Beginnings
“If you reach for a star, you might not get one. But you won’t come up with a hand full of mud either.”
Spend less than you earn—invest the surplus—avoid debt.
Carrying debt is as appealing as being covered with leeches and has much the same effect.
If your lifestyle matches—or god forbid exceeds—your income, you are no more than a gilded slave.
Avoid investment advisors. Too many have only their own interests at heart. By the time you know enough to pick a good one, you know enough to handle your finances yourself. It’s your money and no one will care for it better than you.
Money can buy many things, but nothing more valuable than your freedom.
Life choices are not always about the money, but you should always be clear about the financial impact of the choices you make.
Try saving and investing 50% of your income. With no debt, this is perfectly doable.
The stock market is a powerful wealth-building tool and you should be investing in it. But realize the market and the value of your shares will sometimes drop dramatically. This is absolutely normal and to be expected. When it happens, ignore the drops and buy more shares.
股市暴跌是必然的,高度确定的.就像天会下雨一样,不可避免的,那是你买入的机会
This will be much, much harder than you think. People all around you will panic. The news media will be screaming Sell, Sell, Sell!
When you can live on 4% of your investments per year, you are financially independent.
“You know, if you could learn to cater to the king, you wouldn’t have to live on rice and beans.” To which the monk replies: “If you could learn to live on rice and beans, you wouldn’t have to cater to the king.”
Part I: Orientation
If you intend to achieve financial freedom, you are going to have to think differently. It starts by recognizing that debt should not be considered normal. It should be recognized as the vicious, pernicious destroyer of wealth-building potential it truly is. It has no place in your financial life.
Your lifestyle is diminished. Set aside any aspirations to financial freedom. Even if your goal is living the maximum consumer lifestyle, the more debt you carry the more of your income is devoured by interest payments. A (sometimes huge) portion of your income has already been spent.
You are enslaved to whatever source of income you have. Your debt needs to be serviced. Your practical ability to make choices congruent with your values and long-term goals is seriously constrained. Your stress levels build. It feels as if you are being buried alive. The emotional and psychological effects of being saddled with debt are real and dangerous. You endure the same type of negative emotions experienced by any addict: shame, guilt, loneliness, and above all, helplessness. The fact that it’s a prison of your own making makes it all the more difficult. Your options can become so narrowed and your stress levels so high, you risk turning to self-destructive patterns that only reinforce the dependence on spending. Drinking perhaps, or smoking. Or, ironically, shopping and still more spending. It’s a dangerous, self-perpetuating cycle. Your debt tends to focus your attention on the past, present and future exclusively in the worst possible way. You become fixated on your past mistakes, your present pain and the disaster looming ahead. Your brain tends to shut down on the subject with the vague hope it will all resolve itself in some magical way and in the magical time of later. Living with debt becomes hardwired in your financial attitudes, habits and values.
If your interest rate is… Less than 3%, pay it off slowly and route the money to your investments instead. Between 3-5%, do whatever feels most comfortable: Either put the money to debt payment or investments. More than 5%, pay it off ASAP.
If your goal is financial independence, it is also to hold as little debt as possible. This means you’ll seek the least house to meet your needs rather than the most house you can technically afford.
More house also means more stuff to maintain and fill it. The more and greater things you allow in your life, the more of your time, money and life energy they demand.
Houses are an expensive indulgence, not an investment. That’s OK if and when the time for such an indulgence comes. I’ve owned them myself. But don’t let yourself be blinded by the idea that owning one is necessary, always financially sound and automatically justifies taking on this “good debt.”
Money is a very relative thing.
Money can buy many things, none of which is more important than your financial independence.
Stop thinking about what your money can buy. Start thinking about what your money can earn. And then think about what the money it earns can earn.
Warren Buffett is rather famously quoted as saying: Rule #1: Never lose money. Rule #2: Never forget rule #1. Unfortunately, too many people take this at face value and leap to the conclusion that Mr. Buffett has found a magical way to dance in and out of the market, avoiding the inevitable drops. This is not true and in fact he is on record speaking to the folly of trying: “The Dow started the last century at 66 and ended at 11,400. How could you lose money during a period like that? A lot of people did because they tried to dance in and out.”
