Just Keep Buying

Book by Nick Maggiulli

Savings

About Savings

• Saving matters in early life, investment dominates later in life
• Law of empty stomach: spending doesn’t increase proportionally with income
• Savings = income - spending
• Save less than u think: retirees don’t spend that much
• Biggest lie in personal finance: you can get rich if you cut your spending
• Convert human capital to financial capital (temporary measures): sell your time, sell your skill, sell your product, teach people, climb the corporate ladder
• Think like an owner: extra income should be used to acquire more income-producing assets
• Lifestyle creep
• “Once you spend more than 50% of your future raises, then you start delaying your retirement”
• Save 50% of raises for retirement
• Savings goal of 25x annual spending can lead to a comfortable retirement

Spend money guilt-free

1. The 2x rule: Anytime I want to splurge on something, I have to take the same amount of money and invest it as well
2. Focus on maximising (long term) fulfilment

Debt

• To reduce risk
• To generate a return greater than the cost to borrow
• Value of degree today = (increased lifetime earnings/2) - lost earnings
• Payday loans, credit cards, and loans from family and friends caused the most stress, while mortgage debt caused the least

Rent or buy home

• One-time costs of buying a home can range anywhere from 5.5%-31% of the value of the home depending on the down payment, closing costs, and real estate agents employed
• Ongoing costs: property taxes, maintenance, insurance
• “The primary cost of renting (outside of the monthly rent payment) is long-term risk. This risk shows up in unknown future housing costs, instability in living situation, and ongoing moving costs.”
• “While your home is unlikely to crash in value, it’s also unlikely to be your long-term ticket to wealth either”
• The right time to buy a home: “You plan on being in that location for at least ten years. You have a stable personal and professional life. You can afford it.”
• Afford a house: able to provide 20% as down payment, Debt-to-income ratio below 43%
• “Given the transaction costs, it’s probably better to wait to buy something a little outside of your budget than to buy a starter home and then sell it within a few years. I know this sounds risky, but when you buy a home, the riskiest part is in the first few years. As time goes on, your income will likely grow with inflation, but your mortgage payment won’t.”

How to save for a down payment

• “To test whether investing in bonds beats holding cash, we can run the same exercise of saving $1,000 a month, but this time we will invest that money in U.S. Treasury bonds. We do this via an exchange-traded fund (ETF) or index fund. By buying U.S. Treasury bonds we can earn some return on our money while also holding a low-risk asset.”
• “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”
• “Now, let’s look at saving $1,000 a month and investing it in the S&P 500 instead of U.S. Treasury bonds. How does this strategy fare against bonds? Most of the time it does better, but sometimes it does much, much worse.”
• “Because investing in stocks during major crashes (e.g., 1929, 1937, 1974, 2000, and 2008) would have meant you needed to save and invest for an additional year (or longer) to reach your savings goal, when compared to investing in bonds”

When can you retire

• How much money retirees could withdraw from their portfolios each year without running out of money?
• The 4% rule: “Bengen found that retirees throughout history could have withdrawn 4% of a 50/50 (stock/bond) portfolio annually for at least 30 years without running out of money. This was true despite the fact that the withdrawal amount grew by 3% each year to keep up with inflation”
• “To follow the 4% rule, you would need to save 25 times your expected spending in your first year of retirement.”
• Spending declines in retirement , typically declined by about 1% per year
• The Crossover Point Rule: the point when your monthly income crosses over your monthly expenses to grant you financial freedom
• Crossover assets = monthly expenses / monthly investment return
• Monthly return = (1 + annual return)^(1/12) - 1
• “Zelinski’s book suggests that it is not a financial crisis you need to worry about in retirement, but an existential one.”

Investment

Why

1. To save for your future self
   1. Besides saving for an emergency, those who cited retirement as a savings motive regularly saved more than those who didn’t
2. To preserve money against inflation
   1. The prices of everyday goods should double every two to three decades, under modest levels of inflation
   2. By owning assets that preserve or grow their purchasing power over time, you can successfully counteract the effects of inflation
3. To replace your human capital with financial capital
   1. Human capital: value of your skills, knowledge, and time
   2. Human capital is a dwindling asset
   3. Each year, a portion of your money you get while working should be converted into financial capital

What

1. Stocks: ownership/equity in a business

   1. Annual compounded return: 8%-10%
   2. Pros: high historic returns; easy to own and trade; low maintenance
   3. Cons: high volatility; valuations can change quickly based on rather than fundamentals
   4. How: “You can purchase individual stocks, or an index fund or exchange-traded fund (ETF) that will get you broader stock exposure. For example, an S&P 500 index fund will get you U.S. equity exposure while a Total World Stock Index Fund will get you worldwide equity exposure”
   5. “I prefer owning index funds and ETFs over individual stocks for a host of reasons (many of which will be discussed in the following chapter), but mainly because index funds are an easy way to get cheap diversification.
   6. Even if you decide to only own stocks through index funds, opinions differ on which kinds of stocks you should own. Some argue that you should focus on size (smaller stocks), some argue that you should focus on valuations (value stocks), and some argue that you should focus on price trends (momentum stocks).
   7. There are even others that suggest that owning stocks that pay frequent dividends is the sure-fire way to wealth.”

