Psychology of Money
Re: Psychology of Money
Ah. Got it.
Re: Psychology of Money
While I agree about your observation that strategies are popularized by the mass and then abandoned when crisis hits I still think the strategies themselves hold valid points. IE the VTSAX strategy diversifies your investments and eliminates risk of trying to choose stocks yourself.jacob wrote: ↑Fri Jun 08, 2018 9:25 amSection 5 explains much about the popularity of simplistic investment strategies in the FIRE community from YMOYL's 100% LT Treasuries to the current 100% VTSAX strats. Similar graphs could be drawn for other starting years and other asset classes and they would all lead to the same conclusion. After a good run in any asset class, people eventually get around to writing books and popularizing how all you gotta do to be an investment genius is to buy that particular investment. Those stories all end the same way.
From what I've read you seem pretty sceptical about holding equities in general or/and popular investment strategies. I just don't see the alternative to being invested and diversifying as much as possible -- at any time. Are you suggesting that stock-picking is a better strategy? Are you suggesting that timing the market is a better strategy than being invested according to your risk preference / situation?
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jacob
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Re: Psychology of Money
I'm pretty skeptical about the meta-strategy of choosing strategies based on reading a blog article or three and just copying what "everybody" is doing right now without being aware of alternatives or developing any deeper understanding of how long-term wealth management works.
The biggest risk not in making a tactical mistake (like buying the wrong stock at the wrong time) but in making a strategic mistake (picking the wrong strategy) and running out of money.
History is littered with strategies that held valid points at some point only to fail later. It makes for interesting reading to visit the thrift store and read some popular investment books from the early 1980s arguing how one can not go wrong with putting 100% in money market accounts when it comes to saving for retirement.
The biggest risk not in making a tactical mistake (like buying the wrong stock at the wrong time) but in making a strategic mistake (picking the wrong strategy) and running out of money.
History is littered with strategies that held valid points at some point only to fail later. It makes for interesting reading to visit the thrift store and read some popular investment books from the early 1980s arguing how one can not go wrong with putting 100% in money market accounts when it comes to saving for retirement.
Re: Psychology of Money
@jacob
I get what you're saying but... where does this leave things practically?
We have to reject investment strategies because we are biased by our context when choosing one... but obviously you have to have some sort of investment system. So I guess what I'm asking is:
1) How would you choose an investment strategy?
2) How would you invest today?
I get what you're saying but... where does this leave things practically?
We have to reject investment strategies because we are biased by our context when choosing one... but obviously you have to have some sort of investment system. So I guess what I'm asking is:
1) How would you choose an investment strategy?
2) How would you invest today?
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jacob
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Re: Psychology of Money
It's a very risky idea to punt on being informed about one's main source of income. Practically speaking, it requires spending at least a few hundred hours on investment education as well as some time on regular portfolio management.
I recommend and do the following two steps:
1) Read, read, and then read some more.
2) According to my experience and knowledge.
This is an ongoing process that serves to remove bias.
I spend a lot of time reading personal finance book reviews. It's not uncommon to see people who demonstrate little knowledge or interest in investment declare that they finally found the answer with some simple strategy. "I was so confused about investing until I came across this simple book about using CD-ladders for my retirement savings. Now I know what to do. "--- "Noob Investor Review" (1986). We see strong parallels to this today... and any time really.
This is the kind of laziness that gets them run under the bus eventually.
Practically speaking, anyone who gets their investment education from a blog post or a reading list of a couple of popularized books would be better off spending $100 on a CFP every few years to see if the solid strategy of all LT Bonds they picked in 1970 or the safe gold and stamps strategy of 1981, or the easy CD-ladders that were all the rage 5 years later, the millionaire dotcom stocks of the 1990s, or the they're not making any less of it real estate of the early 00s ... or the index funds always go up in the long run strategy of the 2010s ... still make sense.
