[Mitchhhs]

This is quite sad.

One thing i've been shocked by over the years is how often even well educated, highly intelligent individuals have a very poor education in personal finance and make terrible decisions. Theres just so much noise out there and its still crazy how much of the investment management industry exists despite showing negative value. If I had to sum up personal finance advice for the average person in a few bullets it would be this.

1. Invest in a well diversified portfolio that pays very low fees (vanguard funds for instance) 2. Do not try to time the market 3. Save as much as you can as early as you can - maximize your 401k/ROTH contributions 4. Never carry a balance on your credit card from month to month

And yet so much goes wrong...

[cletus]

There's actually more to it than that.

It's worth noting that there is a not insignificant number of people who are poor because they make (financially) poor decisions. I say this completely not in a way that's judgmental or dismissive of the issues poorer people have (in the US in particular). There are a number of reasons for this. Decision fatigue [1] is one of them.

So when you have anything from a moderate amount of wealth, you probably know that time, patience and a little financial discipline is all that's required to preserve and even grow that wealth.

Have you ever noticed that it's mostly poor people who buy lottery tickets [2]? Likewise it's the poor who disproportionately fall for "get rich quick" schemes. Some of this you can attribute to bad judgment but also desperation plays a part. I mean, if you have $1000, what does a 10% return net you? $100? Who cares? But what if it could turn into $100,000? Now that'd be something! I suspect this plays into the gullibility of many when it comes to scams.

So in the Steadman case I imagine there was some of that but I also suspect many (or even most) investors were just trying to invest in their future without the promise of 1000x returns and just got duped.

Don't discount the "get rich quick" mentality though. I've seen this first hand. My father and uncle spent their entire lives trying to get rich quick.

[1] http://www.nytimes.com/2011/08/21/magazine/do-you-suffer-fro...

[2] https://www.theatlantic.com/business/archive/2015/05/lotteri...

[goialoq]

There are some weird biases on display here, and conflation of income and wealth. Plenty of high-income people have low wealth because they waste money. Obviously, the higher income you have, the more buffer you have against bad decisions, and the more growth opportunity you have.

[ChuckMcM]

It is sad on many levels, but it is also understandable. I've met people who consider their maxed out 401K savings as "meeting their savings goal" and so they spend excess income of frivolous things. Hardest thing in the world to explain to someone looking at an unexpected end of the year bonus of $50K that even though they saved the 'maximum' of the about $25K in their 401k they should also put at least half of that $50K into savings as well. Unless you have 10x your annual salary in a savings account you really can't say you have 'saved enough'. Even then there are so many things that can and do hit you in life that aren't part of the plan. Your house burns to the ground, your kid develops cancer, your wife decides she likes someone other than you better, Etc. It goes on and on.

My grandmother was a daughter of the depression and was really paranoid about future losses (when she passed we found vegetables and fruits she had canned 'just in case' in the cellar that were decades old!) But she also had an expression I liked. I would ask her what she was saving for and she would say "I don't know but I'm sure God will tell me what it is when the time is right."

[nine_k]

Saving 10x your annual salary means saving half of your salary for twenty years. This is, to my mind, not very realistic.

You need to invest into something highly profitable to hit this goal without being so drastic, e.g. to have bought some Bay Area realty in 1980s, or some Apple stock around that time. This is not a common option, and it's mostly unavailable now.

[kayhi]

I think this is why people recommend starting early and having a 40 year window.

I’m considerate of the fact that many have student loans, etc. and this isn’t feasible.

A blogger Mr. Money Moustche pushes hard on having a high savings rate compared to the norm.

[ChuckMcM]

This is absolutely true. Student loan debt is a huge burden. If you're burdened by debt then most financial advisers in a low inflation scenario suggest you pay it off as quickly as you can. If we suddenly get 8 - 12% annual inflation and your salary is tracking that, then by all means stretch out your repayment so that you can pay it off with inflated dollars.

