114 comments

How About that Stock Market!?

We haven’t been talking about stocks much on Mr. Money Mustache recently, and that is for good reason. Despite the tendencies of the TV news to report on the movements “The Dow” as if it were a sports team, there really is no reason for wealthy people like ourselves to follow the mostly-meaningless fluctuations of stock prices.

But since the index (and its more useful big brother the S&P 500) has recently been hovering around its all-time high (a high first reached in March, 2000 and then again in October, 2007), there is naturally more curiosity, excitement and fear buzzing about the subject than usual. Let’s take a look at the price history of the S&P 500, on this graph which just coincidentally covers my entire life:

stocks_since_74

Stock market index price since the Disco era. But this graph is misleadingly pessimistic – it does not account for dividends, which are at least half of the reason we buy stocks around here.

A Fortune Teller might interpret that graph with pretty scary results: “every time it gets to this level, it crashes for another 6-7 years!”

Should we be scared? The answer depends on your level of understanding of investing itself. Consider the following perspectives I’ve heard from various people over the past month:

  1. “I am very risk-averse, so I’m afraid to invest in stocks. I have $100,000 sitting in 1% interest savings accounts, even though I have a big mortgage.”
  2. “I sold all my stocks a few months (or years) ago. I’m waiting for a crash, then I’ll re-invest.”
  3. “I believe the market is overvalued, so while I am leaving 401(k) deductions on automatic and not selling anything, I am using extra cash to  pay down my 4.5% mortgage for now instead of buying more stocks. Will re-evaluate if there is a crash.”
  4. “I use rental real estate as my primary investment vehicle. In my area, this returns 10% or more after inflation, making the stock market a distant second choice for me.”

The first person is clearly not headed for financial success with that strategy. With returns less than half the rate of inflation, she will never reach true financial independence. Every dollar you own is an employee that can work around the clock for you without complaint – provided you give it the opportunity.

Person #2 is playing with fire. He believes he can outsmart the collective intelligence of the world’s investors, and time the crashes and upward spikes. The reason this is a statistical losing game is that he will miss out on dividends during times he is out of the market, incur extra trading costs, and tend to mis-time some of the market moves, losing precious percentage points.

Person #3 may have a valid case, provided she has correctly identified an expensive stock market. A 4.5% return via paying off a mortgage is a very nice hedge against volatile stocks, as it is guaranteed. But once she is out of debt, she’ll need to continue investing somewhere else to avoid amassing a mattress full of idle dollar bills – at this point, she’ll need to invest in something with solid above-inflation returns.

Person #4 may be the winner.. for now. In certain cities, US housing continues to be among the cheapest in the rich world when measured on a price-to-rent ratio. That’s why my own next investment will probably be in another rental house. But note that I’m not selling stocks to do it – for me, that would be putting too many eggs in one basket.

So where does this leave us? It depends on what point you are starting from. For those uncertain about investing and stocks in general, I’d like to present an entertaining 16-part series on the subject from my fellow early retiree pal Jim Collins, who writes about Business, Money and Life over at jlcollinsnh.com. You see, spring time is here in Colorado, and that means I am finding it increasingly difficult to spend time inside with the computer. But now you can bookmark this list, and work your way through them (and the rest of his blog) during the inevitable slack times on Mr. Money Mustache. Thanks Jim!

Stocks — Part 1: There’s a major market crash coming!!!! and Dr. Lo can’t save you.
Stocks — Part II: The Market Always Goes Up
Stocks — Part III: Most people lose money in the market.
Stocks — Part IV: The Big Ugly Event
Stocks — Part V: Keeping it simple, considerations and tools
Stocks — Part VI: Portfolio ideas to build and keep your wealth
Stocks — Part VII: Can everyone really retire a millionaire?
Stocks — Part VIII: The 401K, 403b, IRA & Roth Buckets
Stocks — Part IX: Why I don’t like investment advisors
Stocks — Part X: What if Vanguard gets Nuked?
Stocks — Part XI: International Funds
Stocks — Part XII: Bonds, and a bit on REITS
Stocks — Part XIII: Withdrawal rates, how much can I spend anyway?
Stocks — Part XIV: Deflation, the ugly escort of Depressions.
Stocks — Part XV: Target Retirement Funds, the simplest path to wealth of all
Stocks — Part XVI: Index Funds are really just for lazy people, right?

 

  • Iron Mike Sharpe March 7, 2013, 9:13 pm

    Looks like I have a bit of reading to do.

    Reply
  • Savingtofreedom March 7, 2013, 9:21 pm

    Thanks for this list. I am active on the forums but have been purposely staying away from the investing section because I still don’t have a good grasp of how to “effectively” invest my money.

    Education is the first step. Then I need to actually do something with our stash as our current returns are crap.

    Reply
  • Johnny March 7, 2013, 9:21 pm

    The first article in that series has a photo of Mr. T. He already wins in my book. Look forward to reading those.

    I’d love to become more like Person #4. But being a landlord scares the crap out of me. I readily admit that I need help getting my hands a little dirtier and learning how to fix things. Maybe I’ll purposefully break something this weekend and put my skills to the test. Worse comes to worst, the DIY Forum can probably bail me out.

    Reply
    • CincyCat March 8, 2013, 12:36 pm

      Some of the best change management experts advise conducting a controlled “test” of an “inescapable experience,” so your head is in the right place. Far better to practice (and educate yourself) when you have the flexibility of time & resources than when the kitchen sink is flooding for real, and you have no choice but to call that plumber… :)

      Reply
    • Melissa March 9, 2013, 7:43 am

      One great way to learn skills is volunteering. You could put your hand up whenever a friend says s/he’s taking on a DIY project-maybe you can learn! Also,Habitate for Humanity or a local veteran’s group can always use help building and fixing. I tend to do the first and raise my hand with friends. I’ve learned a lot in this way, and in short bursts of time–a couple hours here or there. And it’s fun!

      Reply
    • BadAss CPA March 12, 2013, 1:46 pm

      Also scared of being a landlord, so I think we’ll start small in late 2013-early 2014 with just a condo rental unit.

      We’ll have to find one that’s still cash-flow after HOA fees, but at least we know there’s no large external repairs to worry about. Simple leaky faucets or clogged toilets don’t scare me :-)

      Once we take our baby steps, maybe we’ll buy a rental house in the future.

      Reply
  • CashRebel March 7, 2013, 9:41 pm

    I’ve got a question regarding REITs. Like you said, you may be able to earn 10%+ returns by investing in real estate. I’d like to get into real estate, but I’d like to do it by adding a Vanguard REIT fund to my portfolio instead of owning actual property. This fund also seems to be nearing all time highs, which makes me hesitant to buy. Why are REIT funds so correlated with the stock market?

    Reply
    • mary w March 8, 2013, 10:41 am

      The simple smart-ass answer is that Vanguard REIT owns STOCK in REITs so it correlates with other stock funds.

      Traded REITs are more volatile (like other stocks) because their price is based on what people are willing to pay on a day-by-day basis. The good news is they are easy to quickly sell like any other stock/mutual fund. Non-traded REITs have less price volatility (since price is more based on the underlying real estate) but harder to sell when you want your money back.

      Unfortunely, I can’t give you a more detailed answer.

      Reply
    • GR March 8, 2013, 11:43 am

      Another difference is leverage. You can borrow against real estate to buy more real estate at low interest rates, and take tax deductions in the bargain. Following a similar route, say, to take out a second mortgage on your house to buy stocks or REITs would be a much riskier enterprise.

      Reply
  • Debt Derp March 7, 2013, 9:48 pm

    This is a great series from Collins. Very informative. I would also humbly propose that his best post in the series is the final one where he says: “Index investing is for people who want the best possible results” This is soooo true and yet there are so many people who think they can beat the market.