2. Bonds: loans made from investors to borrowers, to be paid over a certain period of time (term, tenor, or maturity)

   1. Annual compounded return: 2%-4% (0% in low rate environments)
   2. Pros: lower volatility; good for rebalancing; safety of principal
   3. Cons: “Low returns, especially after inflation. Not great for income in a low-yield environment”
   4. “Many bonds require periodic payments (known as coupons) to be paid to the investor over the term of the loan before the full principal balance is paid back at end of the term.
   5. The annual coupon payments divided by the price of the bond is its yield. So if you bought a bond for $1,000 and it paid you$100 a year, it would have a 10% yield [$100/$1,000].
   6. The US Treasury is the most creditworthy borrower on the planet, since they can just print any dollars they owe at will
   7. “Bonds tend to rise when stocks (and other risky assets) fall.
   8. Bonds have a more consistent income stream than other assets.
   9. Bonds can provide liquidity to rebalance your portfolio or cover liabilities.”
   10. You can choose to buy individual bonds directly, but I recommend buying them through bond index funds or ETFs because it’s much easier

3. Investment Property: you can use it yourself, and it can also earn extra income if you rent it out to others when you are not using it

   1. Annual compounded return: 12%-15% (dependent on local rental conditions)
   2. Pros: Higher returns than other more traditional asset classes, especially when using leverage
   3. Cons: Managing the property and tenants can be a headache. Hard to diversify
   4. You will have rent-paying guests helping you to pay off the mortgage while you enjoy the long-term price appreciation on the property
   5. If you were able to borrow money when acquiring the property, your return can be a bit magnified due to the leverage
   6. Buying individual investment properties is similar to buying individual stocks in that they aren’t diversified

4. Real Estate Investment Trusts (REITs): a business that owns and manages real estate properties and pays out the income from those properties to its owners

   1. Annual compounded returns: 10%-12%
   2. Pros: Real estate exposure that you don’t have to manage. Less correlated with stocks during good times
   3. Cons: Volatility greater than or equal to stocks. Less liquidity for non-traded REITs. Highly correlated with stocks and other risk assets during stock market crashes
   4. REITs are legally required to pay out a minimum of 90% of their taxable income as dividends to their shareholders
   5. Publicly traded: Trade on a stock exchange like any other public company and are available to all investors
   6. Private: Not traded on a stock exchange and only available to accredited investors
   7. Publicly non-traded: Not traded on a stock exchange, but available to all public investors through crowdsourcing

5. Farmland

   1. Annual compounded return: 7%-9%
   2. Pros: Lower correlation with stocks and other financial assets. Good inflation hedge. Lower downside potential (land less likely to “go to zero” than other assets)
   3. Cons: Less liquidity (harder to buy and sell). Higher fees. Requires “accredited investor” status to participate in crowdsourced solution
   4. Farmland is modeled to return in the “high single digits” with roughly half of the return coming from farm yields and half coming from land appreciation
   5. The most common way for investors to own farmland is through a publicly traded REIT or a crowdsourced solution

6. Small Businesses / Franchise / Angel Investing

   1. Annual compounded return: 20%-25%, but expect lots of losers
   2. Pros: Can have extremely outsized returns. The more involved you are, the more future opportunities you will see
   3. Cons: Huge time commitment. Lots of failures can be discouraging

7. Royalties: payments made for the ongoing use of a particular asset, usually a copyrighted work

   1. Annual compounded return: 5%-20%
   2. Pros: Uncorrelated to traditional financial assets. Generally steady income
   3. Cons: High seller fees. Tastes can change unexpectedly and impact income
   4. Lindy effect: something’s popularity in the future is proportional to how long it has been around in the past

8. Your own products

   1. Annual compounded return: Highly variable. Distribution is fat-tailed (i.e. most products return little, but some go big)
   2. Pros: Full ownership. Personal satisfaction. Can create a valuable brand.
   3. Cons: Very labor intensive. No guarantee of payoff

What About Gold, Crypto, Art, etc.

• No reliable income stream associated with their ownership
• Their valuations are based solely on perception

Why you shouldn’t buy individual stocks

• Unstable