[ChuckMcM]

It is important to consider that once you put something away it can start earning money on its own. So if you work backwards, lets assume you save your 25K/year in your 401k and you add 25K/year in just part of your income. That is 50K/year which when you are young is perhaps half your salary and 20 years later is perhaps 1/4th or 1/5th (assuming you go from making $100K / year early on and eventually get to $200K /year). If you look at the S&P500 [1] and no-load or zero load ETFs, you can get an average annualized rate of return of ~ 7%. Do the math (here is a convenient web site: https://www.budgetworksheets.org/invest/) and after 20 years you've got $2.1M saved. You started at 22 and you ended at 42 and now you have 10x your ending salary of $200K/year saved. When you are young and have no dependents you can save a ton of money, and the more you save, the earlier you save it, the more it piles up at the end when you need it. A couple of big signing bonuses when changing jobs, a bit of gain from the stock purchase plan. It isn't as far out of reach as you might imagine.

The other thing to be careful of is the who "bought real estate in the '80s, those days are long gone" kind of things. If you bought real estate in Denver in 2010 you're doing pretty well right now. If you bought 10,000 shares of Facebook stock when they IPO'd and held it (that was only 6 years ago) it would be worth over $1.75M today. I'm not trying to exploit my hindsight, I'm trying to share with you that large changes in investment value happen all the time, markets change. So you should not tell yourself that such opportunities are "mostly unavailable now" they are just as available now as they were then. Sometimes you will win and sometimes you won't but if you are reasonably diversified in your investment plan you can take advantage of a growing economy.

[1] https://www.investopedia.com/ask/answers/042415/what-average...

[jogjayr]

It's entirely possible for any household earning 2x median income. That means you can have the lifestyle of the median household (with 0% savings rate) and save 50% of your income.

Of course 2x median is quite high for most people; that's sort of baked into the definition of "median". I'd expect HN readers to be close to that because of higher tech salaries but acknowledge it's hard for everyone else.

Even with a salary 1.5x of median, you could live the lifestyle of someone making ~0.8x of median income i.e. a lower-income, but not poverty, lifestyle and save 50% (I think my math is right here). You can still lead a happy and fulfilling life at this spending level. There'll be no eating at nice restaurants, drinks at pubs with friends or annual foreign vacations. But plenty of weekend hiking, DVDs from the library, home-cooked meals, and boardgames with friends.

In a nutshell, it's possible but you'll have to change your entire way of living.

[npsimons]

> 1. Invest in a well diversified portfolio that pays very low fees (vanguard funds for instance) 2. Do not try to time the market 3. Save as much as you can as early as you can - maximize your 401k/ROTH contributions 4. Never carry a balance on your credit card from month to month

I have to strongly second all of these; the issue becomes, once you've done them, what more can you do? You get to a certain age and realize you have most of your career behind you, or you'd like to have most of your career behind you so you can retire early - how do you get there? It's a problem that cuts across different aspects in life: what to eat, how to exercise, etc. Min/maxing, munchkining applied to real life. Is it any surprise that software engineers looking to squeeze the last possible cycle or byte out of their software do these sorts of things? But much like software, premature optimization is the root of all evil . . .

[mooreds]

Have you read Mr Money Mustache? He has lots to say about this stuff: http://www.mrmoneymustache.com/

[QAPereo]

Finance isn't rigorous or fundamental in the way that somethings like math, physics, chemistry, etc are. In that way, it's a lot less interesting to many highly intelligent people, because it is after all, just bullshit which happens to be capable of making you rich in a narrow point in time. In another time and place, there would be nothing valuable or true about most of economics, finance, and the like. Meanwhile the hyperfine transitions of Hydrogen are, and will always be what they are, and be just as useful and fundamental in a thousand years (hopefully).

So, unless the highly intelligent, well educated person has a particular interest in finance, it's probably going to appear to be the crooked, black magic shitstorm it really is.

[bllguo]

It may be less interesting to highly intelligent people, but finance employs an enormous number of them regardless. I assure you that plenty of highly intelligent people care just as much as anyone else about being rich. Your implication - that highly intelligent people are more likely to care about "useful and fundamental" scientific results than money - seems very naive.