    When I get my debt paid off it will be index investing for me. As a side thought experiment I have had a practice investing account over at updown.com for the past three or so years. I’m over 20 percentage points behind the return on the S&P 500. That’s all the proof I need that I don’t know how to pick stocks. Others would be smart to heed this advice.

    Reply
    • lurker March 8, 2013, 9:03 am

      Warren Buffett would concur and he is a pretty decent stock picker…trouble is he is one of a kind.

      Reply
  • Ron March 7, 2013, 9:51 pm

    If someone invested $1,000 in early March 09 (at the bottom) in the total stock market, they’d have $2,409 today. 140.9% return in four years. Other data suggests many people are just now investing more in stocks. That means it’s probably a good time to take some profits—for those fortunate enough to have them. Props to you for unplugging and thanks for the reading recommendations.

    Reply
    • Joy March 8, 2013, 5:29 am

      Ron,

      While I haven’t listened or, read any of the speculations on the market.
      I do think MMM has caused a large increase in investing. :)
      Along with other’s like JLCollins.

      I know we have had a large increase in investing since MMM.
      I am sure we are not alone.

      While I am hopeful the market will remain steady or, grow. I can’t
      say that should it fall, I made a mistake. No. I am enjoying the
      process. It is much more fun than spending money collecting
      things.

      Reply
      • Ron March 8, 2013, 9:43 am

        Congrats Joy. Tuning out the “noise” makes me think you’ll succeed as an investor.

        Reply
  • Mr. Doomsday March 7, 2013, 10:00 pm

    MMM,

    I fully apologize for the repeat comment here and I most certainly respect the time the Stache spends on this blog away from family and friends

    I’m Reading through your blog and applying many of its lessons. I’m looking to make a sizable deposit into a Vanguard account. Are you still holding VFIAX for long term returns even though the S&P has returned to 2007 levels? I understand your philosophy on holding VFIAX long term, but my intuition and research tell me to hold off and get in once another collapse occurs. I want to avoid trying to play the market. Wouldn’t it be wise to wait in order to buy cheap rather than investing now? Or, as represented by #4, do you see real estate as the must-stache of the most recent decade?

    Reply
    • Carlos March 8, 2013, 12:18 am

      In theory this makes sense, in practice people are terrible at timing the market and psychologically it is difficult to invest in the face of recent losses.

      Say the S&P500 drops 10% tomorrow, would you be ready to invest your sizable sum? How will you feel if it drops another 10% the day after? Is it now the right time to invest or should you wait longer? How about the reverse scenario? You would have waited a long time for the market to crash if you started in 1991.

      One strategy to avoid market timing is dollar cost averaging. Another similar strategy is to constantly add to your holdings (you are saving for retirement right?). Sure you guarantee that you won’t have outrageous returns but also hedge against outrageous losses.

      Reply
      • Aaron March 8, 2013, 1:08 am

        Another strategy other than dollar cost averaging is value averaging:
        http://www.investopedia.com/articles/stocks/07/dcavsva.asp#axzz2MvuV64MO

        Reply
        • Jason March 8, 2013, 6:12 am

          Totally agree with you here Aaron. Way too many people assume that dollar cost averaging means buying at the same TIME every month or year. There’s no reason averaging needs to be based on TIME. Just make sure that what you’re basing your averaging on is un-emotional, write out your strategy in words, and be disciplined. I’ve had much success using the 13ema and the 5,3,3 full stochastic. The investopedia example of value averaging is even more simplistic than what I do (and probably more effective).

          Reply
        • Mr. Doomsday March 8, 2013, 12:38 pm

          This was very helpful, thank you.

          Reply
        • Lesa March 8, 2013, 5:34 pm

          Thanks for mentioning that, Aaron – I’d never take the time to understand value averaging and now it makes a lot of sense. I found an article that gave what I found to be more illustrative examples here:

          Dollar Value Averaging.

          Reply
    • Matt G March 8, 2013, 5:45 am

      Two things can happen, the market goes up, or the market goes down. Statistically, it goes up more than it goes down…. about 4-12%. Just put that shit in some index funds and wait.

      Reply
      • Ron March 8, 2013, 9:46 am

        Comment of the day, week, month.

        Reply
      • Andrew March 9, 2013, 7:10 pm

        Over what time frame? A year? A decade? A lifetime? There’s only about 3 or 4 lifetimes worth of data to make that sort of claim with…

        Reply
  • Simply Rich Life March 7, 2013, 10:04 pm

    Stocks do not look excessively over-priced (although I wouldn’t complain about being able to buy them at 50% off tomorrow). The last few months of gains plus the news about the Dow hitting record highs may be the final signal that causes all the market-timers to rush back into the market after they sold at much lower prices.

    To add to that, low interest rates mean that companies are able to increase their profits by refinancing bonds and increasing leverage. They still seem to have fairly healthy balance sheets but they could push this a lot further quickly to increase their profits.

    If the stock market rises too quickly from here I will start to see it as dangerous. I’m hoping bonds yield a lot more by then.

    Reply
  • Another Reader March 7, 2013, 10:15 pm

    Any business, whether it is your own real estate or the businesses backing those pieces of paper called stock certificates has to be analyzed to see if it can continue to produce the income you think you are buying. For stock index investors, you have to look at the valuation of the index as a whole. If it looks a bit richly valued, it might be time to consider different asset classes.

    When newly printed money is driving all asset markets higher, it’s time to be very, very careful about what you are buying across the board. Buy the assets that are likely to survive and continue to produce income when the music stops and everyone is looking for a chair.

    I don’t sell stocks or mutual funds much nor do I sell the rental houses unless the rental market changes for an area. I survived the real estate bubble burst and the 2008 stock market crash because the rent and dividend checks continued to arrive for the most part. When money appears, I just buy the best assets available for the amount of money I have available to invest. I’m not always right, bit I’m still here and doing just fine.

    Reply
  • Jeremy March 7, 2013, 10:21 pm

    Another (more?) interesting graph is this one: http://www.multpl.com/s-p-500-price/

    Despite the talking heads in the media saying the market is at an all time high, it still needs to rise 30% to have equal purchasing power to 2000, thanks to inflation

    Reply
    • Simply Rich Life March 7, 2013, 11:07 pm

      In addition to the lower real value, the profits earned by those companies are much higher than they were in 2000 (unfortunately it’s hard to get that data but the much higher P/E ratio at the time confirms this). The stock market is selling a better product at a lower price today which is all right by me.

      Reply
      • RetirementInvestingToday March 8, 2013, 6:35 am

        I have just yesterday written a post that shows in graphical form the Real (inflation adjusted) Earnings (profits) of the S&P500 by month. It might answer your question.

        Cheers
        RIT

        Reply
    • Patrick March 8, 2013, 1:00 pm

      Exactly. Thank you.

      Reply
    • Mrs. Pop @ Planting Our Pennies March 8, 2013, 4:20 pm

      has not been said enough recently!

      Reply
  • Joe March 7, 2013, 10:41 pm

    I sold some stocks and rebalancing to bonds this week. My bond allocation was a bit low and it’s the right time to increase it when the stock market is at an all time high. Rentals are great, but stock had been on a tear lately.
    I’m glad I invested in both of these. Bonds on the other hand is pretty sucky lately…

    Reply
  • Mr 1500 March 7, 2013, 11:06 pm

    Anyone who acts on the fluctuations of the stock market should go out and read Warren Buffett’s annual letter now.

    However, I do like that chart because it reminds me of my upcoming trip to the Tetons in Wyoming.