Most popular investment bestsellers are usually born out of survivor bias from being a strategy that seems like a simple answer to the most recent popular strategy that failed ... while not realizing that by doing so, it's making the same mistake for the next cycle.
I recommend and do the following two steps:
1) Read, read, and then read some more.
2) According to my experience and knowledge.
This is an ongoing process that serves to remove bias.
I spend a lot of time reading personal finance book reviews. It's not uncommon to see people who demonstrate little knowledge or interest in investment declare that they finally found the answer with some simple strategy. "I was so confused about investing until I came across this simple book about using CD-ladders for my retirement savings. Now I know what to do. "--- "Noob Investor Review" (1986). We see strong parallels to this today... and any time really.
This is the kind of laziness that gets them run under the bus eventually.
Practically speaking, anyone who gets their investment education from a blog post or a reading list of a couple of popularized books would be better off spending $100 on a CFP every few years to see if the solid strategy of all LT Bonds they picked in 1970 or the safe gold and stamps strategy of 1981, or the easy CD-ladders that were all the rage 5 years later, the millionaire dotcom stocks of the 1990s, or the they're not making any less of it real estate of the early 00s ... or the index funds always go up in the long run strategy of the 2010s ... still make sense.
Most popular investment bestsellers are usually born out of survivor bias from being a strategy that seems like a simple answer to the most recent popular strategy that failed ... while not realizing that by doing so, it's making the same mistake for the next cycle.
Re: Psychology of Money
Do you believe the potential future pitfalls of index investing are as simple to avoid as hiring a CFP once a year? I mean, if most stocks are in the index, most buyers buy into that index, and this overpowers the price determiners to the degree that index investing is no longer rational (historical market capitalization matters more than business fundamentals?), won't this have repercussions on all strategies that include stocks? It's not that I disagree with the fundamental premise, I'm just not convinced the financial advisers have a sufficiently independent and dispassionate view of their industry to believe and suggest I change fundamental strategies from generalized stocks, to something else at an appropriate time.
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jacob
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Re: Psychology of Money
Correct, even an average CFP would know if/when a previously popular strategy is falling out of favor. Compare to the amateur who thinks they found the answer to all their investment worries by reading a few popularized books on the subject. Perhaps I'm underestimating the average investor, but I don't really think so. Exactly the same behavior is found in people following popular diets, popular exercise forms, popular politics, popular music, ... popular investment methods are no different. All areas are the same.
Not to rip/harp on YMOYL, but it provides a historical lesson when it comes to recommending or even mentioning simplistic investment strategies. It's the main reason why I didn't include a "what to invest in"-chapter in the ERE book. The people complaining about that deliberate omission of mine are exactly the kind of "gimme something easy"-types I worry about.
The original YMOYL is based on the crossover principle(*) and LT Bonds that were rolled every few years to keep the maturity high. While the book didn't appear until 1992, the principles were formulated from 1970 onwards. Dominguez implemented the investment strategy around 1970. I forget exactly when Robin inherited her nest egg, but probably around that time.
(*) The brilliance of this concept is rather underestimated but consider how it provides an algorithmic approach to FI that captures SWR (for non-volatile instruments) in a very very direct way as well as providing a test/dry-run in the form of confirmation and implementation. The crossover approach really does everything and the beauty is in its simplicity.
The investment sentiment at the time was similar to the investment sentiment right after the dotcom crash and to some degree the one around 2008/09 for the credit crises. In the years before, people had enthusiastically speculated in gogo-stocks and buying into the NiftyFifty (containing a bunch of electronics companies) that would always go up, only to get burned when the market started a 12 year decline beginning in 1968. At the time, LT yields were around 6%.
It thus made a lot of sense to base one's FIRE planning on bond income. One was FI once one's bond income exceeded one's expenses. That's where the crossover diagram that one could put on the fridge came from. It was a simple and brilliant idea that took all the worry out of picking electronics stocks only to see them decline year after year.