[alexanderstears]

It's not accurate to characterize finance as simply something that happens to be capable of making you rich in a narrow point in time. More than you know, I'm not a cheerleader of modern finance but it is the reason that most of the capital in the world exists and it's important for people to be aware of it as a fundamental part of our society. People ignore it at their own risk.

You're right that the problems of finance aren't fundamental to the natural world, and they're not as elegant as the problems in mathematics and the mathematical sciences.

However, there is some basic amount of financial knowledge that people should have as a basis of functioning in the world. And I think many intelligent people should be interested in establishing that knowledge base because it can enrich their life.

What's fortunate is that the amount of knowledge required to simply understand one's degrees of freedom and the outcomes is pretty basic. Even if you don't find it interesting, you should be able to slog through it in less than a day. And that's a good thing because it would take a lot longer than a day to get to the state of the art in finance but that's not critical to understanding why it's unfavorable to use a credit card to buy a car.

[recursive]

How do you get trustworthy information? I'm basically financially illiterate, but I'm not really happy about it. I'm interested in learning, but how? Everyone's trying to sell me something. I don't know how to establish credibility of a source. And I'm not keen to take financial advice from an arbitrary source, since there's often a distinct incentive to give bad advice.

[clay_to_n]

The best resource I've found is Reddit's personal finance forum, and specifically their "How to Handle Money" guide - especially the flowchart and "simplified flowchart".

https://www.reddit.com/r/personalfinance/wiki/commontopics

I've found a lot of other great individual articles, but no other "how do I even start?" resource with much value.

[paviva]

The intelligent investor by Ben Graham. He's long dead, so no conflits of interests.

[alexanderstears]

I think the best thing to do is look at each transaction separately, read a few sources, and reflect on what made sense, what the sources were all agreement about, and what seemed like a pitch.

Consumer advocacy agencies usually have excellent advice. Credit unions seem to have well-intentioned advice but the information can be incomplete.

E.g if you're about to buy a car, read a few articles about getting car loans, don't just take the dealership finance person at their word.

I've been meaning to get around to making a decision tree for technical people who never had to bother with this stuff but I don't know how much time I need to dedicate to "please don't buy a jetski if you're unemployed".

[Retric]

Finance also causes a lot of problems.

If nobody could get a home loan the housing prices would drop. But, loans don't create wealth so long term would be closer to break even than you might think.

[Pyxl101]

Loans absolutely can fuel wealth creation by providing the capital to make purchases that increase productivity sooner than a person could afford otherwise.

Imagine that you're a farmer and you work your land by hand, or with the assistance of animals. You don't have enough capital to buy a tractor, which is very expensive. Only by working your land for 15 years will you save up enough money to afford a tractor.

However, if you could buy a tractor, then you could substantially improve your efficiency and grow way more crops. Perhaps with a tractor, you can grow 10 times as many crops or more. Ironically, if you already owned a tractor, then you could quickly earn enough to pay for one, but without one your earnings are too small to afford one.

So, someone comes along and loans you the capital to buy a tractor. It's not a huge risk for them, because if you default, they can repossess and resell the tractor. So you take the loan for a low interest rate and buy a tractor. With the tractor, you're so much more productive that you pay off the loan within a few years. Everyone is better off, both you and the person who provided the loan.

With this effect occurring all throughout society, everyone is better off in aggregate than they would be without loans. Without a loan, you might need to save for many years; with a loan, you can front-load the productivity benefit of a capital purchase. These loans fuel wealth creation.

Loans also enable people to achieve a higher quality of living. Imagine a young working professional has a stable job and a good income. If home loans were not available, the professional might need to save for 20 or 30 years before accumulating enough funds to be able to purchase a home in cash. Because home loans are available, the professional can purchase their home much sooner in their life, and therefore enjoy the benefits of home ownership throughout their life.

A society without any loans at all is a society in which people live as paupers during their 20s and 30s, before finally accumulating enough wealth to purchase a vehicle or housing or capital in their 40s or 50s. The gap between the rich (who have inherited money) and the poor would widen vastly in such a society. Loans are a vehicle for wealth creation, a vehicle for people to better themselves.