    Reply
  • Matt March 8, 2013, 2:11 am

    There’s several other “safe” things you can invest in to make more money. One is yourself, and that’s what I’m currently doing. Furthering my education will give me the ability to gain a higher wage, and there are also “safe” industries, such as utilities and building. Simply because they will always be in demand, over the long term they will always give you back some income. You could debate whether we should add banking to that as well, considering the bailouts they get when they don’t do too well, and it’s never very long before they return to profit again.

    Reply
  • Connor March 8, 2013, 4:43 am

    MMM, there’s a popular fallacy in your assessment of Person 3. Since mortgage payments are fixed based on the starting value of the loan making extra payments to increase your equity has ZERO rate of return. Person 3 is is saying “thanks for the big loan bank, now Ill give you back a big chunk of your money ahead of schedule, and still make interest payments to you based on the original amount.”

    You should overpay a mortgage exactly once: when you are paying it off 100%. In this regard Person 1 has a far more sensible strategy, if he keeps saving his money in the same fashion until he can pay off the mortgage with one enormous payment, which came slightly faster because his money was earning 1% instead of 0%.

    Reply
    • John Evans March 8, 2013, 5:49 am

      Actually, an early payment on your mortgage (or student loan, or other amortizing loan) does save you interest at the APR. It’s true that the monthly payment remains the same, but more of it goes to principal after a partial payoff. There are only two bear traps to avoid stepping in: paying off too much and running out of cash, so the same old monthly payments become a painful struggle; or having a mortgage with penalties for early payoff. These are no longer all that common, but it pays to read the loan agreement. Umm, you did at least scan the loan agreement before signing it, right?

      Reply
    • Gerard March 8, 2013, 5:55 am

      The “interest payments to you based on the original amount” part of this doesn’t make sense, unless I’m missing something…

      Reply
    • makincaid March 8, 2013, 5:58 am

      @Connor

      I can only speak based on my own mortgage. Perhaps there are some type mortgages that don’t give you credit for extra principal payments. However, mine always did. Whenever, I made an extra pricipal payment, I saw an immediate reduction in my interest payment for the following month. The total payment for the month stayed the same, but the principal portion went up, while the interest portion went down.

      The savings I saw by making an extra principal payment were equivilent to what I would have seen investing the same amount of money in a CD or bond at 6% (the rate of my loan), minus whatever tax deduction I lost.

      Reply
    • Jimbo March 8, 2013, 6:21 am

      Hmmm… That’s not how my mortgage works.

      Reply
    • Derek March 8, 2013, 6:36 am

      @Connor,

      I do not think you understand how a normal 15 year or 30 year mortgage work. The payments are fixed, this is true. But, the amount of interest you pay is based on the APR times the unpaid principle. By paying extra each month to reduce the principle, you are DECREASING your monthly amount of the payment that goes towards interest. This has the effect at the end of 15 years or 30 years that you will pay off the mortgage more quickly (i.e. instead of 30 years it might take you 24 or 27).

      Does that make sense?

      Reply
    • Connor March 8, 2013, 7:26 am

      OK, perhaps you guys do have mortgages with non standard amortization schedules. My amortization schedule, uses a formula based only on the initial principal and not the current balance. FYI the interest portion of a mortgage payment always declines each month, prepayment or not.

      I do challenge you to run two scenarios using a mortgage calculator, one with prepayment and one without. The amount of interest paid in the first year is the same in both cases.
      http://mortgage-x.com/calculators/extra_payment_calculator.asp

      Reply
      • Jimbo March 8, 2013, 7:36 am

        Sure, if the loan is amortized once a year… My interests are calculated daily, and I am pretty sure that is how most mortgages in North America work. Can’t say all, but for sure most.

        Plus, it’s tax free profit.

        It’s a pretty good deal 99% of the time, I would say. But my interest rate is low enough I have to keep myself from putting all my free cash into it and invest instead….

        Also, i reimbursed 10% of my mortgage in its first year, and i guarantee it made a huge difference in interest paid… Like, a lot.

        Reply
        • jasonw March 11, 2013, 10:45 am

          Not to make this too complicated, but if you get to deduct your mortgage interest from income taxes, aren’t you then essentially paying a bit of a tax when you prepay?

          Reply
      • Klaas March 8, 2013, 7:51 am

        Re the mortgage calculator: no, it isn’t. If you just use the defaults in that calculator with and without the “Enable Monthly Prepayments” box checked, it says you’ve paid $16.52 less in interest ($4,653.12 – $4,636.60) at the end of the first year.

        Your amortization schedule is one thing–it’s calculated up front and as far as I know lenders won’t recalculate it to lower your monthly payments based on prepayment–but for any normal mortgage, the amount of interest you pay per month will just be the total balance at the beginning of the month times the interest rate divided by 12 (plus or minus a smidge, possibly, if they compound daily or adjust for the number of days in the month). So yeah, your payments stay the same, but when you prepay, the interest part drops (and the principal part rises) by exactly the amount of interest that you would otherwise owe on the chunk of money you’re no longer borrowing.

        Reply
      • Mr. Money Mustache March 8, 2013, 8:01 am

        Yikes! Connor has exposed a scary misconception, but one I have heard before from others.

        Repeat after me: PREPAYING YOUR MORTGAGE DELIVERS A GUARANTEED RETURN EQUAL TO THE INTEREST RATE OF THE MORTGAGE!

        If you’re afraid of non-guaranteed investments like stocks, at least pay off your mortgage – every dollar helps.

        This is true for every US mortgage I’ve ever heard of. There are SOME countries/mortgages with prepayment penalties, but that is rare around here.

        Reply
        • Jamesqf March 8, 2013, 11:23 am

          Another benefit to pre-paying mortgage: in at least some states, you can file a “declaration of homestead” which will shield the equity in your home from many sorts of legal processes.

          Reply
        • Annamal March 8, 2013, 2:16 pm

          New Zealand is one of those countries where penalties (break fees) can apply but even here it’s possible to structure your mortgage such that a portion of it is floating and can be paid off early, leaving you to lower your period of repayment the next time the fixed interest portion of your mortgage comes up for renegotiation.

          I’m currently fairly certain that New Zealand is in the midst of a tulip style property bubble which is a pain because I would really like to buy a house and everyone else seems to have gone completely nuts.

          Reply
      • Connor March 8, 2013, 9:34 am

        Holy crapola I AM the one with the misconception. Thanks for the correction guys, and sorry for sounding like a smug asshole. And even my own reference proved me wrong. . . that’s what I get for doing my research on my phone in the airport.

        I think it traces back to a book I read 5 years ago called “Missedfortune”. Oh well, at least being embaressed on the internet is way better than in real life.

        Reply
        • Mr. Money Mustache March 8, 2013, 9:43 am

          Right on, Connor! That is an ideal comeback – you are fully redeemed in the eyes of the Mustachians, and you just helped about 1000 people with the same misconception un-learn the same thing.

          Reply
        • Garrett March 8, 2013, 5:47 pm

          I’ve heard that some mortgage companies will apply extra payments to the interest portion of the loan unless you specifically state that the additional payment should be applied to the principal. This is a sketchy practice that is done to prevent people from paying off their loan without paying the full amount to the bank.

          Reply
    • mike March 9, 2013, 6:58 am

      I’m a mortgage lender and your above comment couldn’t be further from the truth. Interest in calculated daily based on the remaining balance so each and every additional payment tilts the interest to principal amount.

      Reply
  • Jose March 8, 2013, 4:54 am

    I guess you can call me case #5, I’ve been “all in” for a while now. New high’s like this will find me taking some money off the table and propping winners up with trailing stops. I’m not trying to time the market. But I will try to take advantage of any corrections with money that I have taken off the table. There are a few positions I would like to get into, but I just can’t see buying into one when a stocks price is at a high. If it turns out that a stock continues to rise and I missed getting into it, that’s ok. There will be others!

