If You Can: How Millennials Can Get Rich Slowly – William J. Bernstein
Date read: 7/15/17. Recommendation: 7/10.
An easy-to-read overview of the topics covered in his earlier book, The Investor's Manifesto. I prefer the depth and detail of the latter. But if you're looking for an introduction to investing in low-cost index funds and the importance of developing a financial strategy at an early age, this is a good starting place.
See my notes below or Amazon for details and reviews.
Start by saving 15 percent of your salary at age 25 into a 401(k) plan, and IRA, or a taxable account (or all three). Put equal amounts of that 15 precent into just three different mutual funds:
- A US total stock market index fund
- An international total stock market index fund
- A US total bond market index fund
*Once per year you'll adjust their amounts so that they're equal again.
Rest assured that you will get Social Security; its imbalances are relatively minor and fixable, and even if nothing is done, which is highly unlikely in view of the program's popularity, you'll still get around three-quarters of your promised benefit.
Five Hurdles to Overcome:
1) People spend too much money.
2) You need adequate understanding of what finance is all about.
3) You need to learn the basics of financial and market history.
- "History doesn't repeat itself, but it does rhyme." Fits finance to a tee.
- Nothing more reassuring than being able to say to yourself, "I've seen this movie before and I know how it ends."
4) Overcoming yourself.
- Human beings are simply not designed to manage long-term risks.
- We've evolved to think about risk as a short term phenomenon.
- Proper time horizon of assessing financial risk is several decades
- From time to time you will lose large amounts of money in the stock market, but these are usually short-term events.
5) Recognize the monsters that populate the financial industry.
If you're starting to save at age 25 and want to retire at 65, you'll need to put away at least 15% of your salary.
A plumber making $100,000 per year was far more likely to be a millionaire than an attorney with the same income, because the latter's peer group was far harder to keep up with.
When you buy and sell stocks, the person on the other side of the trade almost certainly has a name like Goldman Sachs or Fidelity. And that's best case scenario. What's the worse case? Trading with a company insider who knows more about his employer than 99.9999% of the people on the planet.
If you want high returns, you're going to occasionally have to endure ferocious losses with equanimity, and if you want safety, you're going to have to endure low returns.
Reading Suggestion: Jack Bogle's Common Sense on Mutual Funds.
You should use your knowledge of financial history simply as an emotional stabilizer that will keep your portfolio on an even keel and prevent you from going all-in to the market when everyone is euphoric and selling you shares when the world seems to be going to hell in a hand-basket.
The real purpose of learning financial history is to give you the courage to do the selling at high prices and the buying at low ones mandated by the discipline of sticking to a fixed stock/bond allocation.
People tend to be comically overconfident: for example, about eighty percent of us believe that we are above average drivers, a logical impossibility.
We tend to extrapolate the recent past indefinitely into the future...Both long bear and bull markets also seem to take on a life of their own.
Humans are "pattern seeking primates" who perceive relationships where in fact none exist. Ninety-five percent of what happens in finance is random noise, yet investors constantly convince themselves that they see patterns in market activity.
To be avoided at all costs are: any stock broker or "full-service" brokerage firm; any newsletter; any advisor who purchases individual securities; any hedge fund.
Your biggest priority is to get yourself out of debt; until that point, the only investing you should be doing is with the minimum 401(k) or other defined contribution savings required to "max out" your employer match; beyond that, you should earmark every spare penny to eliminating your student and consumer debt.
Next, you'll need an emergency fund, enough for six months of living expenses.
Then, and only then, can you start to save seriously for retirement.
Your goal, as mentioned, is to save at least 15 percent of your salary in some combination of 401(k)/IRA/taxable savings. But in reality, the best strategy is to save as much as you can, and don't stop doing so until the day you die.
The optimal strategy for most young people is thus to first max out their 401(k) match, then contribute the maximum to a Roth IRA, then save in a taxable account on top of that.
Once a year you should rebalance your accounts back to equal status.