Lastly, these types of loans are not especially risky or bad. Home loans and auto loans are responsible and relatively low risk because the property can be repossessed in the event of default; this enables lenders to offer low interest rates, such that the "cost" of the loans is not very high.

[Retric]

Loans are not limited to cash. You could also rent a tractor, or pool money across multiple farmers to buy a tractor which is then shared etc.

Now, we can debate the benefits of ownership vs. rentals. But, the risk profiles look very different.

[WalterBright]

Loans are critical to an economy working. Essentially it allows capital to flow from where it isn't needed to where it is. Take that away, and you've got a 3rd world economy.

[alexanderstears]

and so we use finance to bridge time horizons.

The banks should only lend money to people who would be capable of saving for a house. But if you're capable of saving for a house, and someone has money they're not using, why not use their money to buy the house and pay them back?

If every party satisfies their self-interest, their transaction creates value (which is distinct from wealth).

Financial market problems are finance problems to the extent that North Korea's nuclear tests are physics problems. The body of knowledge exists, an actor uses it.

My personal estimation is that a lot of the good things in this world exist because of fractional banking and finance and that humanity is better for it. I think we can do better, but throwing the baby out with the bathwater is a recipe for disaster.

Replace 'finance industry' with 'airline industry'. Sure, the airlines pollute, and planes crash and that's unimaginably bad. But each time a plane crashes, all the subsequent trips get safer. We're never going to make it perfect, but we can make it easier to roll the dice. And people don't fly places and engage finance for no reason - they do so to improve their lives. We should focus on improving peoples lives, whether that's making it easier for them to find a place to live or transport themselves.

[Retric]

The problem IMO is by adding intermediaries to a transaction you also increase costs. Society pays a massive subsidy on home loans so many of these costs are also hidden. EX: Home ownership limits mobility reducing economic growth.

What happens without loans? Well, someone with capital to give out a home loan could just as easily buy then rent out a house. This would increase the pressure on home construction industry to build things to last. Further assuming there was no tax subsidy we would reach a different equilibrium.

I don't know if this would be 'better' but it would have different costs.

[sillysaurus3]

Some of it goes wrong because it has to. Few carry a balance on their card because they're incompetent.

[aperrien]

I agree. Due diligence is always important, but it often seems that a lot of financial advice seems to say "Don't have anything go wrong in your life, or in your family's life."

[jimhefferon]

Yes, OP's advice is perhaps a good first approximation but a lot of people have a kid get sick, or some other disaster that could not be helped. Not everyone, for sure, but a lot.

[walshemj]

There are problems with trackers and closet trackers I sthat you have to by the dog's

Some of my actively managed funds managed to avoid a lot of the loss on bank shares - a tracker would have had to keep holding risky bank stocks or say enron and take the loss

[ceejayoz]

That's the fallacy of active management, though. Given enough time, these active funds make enough bad decisions to wipe out the good ones, especially when you factor in the fees. We've got plenty of data on this phenomenon.

[walshemj]

Don't you think that when almost everyone is saying just chose trackers / index funds that that would not indicate - that's is a bad idea to follow the heard?

As one Wall street type said "when the shoe shine boy was giving you stock tips" he started to get worried

[ceejayoz]

"You're following the herd" seems to be the latest bit of FUD pushed by active managers, but they're still not making a good case for their own ability to beat the herd.

https://www.caseyresearch.com/man-vs.-chimp/

> In the WSJ feature, the darts won 55 of the 142 contests, and the pros won 87. That 61% to 39% margin would be a blow in an election, but remember: this is not just any old human vs. darts. This is the best in the business against randomness.

> In their new book, Dubner and his coauthor Steven Levitt cite a study by CXO Advisory Group examining 6,000 stock market predictions by so-called experts over several years. Experts’ overall accuracy rate was 47.4%.

> Indeed, according to the Wall Street Journal’s online screening tool, only 71 of 17,785 funds—just 0.4%—outperformed the S&P over 10 years.