    Reply
  • Monevator March 8, 2013, 5:12 am

    Mr Money Mustache, I hope you read my article about taking advantage of incredible low rates to add a point 6 option to Jose’s point 5 above…

    (It’s here http://monevator.com/cheap-re-mortgage-to-invest/ — please delete if not appropriate to include a cheeky link. :) ).

    Another thing I’d suggest MMM readers do is get hold of Total Return indices instead of just looking at price indices. This counts in the return from reinvested dividend income.

    In the UK, for example, the FTSE 100 index of the top 100 companies is at around 6,400 after this recent rally, which means it is still nearly 10% below its end of 1999 peak.

    However the total return is up around 50% since then. Dividends really matter!

    It also suggests your strategy of strategic ignorance about the market can be combined with a long-term reinvestment plan for maximum low-pain, max gain purposes. :)

    Reply
    • Mr. Money Mustache March 8, 2013, 9:46 am

      Thanks Monevator! Excellent point about total return, and I updated the chart in the article to point that out.

      Links to one’s own blog may be questionable as a general rule of comment etiquette, but not when they come from the Undisputed Prime Minister of UK Investing!

      Reply
      • Monevator March 9, 2013, 3:24 am

        Ha ha. ;) Glad it was useful!

        Reply
  • Howie March 8, 2013, 5:14 am

    It is very interesting reading the varied comments by the readers. They point out that investing is part knowledge and part psychology. Warren Buffet is quoted often but he is a man of many contradictions because he doesnt always do what he says or writes about. There is nothing wrong about it because investing is about putting your capital to work for the best possible return with least amount of risk. Mr Buffett is one of the best at putting a valuation on an asset and knowing whether it is mispriced. It’s sort of like picking up a brand new car for 50 per cent off the Truecar median price. That is what he does best than many other investors. That is his niche and he has been practicing it since he was MMM junior’s age. Mr MMM is very much like Buffett. Warren has achieved financial independence many many years ago and he basically does what he considers fun. He calls it Dancing to Work every day. Warren as well is anti-consumer and hates to spend or waste money.
    JLCollins series of articles is an excellent starting and ending point for people who have no interest in investing for future growth. Warren Buffett has always said if you dont know what you are doing(dumb money) then index investing is the smart way to invest. Many people dont want to dedicate their lives looking for investments nor the time or willingness to commit to massive amount of reading. This is what Warren does most of his day. He was reading IBM’s annual report for 40 years before he decided to invest in it a few years ago because he felt the valuation was right and longterm future was promising. Who really wants to do that?????? For Warren that is equivalent to Mr MMM doing construction projects for fun!!!!! To each is own in my humble opinion.
    A great place for many readers who want to educate them selves on Dividend Investing is Seeking Alpha. The section on Dividends has thousands of writers on the subject. Many of them were just like your readers saving their money and investing at a young age. Living within their means. Some of the meaningful contributors are Dave Crosceti, Chuck Carnevale, Chowder, Regarded Solutions, Divient 4 Life and many others. Many of the writers are old timers investing in boring dividend growth stocks all through their lives. Although many young writers are contributing as well which will relate to the readers of this blog.

    Many people can’t stand to watch their balances go down. When the market goes down severely is is like a 50 per cent off sale at the Mercedes Benz dealership!!!!! Instead of buying as much stock that they have money for they panic and sell. It is counter intuitive to do otherwise and that is the hardest part!!!! The psychology of the market is half of your success.

    For me personally I invest JL Collins index style plus Dividend Growth style.
    The most important thing to do is to save as much as you can and live below your means. Then every day you can dance to work(on whatever level that is meaningful to you) after you attain Financial Independence!!!!

    Reply
  • My Financial Independence Journey March 8, 2013, 5:28 am

    I avoid index funds. Inside any given index, some stocks will be overvalued and some will be undervalued. You’re basically buying a bunch of garbage with some goodies.

    I prefer to do my own investing with a focus on dividend paying stocks, and in particular those stocks that have a history of raising their dividends over time. The stock value is your capital appreciation which will likely track the S&P500. I’m currently beating the S&P500, but while I’m not arrogant enough to think that will last forever, I’m going to keep focused on buying undervalued stocks. The dividends provide a constant income stream that can either be reinvested or used to live off of.

    Admittedly, what I do takes effort and time, and may not be for everyone. For people who are utterly uninterested in investing, just find the lowest cost major market index fund that you can and save like a madman.

    Reply
  • Bando March 8, 2013, 5:30 am

    That chart reflects a series of bubbles…first the dot com bubble, then the housing+consumer debt bubble, now the government debt/spending bubble.

    I was number 1. Then I decided “this is stupid” so I became number 3. Now that the house is paid off, money is starting to pile up and I don’t know where to put it since every asset class seems overvalued. Real estate prices are low. There is a four family building for sale right now for $20,000 less than when I made an offer on it 7 years ago and interest rates are much lower too. But it seems to me that real estate will see another crash when interest rates inevitably come back to more normal levels. Still I am thinking about paying cash for a rental, then if/when the stock market tanks again I can borrow money against real estate to roll into stocks.

    Has anybody tried investing in timber?

    Reply
    • Derek March 8, 2013, 6:39 am

      I had a co-worker that invested in timber land. If you are OK waiting 20-30 years for all the trees to grow, then it could be a good investment.

      Extremely illiquid though, obviously…

      Reply
      • Gerard March 9, 2013, 8:32 am

        I think you could invest in a woodlot (ideally by living in it) and harvest a few large trees every year (ideally in winter when they’re easy to drag out). That’s what my uncle (a farmer) did with the wooded part of his land. Every year your remaining trees grow a bit and become available for harvest in future years. It’s a bit of work, obviously…

        Reply
    • Mrs. Pop @ Planting Our Pennies March 8, 2013, 4:36 pm

      “There is a four family building for sale right now for $20,000 less than when I made an offer on it 7 years ago and interest rates are much lower too.”

      Sorry Bando, I don’t know what the RE market is like where you are, but that statement could be totally true and yet the property could be hugely overvalued when you consider long term trends in the area.

      I went through an example here which would serve as a perfect example why your statement would be a bad investment. http://www.plantingourpennies.com/2013/02/13/how-to-look-at-real-estate-values/

      In that neighborhood, $20K less than a 2006 value (7 years ago) is probably still about $80K overvalued (that’s 67%) overvalued based on long term trends.

      Reply
  • Heather March 8, 2013, 5:43 am

    I’m a bit more like #1 without the mortgage than I should be. But I just can’t help wincing when I put money in to something that seems to be so influenced by other people’s hysterical emotions. It seems so flakey. I wish I had something more physical or personal to invest in. A huge underground tank full of last-forever heating oil, or a reliable friend starting a practical small business like houscleaning.

    Reply
  • Alex in Virginia March 8, 2013, 5:56 am

    I am invested in individual dividend stocks, and have been since I turned my back on managed mutual funds 4 years ago.

    One key to my perspective on gauging portfolio value is to ignore market value and its virtually daily ups and downs. Instead, I measure the worth of my ‘stash by its book value, the aggregate dividend dollars it generates annually, and the ‘stash’s average dividend yield.

    I do pay daily attention to the company-specific news regarding each of my 20-plus holdings (which takes just 10 minutes each morning using Yahoo.com/finance) and will sometimes move to sell off a position if my longterm business case for that particular company gets fucked up. Otherwise, I just keep collecting the dividends.

    This approach keeps me sane and keeps me from foolish, emotional, panic-driven actions when markets turn down. And it has certainly worked for me in terms of portfolio book value and dividend payout growth.