Dominguez FIRE'd with around $400,000 in 2018 dollars (a handsome sum for a 30 yo... made in a booming industry (finance) at the time which today's software engineers should find quite relatable) which invested at 6% would have created an annual income of $24,000 (in 2018 dollars). So the 1968s version of MMM or about the 25-35% spending percentile of standard consumer units. Quite possible by having a high-income job while being reasonably frugal, but nothing outrageous.
Now, how did it fare?
In 1982, interest rates briefly peaked but then began a steady decline. Not that it matters. The initial feature of rolling LT bonds eventually became its own bug since the rolling strategy preserves a more or less constant income in dollars regardless of where interest rates go. This sounds good... but it doesn't take inflation into account. Obviously, this must have begun to become an issue for many of the earlier adherents. This might be why YMOYL2.0 dedicated some space to discussing why inflation doesn't matter. It's quite right that one can work around inflation, but it requires one to develop additional skills. Incidentally, YMOYL2.0 also changed its forward recommendation to index funds. YMOYL2.0 was published in 1999---seven years after the first recommendation.
So in the late 90s the initial $24,000 dollar income had fallen to a $10,000 income (in 2018 dollars). Those who hadn't enhanced their "badassity" over the years would have run out of money and gone back to work. Those who switched to index funds in 1999 would have gone flat until 2012... however, rates were 5% in 1999 and that's what the original strategy would demand as a WR, so pulling that out for 13 years is 65% down from flat (rough calculation). Has the market tripled since 2012? No. And 4%-rule people have taking out another 24% since then. So ...
Today (if Dominguez was still alive), the $24,000 income would be a $6,000 income. This is no longer possible with simple frugality. Now we're talking ERE level.
When would people have realized that the strategy was failing? That certainly depends on the individual, and thats why I recommend getting a professional opinion from time to time. Looking at amazon reviews of YMOYL, there are comments about "how this would never work with today's interest rates". A wiser reader (now) would not slam the original book for that because they'd understand that the book was written many years ago. However, some of the original readers would have to have learned that their original strategy no longer "work with today's interest rates". Indeed a wiser reader back then would have been right in pointing out the problems of a concentrated strategy.
Now, having learned this one lesson of history ... what are the parallels to today's 100% VTSAX strategy as recommended to/by FIRE enthusiasts but much less so by professionals to the general population?
Questions to ponder?
E.g. "I first heard about FIRE in 2010 and put all my money into Vanguard stocks. I've done fantastic. Nobody can time or beat the market and stocks always go up in the long run. Here's a graph going all the way back to 1870 that 'proves' it. And here's an account from someone who started investing in equity in 1982 that confirms my experience."
Questions to ponder?
Add: To see what I think that living off of one's investments in practice requires cf. living off of one's job income like 99% of people, read https://www.amazon.com/dp/1580622011/ ... The author suggests aiming for WR's at 10-12%. That is in my opinion far too high. And also his only mistake. Otherwise, the book is solid. Do the same aiming for 3% like I recommended in the ERE book based on thousands of years of history (and not the 1990s
) and what's in that book is what I would have put in my book had I added another hundred pages for the investment section. Pay particular attention to his "humility" portfolios. It's very close to what I've eventually come up with even though I only read this book a few months ago.
Not to rip/harp on YMOYL, but it provides a historical lesson when it comes to recommending or even mentioning simplistic investment strategies. It's the main reason why I didn't include a "what to invest in"-chapter in the ERE book. The people complaining about that deliberate omission of mine are exactly the kind of "gimme something easy"-types I worry about.
The original YMOYL is based on the crossover principle(*) and LT Bonds that were rolled every few years to keep the maturity high. While the book didn't appear until 1992, the principles were formulated from 1970 onwards. Dominguez implemented the investment strategy around 1970. I forget exactly when Robin inherited her nest egg, but probably around that time.
(*) The brilliance of this concept is rather underestimated but consider how it provides an algorithmic approach to FI that captures SWR (for non-volatile instruments) in a very very direct way as well as providing a test/dry-run in the form of confirmation and implementation. The crossover approach really does everything and the beauty is in its simplicity.
