they need or can afford. Sure, if you're in the middle of Mountain View or NYC, even the tiniest apartment can be exorbitantly expensive, both in absolute terms and as a fraction of salary (which does not scale to the same degree). Those locales are fundamentally expensive to live in unless you get very creative. On the other hand, in most other locales, if you're willing to live on the high end of "student" rather than on the high end of "professional", while getting paid like a professional, living on a small fraction of your income is quite feasible.

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.

JoachimSchipper3• 12 years ago

Houses are pretty cheap, compared to how much money you need to retire.

Ecio787• 12 years ago

Mr. Money Mustache will probably tell you to move to a different place[1], saving time and money by reducing the commuting time[2] etc..

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...

lbotos• 12 years ago

So I just did the math. I work at a startup in NYC and could probably make more money at $BigCo. I should be able to save %50 of my current salary and be able to pay rent and have a decent daily spend to the point that it's 2AM and I'm furiously recalculating a lot of scenarios. That has to count for something. :)

netcan4• 12 years ago

Not that I'm recommending it, but this strategy is radically different from the norm, so it will require you to be abnormal. Mortgage @ 35% of net income is the norm.

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.

crdoconnor2• 12 years ago

Assumptions: – You can earn 5% investment returns after inflation during your saving years

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.

nmjohn• 12 years ago

You should take a look at stock market returns over the last few years, this year included.

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.

lucaspiller2• 12 years ago

That's exactly why it's 5%, it's an average of the highs and lows. Right now it might be tricky to earn that (it's not impossible though), but in the early 2000s you could easily make that. With decent investments you can make two or three times what the same money sitting in a high interest bank account will make.

icedchai• 12 years ago

You know the stock market has been doing great over the past 3 years, right? Last year I got something like 30%. If you leave your money in money market funds of course you'll get near zero. You need to take some risk.

YZF2• 12 years ago

It would never really make sense. Any investment where you can make 5% after inflation has risk involved. If you're lucky you'll do great. If you're unlucky not so much. "Do you feel lucky punk?" ;-)

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.

usaar333• 12 years ago

Well, except for how difficult that is. Living on only 35% of after tax income requires you either A) live extremely cheaply or B) make tons of cash. Roughly speaking, in California, this requires living off of 20% of pre-tax income.

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.

jacquesm3• 12 years ago

Except that you don't need to live off $100K/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.

alecco• 12 years ago

Perhaps that means SF might not be a great place to work in spite of 6 figure salaries.

CompelTechnic2• 12 years ago

To be fair, you picked one of the world's highest cost of living locations to live in, let alone retire in.

I'm on track to retire in my thirties, or earlier, here in North Carolina. Not hard at all on a mechanical engineer salary.

lars• 12 years ago

Living on a low percentage of income seems like a great strategy if you're optimizing for dying with the maximum amount of money in the bank.

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%...

Retric7• 12 years ago

Living really cheaply in SF is really just a question of cheap rent and never eating out. If your willing to have roommates you can get below 1k/month rent making 25k/year living expenses doable.

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.

lnanek2• 12 years ago

"in SF" - that is not affordable. If you are trying to save money you live somewhere on the BART or Caltrain and take the train into the city every day. My rent in East Palo Alto the year I was there was $400/month all utilities and internet included, for example. Is commuting into big cities like SF and NYC every day by bus and train miserable? Yes. But thousands and thousands of people do it because it is affordable and they have families or retirement they care more about.

halfcat3• 12 years ago

Living on only 35% of after tax income requires you either A) live extremely cheaply or B) make tons of cash. Roughly speaking, in California...

How about C) Move to a different state? If the goal is to do this in California, then yes, it's probably not possible.

ebbv• 12 years ago

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.

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.

MrUnknown• 12 years ago

"live like a homeless man" is going to the extreme. But it's either retire in 10 years, or 30.

You need sacrifices to get a reward.