    Alex in Virginia

    Reply
  • Jason March 8, 2013, 5:56 am

    MMM talking stocks, sign of a top? Hmmm. We’ll see. Might just sell a teensy bit today. ;o)

    Reply
  • Phoebe March 8, 2013, 6:28 am

    We were a combination of a few of the folks above, and have now been steadily investing on our own for about a year. We decided to go with dollar cost averaging since I needed to take the emotion out of it and it was a way to dip our toes in a few thousand dollars at a time.

    In addition to our 401K and some company stock we have about $40K invested in bonds and index funds and so far we’re comfortable with our approach.

    One concern I have is that we have $122K in cash earning basically nothing, that we have on hold to buy a house in cash. At times I feel like we should have that invested as well, but they say not to invest anything you need in the next 5 years and that’s right around when we’ll need it.

    Thanks for the links! I’m going to get to reading them!

    Reply
    • Mr. Money Mustache March 8, 2013, 7:53 am

      I think your house fund is a good idea – you can often get a better deal on a house if you have cash to wave around, and save $1-4k on closing-related costs as well. Plus, as the chart shows, stock investments run the risk of being underwater for 7 years or so, during which period you could miss an entire housing sale, like the one in the US that is on its way to ending these days.

      Reply
      • Phoebe March 8, 2013, 9:32 am

        Thanks for the reply MMM! I didn’t know that you could save on closing costs with cash (I’ve never purchased a house) so thanks for the heads up!

        Reply
  • RetirementInvestingToday March 8, 2013, 6:30 am

    Two points:

    1. The unit (the USD) to which the Dow and S&P500 is measured is not a stable unit because the USD is constantly being devalued. Therefore, I always correct these indices for inflation to create a Real Index. This tells me that when it comes to the S&P500 the real high was actually the year 2000 and we are still some 22.5% below that level even today.

    2. I value the US market using a cyclically adjusted PE (CAPE) ratio for the S&P500. At mid market yesterday this ratio was 22.4 against a long run average of 16.5 indicating a 36% overvaluation. The correlation between the nominal S&P500 Price and the CAPE is 0.66 which is considered a moderate, bordering on strong correlation. I therefore use it to under/overweight the index in proportion to this index.

    Cheers
    RIT

    Reply
    • Patrick March 8, 2013, 12:11 pm

      A+

      Reply
    • Simply Rich Life March 8, 2013, 4:26 pm

      An interesting recent study from Vanguard showed that both the CAPE (or P/E10) and the regular P/E (P/E1) that gets reported in the media can tell you the potential future returns – but if you look at both they sometimes tell you different things. Some people take things too far and look at a CAPE over 20 as a sign of doom when it is just one of many measures.

      I look at valuation as a sign for weighting as well, but most large-cap indexes are sitting at a pretty similar level today. What other investments do you overweight at a time like this?

      Reply
  • Johnny Moneyseed March 8, 2013, 6:39 am

    Most people don’t even invest in the stock market, so when the news starts a hype about it, they get the crazy idea to start investing. Your dollar cost averaging isn’t going to look so hot if we go into a recession, but if you’ve been buying index mutual funds for the past 5-10 years, you would be all set!

    Reply
    • lurker March 8, 2013, 9:21 am

      think you might have it backwards…a recession is exactly what you want when you are starting out with dollar cost averaging as you are buying more stocks with less money…if you have been buying index funds for the past 5 years a recession might look scary but you should probably keep buying if your retirement is many years in the future….

      Reply
      • Howie March 8, 2013, 10:11 am

        BRAVO!!!!!! Buy when the prices go down. It is counterintuitive but THAT is how you build wealth. Everyone loves BOGO at the supermarket or the 70% off rack at the department store. So why not buying excellent grade A companies on sale.

        Reply
        • Jamesqf March 8, 2013, 11:32 am

          Or you can even make a reasonable amount of money by buying at any time (say you invest $X per month, every month), and just not getting scared and selling everything at the bottom.

          Reply
  • Justin@TheFrugalPath March 8, 2013, 6:43 am

    Great list MMM.
    Person #1 isn’t only not making money, but actually losing it to inflation. I wouldn’t mind one more crash in the market right now, or at least a dip. We’re going to be opening a ROTH IRA for my wife and I’d like to buy a little lower when the time comes, but I definitely don’t try to time it.

    Reply
  • HappyFund March 8, 2013, 8:10 am

    Bad news! My crystal ball broke yesterday…

    Good news! My 401k switched to VIIIX from VFINX. My fees went down to 0.02%.

    Anyone care to lend me their crystal ball?

    Joking aside…manage risk, don’t chase returns!

    Reply
    • lurker March 8, 2013, 9:22 am

      and minimize fees!!!! bravo

      Reply
  • TickTock March 8, 2013, 8:32 am

    Long time reader – first time poster… Love the site!

    #1 and #2 remind me of a graph a friend showed me. It’s amazing how missing just a couple days of the market can alter the outcome. Apologies if it’s been posted already.

    http://static2.businessinsider.com/image/5127cd4feab8ea2b1300000c-960/screen%20shot%202013-02-22%20at%202.30.41%20pm.png

    Reply
  • Steve J March 8, 2013, 8:40 am

    Do yourself a favor.

    Buy good Vanguard or Fidelity Index funds with expenses under
    0.10%. In most any given year about two thirds of active fund managers
    can’t beat the indexes, and you will pay many times more for their
    products. There are countless studies supporting this fact.
    I happen to like the total market index.

    My feeling: Concentrate more on the saving, and living below your means part of the equation, and you will ultimately be one happy camper.

    Reply
  • babysteps March 8, 2013, 9:14 am

    Last year I went on a data sidetrack, found no-cost Dow data back as far as I could (including reading off charts from the 1800s…).

    2 things stood out to me (ymmv)-

    first, my best guess at *long term* stock results, price only, is about 2% above inflation. Market has done much better or worse for sustained periods though.

    second, if you want to be 90% or more confident that your stock investments will have positive real returns (that is, beat inflation), your time horizon should be 25 yrs or more. Not that you can’t do great in shorter time periods, just that’s what the data suggest…

    full disclosure of some personal biases – I spent 15 yrs on Wall Street (equities analysis) and believe in direct real estate investing, low-cost indexes for market instruments, dollar cost averaging, and passive rebalancing (using current new $ invested to get back to target asset class mixes)

    Reply
  • Melinda Gonzalez March 8, 2013, 11:09 am

    I think were at a unique point in time where no one can really predict what will happen.

    I think the best course of action is simply to diversify. Don’t have all your money sitting in a savings account, but you can have 20% in case something happens. You could invest 30% in stocks, 30% commodities, 20% savings, 20% other … just an example. You can put more in savings, or vice versa, whatever let’s you sleep at night.

    Personally (not an expert) I think what goes up must come down, and that includes the stock market. But, again, that is only from my own research.

    Hopefully, the stocks don’t crash because that would hurt a lot of people, but I think it’s a big possibility. The problem is we have nothing similar to compare this time to. No point in history has our debt been so large, the stock market so unsteady, and the confidence of the consumers increasingly edging to the negative.

    I think this all depends on how long we can keep consumer confidence high. If you scour the internet you will see consumers are slowly realizing something isn’t right, even though the stocks are high. If this trend continues, people may start spending less and this affects everything from the economy to the stocks. People will start saving more, which is good in theory, but could hurt a lot of our economy.

    In the end, it might be a good thing if everything came tumbling down, although it wouldn’t be fun for those of us who have to go through it. At least people would learn to save and not spend above their means.

    Reply
    • Patrick March 8, 2013, 11:58 am

      Melinda,
      I agree that a savings account is a loser. It is losing money everyday.