The investment sentiment at the time was similar to the investment sentiment right after the dotcom crash and to some degree the one around 2008/09 for the credit crises. In the years before, people had enthusiastically speculated in gogo-stocks and buying into the NiftyFifty (containing a bunch of electronics companies) that would always go up, only to get burned when the market started a 12 year decline beginning in 1968. At the time, LT yields were around 6%.
It thus made a lot of sense to base one's FIRE planning on bond income. One was FI once one's bond income exceeded one's expenses. That's where the crossover diagram that one could put on the fridge came from. It was a simple and brilliant idea that took all the worry out of picking electronics stocks only to see them decline year after year.
Dominguez FIRE'd with around $400,000 in 2018 dollars (a handsome sum for a 30 yo... made in a booming industry (finance) at the time which today's software engineers should find quite relatable) which invested at 6% would have created an annual income of $24,000 (in 2018 dollars). So the 1968s version of MMM or about the 25-35% spending percentile of standard consumer units. Quite possible by having a high-income job while being reasonably frugal, but nothing outrageous.
Now, how did it fare?
In 1982, interest rates briefly peaked but then began a steady decline. Not that it matters. The initial feature of rolling LT bonds eventually became its own bug since the rolling strategy preserves a more or less constant income in dollars regardless of where interest rates go. This sounds good... but it doesn't take inflation into account. Obviously, this must have begun to become an issue for many of the earlier adherents. This might be why YMOYL2.0 dedicated some space to discussing why inflation doesn't matter. It's quite right that one can work around inflation, but it requires one to develop additional skills. Incidentally, YMOYL2.0 also changed its forward recommendation to index funds. YMOYL2.0 was published in 1999---seven years after the first recommendation.
So in the late 90s the initial $24,000 dollar income had fallen to a $10,000 income (in 2018 dollars). Those who hadn't enhanced their "badassity" over the years would have run out of money and gone back to work. Those who switched to index funds in 1999 would have gone flat until 2012... however, rates were 5% in 1999 and that's what the original strategy would demand as a WR, so pulling that out for 13 years is 65% down from flat (rough calculation). Has the market tripled since 2012? No. And 4%-rule people have taking out another 24% since then. So ...
Today (if Dominguez was still alive), the $24,000 income would be a $6,000 income. This is no longer possible with simple frugality. Now we're talking ERE level.
When would people have realized that the strategy was failing? That certainly depends on the individual, and thats why I recommend getting a professional opinion from time to time. Looking at amazon reviews of YMOYL, there are comments about "how this would never work with today's interest rates". A wiser reader (now) would not slam the original book for that because they'd understand that the book was written many years ago. However, some of the original readers would have to have learned that their original strategy no longer "work with today's interest rates". Indeed a wiser reader back then would have been right in pointing out the problems of a concentrated strategy.
Now, having learned this one lesson of history ... what are the parallels to today's 100% VTSAX strategy as recommended to/by FIRE enthusiasts but much less so by professionals to the general population?
Questions to ponder?
- What has been the 100% VTSAX experience of someone who began investing 5, 10, 15, 20, 25, 30 years ago respectively?
- What if the same question had been asked 5, 10, 15, 20, ... years ago...
E.g. "I first heard about FIRE in 2010 and put all my money into Vanguard stocks. I've done fantastic. Nobody can time or beat the market and stocks always go up in the long run. Here's a graph going all the way back to 1870 that 'proves' it. And here's an account from someone who started investing in equity in 1982 that confirms my experience."
Questions to ponder?
- Which parts of that quote are autobiography bias?
- Which parts are survivor bias?
- Which parts are confirmation bias?
