Hard-won lessons about money and investing • Hacker News Board

Re: Hard-won lessons about money and investing

#181

Post by icedchai » Sun, Nov 30, 2014, 8:12 PM UTC

crdoconnor wrote: post #66

j_lev wrote: post #3

> 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 o…

>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.

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.

Re: Hard-won lessons about money and investing

#182

Post by gfodor » Sun, Nov 30, 2014, 8:20 PM UTC

This is the typical investment advice, and it's generally outdated and wrong to just invest in index funds based on asset classes if your goal is to diversify away volatility.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

Re: Hard-won lessons about money and investing

#183

Post by marincounty » Sun, Nov 30, 2014, 8:28 PM UTC

gbog wrote: post #126

lars wrote: post #123

Earlier quoted context omitted.

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…

But money don't buy good memories. I have much better memories of camping with friends for near zero euros, than expensive hotels.

Yea, it's good relationships with people. I'll throw pets in there too. Some of my best friends have been dogs, and cats.(Some might consider this pathetic, but my pets were important part of my life, and I miss them all. Hell--I don't consider them as pets--they were family members.)

Re: Hard-won lessons about money and investing

#184

Post by beagle3 » Sun, Nov 30, 2014, 8:52 PM UTC

Ecio78 wrote: post #161

justincormack wrote: post #93

Earlier quoted context omitted.

US government bonds (ten year, so plenty of short term price risk) pay 2.16%. If you are in Europe, German government bonds pay around 0.8%.

if you consider inflation (1.70% in the US,0.60% in Germany) those interests are almost zero. If you have 1M$ and want to live on that, and you're good enough to live with 25k$/yr, you need to consistently "extract" 2.5% on that capital, that means you need to consistently get 4.2% every year. And this exposes another issue: even if you have a safe investment that can give you 4.2%/yr on average, that's not steady, s…

> I'm not a finance expert so feel free to show me the fallacies of my reasoning!

Your reasoning is sound. And it's actually worse than that - the reported inflation in the US (CPI) vastly underestimates realistic costs of living. I would assume that's true in Germany and the rest of the world as well.

Officially, it is 1.7%. However, that includes hedonistic adjustments (you can buy a TV now for $70 that is equivalent to a $2000 TV from 30 years ago; therefore, $70 today is worth $2000 of 30 years ago; weighted by the relative part of your expenses that go towards buying TVs), "owner equivalent rent", which is a speculation by a sampling of home owners about how much rent they would have paid to live in their own house (are they over estimating? underestimating?), some measures ignore food and energy costs (who needs either?) and other shenanigans that make the numbers easy to manipulate on one hand, and impossible to reproduce on the other.

Unless the majority of your expenses are technology related and unchanging (you still happy with your Apple ][ performance, right?), the CPI is probably closer to 5% per year for a while now. Health, Education, Energy, Food and housing, which are responsible for most of everyone's expenses have been appreciating at a much faster rate than the official "inflation".

Re: Hard-won lessons about money and investing

#185

Post by j_lev » Sun, Nov 30, 2014, 8:55 PM UTC

MrUnknown wrote: post #155

ebbv wrote: post #119

Earlier quoted context omitted.

> 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.

"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.

Except it doesn't feel like sacrifice after a while.

Netflix/Cable TV --> reading a book (from the library) or HN. Starbucks --> broaden your horizons and explore the world of "grind your own." Eating out more than once a week --> eating out once a week, and preparing healthy meals the rest. Sometimes having your friends over for dinner. Gym membership --> enjoy looking for new kettlebell and bodyweight exercises that you can do at home. Go for walks with your wife in the evenings, or incorporate walking/exercise into your weekly date.

I'll admit that overseas travel is one area where I still overspend, so this would fall into the "sacrifice" category if I were to cut back. Even so, the skills in frugality that you learn while working your day job are useful on overseas trips. Haggling while jostling with old ladies at a wet market (in a language you don't understand) in order to buy ingredients for breakfast and a packed lunch is an experience that many travelers will miss out on.

(full disclosure: last holiday was a "relax by the hotel pool/private beach" affair. But even then we had a trip to the supermarket to buy some beer, fruit and snacks instead of pay hotel rates).

Anyway, it's not something that happens over night, rather a skillset you work on like any other. You find your own level of "sacrifice," your own groove, that you're comfortable with. Mr Money Mustache is just one guy but there are plenty of people who have entire sites dedicated to the movement who can talk about this idea of "sacrifice" better than I can.

Re: Hard-won lessons about money and investing

#186

Post by aquadrop » Sun, Nov 30, 2014, 8:58 PM UTC

lubos wrote: post #132

gbog wrote: post #126

Earlier quoted context omitted.

But money don't buy good memories. I have much better memories of camping with friends for near zero euros, than expensive hotels.

You need to consider the opportunity cost too. While you were camping in the bush, you weren't earning.

I don't know why you were downvoted, your statement is right. For example, if someone have financial problems for some reason and have to work 2 jobs to deal with it, he/she hardly could get out camping with friends. Money can buy you spare time which you can fill with uncostly memories.

Re: Hard-won lessons about money and investing

#187

Post by robrenaud » Sun, Nov 30, 2014, 9:00 PM UTC

JoshTriplett wrote: post #38

dave1619 wrote: post #22

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, invest…

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 fan…

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

Re: Hard-won lessons about money and investing

#188

Post by Retric » Sun, Nov 30, 2014, 9:01 PM UTC

tacos wrote: post #165

Retric wrote: post #160

Earlier quoted context omitted.

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…

Getting the same return on a bond investment as a stock investment is not the goal. Diversification into fixed income reduces risk (specifically volatility) which is important when you need the money at a predicted date. See this link, provided elsewhere in this thread: http://bucks.blogs.nytimes.com/2011/09/06/why-and-how-divers... Sorry to ding, but "I don't think bonds are a good investment for most people" is exa…

Bonds are paying way less than stocks. If you think there a good idea feel free to defend them but consider this:

First off most methods of diversifying bonds (bond funds) add interest rate risks so there not predictable returns. Which means you can buy specific bonds. A 1 year T-Bill pays under 1% before taxes which is hardly worth the hassle for most people. To get better returns in the short term your stuck with increased risks. Sure, longer term bonds have higher returns but not all that high and your still stuck with inflation risks.

As to the classic advice of sticking 50% of your portfolio into bonds your basically getting negative risk adjusted returns. If you want liquidity just hold cash it's safer and more flexible. As to being an inflation hedge I don't see how we can have less inflation in the future.

PS: There are edge cases, but as long as interest rates are this low their fairly rare.

Edit: I do agree it's a good idea to keep some liquidity, but nothing is wrong with just holding some cash.

Re: Hard-won lessons about money and investing

#189

Post by j_lev » Sun, Nov 30, 2014, 9:06 PM UTC

markovbling wrote: post #112

FiReaNG3L wrote: post #110

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?

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)

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.

Re: Hard-won lessons about money and investing

#190

Post by oldspiceman » Sun, Nov 30, 2014, 9:07 PM UTC

dredmorbius wrote: post #152

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 catastr…

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.