[imtringued]

Index funds are for passive investors that are happy with current market returns.

The only way to get higher than market returns is by outsmarting someone else and causing them to lose potential gains.

[joosters]

And the active funds would have noticed Enron how?

[kgwgk]

Not a good example: https://en.wikipedia.org/wiki/James_Chanos#Enron_collapse

[ceejayoz]

Also not a good example. Individual fund managers, financiers, etc. often make individual correct (or lucky, sometimes) decisions. It's their ability to do that continuously for decades that's very much in doubt.

[walshemj]

I think there where enough signs of enron being doddgy

[ceejayoz]

Given that individuals who predicted it are notable enough to have a Wikipedia entry, I'd say that's hindsight talking.

[jogjayr]

That just moves the problem away from stock-picking to manager-picking. How do you pick a "good" manager as a retail investor? A winning track record could just be the result of survivorship bias.

[3pt14159]

Disclosure: I'm probably exposed to every stock in this comment.

Eh. If you're smart and in technology you can beat index funds pretty easily. I'm not even counting Bitcoin. I time the market too.

Your advice works for the median person, but if you're in the intellectual 1% or 0.1% beating the market is pretty easy.

1. You should have a really good reason for buying a high P/E or negative EPS stock. It should be grounded in unit economics and entrenchment, not marketing. Tesla is a good example, I knew it was just a matter of unit economics. The technology was solid. Made over 10x sans options. Apple is another good example: They had a low P/E and I thought they were well situated to make money from services if they could just figure out how to design better software. They did it.

2. When the cover of Time magazine is this:

http://img.timeinc.net/time/images/covers/pacific/2005/20050...

And The Economist is this:

https://i.ebayimg.com/images/g/qcYAAOxyGwNTFJSE/s-l300.jpg

Put two and two together and put everything in cash. Sure I missed out on two years of growth, but after the recession hit I bought back at half. Bought back in when things had stabalized and recently sold 85% of the portfolio because fundamentals look wacky. It might take a month it might take two years, but another recession is coming.

3. Research the damn thing. If you don't understand it well enough don't buy it. You're not losing money by failing to buy the next hot thing. I read the entire Bitcoin paper before buying to make sure it could handle different stresses. My only regret was not leaning harder into it when I bought it at $4 CAD / BTC. I was too sheepish about "internet monopoly money" even though I knew it could hit $10k or $50k a coin if it took off.

4. Don't necessarily max out your 401k / RRSP. Tax rates are going way, way, way up once the baby boomers hit the social safety net. If you aren't at the top marginal rate you're using up tax deferment that will be better once you are. Plus having money outside of these vehicles makes investing in your friends startup easier. The only exception is if you're buying a house and you can loan yourself money from it (since it's like buying the house tax free).

5. Bubbles can go on for way longer than you think. Just be fucking patient. Do I wish I mortgaged a house in Toronto in 2009? Sure. But the stock market has gone up too and housing at these levels is unsustainable. At the very least housing price growth will subside.

[mikestew]

I'm sure you're being downvoted for going against orthodoxy by suggesting that one can "beat the market". I agree with you in that it can be done, and should not be attempted by most people (I personally would not put intelligence constraints on it; I think it's a factor of one's tolerance for looking at financial data, and an ability to keep emotion out of trading decisions). I don't try to time the market, however. My prime directive is to preserve capital, which I implement mostly through stops. I'm happy to leave money on the table, but I don't want to lose money.

But let's look at the fund in question: how did they stay funded? The same way a lot of bad funds stay funded: people put money in and never look at it again. And those people are not the ones updating stop limits, looking at charts, and basically making a hobby of their finances. Those people should be buying index funds. And there is absolutely nothing wrong with that. With the time I've spend reading books, tracking markets, etc., I could have learned a language, started a business, build my own house, whatever. Because after looking at returns over the last twenty years, yeah, I have demonstrated I can consistently beat the market (or more likely, can leverage opportunities of sheer luck), but not by enough to make the opportunity cost worth it if I didn't actually like doing it as a hobby.