Like the rest of us, Buffett was unable to time the market and in fact, knowing market timing to be a fool’s errand, he didn’t even try. But unlike many others, Buffett didn’t panic and sell. He knew that such events are to be expected. In fact, he continued to invest as the sharp decline offered new opportunities. When the market recovered, as it always does, so did his fortune. So did the fortunes of all who stayed the course. That’s why I put “lost” in quotes.
At $ 56 per share or at $ 52 per share, you still own the same 186.3238308 shares of VTSAX. That in turns means you own a piece of virtually every publicly traded company in the U.S.—
Once you truly understand this, you’ll begin to realize that in owning VTSAX you are tying your financial future to that same large, diverse group of companies based in the most powerful, wealthiest and most influential country on the planet. These companies are filled with hardworking people focused on prospering in the changing world around them and dealing with all the uncertainties it can create.
你拥有的是公司的一部分，拥有了全世界最聪明的大脑帮你工作。你是他们的老板。
It is simply not possible to time the market, regardless of all the heavily credentialed gurus on CNBC and the like who claim they can. The market is the most powerful wealth-building tool of all time. The market always goes up and it is always a wild and rocky ride along the way. Since we can’t predict these swings, we need to toughen up mentally and ride them out. I want my money working as hard as possible, as soon as possible.
Fear is perfectly understandable. Nobody wants to lose money. But until you master it, such fear will be deadly to your wealth. It will prevent you from investing. Once you are invested, it will cause you to flee in panic for the exits every time the market drops. And drop—repeatedly on its relentless march upward—it will. The curse of fear is that it will drive you to panic and sell when you should be holding. The market is volatile. Crashes, pullbacks and corrections are all absolutely normal. None of them are the end of the world, and none are even the end of the market’s relentless rise. They are all, each and every one, expected parts of the process.
Any investing done short term is by definition speculation.
任何短期行为都是投机
Therefore, if we know a crash is coming, why not wait to invest? Or, if currently invested why not sell, wait till the fall and then go back in? The answer is simply because we don’t know when the crash will occur or end. Nobody does.
Part II: How to harness the world’s most powerful wealth-building tool
“Simplicity is the keynote of all true elegance.”
“Those who would trade liberty for security deserve neither.”
The market always recovers. Always. And, if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway.
世界崩坏,找个墓地吧
The market always goes up. Always.
区别在于是不是当权者拿走你那份
The market is the single best performing investment class over time, bar none.
The next 10, 20, 30, 40, 50 years will have just as many collapses, recessions and disasters as in the past. Like the good Professor says, it’s not possible to prevent them. Every time this happens your investments will take a hit. Every time it will be scary as hell. Every time all the smart guys will be screaming: Sell!! And every time only those few with enough nerve will stay the course and prosper.
- This is why you have to toughen up, learn to ignore the noise and ride out the storm; adding still more money to your investments as you go.
- To be strong enough to stay the course you need to know these bad things are coming—not only intellectually but on an emotional level as well. You need to know this deep in your gut. They will happen. They will hurt. But like blizzards in winter they should never be a surprise. And, unless you panic, they won’t matter.
- There’s a major market crash coming!! And there’ll be another after that!! What wonderful buying opportunities they’ll be.
Of course, over those same years she’s going to see several major bull markets as well. Some will rage beyond all reason, along with the hype that will surround them. When those occur, the financial media will declare “this time it’s different” with all the same confidence as when they claimed the end had come. In this too they will be wrong.
Through disaster after disaster the market always makes its way higher over time. It’s a wild ride along the way. There is a Big, Ugly Event.
- The market is self-cleansing.
- Owning stock is owning a part of living, breathing, dynamic companies, each striving to succeed.