Ecio787• 12 years ago

I don't think it's impossible to do it (I think I could be around that but I should run some numbers before confirming that.. and no, I'm not homeless :)), but it's also not that easy to do the calculation: it's easy for rent and maybe other expenses (internet access, bills) but when you go to one-shot expenses like furnitures or cars etc.. I think there's not an agreed methodology on how to split them over the years (5 years ? 10?) so those could easily spoil the maths.

g_mifo4• 12 years ago

Don't forget health insurance. Everyone forgets hrealth insurance. Having a family is tricky too.

Ecio787• 12 years ago

I think I read that MMM was (is?) paying around 250-300$/month for a family of three. So not that much.

senthil_rajasek• 12 years ago

Assumptions – You can earn 5% investment returns after inflation during your saving years

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.

YZF2• 12 years ago

From that link, under assumptions: "You can earn 5% investment returns after inflation during your saving years"

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.

dllthomas3• 12 years ago

It says "during your saving years", which I understand to mean while you are working. This would seem to leave you the flexibility to adjust if your return doesn't meet your expectations (as compared to an assumption of X% return while retired).

ForHackernews5• 12 years ago

https://www.bogleheads.org/wiki/Getting_started

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.

lpolovets• 12 years ago

Have target date funds been successful? The last time I checked, their historical performance (admittedly for only 6-7 years) seemed underwhelming.

JoshTriplett3• 12 years ago

If you care about a 6-7 year window, especially the most recent 6-7 year window, target date funds aren't for you. They'll underperform when the market is doing well. They'll also suffer less when the market tanks. Overall, they're a safer investment if you really do have a fixed target date and want to retire close to that date, and thus you have much less tolerance for risk. In particular, they tune for less risk the closer you get to the target date, to limit unexpected surprises.

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.

wiredfool4• 12 years ago

The last 6 or 7 years hasn't exactly been average for historical performance in either stocks or bonds. I'd expect that the target date funds would wind up underperforming in this sort of market, and likely outperform in down markets, especially once you factor in ill-advised market timing/panic changes when the bottom drops out.

tempestn6• 12 years ago

Bogleheads is a great resource, but I expect most HN readers can handle managing their asset allocation manually (using a simple "three-fund portfolio" or similar), which allows you to save a bit on expenses compared to a target date fund, as well as take more advantage of tax management techniques like municipal bonds and tax loss harvesting.

saryant• 12 years ago

In Vanguard's case, the TD funds generally make sense starting out given their lower minimum investment requirements ($1000 vs $3000 for most others). Once you reach $10-20k and can starting using Admiral funds, then you can switch to a three-fund portfolio and take advantage of lower ERs.

ForHackernews5• 12 years ago

This is very true. But for people who know nothing about investing and just want to get started, the simplest non-harmful advice I always give is "Vanguard Target Date Fund". That way, at least they are not doing anything wrong that will serious hurt their returns. Later on, when they have more experience or more money, they might want to switch to some other allocation.

mcfunley2• 12 years ago

Think about working for equity vs. salary

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.

steven20125• 12 years ago

I agree. It's easy for Matt Cutts to say that you should take more equity, because he has only seen massive success. I've been in the Bay Area exactly as long as he has, and I've had 1 company out of 6 where my options actually made me money. The rest were all worthless.

nikcub2• 12 years ago

If you're exchanging salary for equity you have to look at taking a job at a startup like an investment decision. I don't know what the broader startup stats are now, but 1 in 6 sounds about average. It means you should negotiate down vesting periods and try and spend a few years at each startup before figuring out if it will succeed or not.

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.

Matt_Cutts11• 12 years ago

You're completely right that I was very fortunate. All I'm saying is that if your goal is financial independence, it can be hard to get there on a straight salary, and that trying to get some sliver of equity can radically increase your odds of financial success.

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.

phamilton2• 12 years ago

I've seen more than once that in a acqui-hire situation employees are left with very little value in their options and lots of value in their retention package. Not always the case, but it adds to my opinion that equity is really impossible to value.

