• If your expected savings are higher, then you need to focus more on saving money and adding to your investments. However, if your expected investment growth is higher, then spend more time thinking about how to invest what you already have. If the numbers are close to each other, then you should spend time on both.
• When we have the ability to save more, we should save more—and when we don’t, we should save less. We shouldn’t use static, unchanging rules because our finances are rarely static and unchanging.
• This implies that saving more is only beneficial if you can do it in a stress-free way. Otherwise, you will likely do yourself more harm than good.
• Another tactic that has helped me better estimate my spending is putting all of my variable expenses on the same credit card (which I pay off in full at the end of the month).
• This is why the biggest lie in personal finance is that you can be rich if you just cut your spending.
• The most consistent way to get rich is to grow your income and invest in income-producing assets.
• I recommend that you do research to find where your set of skills are put towards their best use. You may not make much from this initially, but as you develop expertise, you can start charging more.
• This explains why the typical age of an entrepreneur is 40 years old.²² By age 40 you have two things that most 22-year-olds don’t have—experience and money.
• The first tip is what I call The 2x Rule. The 2x Rule works like this: Anytime I want to splurge on something, I have to take the same amount of money and invest it as well.
• I like this rule because it removes the psychological guilt associated with binge purchases. Since I know that my splurging will be accompanied by an equal-sized investment in income-producing assets, I never worry about whether I am spending too much.
• For example, buying a daily latte may seem unnecessary, unless that latte allows you to perform at your best while at work. In this instance, the daily latte is enhancing your occupational mastery and represents money well spent.
• Ultimately, you are the one that must figure out what you want out of life. Once you do, then spend your money accordingly. Otherwise you might end up living someone else’s dream rather than your own.
• This is why buying a home usually only makes sense for people who will stay in it for the long term. The transaction costs alone can eat away any expected price appreciation if you buy and sell too often.
• The right time to buy a home is when you can meet the following conditions:
You plan on being in that location for at least ten years.
You have a stable personal and professional life.
You can afford it.
• If you plan to stay in an area for ten years but your personal or professional life isn’t stable, then buying a home may not be the right choice. For example, if you buy a home while you are single, you may end up needing to sell it and upgrade to a larger home if you decide to build a family. In addition, if you are always changing jobs or your income is highly variable, then taking out a mortgage may put your finances at risk.
• If you are deciding whether you should save up and get a bigger home or get a starter home and then transition later, I recommend waiting for the bigger home.
• When it comes to saving for a down payment (or other big ticket item), cash is the safest way to get there. Inflation is going to cost you a couple of percentage points a year while you save. However, given that you are only saving for a short period of time (a few years), the impact will be small.
• This suggests that when saving for less than two years, cash is probably the optimal way to go since there is less risk around what might happen with your money.
• If you need to save for something that will take less than three years, use cash. If you are saving for something that will take longer than three years, put your savings in bonds.
• After a major market crash you could lose your job or have other financial needs that prevent you from saving money. This is the risk of using stocks to save up for a larger purchase.
• It’s called the Crossover Point because this is the point when your monthly income crosses over your monthly expenses to grant you financial freedom.For example, if your monthly expenses are $4,000, once your investments can pay you more than $4,000 a month, then you have reached your Crossover Point.
• Work defines who you are. It provides a place where you are social with people. It gives you interaction with people all day long in an interesting way. It even helps you live longer and is very, very good for brain health.
• One of the other benefits of owning stocks is that they require no ongoing maintenance. You own the business and reap the rewards while someone else (the management) runs the business for you.
• It is this highly volatile nature of stocks that makes them difficult to hold during turbulent times. Seeing a decade’s worth of growth disappear in a matter of days can be gut-wrenching even for the most seasoned investors.
• The best way to combat such emotional volatility is to focus on the long term. While this does not guarantee returns, the evidence of history suggests that, with enough time, stocks tend to make up for their periodic losses.
• If I wanted to take more risk, I wouldn’t take it in the bond portion of my portfolio by buying riskier bonds. Bonds should act as a diversifying asset, not a risk asset.
• During market sell-offs, bonds are one of the only assets that tend to rise while everything else is falling. This happens as investors sell their riskier assets to buy bonds in what is commonly known as a “flight to safety.”
• If you lose your job because of a financial panic, you will be pleased to know that you should be able to rely on the bond portion of your portfolio to get you through these tough times; in other words, you can sell some bonds to generate cash.
• The one major downside to owning bonds is that their returns tend to be much lower than stocks and most other risk assets.
• We buy stocks so we can eat well, but we buy bonds so we can sleep well.”
• Since major price crashes in real estate tend to be rare, leverage usually provides a positive financial benefit to real estate investors. Despite the many financial upsides to owning an investment property, it also requires far more work than many other assets that you can set and forget.
• A property investment requires the ability to deal with people (the renters), list the property on a rental site and make it look appealing to prospective guests, provide ongoing maintenance, and much more.
• While the returns on investment properties can be much higher than stocks or bonds, these returns also require far more work to earn them.
• A REIT is a business that owns and manages real estate properties and pays out the income from those properties to its owners. This requirement makes REITs one of the most reliable income-producing assets.