Add: To see what I think that living off of one's investments in practice requires cf. living off of one's job income like 99% of people, read https://www.amazon.com/dp/1580622011/ ... The author suggests aiming for WR's at 10-12%. That is in my opinion far too high. And also his only mistake. Otherwise, the book is solid. Do the same aiming for 3% like I recommended in the ERE book based on thousands of years of history (and not the 1990s
) and what's in that book is what I would have put in my book had I added another hundred pages for the investment section. Pay particular attention to his "humility" portfolios. It's very close to what I've eventually come up with even though I only read this book a few months ago.Re: Psychology of Money
Okay. I should look around and see what is on offer for a fixed fee. While I've looked at fee based advisers before, they often want a %, and I'm not interested in that .
I target 2.5% adjusting for any taxes/fees, and to be blunt, I'm not optimistic on the tax forecast. There are government benefits I will be in theory entitled to, now and in the future -- I assign them a zero value. So 3% is just preaching to the choir
. Depending on my life circumstances, I have no solid plans to quit working even at 2.5% -- that's just where I draw the line of having the option to.
I've looked at the charts for a Canadian tilted global stock market portfolio (~2/3s of my current assets), and yes the drawdown periods are daunting. They would require faith in the sustainability of our society that I'm not sure I possess. It is one thing to see "oh after 15 years, it got here!" and another thing to live it. Reading books like Limits to Growth: The 30 Year Update only compounds that. Let alone immediate concerns like CAPE valuations, rising interest rates, etc. Hence my ever growing cash allocation while I ponder this. I would be surprised if I ever became truly comfortable with a strategy and never questioned it. To doubt things that I've become consciously aware of is my nature. My problem tends to come after, decision paralysis, and faith that I've chosen the correct course for the moment.
Ultimately I would like to explore alternative sources of revenue (occasional contract software developer? novels?? yoga instructor???) and reduce my reliance on money (join clubs of interest that give volunteers incentives? grow my own food??). With the money relatively easy right now, I've only explored some of these options.
I placed an order for the book, thanks for the suggestion.
.I target 2.5% adjusting for any taxes/fees, and to be blunt, I'm not optimistic on the tax forecast. There are government benefits I will be in theory entitled to, now and in the future -- I assign them a zero value. So 3% is just preaching to the choir
. Depending on my life circumstances, I have no solid plans to quit working even at 2.5% -- that's just where I draw the line of having the option to.I've looked at the charts for a Canadian tilted global stock market portfolio (~2/3s of my current assets), and yes the drawdown periods are daunting. They would require faith in the sustainability of our society that I'm not sure I possess. It is one thing to see "oh after 15 years, it got here!" and another thing to live it. Reading books like Limits to Growth: The 30 Year Update only compounds that. Let alone immediate concerns like CAPE valuations, rising interest rates, etc. Hence my ever growing cash allocation while I ponder this. I would be surprised if I ever became truly comfortable with a strategy and never questioned it. To doubt things that I've become consciously aware of is my nature. My problem tends to come after, decision paralysis, and faith that I've chosen the correct course for the moment.
Ultimately I would like to explore alternative sources of revenue (occasional contract software developer? novels?? yoga instructor???) and reduce my reliance on money (join clubs of interest that give volunteers incentives? grow my own food??). With the money relatively easy right now, I've only explored some of these options.
I placed an order for the book, thanks for the suggestion.
Re: Psychology of Money
Yeah, this seems obvious to anybody who can do the math (IOW, almost everybody on this forum.) So, what is the motivation for accumulating more capital than is necessary to reasonably assure freedom? IOW, past the point of reasonable assurance, any individual would have to be trading freedom in the present for something other than freedom in the future. Ergo, there is some other aspect of money that is being secretly or subconsciously sought through further accumulation, like maybe just becoming a millionaire.jacob wrote:I'd submit that most people here who are in runaway mode(*) will end up somewhere in the high-millions (AFTER adjusting for inflation) but that's if and only if they live to 95+ (which both of these admins did).