Matt_Cutts11• 12 years ago

Great point. I'd recommend the book "Consider your Options" when you're accepting a job with stock options: http://www.amazon.com/Consider-Your-Options-Equity-Compensat...

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.

mcfunley2• 12 years ago

Exactly--a company I worked for did a stock split that was at least partially rationalized by being able to offer candidates higher share counts. Companies also hand out explainer sheets with their grants that don't really help, inasmuch as they seem to be intended to get you excited about the value of the shares disregarding the exercise price (and the fact that in most scenarios, you're paying normal tax rates on what's left).

prostoalex3• 12 years ago

I had a friend of a friend quote me the value of his "options package" once (was high six figures), and only after drilling down I discovered this was the amount of ISOs multiplied by his strike price, i.e. a price that he would have to pay up to exercise it.

g_mifo4• 12 years ago

I once had a VP of Engineering quote me the "value" of my options using that calculation. I declined the offer. Ironically, it was a Lisp startup, and Lispers "know the value of everything and the cost of nothing."

steven20125• 12 years ago

I'm of the opinion that the stock markets are now inherently unstable, and they will continue to crash every 7-10 years. I'm expecting a market crash somewhere between 2015 and 2017. Most of my money is in cash, but I do hold a few select stocks like AAPL, GOOG and TSLA.

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.

jamesaguilar3• 12 years ago

I'm of the opinion that the stock markets are now inherently unstable, and they will continue to crash every 7-10 years.

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.

steven20125• 12 years ago

I'm not talking bear markets, I truly believe there will be 50%+ drops every 7-10 years, which is something that you wouldn't expect pre-2000, except 1987. I think the stock market is a battle ground for amoral participants who are willing to break the stock markets in order to make as much money as they can, and the NYSE and NASDAQ don't seem to care.

justincpollard• 12 years ago

One of the nice things about Vanguard is that the fee structure is much less than 1-3% for many of their funds. I invest with them in some of their index funds and pay no more than 0.4% in fees; usually much less than that.

wiredfool4• 12 years ago

Vanguard is owned by their funds, so incentives are aligned with the shareholders of the funds. They are very different than most fund companies.

zo12• 12 years ago

I watched a good documentary about this a while back.

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

hnnewguy9• 12 years ago

I invest with them in some of their index funds and pay no more than 0.4% in fees

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.

eps• 12 years ago

I'm expecting a market crash somewhere between 2015 and 2017.

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.

kasey_junk• 12 years ago

Not only is it easy to make there is no downside to making it. If the markets don't turn down then, he can claim that they will in a couple more years, or the fed is juicing the stats, or something else.

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.

sumedh2• 12 years ago

I also believe that the stock market is a game, not an investment vehicle.

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.

highiquser3• 12 years ago

OP remarked, why do the mutual fund managers have yachts but none of the clients do?

It's as frivolous as asking why the executives of Nike have millions but the majority of people who buy Nikes don't.

steven20125• 12 years ago

This is a very terrible analogy. Nike is in the business of making shoes. A better analogy would be, why do Nike's customers' shoes fall apart after 1 year, but the shoes of the Nike executives last for several years?

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.

PhantomGremlin3• 12 years ago

It's because they make their money from the hundreds of billions of dollars they skim off the top of their customer funds.

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.

jamesaguilar3• 12 years ago

Hedonic adaptation is the devil. You'd hope/intuit that spending more resources would make you happier, but that's just not the way it works. That said, you can use knowledge of this quirk of human psychology to make you richer and more secure compared to your higher-consuming self, not sacrificing any long term contentment or satisfaction to do it. Here's a more in-depth review of the topic[1].

[1] http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-ad...

arkem3• 12 years ago

I've been considering moving from holding Vanguard ETFs (one of their Total Retirement funds) over to Betterment or Wealthfront to take advantage of their automated tax loss harvesting.

Does anyone have any thoughts about whether automated tax loss harvesting is worth the 0.15-0.25% fees that the robo-advisers charge?