      But I don’t agree with the diversify camp unless you have no idea what you’re doing. Instead I would recommend specializing and learning everything possible about your preferred inestment vehicle. Even a book or two on the topic will put you in the 90% region because of the severe lack of financial literacy in the world. Don’t take this to mean that you shouldn’t have diversity — I’m just saying you should diversify by not holding everything in any single investment. In my mind, you should make several investments within a similar category.

      Another point I’d like to make is that the stock market is relative only to itself. It’s 30 companies in the Dow. It’s not inflation adjusted like every other significant measure. In other words, there’s A LOT it doesn’t say, so I don’t think about it too much. I started getting good at money the moment I started to narrow my aperture and then learn, learn, learn. Then act. When it comes to money, many people act first then learn the hard way… this USED to be me. Don’t let it be you.

      Reply
  • nicoleandmaggie March 8, 2013, 11:18 am

    Our taxable stock account keeps going up and down within 1K of the amount left in our mortgage. It’s tempting to cash it out and pay off the mortgage, but I like having that secondary emergency fund just in case. So, not adding to it, but not cashing it out either.

    Reply
  • Patrick March 8, 2013, 11:31 am

    Stock market investing is long haul investing. If you’re not in it for the long haul, you are doing something called, “speculating” or “trading.” From a personal finance perspective, I have a hard time justifying this because trading is a full-time job. Just read, “A Random Walk Down Wall Street.”

    Similarly, I’m not heavy into the stock market because I don’t like not having much control. If I don’t know everything about what I’m spending my money on (I’d argue that most passive investors are almost exclusively guessing), then I call it speculating. I don’t speculate with my life’s earnings. I invest.

    Just consider that GE’s financial statements are about 23,000 pages and prepared by TEAMS of the best accountants in the world. The best financial minds assisted by algorithms developed by laid off Lockheed Martin astrophysicists fuck it up all the time. If you don’t know what a 10Q is, then I’d say you have no business even reading the subject blog post. Instead, you should take a class if you’re interested.

    The point about investing in 2009 at the bottom and realizing a huge gain now is sort of irrelevant to me. That’s like saying we should have dropped a nuclear bomb on Japan on December 6th, 1941. If we reach back to October of 2009, all I remember is a lot of doom and gloom and virtually nobody knew anything about where the market was going — especially no passive investor. If you did this and kicked ass – that’s called good guessing or luck.

    Don’t let today’s success indicate a sure thing in the future just like don’t assume today’s doom is doom tomorrow. This is the lull of tossing a coin 10 times and each time getting heads. Don’t assume anything — it’s still 50/50. The only helpful insight is that you just may be exceptional at gauging how hard everybody else is going to freak out. I’m terrible at this, so I stay away.

    I stick with tangibles. Rental income makes sense to me. I can see the roof, turn the water on, change the locks. I have much more control and understand the local market much more. Like MMM, I can screen tenants, paint the fence, upgrade counter tops…

    One last thing… I don’t care at all about Warren Buffet, and I’m sort of sick of the financial hero worship and focus. These people are playing a COMPLETELY different game than anybody reading this blog. I say let’s play OUR game. If you get to the billion dollar level by reading MMM, I would give him a substantial bonus.

    In my mind, long haul index is the only acceptable level if you’re passive.

    Reply
    • reader from the rockies March 9, 2013, 8:15 am

      Totally second this. Warren Buffett is in a category by himself and he plays a totally different game than you and me. Reading financial statements and studying your investments is hard work, if you can even understand it at all.

      Vanguard low cost broad index fund investing is the way to go for most people. Yes, you will buy some duds along with stars, but the overall performance is terrific. Sure beats lying awake at night wondering if you missed something in the analysis of that “diamond in the rough” stock you bought, or wondering if a skeleton will fall out of the closet.

      Reply
  • Paula @ Afford Anything March 8, 2013, 12:19 pm

    I’ve been doing this for years (investing in rental real estate). It provides much stronger returns than the stock market. I still “diversify” (and take advantage of federal tax laws) by maxing out my Roth IRA every year, but the rest of my money goes into investing in rental properties. I have 5 units, and I’ll finish the year 2013 with several more, if all goes according to plan. As a result, at age 29 I already make about $20,000 – $25,000 annually in passive income.

    Reply
    • patrick March 8, 2013, 5:04 pm

      “As a result, at age 29 I already make about $20,000 – $25,000 annually in passive income.”

      And, therefore, you totally rock.

      Reply
    • Howie March 9, 2013, 5:49 am

      Paula….. Is that total net after expenses and depreciation? Do you have mortgages on those properties and if you do what per centage down payments are you applying? I have read your interesting blog and I don’t remember seeing breakdowns. If you did then I must of forgot.

      Reply
      • Paula @ Afford Anything March 13, 2013, 2:34 pm

        @Howie — Yes, that is my net total passive income, after expenses. One of the houses I bought all-cash — and, as you can imagine, it cash flows beautifully. :-) The other two houses have mortgages, but the rental income vastly exceeds the mortgages, taxes, maintenance and other expenses.

        All the houses meet the One Percent Rule, and one of them is even close to meeting the Three Percent Rule.

        One thing that’s helped me a lot is buying multi-unit properties (3-plexes or 4-plexes). That way, my overhead is a lot lower — I’m only paying for the underlying land once, I’m only replacing one roof, I’m only caring for one yard and one set of gutters, I’m only paying the closing costs once. But I get 3 autonomous units out of that deal.

        My 3-plex brings in about $3,650 per month, and the expenses on it are roughly $2,200 per month. Another one of my houses, the all-cash deal, brings in $900/mo with no mortgage and minimal repairs/maintenance. And the third house brings in $1,300/mo with expenses of roughly $880.

        Reply
  • SavvyFinancialLatina March 8, 2013, 12:26 pm

    Great advice Mr. MMM.

    Now, I would be interested in reading a post about how you buy a house in cash, and how much you save in closing costs.

    I haven’t read much info on it.

    Reply
  • Jeff March 8, 2013, 1:06 pm

    For this kind of long term stock market performance, it’s better to look at a graph with a log scale on the y axis.

    That way consistent performance, such as doubling every 10 years gives a straight line.

    Reply
  • Nick @ ayoungpro.com March 8, 2013, 1:15 pm

    That is a very interesting graph, but as they say “past performance does not guarantee future results”. Just because the market has crashed at this point before doesn’t mean it will now. I will continue to buy through all of the highs and lows, the overall return should remain beneficial.

    Reply
  • LeeonLife March 8, 2013, 1:18 pm

    Stocks to the moon! I subscribe to the “sell in may and go away theory” for my retirement accounts (since no capital gains consideration for selling early), and I buy and hold leveraged ETFs with 50% of my taxable account and speculate on individual securities with the other 50%.

    The only way to beat the stock market in the long term is with luck or leverage. Look up performance of UPRO vs SPY on google finance for the last 3 years. S&P is up 70% but UPRO is up 293%. Of course during bear markets, UPRO will underperform, but since stocks go up over the long run, who cares? Downturns—even bad ones like 2008—are tiny noise in the longrun that you can safely ignore if your investment horizon is 30+ years.

    A simulated UPRO was shown to have provided a 16% CAGR over since 1950 compared to just 7% CAGR for the S&P 500 as a whole during that time. If you had saved 5,000 per year inflation-adjusted from 1950 to today you would have ended up with:

    SPY: $5,348,996
    UPRO: $416,998,021.

    That’s right — you would have almost half a BILLION dollars simply from buying and holding the leveraged performance of the S&P 500. Leverage is king.