Stocks are not just little slips of traded paper. When you own stock you own a piece of a business. These are companies filled with people working endlessly to expand and serve their customer base. They are competing in an unforgiving environment that rewards those who can make it happen and discards those who can’t. It is this intense dynamic that makes stocks and the companies they represent the most powerful and successful investment class in history.
Why most people lose money in the market
Most people lose money in the stock market.
- We think we can time the market.
- We believe we can pick individual stocks.
- We believe we can pick winning mutual fund managers.
- We focus on the foam.
It is the beer: The actual operating businesses of which we can own a part. It is the foam: The traded pieces of paper that furiously rise and fall in price from moment-to-moment. This is the market of CNBC.
The good news for our VTSAX wealth-building strategy (which we’ll discuss in depth in the next few chapters) is that stocks are a pretty good inflation hedge. As we’ve discussed, in owning stocks we own businesses. These businesses have assets and create products. The value of those rise with inflation, providing a hedge against the falling value of the currency. This is especially true in times of low to moderate inflation.
In what stage of your investing life are you? The Wealth Accumulation Stage or the Wealth Preservation Stage? Or perhaps a blend of the two? What level of risk do you find acceptable? Is your investment horizon long-term or short-term?
Safety is a bit of an illusion.
- To buy the index is to accept the market’s “average” return. People have trouble accepting the idea of themselves or anything in their life as average.
Bonds pay interest, providing us with an income flow.
When you buy stock you are buying a part ownership in a company. When you buy bonds you are loaning money to a company or government agency.
Since deflation occurs when the price of stuff falls, when the money you’ve lent is paid back, it has more purchasing power. Your money buys more stuff than when you lent it. This increase in value helps to offset the losses deflation will bring to your other assets. In times of inflation prices rise and so money owed to you loses value. When you get paid back your cash buys less stuff. Then it is better to own assets, like stocks, that rise in value with inflation.
The two key elements of bonds are the interest rate and the term.
流动性与收益率
When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. In either case, if you hold a bond to the end of its term you will, barring default, get exactly what you paid for it.
when we get an Inverted Yield Curve and short-term rates are higher than long-term rates, investors are anticipating low inflation or even deflation.
Put all your eggs in one basket and forget about it.
The great irony of investing is that the more you watch and fiddle with your holdings the less well you are likely to do. Fill your basket, add as much as you can along the way and ignore it the rest of the time. You’ll likely wake up rich.
Owning 100% stocks like this is considered a very aggressive investment allocation. It is aggressive and in this Wealth Accumulation Phase, you should be. You have decades ahead and you’ll be adding new money as you go. Market ups and downs don’t matter because you’ll avoid panic and stay the course. If anything, you recognize drops as the “stocks on sale” buying opportunities they are. Perhaps 40 years from now (or whenever you are living on your portfolio) you might want to add a bond index fund to smooth the ride. Worry about that then.
You can’t predict them and you can’t time them.
If you look at all asset classes from bonds to real estate to gold to farmland to art to racehorses to whatever, stocks provide the best performance over time. Nothing else even comes close.
Stocks are not just little slips of traded paper. When you own stock you own a piece of a business. Many of these have extensive international operations, allowing you to participate in all the markets across the globe.
Because VTSAX is an index fund, we don’t even have to worry about which companies will succeed and which will fail. As we’ve seen, it is ‘self-cleansing.’ The failures fall away and the winners can grow endlessly.
Put all your eggs into one large and diverse basket, add more whenever you can and forget about it. The more you add the faster you’ll get there. Job done.
~ 75% Stocks: VTSAX (Vanguard Total Stock Market Index Fund). Still our core holding for all the reasons we’ve discussed. ~ 20% Bonds: VBTLX (Vanguard Total Bond Market Index Fund). Bonds provide some income, tend to smooth out the rough ride of stocks and are a deflation hedge. ~ 5% Cash: We hold ours in our local bank.
Life is balance and choice. Add more of this, lose a little of that.