ForHackernews5• 12 years ago

Probably not worth it unless you have a very large portfolio and you're too lazy to do the tax loss harvesting yourself. It's especially not worth it if you're correctly holding most of your retirement savings in tax-advantaged accounts (401k/403b/IRA/HSA). You are, right?

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-...

arkem3• 12 years ago

Thanks for the tip about Schwab, looks interesting, especially the 'free' part.

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.

prostoalex3• 12 years ago

Wait till the price drops to 0%

https://intelligent.schwab.com/

tacos8• 12 years ago

Schwab is also aggressively pricing their ETFs vs Vanguard, beating them in many cases. Not worth switching, but "Vanguard is Best" isn't the rule either.

jpp3• 12 years ago

I made a comment elsewhere in this thread, but will reiterate it here: tax loss harvesting only shifts the tax burden to the future. If you put in $100k today (post tax dollars), and tax loss harvesting is able to fully "realize" that $100k, you'll have to pay tax on that $100k when you go to sell it (because the basis will be down to $0).

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.

arkem3• 12 years ago

I'll take any interest free loan that I can get, offsetting today's gains to lower my tax bill means more money to invest.

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.

kirillzubovsky• 12 years ago

FYI, if "tax loss harvesting" is something you'd like to consider, there're companies out there which (for a fee), would do it for you. Their entire business model is to lose money for you, in a smart way. That said, if you need to use this method, you're probably wealthy enough to know how/where to use it.

tempestn6• 12 years ago

Honestly IMO tax loss harvesting becomes very straightforward if you have a nice, simple portfolio of index funds. Your entire portfolio will be maybe 3-5 funds, so there really isn't much to keep track of. A few minutes reading the superficial loss rules for your jurisdiction should do it. (Generally, as long as you sell a fund at a loss and replace it with something similar, but tracking a different index, you're fine.)

dave16192• 12 years ago

I added a comment on Matt's blog post but it's waiting moderation so I'll post it here to hear other folks' input.

"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."

tempestn6• 12 years ago

In markets like real estate and private business, I agree with everything you wrote. In a liquid, public market like publicly-traded stocks though, I'm not so sure. I don't disagree that if you devote your life to it, you could possibly find an edge - although it will likely continue to get more difficult as institutional players become ever better at exploiting (and thus removing) any inefficiencies. But even if we accept that it's possible, you would almost certainly have to accept significant volatility to do so. And even if you didn't, you would ultimately be devoting your life to winning a zero-sum game. (Similarly it is possible to become good enough at poker or (with more difficulty) blackjack to make a living from them. Even a good living, potentially. But you're going to have to weather some downswings along the way, and you won't have any consolation in the fact that you're creating something of value - as you would starting a business for instance.)

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.

JoshTriplett3• 12 years ago

Perhaps you're right; perhaps 1-2% of people (if that) could potentially beat the market in their investments. And the majority of people think they're in that 1-2%.

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.

Matt_Cutts11• 12 years ago

This is such a spot-on answer--thanks.

robrenaud• 12 years ago

With index funds, you always do slightly worse than the market.

arasmussen3• 12 years ago

I don't know why this has been downvoted, I couldn't agree more.

highiquser3• 12 years ago

most social news sites like reddit and digg consist of a clique of a dozen or so people who control the flow of discussion, and dissent is down-voted. such is life. That's why I work for myself so I call the shots.

Matt_Cutts11• 12 years ago

Hey Dave, I approved your comment over on my blog--sorry about the delay. I also wrote a response which I'll paste below:

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.

arasmussen3• 12 years ago

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.

highiquser3• 12 years ago

I'm of the tiny, minority unpopular opinion that believes you can beat the market by picking stocks,. I have done so consistently for the past decade. Pick large cap companies with huge growth, high barriers to entry, insulated from economic trends, no debt, and high profit margins.

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.

dave16192• 12 years ago

Hey Matt, I've heard the Warren Buffett argument many times but it's usually misrepresented. Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far, far better with picking individual stocks. The problem is the vast majority of people are not skilled in evaluating companies and that's why Warren Buffett suggests them to choose a low-cost index fund.