    Reply
    • Simply Rich Life March 8, 2013, 4:39 pm

      A simulation of UPRO back to 1950 may not be accurate since a market with UPRO will not behave the same as a market without UPRO (think of real estate returns going back 100 years which aren’t fully predictive because people didn’t use 900% leverage to buy a house back then). It’s quantum investing :)

      Reply
    • abraxas March 8, 2013, 6:25 pm

      During market downturns a leveraged ETF will suffer from a decay phenomenon that will kill your returns. In fact it could asymptotically approach zero. The way to achieve this kind of leverage without the decay is through deep in the money call options. You can still get wiped out, mind you but at least will not get bled to death by the levered ETF decay.

      Things like UPRO are only for short term trading.

      Reply
  • Spork March 8, 2013, 1:36 pm

    you forget person #5. This one is my favorite to mock and I see them everywhere… That is the “buy high/sell low” crowd. “OHMYGODTHEMARKETISTERRIBLEIWILLNEVERINVESTINITAGAIN!!!!!” followed a few years by “Hey… that guy down the hall is making a killing, I’m going to buy in!”

    Reply
  • abraxas March 8, 2013, 6:19 pm

    You can have your cake and eat it too. I’m invested in stocks and when the happy times like today roll into the market I purchase out of the money put options on the S&P index. This is a form of insurance against the stock market collapsing 2008 style. The end result is that my portfolio can never dip more than about 10% yet the cost of this insurance is only about 1-2% of my portfolio on a yearly basis. Yeah it’s a drag on performance in ‘normal’ years but I will make up for it in the years when the rest of you suffer huge drawdowns.

    Reply
  • Anonymous March 9, 2013, 3:42 pm

    If the near-term future of the stock market concerns you, you might also consider looking at balanced funds, such as VBIAX. Balanced funds have slightly lower highs than pure stock funds, but they also have far less severe drops when the stock market drops.

    Reply
  • Doug in London, ON March 9, 2013, 4:03 pm

    I could easily write a book on this subject, but will try to keep it short. In the past I invested in mutual funds and mostly by dumb luck was successful in 1998 when I sold a lot of equity funds in May, went into money market funds, then bought back in September when they were cheaper. Thus I thought, this timing of the market is so easy. Well, from then on it was hit and miss, sometimes getting it right and other times I sold and the markets kept going up. However, I did have the good judgement to buy more equity funds when they were cheap in late 2008 and early 2009. Fast forward to the present, I followed the advice of Derek Foster (www.stopworking.ca) and have about half of my portfolio in dividend paying stocks. The other half is in a professionally managed portfolio with a good track record. The managers pick a good mix of equity ETF’s and fixed income investments, and rebalance it periodically. So far, so good. However, it’s worth noting that American stocks have had a good run so I have sold off some of a U.S. equity mutual fund recently.

    Now for the question I like to ask about stock markets, why don’t they act like an engine with a governor? By that I mean imagine an engine with a governor to keep the speed constant. If there is a sudden increase in load and the speed drops, the governor senses the speed drop and opens the throttle to give it more fuel, to produce more torque and power to pull the speed back up to the desired value. Similarly, if there is a load loss and the speed increases, the governor closes the throttle to cut the power, and the speed settles back to the desired value. Now for the stock market, when it takes a big drop like it did 4 years ago, why weren’t investors frantically piling in money to get the good deals which, like the governor, would pull the market back up? Similarly, when the market gets high why aren’t there more sellers trying to take their profits which, also like the governor, clamps the market and stops it from going higher?

    Reply
    • Mr. Money Mustache March 10, 2013, 8:02 am

      There are definitely real investors out there who do exactly as you suggest – buying low, selling high, and taking advantage of market opportunities both in stocks and in business ventures as a whole. I think that phenomenon is why the the US economy in general has come back so quickly since the 2008 financial crisis. But the market itself will probably always be volatile, because of the huge sloshing tub of money controlled by things like momentum traders and hedge funds (and to a lesser extent the TV-watching retail speculators). Looking at the stock market before the days of computers and stock TV shows, you see a much less volatile pattern.

      Reply
  • Investor March 10, 2013, 10:54 am

    I’ve been an investor for over 20 years–saving 30% of my income for that purpose. Mostly, the mix was 60% equities, and 40% bonds. My financial advisor said I was too conservative but I was o.k. with that. Fast forward to 2008, I lost almost a half million dollars in two weeks. After the crash everyone then told me I was too aggressive and that’s why I lost so much money–but I had the same 60/40 mix as always. So, the point is I can’t be both too aggressive and too conservative at the same time.

    Reply
    • Mr. Money Mustache March 10, 2013, 11:32 am

      Did you really lose money in the crash? Only if you sold during the panic.

      I personally made a tidy profit in 2008, by continuing regular investments and reinvesting dividends. Taken at today’s stock price, the portfolio is looking better than ever.. but I’m still looking forward to the next crash when stocks go on sale again.

      Reply
      • Doug in London, ON March 10, 2013, 4:00 pm

        That’s what I think. Why is it you have many people lining up, often in cold weather, before stores open on Black Friday or Boxing Day? Obviously to get merchandise on sale. Similarly, I look forward to when stocks, or funds that invest in them, go on sale.

        Reply
    • Rob aka Captain and Mrs Slow March 10, 2013, 1:16 pm

      Hey Investor you’ve given me an opportunity to insert a good link.

      He about sums up Millionaire Teacher in one bog posting

      http://www.greaterfool.ca/2013/03/08/whats-in-your-wallet/

      Reply
  • George March 11, 2013, 3:20 pm

    A couple of points I am surprised no one brought up yet about this.

    First of all, MMM has already established that for most people (especially those in debt), their time is much better spend trying to lower their expenses rather than worry about investing
    i.e. see http://www.mrmoneymustache.com/2011/04/26/why-hardcore-saving-is-much-more-powerful-than-masterful-investing/

    Thus, in my opinion people who have debt other than maybe just a mortgage alone, really should not give a shit what the stock market is doing; if you have debt, how the hell are you going to have the balls to put more money into the market when its at its lows? Risk is not so much personality based but rather life-situation based;

    most people would be 1000x better off learning to pay off their credit cards faster, learning to do their home repairs, cutting the utilities, selling their car using a bike, learning about the library, and cutting their own hair as examples

    This discussion really is only for people who are completely debt free, or maybe only have the mortgage left as their only debt

    Anyway, when you do reach this pinnacle point in your life where all debt is gone and you have your paid off house, one problem I have noticed with pure stock investment strategy is how uneven the profits are.

    If you think about it, a person seeking early retirement wants predictable, regular schedule payments; also you want those payments high rather than low. The problem with the stock market in general is that the gains are so damn uneven, i.e you can loss 30% one year, get 0% the next, but make 50% the year after that; I think this is why early retirees prefers things like rental housing, REITs, or only the subset of super high dividend stocks (i.e. AT&T or Verizon, I believe returns about 5% a year in dividends).

    Thus, I don’t even know how an early retiree would make use of a small cap section, non-dividend paying sections of stocks, in their index fund; after all we seek passive income but you have to at least known what the hell that passive income is going to be for a given month before you know whether it will pay your bills or not

    For what I gather so far, MMM already has enough investments paying off regular passive income (i.e. the 1st foreclosure project), that additional money he uses for these uneven, unpredictable stock indexes; I guess this is why this topic hardly ever comes up on this blog; its pushed by the well-street industry and media but really has very little significant for most regular everyday people

    Reply
    • Simply Rich Life March 11, 2013, 4:18 pm

      Investing, and investing early, does matter.The fact that gains are uneven means that it’s more risky to concentrate your investment in a short period of time, when the completely unpredictable behavior over a few years could throw off your plans. Investing earlier also gives more time for growth. That may not be significant if you plan to be free in 10 years but for those who are planning for a slightly longer time frame it does make a difference.