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IlliniDave
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Re: Psychology of Money
Maybe they are looking for better mating prospects?7Wannabe5 wrote: ↑Mon Jun 11, 2018 1:32 pm
Yeah, this seems obvious to anybody who can do the math (IOW, almost everybody on this forum.) So, what is the motivation for accumulating more capital than is necessary to reasonably assure freedom? IOW, past the point of reasonable assurance, any individual would have to be trading freedom in the present for something other than freedom in the future. Ergo, there is some other aspect of money that is being secretly or subconsciously sought through further accumulation, like maybe just becoming a millionaire.
Re: Psychology of Money
The essay is accurate in its nuanced picture of wealth. I had similar thoughts when I read the portion on consistency.7Wannabe5 wrote: ↑Mon Jun 11, 2018 1:32 pmSo, what is the motivation for accumulating more capital than is necessary to reasonably assure freedom? IOW, past the point of reasonable assurance, any individual would have to be trading freedom in the present for something other than freedom in the future. Ergo, there is some other aspect of money that is being secretly or subconsciously sought through further accumulation, like maybe just becoming a millionaire.
Part of the reason people like Grace Groner and Warren Buffett become so successful is because they kept doing the same thing for decades on end, letting compounding run wild. But many of us evolve so much over a lifetime that we don’t want to keep doing the same thing for decades on end. Or anything close to it. So rather than one 80-something-year lifespan, our money has perhaps four distinct 20-year blocks. Compounding doesn’t work as well in that situation.
There is no solution to this. But one thing I’ve learned that may help is coming back to balance and room for error. Too much devotion to one goal, one path, one outcome, is asking for regret when you’re so susceptible to change.
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Jason
Re: Psychology of Money
I kind of disagree with that assessment. Warren Buffet went through at least four incarnations in his career. It was necessary as his wealth grew.
Not selling when confronting one's desire to change can simply be a non-negotiable contingency in planning.
Not selling when confronting one's desire to change can simply be a non-negotiable contingency in planning.
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classical_Liberal
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Re: Psychology of Money
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Last edited by classical_Liberal on Fri Feb 05, 2021 12:27 am, edited 1 time in total.
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IlliniDave
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Re: Psychology of Money
There is a difference between anonymous admiration and attractiveness/perceived suitability (allegedly). First example I pulled up, but I don't think the findings are unique.classical_Liberal wrote: ↑Tue Jun 12, 2018 2:44 pmFrom the articleThe paradox of wealth is that people tend to want it to signal to others that they should be liked and admired. But in reality those other people bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth solely as a benchmark for their own desire to be liked and admired
https://akademiai.com/doi/abs/10.1556/JEP.12.2014.1.1
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classical_Liberal
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Re: Psychology of Money
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IlliniDave
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Re: Psychology of Money
classical_Liberal, I agree, and I took 7wb5's original observation to extend beyond the ERE crowd. I think the blog author was talking mostly about "keeping up with the Joneses"-type signalling and how it affects hierarchy jostling among demographic peers. In the more important quest for a mate where historically wealth/social status are important contributors to the future of offspring (and per another thread here apparently still are to a degree), and where women ultimately do most of the selecting, being a potential partner "of means"/establishment, is apparently important in selectability.
Re: Psychology of Money
This is sad. I try to avoid these people.
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thegreatvoid
Re: Psychology of Money
https://psmag.com/environment/17-to-1-r ... ve-successIlliniDave wrote: ↑Tue Jun 12, 2018 4:49 pm, and where women ultimately do most of the selecting, being a potential partner "of means"/establishment, is apparently important in selectability.
8,000 YEARS AGO, 17 WOMEN REPRODUCED FOR EVERY ONE MAN
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Jason
Re: Psychology of Money
Although no Grace Groner, this lady made the news for giving away $1.5 million. More ERE'ish - depression era informed, school teacher, single, frugal, most likely beneficiary of TIAA-Cref. Shows how it's done.
https://www.cnn.com/2018/06/11/us/new-j ... index.html
https://www.cnn.com/2018/06/11/us/new-j ... index.html