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.

crimsonalucard2• 12 years ago

Lately, even the experts have a hard time beating the SP500.

ballstothewalls• 12 years ago

Lesson number 1 is unequivocally wrong and contradictory with the start of the article. He says you shouldn't invest your money in single stocks, but then advocates for you to invest your money (by way of forgoing salary in favor of equity) into a start up company with (by definition) no track record of success or guaranteed future. Not to mention that when the start-up tanks (which it will do statistically) you will both lose your salary and your investments/equity will be worthless.

burnstek• 12 years ago

The assumption is that you work for the startup and have a critical enough position to earn equity, and therefore have more influence over its performance than that of a public company.

tempestn6• 12 years ago

Exactly. There's a big difference between investing time and money in a venture where you have some control over the outcome and unnecessarily concentrating your passive investments in a single company (or even in anything less than the broad market, given the ubiquity of low-cost index funds). And even then, assuming your startup succeeds, you wouldn't want to wait too long before diversifying some of the profits (which the article supports).

Matt_Cutts11• 12 years ago

That's right. In the same way that Buffett can select a company that he believes in and then drive it forward with a strategic investment, you're trying to do the same thing with the startup that you select and drive forward.

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.

Patient0• 12 years ago

My thoughts exactly when I read this article.

ploxiln• 12 years ago

If we all lost our money in our own startups, instead of to money-managers on Wall Street, I think the world would be a better place. My 2c

prostoalex3• 12 years ago

Instead of buying a bunch of lottery tickets he suggests getting a decent salary and a lottery ticket.

orblivion• 12 years ago

I noticed the same thing. One difference I came up with is that you get to buy low, long before any of the professional traders get a chance.

dredmorbius3• 12 years ago

It's a mix.

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.

influx• 12 years ago

I use Wealthfront, which allows you to park your money into an account, and depending on your level of risk, will automatically balance it across the US Stock Market, dividend stocks, emerging and foreign markets, bonds, and natural resources.

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.

jpp3• 12 years ago

An important note on tax loss harvesting: it only defers taxes. If you'll be in a lower tax bracket in the future, that can be good; but if you'll be in a higher tax bracket when you need the money (eg house down payment), tax loss harvesting will actually cost you money, so beware.

ssanders82• 12 years ago

This can be balanced against the fact that you get to invest and compound that deferred tax until you do end up paying it, possibly several years later. So instead of multiplying your account by .65 every year (assuming 35% tax rate), you only multiply it once, at the end.

Animats• 12 years ago

If you do get a lot of money somehow, read The Challenges of Wealth, by Amy Domini. Most people who get a reasonably large chunk of cash all at once blow it, in an average of seven years. A sizable fraction of old pro athletes are broke. So are a sizable fraction of lottery winners.

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.

pbhjpbhj• 12 years ago

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.

jacquesm3• 12 years ago

The idea is that if it was any good there would be plenty of money thrown at them without having to approach random strangers cutting them in on the action just because they're such nice people.

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.

jandrewrogers3• 12 years ago

For most people, the easiest way to become financially independent is to save aggressively.

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.

justin662• 12 years ago

Based on what you've written, it doesn't appear that you've measured the performance of whatever method you're using against an appropriately risk-adjusted benchmark. For example, beating the S&P 500 over a certain time period is okay but if you're doing it with a bunch of small- or mid-cap tech stocks, it's quite possible you're not being compensated adequately for the risk you're taking.

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.

jandrewrogers3• 12 years ago

I only invest in large caps, ones everyone knows, based on two criteria:

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.

crimsonalucard2• 12 years ago

Everybody in the tech world is talking about investing in index funds. Historical evidence says this is the way to go, but when everybody is doing it, it makes me question whether or not it's the right choice.

There's a possibility that the market is in another bubble right now.

walshemj10• 12 years ago

the trouble with index funds is you participate fully in any crash/dogs eg index funds had to hold enron to the bitter end.

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

sumedh2• 12 years ago

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.

hnnewguy9• 12 years ago

hold enron to the bitter end.