• Max’s argument is quite clear—if you want access to the best angel investments with big, outsized returns, then you have to be deeply embedded in that community. You can’t do angel/small business investing as a side hustle and expect big results.
• Because Darren only bet what he was willing to lose, and he made sure that any such loss wouldn’t affect his financial future. If you ever decide to buy individual stocks, I can only hope that you do the same.
• The proportion of winning stocks that you’re trying to find is very low; and even those winning stocks aren’t winners forever.This is why owning all of the stocks—by buying an index fund or ETF—is usually a far better bet than trying to pick big winners among individual stocks.
• Because most markets going up most of the time means that every day you end up waiting to invest usually means higher prices you will have to pay in the future. So, instead of waiting for the best time to get invested, you should just take the plunge and invest what you can now.
• That feeling is accurate because it is very likely that a better price will appear at some point in the future. However, the data suggests that the best thing to do is ignore that feeling altogether.
• If you invested into the S&P 500 using these two approaches across history, you would find that the Average-In strategy generally underperforms Buy Now most of the time.
• Averaging-In to a 100% U.S. stock portfolio has underperformed Buy Now into a 60/40 U.S. stock bond portfolio most of the time.
• The Buy Now strategy with a balanced 60/40 portfolio usually beats the Average-In strategy for a portfolio of 100% stocks.
• Dollar-cost averaging (DCA): You invest $100 every month for 40 years. Buy the Dip: You save $100 each month and only buy when the market is in a dip. A dip is defined as anytime when the market is not at an all-time high.
• Buy the Dip underperforms DCA in more than 70% of the 40-year periods starting from 1920 to 1980. This is true despite the fact that you know exactly when the market will hit a bottom.
• The problem is that severe market declines don’t happen too often. In U.S. market history severe dips have only taken place in the 1930s, 1970s, and 2000s.
• Therefore, if you build up cash in hopes of buying at the next bottom, you will likely be worse off than if you had bought as soon as you could. Because while you wait for your beloved dip, you may find that it never comes. As a result, you end up missing out on months (or more) of compound growth as the market keeps rising and leaves you behind.
• Getting the negative returns later in life (when you have the most money in play) leaves you far worse off than if you experienced those negative returns when you first started investing. In other words, the end is everything.
• The Avoid Drawdowns strategy because it invests all of its money in bonds in years when stock drawdowns are too high (in this case 5% or more) and moves that money to stocks in all other years.
• Investing in bonds in years when the market declines by 15% (or more) and investing in stocks in all other years would maximize your long-term wealth.
• Losing 10% requires an 11.11% gain to recover, losing 20% requires a 25% gain to recover, and losing 50% requires a 100%.
• This implies that when the market is down by 50%, it’s time to back up the truck and invest as much as you can afford.
• If you aren’t rebalancing your portfolio, getting out of a concentrated (or losing) position, or trying to meet a financial need, then I see no reason to sell an investment—ever. I say this because selling can have tax consequences, which is something we should avoid as much as possible.
• If we made a single investment into a 60/40 U.S. stock/bond portfolio and never rebalanced it over 30 years, it would be mostly stocks by the end of the period.
• The Never Rebalance strategy tends to have portfolios that end up with 75%–95% in stocks after 30 years.
• Rebalancing reduces risk by shifting money from your higher-volatility assets (stocks) to your lower-volatility assets (bonds).
• All of these analyses illustrate the same thing—it doesn’t matter when you rebalance, just that you do it on some periodic basis.
• This is why I don’t recommend rebalancing frequently in your taxable accounts (i.e., brokerage account). Because every time you do, you have to pay Uncle Sam.
• For example, imagine that your portfolio is currently 70% stocks and 30% bonds, but you really want it to be 60% stocks and 40% bonds. Instead of selling 10% of the stocks and buying 10% more in bonds, you would keep buying bonds until your allocation is back to 60/40.
• The Roth is also better if you are reasonably certain that your tax rate in retirement will exceed your tax rate while working.
• I spoke with some retirement professionals who recommend utilizing a Roth 401(k) early in your career when your earnings may be lower and then switching to a traditional 401(k) later as your earnings increase.
• The conventional wisdom suggests that you should put your bonds (and other assets that pay frequent distributions) into your nontaxable accounts and your stocks (and other high-return assets) into your taxable accounts.
• In fact, if you want to maximize your after-tax wealth, then you should put your highest-growth assets in tax-sheltered accounts (e.g., 401k, IRA, etc.) and your lowest-growth assets in taxable accounts.
• Additionally, by placing your high-growth (and likely higher-risk) assets into a nontaxable account, you may be less tempted to sell them during a market crash because they are harder to access.
• For example, you can probably think of at least one person who is wealthier than you are. Well, that wealthier person likely has some wealthier friends, so they can think of someone wealthier than themselves as well. And if they can’t, then they can easily reference a celebrity (e.g., Gates, Bezos, etc.) who is.
• Researchers at the Federal Reserve Bank of New York have shown that an individual’s income grows most rapidly in their first decade of work (ages 25–35). Given this information, you can see why my focus at age 23 should’ve been on my career and not my investment portfolio.
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