And folks should completely ignore your point #4, especially the part about buying a house "tax-free". Eh, not quite.

[3pt14159]

I agree that it isn't really tax free since you got to pay it back eventually, but because mortgages generally require some minimum amount down (at least here in Canada) it's a real consideration for many people, though it does come at a cost later if you're going up tax brackets.

I also agree that it isn't just intelligence, but I do think you can't do much if you aren't at least in the top 5%, even with a whole hell of a lot of training. Much of investing is a zero sum game, and it's extremely competitive.

I also agree that most people should do broad basket, diversified ETFs and I also think your stop-loss strategy is above average, but I think you could probably do better if you were willing to take more risks on individual companies / technologies.

As for returns, I agree that it doesn't look good on paper for the first 20 years, but the difference compounds and building experience matters. I'm now at the point where I'm both better at it and I have more at my disposal to grow. Last time I checked, not counting crytpo-currencies, I'm averaging around 18% per year pre-inflation across a mix of bonds, stocks, and funds. Now, much of that has been a combination of timing / luck on currencies. So let's call it 15% to be safe. Doubling every 5 years, I'm 32 and I started this at around 15. I put maybe 200 hours into it a year and the family portfolio not counting housing or shares in hard-to-sell startups is almost $1m. Another 40 years of this is going to really make all this effort worth it, provided we don't have something catastrophic like a world war / economic collapse.

On getting downvoted:

I don't let it bother me. I try to remember that sometimes I see things I know are factually wrong get upvoted and that sometimes I'm getting upvoted despite being wrong. The votes aren't the truth, even if they do correlate.

Maybe we need more webs-of-trust on social networks that should influence how votes are counted. Because if you just judge thing by the words on their own, somethings can sound wrong or crazy at first blush even if they are right. For example, Facebook's Instagram acquisition was seen as dumb, but it was genius. Although maybe this idea is wrong. Maybe we already overweigh the opinions of the connected and powerful.

[toomanybeersies]

> My only regret was not leaning harder into it when I bought it at $4 CAD / BTC.

In another universe, you're commenting on HN, saying "investing in bitcoin was a complete waste of money, after it was abandoned en masse in 2015".

Hindsight is 20/20, that goes both for missing opportunities, and for losing money.

For every example of someone like you that says "it's easy, just time the market, and you'll make a bunch of money", there's several people that tried, and failed.

In the end day trading and timing the market are gambling. It's no different to betting on the result of a sports match, you have information and odds, but in the end, there is the random element. For every person that strikes it rich betting on horses, there's a lot of people who lose a lot of money.

[3pt14159]

The difference is when you write out your reasons and you find out 3 years later that you were right.

It can be gambling, but that's like saying dating is gambling because there is an element of chance involved with whether or not you get physical with someone.

No. It's not. There are people that are good at romance. There are people good at understanding and predicting technology. This whole mantra of "it's just gambling!" is by a bunch of people that didn't have an approach rooted in discipline and science.

[dopamean]

> ...beating the market is pretty easy

I pretty much stop reading when I get to this point in someone's comment. This statement is as ridiculous as it is irresponsible.

[KozmoNau7]

It's a prime example of survivorship bias and 20/20 hindsight.

[akvadrako]

This is a very irresponsible comment. It's the kind of thing you hear from someone selling a get rich quick scheme; it sounds plausible, but it has less to do with the reasons given then having a greater pool of suckers to build on. Even a gambler who wins the lottery can make a story about how he knew which numbers to pick and that it was based on "unit economics and entrenchment".

I could try to describe the fallacy in general terms but I don't have to because your reasoning is obviously bullshit. Tesla has not made any money yet - they are still burning through billions a year financed by junk bonds. The value of Bitcoin is also almost wholly speculation; how could it be otherwise when it's limited to 7 slow, public, expensive, wasteful transactions per second. Both those assets could crash to zero next year.

So, yeah, you managed to get in at the top of some major bubbles, which could be called "intellectual" except you can't even identify the real reasons for your success. And in general this is not a healthy approach to finance because these assets don't make money - they just transfer it from later investors to earlier investors.