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.

armansu• 12 years ago

Made me think (as most of the lessons coincide) about the book I'm reading at the moment - 'Money: Master the Game' by Tony Robbins: http://moneymasterthegame.com/

clamprecht• 12 years ago

Want to see how hard it is to predict the market? Watch this message from Tony Robbins to his followers in 2010: https://www.youtube.com/watch?v=KzREzgDoaZg

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.

grimlck• 12 years ago

"Google worked out a deal with “full service” broker to give us free accounts"

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

j_lev5• 12 years ago

It also seems at odds with what was said in this article, linked to here on HN a couple of weeks back:

http://www.modernluxury.com/san-francisco/story/the-best-inv...

Matt_Cutts11• 12 years ago

Just to answer this thread:

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.

netcan4• 12 years ago

I'm surprised he doesn't mention real estate or investing in friend/family businesses as an option.

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.

Sven7• 12 years ago

Nor did he mention Facebook stock. Weird.

netcan4• 12 years ago

I'm not sure I understand your point. Are you just implying the FB is a bad investment and so are the ones I mentioned?

tacos8• 12 years ago

He also didn't mention putting your money in TSP if you're an eligible federal employee, or talk about individual 401ks tied to an LLC to increase retirement saving limits, or why wandering the halls of Google makes you predisposed to think Cisco would be a no-way-to-lose investment. The article represents a smart but narrow dude's perspective on a very, very big world.

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...

briandear• 12 years ago

If you diversify enough, you can ensure a 0% return and a 0% loss. The argument for "diversification" is a recipe for safety, but not real wealth creation. Real wealth creation isn't "sticking your money in an index fund." It's a very middle class approach but as with anything, there's no such thing as a free lunch. If it takes 30 years of index funds to be able to retire, then you're doing it wrong. Investing in actual cash-flow producing assets is how you create wealth. Capital appreciation is only one part, the other part is creating cash flow. That means owning businesses, real estate and other passive income generators (IP, for example.)

oscilloscope2• 12 years ago

Diversification is considered to be one of the only "free lunches" in finance. It can both increase your return and decrease your risk, with almost no downside.

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...

netcan4• 12 years ago

There is an economics article I’ve brought up several times on HN. It has a lot of non obvious deep implications: “The Nature of the Firm' (1937), By Ronal Coase” It tries to answer the question of why companies exist rather than bilaterally trade of goods and services between individuals in a market. IE, if centralised economies are so bad, why are free market economies dominated by enormous companies that are internally run like a Stalinist country. Instead of Apple making all the software and hardware and the babushka doll of precursor software and hardware, couldn’t we have Apple replaced by a market?

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.

FiReaNG3L• 12 years ago

Literally everywhere for the past years I see the advice to invest in index funds - the only question I have is what happens when a critical mass of people do just that? Wouldn't that influence the market in some way?

markovbling• 12 years ago

that's the paradox of the efficient market hypothesis - if everyone is a passive investor then who keeps the market efficient?

(...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)

j_lev5• 12 years ago

Companies themselves buy and sell their own stock when they believe it is under/overvalued. And there will always be people out there who believe they have an edge and can pick undervalued stocks.

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.

thejteam• 12 years ago

And just like engineering standards, the nice thing about stock indexes is that there are so many to choose from.

tacos8• 12 years ago

The tone is far too authoritative given the narrow experience of the author. Reading an Googler's quickie blogpost investment guide isn't the path to financial independence. It's barely the bot-filled advice of /r/personalfinance with a better PageRank.

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.

7Figures2Commas4• 12 years ago

I agree. One of the most cringe-worthy parts of this post is the author's multiple references to bond funds. Owning bond funds is not the same thing as owning bonds and every bond investor should know the difference.

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.

Retric7• 12 years ago

I don't think bonds are really a good investment for most people. They basically have the same edge case volatility as stocks(1) without the upside. If you have a diversified portfolio the worst stock market crashes where only an issue if you used leverage.