      When you know you will rely on investment income soon it’s especially important to pay attention to diversification. It’s not common for stocks and bonds to move in the same direction at the same time (but it does happen). It’s even less common for stocks, bonds, and REITs to move in the same direction at the same time. The right portfolio can give you fairly consistent returns that are high enough to pay your expenses over a long period of time. It’s not perfect but nothing is. If you have the willingness and ability to pick up some extra income in years when your portfolio is down a bit that can be a huge boost.

      Reply
      • George March 11, 2013, 8:36 pm

        yeah, I was talking about a time frame of less than 10 years (I just assumed this is what most Mustachians are shooting for on this blog, I am about 7 years away- Wish I knew what MMM knew earlier on in my life! He is damn smart).

        What is you said is definitely true about early investing in stocks; i.e. compounding over time is exponential after all; the stock market investing model works really good for conventional, old-age retirement, i.e. putting money away in a 401k for 30 or 40 years and not touching it until your 59 and a half or later. This really is the standard model of investing, and is what most financial advisers would put their clients in as well. If you take a long enough time frame, the wild fluctuations in stocks average about 7-12 percent or so (I believe there is a blog entry titled, Dude where’s my 7% investment return)

        I too have one of these 401ks (invested in index stock and bond funds with the occasional rebalancing), but I don’t pay much attention to it because right now I am in my early 30s and are more excited about the regular, taxable investments due to the shorter time frame to early retirement.

        Reply
  • Doug June 5, 2013, 2:19 pm

    Despite being 3 months old to date, is anyone still following this topic? Whether you have or not, you may have noticed REIT’s, utilities, and preferred share ETF’s are on sale now! I’ve been taking advantge of these sale prices to increase my exposure to stocks and ETF’s that invest in these assets. As described in my posting of March 9, the governor sensed the speed drop and pulled the throttle wide open.

    Reply
  • George November 19, 2013, 9:28 am

    Dear MMM,
    I’m currently working my way through your stupendous exhibition of brilliance as contained in your blog. I estimate that I will become an intellectual senior mustachian by the end of this week, at which point, I will begin implementing mustachian philosophy in earnest.
    I would like to suggest a 5th person: The Infinite Banker. He is a true mustachian because his ‘stache enjoys the ultimate protection, flexibility and liquidity simultaneously. He’s an “AND” investor, who enjoys complete control of all of his little employees at all times.

    I have taken the liberty to make sure your favorite bookstore (your local library) has a copy of the Infinite Banking manual, which explains everything in detail. Becoming your own Banker by R. Nelson Nash

    Thank you for everything you do for us! I’m off to the next article! Look forward to hearing from you sir!

    Reply
  • Doug May 5, 2014, 12:37 pm

    If anyone out there is following this discussion and the stock markets, you’ll see the TSX300, Dow Jones, S&P500, NASDAQ, and other markets have performed well over the last year. Even those REITs, preferred shares, and utility stocks have climbed. What to do? I’ve sold off a few stocks that have gone way up, and sold 2 covered all options also. No need to panic but it’s a good now time to sell off some holdings, at least enough to pay off margin debt if you have any. Referring to my post of March 9, 2013 at 4:03 PM and my more recent one of June 5, the speed has recovered so the governor has closed the throttle slightly. Wow, it all seems so ridiculously simple.

    Reply
  • Mother Fussbudget August 4, 2014, 3:13 pm

    Hey MMM, you realize Jim Collins has added several more sections to his ‘Stocks’ discussion (parts 7-19 + a couple of sections on Q&A). I’m presuming these are still interesting, and this thread only SEEMS stale because you’re out living. ;-)

    Reply
  • Frugal Norwegian Banker August 6, 2014, 3:37 am

    I am a long time reader and fan of MMM. I am debt free – partly supported by a lot of good advice from this website. I have been an equity analyst with an investment bank for several years, but I am now “retired” to a job with better work-life balance (to have more time with my kids).

    I support the general advice of investing in index funds. But in my experience, the real big issue here is the investor’s behaviour when the crisis/crash hit (as described very well by Jim Collins). Everyone will be told by some “expert” that “this time is different – normally you should invest in a crisis, yes, but THIS crisis is different”. Back in 2008-2009 I would estimate that more than 80% of my colleagues (“smart” and trained equity analysts!) either stopped their investing completely or did not invest for a whole year, even though everyone easily should have been able to calculate the crazy upside potential. I myself invested in 2008-09, but clearly not enough.

    I do not think it is sufficient to have plan for investing in crisis. I think we all need practice for investing in crisis. “Be greedy when others are fearful, and be fearful when others are greedy” and “you can not buy what is expensive and do well” are two of several Buffett quotes that have led me to invest in index funds for different regions rather than consistently in one region. So when the US Gov debt was downgraded in august (?) 2011 I invested heavily in the world-wide index fund (US dominated), and late last year when “everyone” were worried about a property bubble in China, I invested heavily in the emerging markets index fund. I felt some fear when doing both those investments, but I felt less fearful about the latter investment – hopefully even less the next time. I am a trained analyst and had simply investigated the Price/book ratios (“price is what you pay, (book) value is what you get”) and both were attractive in an historical perspective.

    As you understand, I am not agreeing to Jim Collins conclusions on not investing aboad for Americans. I believe that shareholders are in genereal more powerful relative to CEOs outside US. For instance, I have never understood the crazy high CEO compensations US companies operate with. Do the shareholders support that? (not me). Also, I would argue that accounting standards are at least as good in Europe. And you should remember that there only big companies in foreign index funds as well (Samsung, Volkswagen, BMW..)

    My advice is simply, practice facing your index fund buying fears (abroad) – so you are prepared when the big opportunites arises.

    Reply
  • Maximus Peto August 27, 2014, 5:11 pm

    Hello MMM!

    This is the first article I’ve read on your site here. Very interesting content!

    I’m particularly interested in this post about stock market valuations, and would like to share a unique perspective with you. A friend of mine has told me you are open-minded and thoughtful to alternative views.

    My perspective relates to your analysis of the all-time-highs in the U.S. stock markets. Have you ever considered these highs in the context of U.S. demographic trends?

    That is, as baby-boomers age (~76 million people in the U.S., see http://www.prb.org/Publications/Articles/2002/JustHowManyBabyBoomersAreThere.aspx), there will be unprecedented selling pressure as these people downsize their homes and sell their stock holdings to pay for retirement, medical care, etc.

    I encourage you to consider reading the work of Harry S. Dent. His most recent book “The Demographic Cliff” makes a strong argument for the idea that stock market valuations are largely based on the spending patterns over a normal lifetime (i.e. where company profits come from), spending which is in the process of peaking and declining, with baby-boomers now retiring in large numbers.

    Current valuations are tenuous in my view because never before in human history has a smaller generation followed a larger one (the baby-boomers), which is happening right now in the U.S. and many other countries. This phenomenon, combined with Harry Dent’s work on spending trends over a lifetime, suggests strongly to me that stock markets may be nearing a top that may never be seen again, or not seen again for decades (fewer buyers, because of a smaller investing population, makes for lower prices). If correct, then the “buy and hold” strategy, even for fairly long-term investors, may end up negative or with very poor returns, even over 10, 20, or more years from now.

    I also suspect this concept explains, to some degree, the failure of quantitative easing to accelerate the economy; quantitative easing has little effect on the spending habits which evolve over a lifetime according to one’s family, career, and declining health with age (i.e. not central bank policy).

    Here is a link to Harry S. Dent’s book, “Demographic Cliff”: http://www.amazon.com/The-Demographic-Cliff-Deflation-2014-2019/dp/1591847273/

    I’m interested in hearing your thoughts on this topic, as you are clearly thoughtful about your money!

    –Maximus

    Reply

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