The wealth accumulation stage is when you are working and have earned income to save and invest. For this stage I favor 100% stocks and VTSAX is the fund I prefer. If financial independence is your goal, your savings rate in these years should be high. As you invest that money each month it serves to smooth out the market’s wild ride. You enter the wealth preservation stage once you step away from your job and regular paychecks and begin living on income from your investments. At this point, I recommend adding bonds to the portfolio. Like the fresh cash you were investing while working, bonds help smooth the ride.
Managing other people’s money is a very big business, and for those who engage in it, a very lucrative one.
Part III: Magic Beans
Buffett writes: “My advice … 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.”
My advice: Use the index funds and the company Mr. Bogle created and keep what is yours.
At this point you are probably beginning to see why I’m not a DCA fan, but let’s list the reasons anyway: By dollar cost averaging you are betting that the market will drop, saving yourself some pain. For any given year the odds of this happening are only ~ 23%. But the market is about 77% more likely to rise, in which case you will have spared yourself some gain. With each new invested portion you’ll be paying more for your shares. When you DCA you are basically saying the market is too high to invest all at once. In other words, you have strayed into the murky world of market timing. Which, as we’ve discussed, is a loser’s game. DCAing screws with your asset allocation. In the beginning you will be holding an outsized allocation of cash sitting on the sidelines waiting to be deployed. That’s OK if that’s your allocation strategy. But if not you need to understand that, in choosing to DCA, you’ve changed your allocation in a deep and fundamental way. When choosing to DCA, you must also choose the time horizon. Since the market tends to rise over time, if you choose a long horizon, say over a year, you increase the risk of paying more for your shares while you are investing. If you choose a shorter period of time, you reduce the value of using DCA in the first place. Finally, once you reach the end of your DCA period and are fully invested, you run the same risk of the market plunging the day after you are done.
Step 1: Make a prediction for a huge short-term swing in the market. Up or down doesn’t matter. But down is easier and scarier. Scarier will get you more play if you’re right. Step 2: Document the time and date you made it. Step 3: When it doesn’t happen, wait a bit. Step 4: Repeat Steps 1-3 until one day you’re right. Step 5: Issue Press Release: Market Plunges!!!, just as (insert your name here) recently predicted. Step 6: Clear your schedule for media interviews. Step 7: Send me my 15% agent’s fee of your new-found wealth. Be sure not to issue your press release until events prove you right.
Rule #1: Everybody can be conned. Certainly stupid people are marks. But so are the exceptionally bright. The moment you start to think that it can’t happen to you, you’ve become a most attractive target. The easiest victims are those that think they are too smart, too knowledgeable to be taken. This means you, bucko.
Rule #2: You are likely to be conned in an area of your expertise. The reason is simple: Targeting and ego. When con men pick a scam they look for people to whom it will naturally appeal. Those are people in the field. People feel secure and safe in those areas they know well. They believe they will be too smart to be caught unawares. Smart people know the areas they don’t know and tend to be far more cautious there. Many of Bernie Madoff’s victims were financial professionals.
Rule #3: Con men (and women) don’t look like con men. This isn’t the movies. They’re not going to have slouch hats pulled low over their shifty eyes. Successful con men look like the safest, most trustworthy, honest, stable, comforting people imaginable. You won’t see them coming. Or rather you will, and you’ll be warmly welcoming them.
Rule #4: 99% of what they say will be true. The best, most effective lies are surrounded by truth. Buried in it. The con, the thing that will leave you broke and with a real reason to cry, is carefully hidden. It is deep in the proverbial fine print.
Rule #5: If it looks too good to be true, it is. There is no free lunch. Not ever. Your Mama taught you this. She was right. Listen to your Mama.
Part IV: What to do when you get there
“Money frees you from doing things you dislike.
True financial security—and enjoying the full potential of your wealth—can only be found in this flexibility. As the winds change, so will my withdrawals. I suggest the same for you.
Plan your financial future assuming Social Security will NOT be there for you. Live below your means, invest the surplus, avoid debt and accumulate F-You Money. Be independent, financially and otherwise. If/ when Social Security comes through, enjoy.