(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.

gfodor3• 12 years ago

This is oft-cited difference between bonds and bond funds is a red herring when it comes to determining the proper investment of the two. The reason a single bond keeps you from losing your principal is because it has a declining duration, whereas bond funds generally have a fixed duration (more or less) since maturing bonds in the portfolio are usually reinvested into bonds of the same time to maturity.

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...

Matt_Cutts11• 12 years ago

7Figures2Commas, of course I know the difference between a single bond vs. a bond index fund. I clipped coupons off a bond my grandfather gave me as a kid.

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.

maguirre• 12 years ago

Interesting topic and one that really resonates with me. I have always been interested in learning how to make money the way "people with money" make it. Personally I have come to the conclusion that a few solid stocks paired with protective puts and/or call options (to make a little extra money for sideways markets) provides a decent way to generate some extra income and greatly reduces risk of losing everything from a single mistake

g_mifo4• 12 years ago

Most of this is standard sane advice, but the tip about "work for equity [in the next Google] instead of chasing salary": well if we all could pick stocks like that, we would not need the rest of his advice!

applecore2• 12 years ago

Regarding most of these lessons, in 2004, Google brought in experts on personal investing to educate employees heading into its initial public offering:

http://www.modernluxury.com/san-francisco/story/the-best-inv...

TL;DR: Put your money into some broad-based, low-cost index funds.

walshemj10• 12 years ago

ah so why do the Rothschilds put a good chunk of family money in an active fund aka RIT Capital partners.

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.

applecore2• 12 years ago

How many people are actually living entirely off passive income from interest, dividends, and capital gains? I feel that goal—which requires millions of dollars in investable financial assets—is only realistic for a tiny percentage of the population.

walshemj10• 12 years ago

You could live quite well off only a £million or so in the UK so 2 mill in the USA will give you a nice life style - baring any catastrophic health issues

jafaku• 12 years ago

Consider also buying a bunch of bitcoins. The reward/risk ratio is too high in my opinion.

mbesto• 12 years ago

Instead of a regular stock broker, I highly recommend Vanguard. Go with Vanguard whenever you can.

This is good advice. YMMV but my retirement fund with Vanguard has been yielding ~10% annually (VWELX).

dredmorbius3• 12 years ago

Matt's article (and the linked one of Scott Adams' advice) is a good and basic foundation.

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.

jseliger• 12 years ago

Great comment! I want to emphasize this:

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!

oldspiceman• 12 years ago

If you don't want to read a book on diversification, look at this picture: http://fycs.ifas.ufl.edu/younginvestor/images/unsystemic-ris...

Unsystematic risk means risks tied to holding individual stocks. Notice the x-axis. Holding more stocks (diversifying) means removing individual stock risk.

dredmorbius3• 12 years ago

Oh, and adding to the book recommendations: pick one of Michael Lewis's books. Lair's Poker, The Big Short, Panic, or Flash Boys.

http://www.powells.com/s3?author=lewis%2C+michael

tempestn6• 12 years ago

Another great book is The Four Pillars of Investing by Bill Bernstein. If you're already sold on an index portfolio there isn't a ton of info there (although there are certainly some useful bits), but it's great for making the case.

halfcat3• 12 years ago

A Random Walk Down Wall Street...

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.

crazy1van• 12 years ago

Great list. Another book I've found helpful is "The Intelligent Asset Allocator" [0]. The concepts on modern portfolio theory it discusses seem to jive with Matt's article. Basically, when investing for the long term, focus more on balancing the asset classes in accordance with your risk profile than picking specific investments within an asset class. It was a very readable book for someone like me without investing experience but didn't feel like it oversimplified things.

