Yesterday, my pal Jim Collins dropped me a line. "The audio version of my book just came out," he told me. "Audible is letting me give away some free copies. Do you think your readers would be interested?" I do think so! Plus, this is a perfect opportunity to migrate my review of The Simple Path to Wealth from Money Boss to Get Rich Slowly. At the end of this article, I'll explain how you can get a copy of Jim's audiobook, if you're interested (and lucky).
In 2015 and 2016, Kim and I took a 15-month RV trip across the United States in an RV. It was awesome.
During late July 2015, we stopped for a few days on the Wisconsin side of Lake Michigan. My friend Jim Collins had invited us to spend some time at Shamba, the waterfront vacation home that belongs to his sister-in-law. For several days, we sipped wine and walked in the surf with Collins and his wife. We also talked about work. (I had just begun formulating plans for Money Boss; Jim was writing a book.)
"What do you do?" Kim asked Collins on our first afternoon at Shamba.
"I retired early," he explained. "I saved up and got out of the rat race. Now I write a blog about money. It started as notes I wanted to share with my daughter, but it's become something bigger. I guess most people know me because of my series of articles on stock-market investing. Now I'm turning the blog into a book."
"Ugh," Kim said. "Investing frustrates me. J.D. has tried to explain his investment philosophy a couple of times since we started dating. He says it's simple, but it still seems overwhelming."
"It doesn't have to be," Collins said. "You should read my articles. Maybe they'll help." Kim read his articles. They helped.
By the time we'd driven around the Upper Peninsula of Michigan and made our way to Indiana's Amish country, Collins' blog had spurred Kim to action. As I sat in the RV outlining my early vision for Money Boss, Kim was opening Vanguard accounts and moving her retirement savings into index funds.
During four years together, I couldn't persuade Kim to manage her own retirement savings. Collins convinced her in two weeks. His advice is that good.
Since that weekend in Wisconsin, Collins published the book he was working on. The Simple Path to Wealth presents the advice from his blog in a coherent, unified package. It's an easy-to-understand primer on stock-market investing — and financial independence.
Robert Farrington from The College Investor recently went to bat for one of his readers. "I feel like my advisor isn't steering me in the right path," his reader told him. "When I mention [index funds] to him, he changes the subject or diverts to other topics."
Farrington ran the numbers and discovered that his reader's financial advisor stood to gain $7247.50 in commissions by recommending expensive mutual funds. But that's not all. "When you add in the expense ratio, this portfolio is costing the investor $11,004.71 in year one," Farrington writes. "And potentially costing the investor $1,879.21 or more per year after!" (And that doesn't include any commissions and fees created by rebalancing the portfolio periodically.)
As an experiment, Farrington looked at what it would take to move his reader's existing portfolio to low-cost index funds. The results were shocking: "By simply investing in a low cost portfolio, we were able to reduce total costs from $11,004.71 to just $176.60. That's a 99% reduction in costs."
This reminds me of a story from my own life.
Hold onto your hats, folks. It's rant time!
Based on what I'm hearing on Facebook, Twitter, and in real life, it's time for a refresher course on the difference between investing and speculation. Although these two concepts share some commonalities, they're very different things.
Let me start by telling a story, one I've told many times before. It's the story of the worst "investor" I've ever known: me.
The Worst Investor I've Ever Known
Before my financial turnaround, I didn't really understand what the stock market was for. I viewed it as a sort of casino, I guess. I believed investors gambled on individual stocks and hoped that they'd outperform the rest of the market.
So, that's what I did. I treated the stock market as if it were a casino. I'd pick a stock, put all my money into it, and cross my fingers. I took risky gambles hoping to strike it rich.
Unsurprisingly, I lost a ton of money.
- During the late 1990s, some friends and I formed an investment club. Each month, we contributed money and picked where to put it. We chose stupid, stupid stocks -- whatever was riding high at the moment. When the tech bubble burst, so did our bankroll and our enthusiasm.
- In 2000, enamored by PalmPilot, I bought stock in the company that made the devices. I paid close to $90 per share. Just over a year later, the stock had lost 90% of its value. Oops.
- One of my friends worked for The Sharper Image. In 2007, the company was struggling and the stock was in the toilet. At dinner one night, my friend told me how management was trying to turn things around. Sounded promising, so I put my $3500 Roth IRA contribution into the company's stock. The company soon went bankrupt and my 2007 IRA contribution is now worth nothing.
- During the banking crisis, I invested in Countrywide Financial. "Countrywide is on your side," right? Wrong. Yet another stock that went to zero.
I wasn't investing; I was speculating. I was gambling. I was trying to pick winning cards at the casino. But that's how I thought the stock market worked.
The High Risk of Risk
After writing at Get Rich Slowly for a while, my viewpoint changed. As I became better educated, I realized that the stock market is not a casino. It's a marketplace. It's a tool that allows people to buy shares of businesses. (This is obvious, but trust me: Most people don't understand this.)
When I buy a piece of one business, I'm taking on the risk associated with that business. We hear all the time that most small businesses don't survive seven years, right? Well, even big businesses go under. Even big businesses lose money. There's always risk associated with owning a business.
In the world of investing, "risk" is the probability that you'll lose money. (There are many types of investment risks, by the way.) The notion of "return" is fundamentally tied to the concept of "risk". The greater the risk -- the greater the chance you'll lose money -- the higher your potential returns (gains) are.