[0] http://www.amazon.com/The-Intelligent-Asset-Allocator-Portfo...

brentiumbrent• 12 years ago

Simple advice: just use Wealthfront and take all of this advice at once, automatically. http://wlth.fr/1fsdN6t

n722• 12 years ago

The tragic thing is that these lessons don't have to be "hard-won". I find it astonishing that a majority of even intelligent people don't do more basic research before making major decisions with something as important as their money. A few hours of research should turn up things like bogleheads.org, Bernstein, Malkiel, etc. Heck, a simple google of "site:ycombinator.com investing advice" should get you on the right track to all the advice you need in a few clicks.

dirtyaura• 12 years ago

What is especially hard in investing is timing. If you followed Matt's advice and put all your investments to index fund (say Vanguard Total Stock Market ETF, https://www.google.com/finance?q=NYSEARCA) in the late 2007, you would have lost almost 50% of your savings in a year. And this example is not far fetched. My startup got acquired in 2007 and I invested some of that money to the stock market in late 2007. Not all, fortunately.

n722• 12 years ago

This is a terrible way of looking at things, since your time horizon is far too short. If you had put your money in the market at the height and kept it in until now, you would have made money. On Oct 5, 2007, VTSAX was trading at 37.72. It is currently trading at 51.87. Moreover, what was the alternative? Cash would have lost value due to inflation. Fixed income would have gotten you less and also been vulnerable to inflation.

hnnewguy9• 12 years ago

I invested some of that money to the stock market in late 2007. Not all, fortunately.

Why? The inflation adjusted CAGR of the S&P from Jan 1, 2007 to Jan 1, 2014 was almost 4%.

mathattack• 12 years ago

Remarkably good ideas, and I tend to view most posts like this as Snake Oil.

Almost everyone should be doing most of their equity investments through a passive low cost index like Vanguard's.

gfodor3• 12 years ago

This is the typical investment advice, and it's generally outdated and wrong to just invest in index funds based on asset classes if your goal is to diversify away volatility.

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...

DanBC• 12 years ago

For a different take people might be interested in "A Mathematician Plays the Stockmarket", by John Allen Paulos (he also wrote the excellent "Innumeracy").

The book explains a bunch of mistakes he made when investing.

http://www.amazon.com/Mathematician-Plays-The-Stock-Market/d...

vpeters25• 12 years ago

You are probably a bad stock picker

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.

mistermann• 12 years ago

I doubt you'll believe me, but there are a lot of 100% independent investors that are on twitter and forums as well as write in-depth blogs who consistently outperform the market and do not resort to any sort of tricks like this.

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.

ingend882• 12 years ago

I am one of those people who have lived this advice and after 10 years of following some of the recommendations here, I can confirm that it works.

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.

chatmasta• 12 years ago

This is good advice but may also have some element of survivorship bias. If you haven't noticed, not everybody works for Google. In fact, not everybody works for a company that will match their 401(k). If you're lucky enough to be taking home a six figure salary (not to mention one that grows with bonuses as you progress) every year, maybe this advice is good. But you should consider in your advice that not everyone is taking home $xxx,xxx per year, plus bonuses, plus full company 401(k) matching and all benefits. You are very lucky that you were able to live below 35% of salary.

Still, I wonder if advice would be different for people who are making less?

Matt_Cutts11• 12 years ago

For the case you're talking about, see Scott Adams' financial advice. I linked to it in my post.

ingend882• 12 years ago

I think the mindset still applies. Surprisingly, I know people who get 6 figure salaries and yet are not financially independent.

The secret here is to start early since the expenses rise exponentially after wife and kids.

CurtMonash2• 12 years ago

I was a #1-ranked stock analyst (computer software and services industry) in the 1980s. I took a portion of my parents' money and doubled it in 18 months, by splitting it among 5 stocks that went to 4X, 3X, 3X, 0X and 0X. Then I left Wall Street, told them I no longer was in a position to do such stock picking, and they should put their money into Vanguard index funds.

They were not pleased, and felt I let them down by not being more active in investing for them.

hnnewguy9• 12 years ago

it among 5 stocks that went to 4X, 3X, 3X, 0X and 0X

What stocks?

CurtMonash2• 12 years ago

Symbolics was one of the bankruptcies. American Management Systems and Lotus were two of the winners. I've forgotten the others.

Hard-won lessons about money and investing

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