One difference between investment and speculation is the amount of risk involved. When you put your money into something with minimal risk, you're investing. When you put your money into something with high risk, you're speculating. Like I said at the start, there are plenty of commonalities in the two actions -- but the element of risk is a huge differentiating factor.
One way to mitigate risk is to own pieces of several businesses. Owning many businesses is even better. This practice is known as diversification. Diversification reduces risk. It allows you to enjoy the profits and benefits without getting screwed when one business goes under. This is investing. Putting all of your money into one stock and hoping that it increases in value is speculation.
While I'm primarily an index fund investor -- and at 48 years old still have 80% of my money in equities (my only bonds are "legacy" bonds) -- I do like to read about other approaches to retirement investing. I've long been tempted by the Permanent Portfolio, for example.
The November 2017 issue of Kiplinger's features suggested portfolios for five stages of life. Mostly I disagree with them, and I don't like that the funds they promote are expensive. That said, I think their approach to retirement investing is interesting. On the surface, it's the age-old "60% stocks/40% bonds portfolio". What makes it interesting, however, is their reasoning behind this asset allocation.
The Bucket System
Kiplinger's suggests that retirees can balance both risks using what they call a "bucket system". Here's how it works.
- Divide your portfolio into three "buckets". Each one serves a specific purpose.
- The first bucket contains one year's worth of living expenses. This money is in cash (or a cash equivalent). So, for instance, if you spend about $36,000 per year, then your first bucket might have $36,000 in a high-yield savings account.
- Your second bucket contains enough money to cover expenses for nine years. For someone who spends $36,000 per year, this would be roughly $324,000. Kiplinger's says this money should be invested in "high-quality bonds or a fixed annuity". In reality, it should be in something smarter than cash but safer than stocks -- whatever that means to you.
- The final bucket contains the rest of your retirement savings, which turns out to be 60% of the entire portfolio. You want to invest this money in "stocks and other aggressive options". (For me, this would include real estate.) Your aim is for this bucket to be continually growing.
Naturally, you keep your buckets at the suggested levels through regular rebalancing. From the article:
Replenish your buckets periodically by trimming top performers in your third bucket and by selling bond-fund shares as necessary to refill the cash bucket. If the market tanks, hold off on touching your stock funds until they recover, even if doing so means you draw down your second bucket for a few years to pay for living expenses.
Like I said, this is a traditional 60/40 asset allocation, but it's explained in a manner that actually makes sense to me. It's still too conservative for me, but I could see why other folks might choose this option.
"Got any investment tips?"
It's a common question, but there is no one answer to it. The right investment decision depends on the circumstances, and circumstances change over time. For example, the right way to invest can vary depending on how much money you have available. To look at how the size of the investment should guide your approach, consider the different actions you might take with $1,000, $10,000, or $100,000 to invest.
Investing can be intimidating, but it doesn't have to be. The key is to get a few basic concepts down first and then set clear goals for your money. Then it's a matter of determining which tools will be best for the job at hand -- do you want to be risk-averse, passive investor? Are you focusing on retirement and college savings at the same time?
To the end, we've gathered all the basics in one place so anyone can quickly get a sense of the mechanics of the market and what it means to their future.
I've just come from the gym. My arms are so spent I can barely type. My glutes are killing me as I sit on my wooden chair. I am guzzling ice water and still sweating a little. An hour of concentrated exercise with a trainer -- part of my gym memberships -- has left me feeling both exhausted and accomplished. I love my gym.
My gym membership costs us $158.46 per month. I can hear the gasps of horror from the frugal corner: that's 1,901.52 a year! Over the next 10 years, that's almost $20K I could be putting into my Roth IRA. That's $5,704.56 we could be putting into the 529 college account for our second child (you remember him, the one we call Hope He Gets A Soccer Scholarship)! I could use that to open a stock investment account and invest in electronic-traded funds. I could purchase corporate bonds!
Knowing you aren't saving enough for retirement isn't a great feeling, but at least you are not alone.
A full 71 percent of Americans say they are behind on their retirement savings and more than half, 54 percent, believe they will never pay off their debt fully, according to a new national survey commissioned by Experian together with Get Rich Slowly and other top U.S. personal finance blogs. Entering retirement with a large debt load is risky, experts say, and older consumers are carrying more debt -- mortgage, credit card, even student loans -- into their retirement years than ever before, according to data by the Consumer Financial Protection Board.
Lower risk investments are becoming more popular now that interest rates seem fixed at historic lows.
Remember the thrill of bringing your savings account book to the bank when you were a kid? They would stamp it and -- ta-daaaa -- you had more money than when you walked in.
Fast forward to today. Most of us don't get that giddy feeling after making a deposit with the so-low-it's-not-even-worth-it interest earned on traditional bank deposit accounts like savings accounts, money markets and certificates of deposit.
Ah, retirement strategies. Either a dream or a worry, but either way, you need them.
Dreaming of retirement is part of the evolution of life. As a 20-something, you spend time envisioning the amazing career you'll have and the important work you'll do. As a 50-something, what you picture is a hammock, an ice-cold beer, and a good book. You picture retirement.
For years, The Husband has laughed about the retirees who snag the earliest oil change and dentist appointments simply because they are so used to getting up at the crack of dawn every day of their working lives. So in retirement, they keep the schedule. Not me. I. Am. Sleeping. In. My vision of retirement consists entirely of not having the alarm go off every morning. Never. Not for any reason.<